When the Bank of England "suspended" during the Napoleonic Wars, it had not run out of gold; and it did not stop paying out gold and silver coin based on their relationship to the unit of account known as "the pound". Neither did the U.S. Treasury during the Civil War, when thanks to the currency acts that created National Bank Notes, the Treasury had become America's first central bank to control the country's legal tender. There were still outstanding debts that continued to be paid off in coin. What was suspended was the redemption of the bank/Treasury's own near money;in both cases what Cantillon called "the state bank" would no longer redeem its paper notes in coin on demand.

The present American central bank has no redemption obligations for its reserve notes; neither does the U.S. Treasury have any outstanding debt obligations that require interest and principal to be paid in coin. So, there is literally nothing against which dollar paper notes can be discounted as money within the boundary of the U.S. of A. At home the dollar will always be at par; and there will be no "gold cases".

As the bond pros and even us idiot amateurs know, the Fed has gone on an acquisition spree. Its assets have grown from $900 billion at year-end 2007 to over $4.5 trillion, which serious money. To support those holdings, the Fed's has also raised its own capital - from $37 billion in 2007 to $58 billion now.

The question that this raises for us idiots in the bleachers is this: what happens politically when the Fed starts to lose money?. At some point the market value of the Fed's assets is going to fluctuate in the wrong direction enough that the losses are more than the Fed's capital.

Under the Fed's rules adopted in 2011 that will require the Fed to suspend making payments to the Treasury of its "net" profits. The pros who long ago flagged this are not worried.

We amateurs who insist that dealings in money raise questions of "political economy" think the headline: "Fed Goes Broke" may have somewhat larger market implications.


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