The European Central Bank Explains Why Central Banks Can’t Go Bankrupt in a Footnote. Western central banks (but not the Australian Reserve Bank) have being “expanding their balance sheet” by buying assets, typically bonds, since the GFC in 2008. They do so with new money, created by the central bank by the act of buying, thereby injecting brand new money into the economy. This has been a large part of the ongoing economic stimulus since the GFC.
So what happens if the assets bought by the central bank go down in value, so the central bank makes a loss? Many of the purchased bonds have indeed lost value, as companies or mortgagees are unable to repay. Is this serious?
In a research paper issued yesterday the ECB addresses this point, in a footnote so as not to draw attention:
Central banks are protected from insolvency due to their ability to create money and can therefore operate with negative equity.
Translation: Central banks cannot run out of money because they are the ones that create the money.
Prediction: Increasingly it will come to this, if the monetary bubble that started in 1982 but which stalled in the GFC is to be kept alive. If the bubble bursts there will be a deflationary collapse into a greater depression than the 1930s. Rock, hard place, run out of easy options.