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Federal Reserve solvency


K-Pierro
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Is the solvency of the Federal Reserve relevant today, or is it a relic from the gold standard days ?

Since the USD was taken off the gold standard domestically in 1933 and fully became a fiat currency in 1971, Federal Reserve Notes and reserves deposited at the Fed are not redeemable, they just are money. This money appears on the Fed's balance sheet as liabilities. Fed assets that exceed the value of these liabilities, currently Treasury securities and MBSs, are required to be held on the other side of this balance sheet. If I understand correctly, Fed liabilities are very unique in the way that they have no credit risk, and cannot be defaulted on, as they aren't redeemable, or withdrawable, in the way regular bank deposits are.

Do these liabilities really need to be "backed" by these assets ? What would be the consequences, if any, of the Fed's assets dropping in value and leaving the Fed "insolvent" by regular bank standards ? Excluding things like RRP operations, couldn't the Fed keep working seamlessly even if all of its assets were worthless ?

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Joseph Wang
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We are in a fiat system where the government can print as much money as it wants, so it is impossible for it to become insolvent. It can always just crank up the printers. If rates spike Feds security assets can decline in value and make it technically insolvent, but there is no real consequence to that.

Fed reserve liabilities can be redeemed for currency (paper bills). In fact, when your bank runs out of currency it calls up the Fed and redeems Fed reserves for currency. Then it can use that currency to stock up its ATMs. 

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K-Pierro
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Thanks, I suspected that potential insolvency wouldn't be anything more than a technicality with no real consequences. When it comes to the redeemability of physical currency and digital reserves, am I correct in my understanding that they are exclusively redeemable for one another ? Could a commercial bank deliver physical currency to the Fed and redeem them them for anything else than an increase in their reserve balance ?

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