Can central banks go bankrupt? No – as long as it has enough gold!

This is a very interesting question because the common opinion is that central banks can never go broke because they can simply print money when needed! But this is a wrong anticipation and not how it really works.

When central banks print money, they’re not creating an asset but a liability. Therefore, a central bank can’t print its way to solvency. When central banks print money, they do acquire assets. As an example, in the U.S. the US Federal Reserve would buy Treasury note. Buying the asset (a Treasury note) creates a liability (money) at the same time and both expand the balance sheet and increase leverage, but don’t create a positive net worth. The net worth of a central bank is just the assets minus liabilities like any other balance sheet. The only way to ensure the net worth of a central bank is increasing, is earning more on its assets than it pays on its liabilities. For a Central bank this is usually done by selling more shares to their stockholders, realising capital gains due to asset appreciation, or taking a bailout from the government.

Central banks do not record its accounts on a mark-to-market basis. When their assets go down and even if their liabilities hold their value, it can easily drive the central bank into a negative net worth position. In fact, central banks might be in this position now because when interest rates rise the value of bonds and notes are going down.

But central banks value their gold a lot lower than the actual price. For example, the Fed values its gold at $42.22 per ounce. The market value of gold is about $1,750 per ounce. The difference of $1,708 per ounce multiplied by 8,000 metric tonnes of gold in possession is about $440 billion. This means the Fed sits on hidden asset worth about $440 billion more than its balance sheet shows. If this gold would be revalued at market price, the central bank would be comfortably solvent. And so would be most other major central banks.

Sven Franssen