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Lehman's Collapsed with an Asset-to-Capital ratio of 3% - $3.57 trillion to just $54bn. All Four Western Central Banks are At or Below that Ratio - Getting to the Point Where the System "Cannot Function”

Friday, July 26, 2013 12:03

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The real consequences of Fractional Reserve Banking?

“The US Federal Reserve’s current Asset-to-Capital ratio, $54 billion in capital against $3.57 trillion in (owed) assets or roughly 1.53%.

This is actually less than the 1.875% capital they had in December. So the trend is getting worse.

Asset-to-Capital ratios:

European Central Bank: 3.69%
Bank of Japan: 1.92%
Bank of England: 0.843%
Bank of Canada: 0.532%

Think about Lehman again. When Lehman’s equity was wiped out, it caused a huge crisis. The company’s liabilities instantly lost value, and almost everyone who was a counterparty to Lehman Brothers lost a lot of money because the company could no longer pay its debts.

Accordingly, if the US Federal Reserve’s assets unexpectedly lose more than 1.5% of their value, the Fed’s equity would be wiped out. This means that any counterparty holding the Fed’s liabilities (i.e. Federal reserve notes) would lose.

More specifically, that means everyone holding dollars.

(Even more specifically, one country sitting with over three trillion in US Treasuries – China. t.d)

Theoretically if a central bank becomes insolvent, it can be bailed out. It happened in Iceland a few years ago.

There’s just one problem with that thinking.

Iceland’s government wasn’t in debt at the time. So they were able to borrow money in order to bail out their central bank. Today the government is in debt over 100% of GDP, but the central bank is solvent.

But governments in the US, Europe, Japan, England, etc. are all too broke to bail out their central banks. These governments are already insolvent. So if the central bank becomes insolvent, there won’t be anyone to bail them out.”

This is one of the strongest indicators of all that the financial system as we know it is finished. When central banks can no longer credibly issue liabilities, and their home government are too broke to bail them out, this paper currency standard can no longer function.

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