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Can the Federal Reserve go bankrupt?
The issue of whether the Federal Reserve can go bankrupt (or become insolvent/default) is interesting. In this article, I want to give my take on the matter so that you can have a better grasp of the topic.
Technically
Technically, no, the Federal Reserve can’t default or become insolvent. Why? Because they can always create new money/credit out of thin air. However, this technicality is highly contingent. What do I mean? I mean that it’s not inevitable since there used to be such a thing as a gold standard. Under a gold standard, it would be possible for the Federal Reserve to go belly up. Without something like a gold standard, it’s not possible.
So if we were under a gold standard, things would look different. It’s not as if the fiat system we are currently under was always used! And it’s not as if the system we are presently under is/was inevitable.
Effectively
Effectively the Federal Reserve would become insolvent or default if they pass on their balance sheet to U.S. citizens through inflation. Yeah, technically, that’s not bankruptcy or a hard default. But the effects would be very painful for the average citizen. This is similar to the situation with the U.S. national debt. Yes, in theory, we could hard default on the debt, but the reality is that it will never happen. In…
