There’s no doubt that one of these days (hopefully very soon), our current monetary system will be viewed as one of the most absurd financial experiments in history.
Consider the monetary system for what it really is– politicians award unelected central bankers with the power to conjure money out of thin air… a power that they are not shy about using.
In the US, for example, the Federal Reserve’s asset base is now roughly $4 TRILLION, constituting over 25% of US GDP.
When Lehman Brothers went bankrupt a few years ago, the Fed had less than $900 billion in assets. So that’s over a 400% increase in five years, all because they simply willed trillions of dollars of new money into existence.
Of course, the Fed is not alone.
The Bank of Japan and People’s Bank of China among others have printed so much money they make the central bankers at the Fed look like a bunch of amateur hacks.
And while it is my fixed opinion that such destructive behavior will soon drive these paper currencies to their intrinsic values in British Thermal Units, it’s clear that not all paper currencies are the same.
So if you want to understand the health and safety of a currency, it’s imperative to analyze the fundamentals of a central bank. And the most important fundamental to look at is the bank’s net financial position.
Central banks are like any other bank… or any other business for that matter– they have assets and liabilities.
The difference between the two is called the bank’s equity, or capital. And the greater the equity, the healthier the bank.