Source: Grant/Barrons

“In finance today, comfort trumps propriety. As necks are tieless, so are earnings ‘adjusted.’ As shirts are untucked, so are balance sheets encumbered. In the 21st century way of doing business, freedom of action is the beau ideal. Neither clothing nor rules should constrain it. Has anyone noticed that the Federal Reserve is solvent again? Unlikely, as few realized that it was technically insolvent. At the Sept. 30 reporting date, cumulative unrealized losses in the system’s open market account totaled $66.4 billion, almost twice the $39.1 billion of capital available to absorb that hypothetical loss. These are matters of form, not function, you will hear…Does any of this matter? It used to. A currency once derived its strength from the integrity of the balance sheet of the bank that issued it – the more liquid that institution’s assets, the more plentiful its capital, the more confident the market could be in the ability of the money-holding public to exchange its currency for gold, and vice versa. That was the classical, white-tie gold standard…Succeeding it is the paper-money, or blue-jeans, standard. The paper dollar owes its value to the say-so of the government alone. Since 2008, the blue-jeans standard has given way to a kind of knee-ripped jeans standard – quantitative easing, ultralow interest rates, along with the rest of the bag of worldwide radical monetary-policy tricks. Under the gold standard, people adjusted their affairs to the fixed value of the dollar. Under the paper system, the Fed adjusts the unfixed value of the dollar to the perceived needs of the people. This is a profound transformation, but it long ago lost its shock value….It’s a long way down, once things start slipping. Classically structured central banks start to look like Lehman Brothers, investment bankers like DJs, and cash flows like revenues. As for the quality of the money in which every investor keeps score, it, too, is slipping. Strangely, it’s what modern central bankers say they want.”

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