July 30, 2013
Is there such a thing as a ‘safe’ fiat currency?
The term itself is as intellectually disingenuous as terms like ‘fair tax’ or ‘government innovation’.
But as we’ve been exploring recently why modern central banking is completely dysfunctional, it does beg the question– is any currency ‘safe’?
Let’s look at the numbers for some data-driven analysis.
Remember, a nation’s currency is issued by its central bank. And a central bank is structured like any other bank– it has assets and liabilities.
On the asset side of the balance sheet are things like government bonds and gold.
Meanwhile, a central bank’s liabilities include the nation’s money supply, technically known as central bank ‘notes’.
Look at those US dollars, Canadian dollars, British pounds, etc. in your wallet. You’ll see they’re actually ‘notes’ issued by the central bank, i.e. liabilities.
Just like any other bank, healthy central banks hold portfolios of high quality assets. And those assets should exceed liabilities by a substantial margin.
This is known as a bank’s capital ratio, and it represents a bank’s margin of safety in the event of a crisis.
Consequently, ‘safe’ currencies are issued by well-capitalized central banks with a high capital ratio.
Additionally, though, it’s critical to check the government’s balance sheet. Central banks that get in trouble will require a government (i.e. taxpayer) bailout. And heavily indebted governments won’t have the ability to do this.
This automatically eliminates the US dollar.
Why? Because the Federal Reserve’s capital ratio is a laughable 1.53%. And since the US government’s debt is nearly $17 trillion, there’s no chance Uncle Sam can bail out the Fed.
This reasoning also eliminates the British pound, euro, and yen.
Even the Canadian dollar is not in good shape given the country’s debt level and the razor-thin capital (0.53%) at the Banque du Canada.
Singapore is an interesting case. In its just-published annual report, the Monetary Authority of Singapore announced that it lost $8 billion last year trying to keep its currency depressed against the US dollar.
This is astounding… and suggests more than anything that this absurd dollar-centric fiat system is on the way out.
Singapore’s central bank balance sheet is still in much better condition than the West with a 7.2% capital ratio. And the government there has zero net debt. So the Singapore dollar is far safer than the dollar or euro.
But which is the safest major currency? Looking at the numbers, the answer is simple. It’s the Norwegian krone.
Norway’s central bank, which issues the krone, has among the highest capital ratios of any central bank in the world at 23.3%.
Moreover, the Norwegian government has zero net debt, i.e. its total financial assets far exceed debt.
Norway isn’t part of some supranational body like the European Union, which means that Norway cannot be stuck with some other nation’s liabilities (just as we see Luxembourg stuck with a share of Greece’s bailout…)
Last, the krone is not pegged to any other currency, so it can’t be dragged down with a sinking ship.
In a paper currency system controlled by a tiny banking elite, the Norwegian krone is as ‘low risk’ as it gets.
* Bear in mind, this analysis does not suggest that the Norwegian krone is ideal for speculation or investment gain… but rather the fiat currency with the sturdiest fundamentals in the event of a global crisis.