What exactly is a “money-good” asset, and why should I care?
One need not look any farther than the above quote representing the seminal example of credit risk valuation, from John Pierpont Morgan.
But if gold is money, then what is a money-good asset?
A “money-good” asset is considered by market participants to be “as good as money,” a “safe asset,” or more clearly, an asset expected to have virtually no counterparty risk of default.
“Bernanke admitted in his recent speech, on this very issue, [that] there are very few “safe” assets to leverage the rest of the system upon.” Read more in the WealthCycles.com article IMF Sees Gold as Safe Asset as Crisis Looms, in which we look at the opinion of the IMF (see pie chart).
The International Monetary Fund (IMF) also warns of illiquidity in “safe haven” markets. In this premium piece we explain the collateral crisis defined by the shrinking pool of money-good assets underpinning systemic stability.
The FDIC lists Zero Percent Risk-Weighted Items (money-good assets):
- Gold bullion;
- Direct and unconditional claims on the U.S. government, its central bank, or a U.S. government agency;
- Exposures unconditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency;
- Claims on certain supranational entities (such as the International Monetary Fund) and certain multilateral development banking organizations;
- Claims on and exposures unconditionally guaranteed by sovereign entities that meet certain criteria.
“There is no credit risk associated with gold after it has been settled,” says Intercontinental Exchange (ICE), one of the central counterparty clearing houses (CCPs) that accepts gold as collateral.
Problem solved. Eliminate the rating agencies.
ECB Rating Assets & New Collateral Rules
“The European Central Bank is discussing a medium-term plan to scrap rating rules on euro zone sovereign bonds and instead set their value when used as collateral in lending operations on its own internal assessment, central bank sources said,” as reported by Reuters. Continuing:
So the goal is admitted: increase the pool of money-good assets. We wrote only three days ago about how the ECB would loosen standards on securities pledged in exchange for cash.
Lo and behold, hitting the wires now:
- ECB HAS DECIDED TO SIGNIFICANTLY LOOSEN ITS COLLATERAL RULES
- ECB TO ACCEPT SECURITIZED MORTGAGE LOANS AS COLLATERAL
The credibility necessary to backstop $10 trillion in deposits has just become worthless. This is because the last remaining market test of even the faintest credibility, that of independent rating agencies, is set to be eliminated. Surprising that anyone invests in the ECB any longer via the bank notes it prints.
Accelerating this worry, the money promised to Spain is simply not there, as we reported:
Updated today by Reuters:
The flow of capital from Germans, in a frantic replacement of decaying “previously money-good” assets, is in question.
According to Bloomberg, one year ago, the debt of trusted issuers totaled $24 trillion. Today, $10 trillion of the $24 trillion in “money-good” assets have disappeared, been downgraded, or defaulted, and are no longer able to compose the base of Exter’s pyramid (see below). This adds to the demand for, and to the price for the remaining assets still considered safe.
From the top down, gold is being revealed as the no counterparty, can't default, fiduciary par excellence that it truly is. Banknotes are simply the liabilities of the historically transient issuers. Trade some banknotes in, adding to your gold savings now!