Money-Good Asset Stocks Shrivel Prompting Collateral Crisis

The WealthCycles Staff

What exactly is a “money-good” asset, and why should I care?

John Pierpont Morgan“Money is gold, and nothing else.”

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 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):

  • Cash;
  • 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.

If you look over the long-term history, gold performs very well in the periods when clearing houses are most concerned; and that is during periods of stress... When considering collateral, cash and government bonds may be the first assets that spring to mind, but gold is in many ways the ideal form of collateral for both investors and CCPs... By contrast, credit risks on other collateral assets have grown discernibly recently.
The last several years have proved that no assets can be considered “risk free.” The European sovereign debt crisis showed that even the credit quality of government bond markets can deteriorate rapidly as rating agencies continue to downgrade many European bonds.

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:

“In the case that the ECB Governing Council decides this, it would reduce the widely criticised influence of Standard & Poor's, Moody's and Fitch," one euro zone central bank source who spoke on the condition of anonymity said.
On the other hand, this could also expand the shrinking pool of collateral which banks in troubled countries have available."

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.

While the acceptance of shady-quality paper by central banks is nothing new (see ECB LTRO program), the junk bond fund known as the ECB may also consider loosening its standards further in light of margin calls set to demand billions to be put up by Spain and Italy.

Lo and behold, hitting the wires now:


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:

“The treaty [creating the European Stability Mechanism, or ESM] has yet to be ratified by most governments, including Germany.”

Updated today by Reuters:

Germany's constitutional court said on Thursday it will need time to study the euro zone's permanent bailout mechanism after its expected approval in the German parliament next Friday, which could delay its scheduled start date on July 1... A spokeswoman for the top court said the ESM is so complex it expects head of state Joachim Gauck to delay his signature of the text approved by parliament until the court has had time to study it.

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!


Right On!!!

On the Comment of the WeeK ""We can have "universal healthcare" without any mandates. Simply get rid of the USDA that promotes faux foods that make us sick
and the FDA that pushes the drugs that's suppose to cure us."

- Exactly. For any one who knows anything about food in the US, it is obvious that the solution to healthcare is not in health care, but in the food production. America is the most fed counrty in the world and the worst fed. Relax the regulations on local food production and sales, and enforce the laws on industrial food production. Change all food subsidization. A lot more could be said on this. There are good books and documentataries out there. Start your veggie garden and soon your taste buds will not stand anothe rmorsel of processed food!

Peter Searle

Agree. We have been raised to think our health care system is set up to help us, occasionally it does, but the norm is to keep us sick and dependent on medicine that causes side effects.

Have been a Type1 diabetic for over 60 years and have followed 10 principles that have kept me healthy. Do have a doctor, but aside from insulin, rarely take any type of medicine due to those nasty side effects. We need to understand that eating healthy non processed foods and striving to have an alkaline pH, we can become disease free.


I believe that have a few months of food storage for you and your family is actually quite a good idea. Not many people in this country are prepared for a "trucks stop running" scenario. With the mainstream media telling us there is a recovery and people suffering from "normalcy bias" we could soon see things in this nation that are new to us all and something we will wish we never had to see. Get your food preps where you feel you need to and if you cannot afford gold you could buy some silver dimes for about $2 apiece or silver quarters for a little over $5. Good luck to all!

Good article.. wish I have the cash for gold... poor me.. guess I will buy the 2nd next best thing to gold..buying another can of beans instead.$1.59 :)

The 2nd best thing to Gold is Silver, which everyone should be buying like mad since its only $26 an ounce right now! Also, if your paying $1.59 for a can of beans, you are definitely getting ripped off. Jewel sells them for $1.19 a can, Costco for $0.89 a can, or if you really want to get your money's worth like me and don't want to get the harmful chemicals like BPA that canned foods contain, you can buy a bag of dried beans which contains more then twice the beans a can does and it only costs $0.79-$0.99 a bag. But at least you have the right idea.

Excellent! Everyone should start their savings with their own "food bank" and then move on to silver and then to gold as your savings allow.

Is it possible for silver to decouple from gold?


Yes it is possible fundamentally.


great stuff Mike !!