Conclusion-: Central banks enjoy a revered position in discussions on monetary matters. At their disposal are a seemingly endless array of tools and weapons ready to correct any market "imbalance" that threatens economic stability. However, these institutions are only as useful as the assets they represent. Expansionary monetary policies cannot fix all problems that a central bank faces. Countries faced with banking sectors heavily indebted in foreign-denominated liabilities will eventually find the central bank (which lured them to these positions) to be impotent. Jésus Huerta de Soto demonstrates in his magisterial work Money, Bank Credit, and Economic Cycles that the current banking system enjoys the privileged legal provision of being able to treat deposit accounts as though they were loans. A central bank sustains this fractional-reserve system by ensuring that an illiquid banking industry will have adequate liquidity in times of banking crises. The possibility of an insolvent central bank, however, bypasses the question of whether the central bank should be abolished and concludes that it will, in certain instances, abolish itself as insolvency renders it helpless. Banking systems heavily indebted in foreign-denominated currencies are especially vulnerable to this possibility, simply because central banks are only able to bailout domestically denominated debt obligations. A well-known adage states that "if it ain't broke, don't fix it." Economists have long claimed that central planners are necessary to ensure economic stability. Their looming bankruptcies could end up exposing the sterility of this very function. Let's hope that once these monetary authorities are exposed as broken, they will be fixed in light of the true needs and demands of a prosperous economic order. Free banking, operating under established legal principles coupled with the private production of money, will ensure that an oversized banking industry does not develop. Neither will it rely on the fallacy that an omnipotent centralized monetary authority is always on guard, ready to save capitalism from its own excesses. Complete article-: http://www.marketoracle.co.uk/Article13205.html
by broke i take it you mean unable to control aggregate demand due to the limitations of the credit market?
As long as the dollar remains a major reserve currency, the federal reserve system cannot go broke. That's the difference between Zimbabwe and the US. Zimbabwe printed money to pay debt in other currencies. The US is printing money to pay debt in dollars. Therefore, there cannot be a collapse in the dollar currency unless worldwide confidence in the world dollar currency system was severely lost. It is only, and all about confidence, with fiat currency systems. That's why the bailouts worked this year. They restored confidence.
So the US default won't be a default, in dollars per se, but rather, will be a default in goods and services. Its kind of like lending your brother-in-law $500k to build a housing construction business, and instead of him repaying you by building you a $500k house -- he gives you a little doghouse in repayment, while running around, enjoying the spoils of running his business, driving nice cars, new pickup truck, etc. Sure, the brother-in-law has ripped you off, and is $499.5k wealthier. But you'll *never* lend that brother-in-law another penny again, nor will anyone in your family. If the USA had gone into massive amounts of debt to build factories, to build a technology industry, to rebuild its infrastructure -- then the debt would have been repayable. But where did all the money go? Into junk. The Chinese will not continue to work for nothing, while America lavishes multiples of their annual wages onto American welfare recipients.