• The Federal Reserve is on the brink of bankruptcy and this is due to its quantitative tightening policy.
• The Fed has been selling assets at a loss, and this, combined with increasing interest rates, will only make matters worse.
• An accounting gimmick called a deferred asset makes it seem like the Fed isn't insolvent, but this won't last forever.
• Joseph Wang, an insider at the Fed, says that there's a risk of a fundamental regime shift in the near to medium term, which would be very disruptive.
Problems at the Fed
The financial world has been rocked by the news that one of its strongest pillars, the Federal Reserve, is on an inevitable trajectory toward bankruptcy.
Astonishingly enough, it was just 13 years ago, in 2011, when Fed profits were beginning to soar – evidence points to profits deposited at the US Treasury, minus a 6% dividend paid back to the banking cartel.
In other words: The party seemed like it would never end, yet here we are today with nothing but rapidly depleting funds ahead of us. So let's get down and dirty into what went wrong – or rather who took advantage – before things take their irrevocable downturn!
For the past few months, the Fed has gone from being an asset to the Treasury of almost $2 billion each month to becoming a liability.
They were humming right along, usually making about $2 billion payments to the Treasury, and all of a sudden, we get to about two months ago, and the amount that the Fed sends the Treasury goes negative.
Currently, as of December 8th, 2022, the Federal Reserve's assets totaled roughly $8.6 trillion dollars; these include investments such as treasuries and mortgage-backed securities along with gold holdings.
It would seem that our monetary institution are facing uncharted waters ahead in their financial commitment to Americans everywhere!
The Federal Reserve is reducing its balance sheet by allowing securities to mature and selling a portion of them.
They bought these assets at lower interest rates, resulting in higher purchase prices – meaning when they are sold, the Fed takes on an unfortunate loss that can be seen reflected in remittances back to Treasury noted on previous charts.
The Federal Reserve is facing an increasingly precarious situation. Selling securities, even at a loss, will only further reduce its assets and increase liabilities beyond the point of insolvency.
Moreover – those proposing that it print money to combat this problem may be exacerbating it by making them more financially unstable than before!
Can't the Fed just Print More Money?
If the Fed prints money, it has to put it in the reserve accounts of banksters like Goldman Sachs, JP Morgan, Bank of America, et cetera. It's increasing the liability side of its balance sheet without increasing the asset side. So it just makes the matter worse.
So then the question becomes, okay, George, well, how is it getting away with this? What are they doing to plug the hole that's being blown in its balance sheet?
This is where its comes up with basically an accounting gimmick to make it seem like they're not insolvent.
It's called a deferred asset.
This means it's giving itself IOUs on future profits that it is going to make.
It is booking future profits now as if they already exist.
The Deferred Asset Accounting Gimmick
It appears that the Fed has resorted to a clever accounting ploy in order to deceive the public and make it seem like it is not facing insolvency.
It is estimated that $13 billion of its balance sheet was created through this deceptive tactic, leaving many wondering if there's enough equity left for it to take such a hefty hit without repercussions.
To properly answer this question, one would have to dig deep into exactly how much equity remains within Federal Reserve coffers – an effort that could help us better comprehend what risks may be associated with short-term financial maneuverings by powerful institutions.
How much equity does the Fed really have?
Though the liabilities section of its balance sheet appears straightforward, it is quickly taking a turn for the worse.
In just two to three months since quantitative tightening, they have already taken a $13 billion loss which threatens not only to exceed but also outstrip their total equity and capital holdings at $35 billion – effectively placing them in insolvency.
Unfortunately, things seem destined to become even more dire.
Interest On Reserves
IOR is the interest rate the Fed pays the big banksters for holding their cash at the Fed.
Recently, the Federal Reserve has increased rates, and it looks as though they're expected to go up, even more.
This illustrates just how much the Fed pays major lenders for holding funds at its facility.
If interest rates continue to increase, then the Fed's expenses will increase as well just like any other bank.
The Fed is already losing money, as a result of having to sell assets it has on its balance sheet at a lower price for quantitative tightening.
This means the loss the Fed is going to have to absorb is going to grow bigger with interest rate increases.
So we're seeing a $13 billion loss now. It could easily go up to $50-100 billion or even more.
Can't the fed take a loss, forever?
Can't the Fed just take infinite losses? After all, its just part of the government, right?
Well, for further insights as to whether this will matter. Let's go right to an interview between George Gammon and fed insider, Joseph Wang.
George Gammon: If you want to get technical here, it takes them further and further and further into insolvency. If not for this little, I would call it an accounting gimmick, of a deferred asset.
Joseph Wang: Yeah, no, it's exactly right. It's an accounting gimmick. And you know, so central banks around the world handle this differently. Sometimes, they actually have to go and get money from their governments to pay for their operating losses. But here in the US, this is how it's done.
George gammon: So I guess the next question would be, as someone who's worked at the Fed, and I'm sure you've maybe given this some thought. Is there any limit to this account?
Do you think there's a point where the market sees this as, “like, wait a minute, whoa, timeout, you have $3 trillion in deferred assets.”
They're not going to make that much money. That's not possible.
And then they realize that the Fed, just based on GAAP accounting, let's say, or the spirit of GAAP accounting, can't get back to positive equity. Does that even matter?
Joseph Wang: I think that's a really good big-picture question. But, instead of focusing on the Fed just printing all this money to pay interest rate payments, I would also include what's happening with the US government.
They're just, you know, spending a trillion dollars in deficits every year, printing treasuries to pay for that.
So from my perspective, I kind of lump that together. The Fed is printing money to pay interest rate payments, the federal government is printing treasuries to pay for their purchases.
Now, is there a point where the market can't handle it? Where people will start to realize that this is crazy? Where this is not sustainable?
And then we have this big moment where maybe we have tremendous concerns about inflation. Maybe we lose confidence in the debt market, and people go and try to move their money elsewhere.
Historically that is usually what happens. I think maybe we are getting to a point in the coming years that may happen here as well.
But what I hear from people in the markets and what I see in the market pricing, it seems like there are a lot of people who don't really realize that maybe there might be a fundamental regime shift as well.
So as your thinking suggests, this is not sustainable and probably will bring some kind of disruption in the near to medium term.
Joseph Wang not only worked at the Federal Reserve, but he was also in charge of the New York Fed's trading desk, which means he ran quantitative tightening and quantitative easing, which was the management system for the Fed's balance sheet.
So if he's telling you, it's not going to matter, until it matters, then you should listen. It goes right back to that old quote, about going bankrupt. It happens very slowly. And then all at once.
The bottom line is, even if the Fed can make it seem like it's not bankrupt by this little accounting gimmick until it is bankrupt.
And this is a risk that we should all be paying attention to.
George is a brilliant macro guy! Been following for years.