Is the Fed close to bankruptcy? or is the Fed just very good at keeping the American public at arms length away from their true value and financial health? Ponder this, Imagine having a net worth of $57 billion. That sounds like a lot. And for the few folks out there like Bill Gates, Warren Buffett, and Vladimir Putin who have racked up such a prodigious amount, it is a lot. But not if you’re the U.S Federal Reserve.
Just like how individual people can calculate their ‘Net Worth’ by adding up all of their assets (cash, property, and investments) and subtracting liabilities (loans, credit card debt, etc.), the Fed has a net worth as well. But for the Fed, its $57 billion net worth only constitutes about 1.28% of its massive $4.5 trillion balance sheet. (In direct figures, the Fed has $4.485 trillion in assets, but a whopping $4.428 trillion in liabilities, leaving only $57 billion, or about 1.28%.)
This means that if the value of the Fed’s assets drops by more than 1.28%, the Fed will be Bankrupt. And in a time when markets are extraordinarily volatile, a 1.28% drop can happen in a matter of days. Just consider the massive impact on the world if the Central Bank of the United States of America… the issuing authority of the U.S Dollar… goes Bankrupt?
We don’t have to look too far to find examples; Iceland’s Central Bank went bust in the early days of the 2008 Financial Crisis. And almost overnight the currency went into freefall.
Technically speaking, a Paper Currency is a liability of a Central Bank, and the two are joined at the hip. So when a Central Bank goes bust, its liability (i.e. the Currency) loses value.
Think about it like this: let’s say Barry owes you $1,000. And Barry has given you a formal IOU stating that he’s obliged to pay $1,000. As long as everyone else trusts in Barry, this IOU could be used as a substitute for cash within your community. But then suddenly Barry goes bust. And everyone finds out. Now no one is willing to accept the IOU as payment. Its value becomes instantly worthless.
That’s what happens when a Central Bank goes broke: it’s called a Currency Crisis, and yes, not only could it happen, but all the objective data on the Fed suggests that things are moving in that direction. Here’s the thing—the Fed owns trillions of Dollars worth of Bonds which are extremely sensitive to changes in interest rates. If interest rates rise, the value of their bonds will fall.
It’s a very simple relationship, and given the Fed’s already razor thin levels of capital, the slightest decline (1.28%) in their asset prices means that it’s “Game Over”. The real zinger here is that The Fed controls interest rates (and hence bond prices). Yet they keep talking about raising interest rates, almost as if they’re trying to push themselves into insolvency.
Not to worry, though, says the Fed, we have a “Plan B”. In the event of its own insolvency, the Fed will simply seek a bailout from the U.S Government, and the Crisis would be over. Eh… come again? The U.S Government loses hundreds of billions of Dollars each fiscal year. They have to borrow money just to pay interest. In fact, the Federal Reserve is already one of the largest owners of U.S Government Debt.
So you see the conundrum here. If the Fed goes broke and needs a bailout from the U.S Federal Government, the Federal Government would first have to borrow the money from the Fed in order to bail it out. And that, ladies and gentlemen, is what the people controlling the system have come up with to stave off a looming Currency Crisis. So what’s your Plan B?
the U.S Federal Reserve recently published a paper entitled, “When Does a Central Bank’s Balance Sheet Require Fiscal Support?” Translation: how bad do things have to get at the Fed before they need to be bailed out by the Federal Government? Remember that the Federal Reserve is ultimately the issuer of the United States Dollar. In fact, you’ll notice when you look at any U.S Currency note it says ‘Federal Reserve Note’ on the face.
And over the last several years, the Fed has engaged in the most extraordinary program of expanding its balance sheet. They’ve essentially conjured up new Paper currency out of thin air and given most of them to Banks, in exchange for all the toxic assets that blew up in 2008, along with trillions of dollars worth of U.S Government Debt.
In the Fed’s latest paper, they say that while it is *possible* that their net worth “could” become negative, such a phenomenon would be “temporary and would not create serious problems.”
What a convenient assumption. In other words, the issuing authority of the U.S Dollar and one of the largest financial institutions in the world, thinks it’s no big deal if it goes broke.
How can they possibly justify such madness? Simple. They have pages and pages of complex mathematical models and differential equations to back it up. Funny thing, Karl Pearson and his colleagues had complex mathematical models too. And influential policymakers believed Pearson’s dubious theories, in many cases actually waging war against ‘inferior races’.
Today’s policymakers believe modern economic pseudoscience as well, and they actually are implementing the ideas… like printing your way to prosperity. These are the same people who have total control over your savings, your investment returns, and Your livelihood. We’re supposed to trust that they’re good guys. That they’re smart, responsible stewards of the financial system.
These lunatics think it’s perfectly fine if the issuing authority of the United States Dollar is Bankrupt.
So you see the conundrum here folks. If the Fed goes broke and needs a bailout from the U.S Federal Government, the Federal Government would first have to borrow the money from the Fed in order to bail it out. And that, ladies and gentlemen, is what the people controlling the system have come up with to stave off a looming Currency Crisis.
So what’s your Plan B?
Author: Simon Black