The Federal Reserve Faces Insolvency Amidst Rising Losses But Is Being Saved by Controversial Accounting Methods
In 2011, the Federal Reserve implemented controversial accounting techniques to safeguard itself from legal bankruptcy. By redefining losses as negative liabilities instead of reducing its capital, the Fed ensured its balance sheet would never indicate insolvency. Although this was primarily a theoretical exercise at the time, the current reality reveals that the Fed is indeed insolvent, despite the deceptive post-2011 accounting practices that conceal this fact. The value of the Fed’s assets is declining while its interest payments exceed its interest income.
The Fed's Financial Struggles
Recent revelations from the Fed's report highlight a significant increase in its interest payments on bank reserves in 2022. The press release states that the total interest expense surged to $102.4 billion, a substantial rise from the previous year's $5.7 billion. The growing costs of operations and declining remittances have further strained the Fed's financial position.
Deferred Assets and Diminishing Remittances
To compensate for the lack of surplus, the Fed began recording a "deferred asset" since September, representing the tally of its losses. By the end of the year, the deferred asset amounted to $18.8 billion. In essence, deferred assets are essentially a euphemism for financial losses in the Fed's terminology. The Fed is supposed to make remittances to the US Treasury based on its surplus, but when there is no surplus, the payments are postponed. Remittances plummeted into negative territory from September onwards, and this downward trend is likely to persist in 2023 unless the Fed takes a highly accommodative stance and reduces interest rates.
Factors Contributing to the Fed's Insolvency
The Fed's insolvency can be traced, in part, to its significant purchases of Treasury debt and mortgage-backed securities since 2008. These assets were acquired to support real estate and government bond prices, effectively subsidizing Wall Street, banks, and the real estate industry. However, as the Fed bought these fixed-rate assets when interest rates were low, their income did not experience substantial growth as interest rates rose in the past year.
The Fed's payments to banks for reserves and reverse repos, which are subject to fluctuating interest rates, have also increased. Consequently, the Fed now pays more in interest to banks than it earns from its MBSs and government bonds, necessitating the deferral of payments to the Treasury.
Value Erosion and Implications
Another factor exacerbating the Fed's financial difficulties is the declining value of its portfolio. As interest rates increased, the prices of MBSs and Treasury debt held by the Fed decreased. Consequently, the Fed has less capital. However, thanks to questionable accounting practices, the Fed's insolvency is not a legal problem.
A Bleak Outlook and Potential Consequences
Given the mounting losses, it is highly likely that the Fed will require a bailout. The Fed's current situation mirrors the circumstances that led to the collapse of savings and loans institutions in the early 1990s. These institutions invested heavily in long-term debt with low fixed interest rates, only to face soaring interest payment obligations as rates increased. While a normal financial institution would face bankruptcy in such a scenario, the Fed will bail itself out by printing money.
This ultimately leads to price inflation, affecting assets, consumer goods, and people's cost of living. As ordinary citizens experience a decline in real wages and increased living expenses, the Fed and the ruling regime will continue to benefit. The Fed's ability to carry out inflationary monetary policies remains unaffected by its de facto bankruptcy, ensuring ongoing advantages for the parasitical class while the productive classes suffer.
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