Horowitz: When money printers can no longer print money
How bad is the national debt crisis? The twelve regional Federal Reserve Banks, which make up the world’s largest central bank, have a monopoly on printing paper dollars, the world’s reserve currency. But despite its ability to print paper and then invest it in bonds, the Federal Reserve is now on track to lose over $100 billion in money this year on its own program.
The large rescue institution of last resort has now itself become a further burden on the federal treasury.
Until recently, the Federal Reserve was the ace up the hole for ruling elites seeking to establish an armed government inexpensively. The central bank was able to keep interest rates extremely low, which made private borrowers happy, but also serviced government debt cost-effectively. And by using maturity transformation to borrow short and lend long-term, the central bank could make a profit by lending at higher interest rates than it borrowed. The net profit was always deposited into the Treasury’s predatory accounts to offset some of its ballooning debts.
Then came COVID.
COVID ended the pyramid scheme. In its attempt to permanently control our lives, the Federal Reserve had to pay for the lockdowns and ultimately lost control of the money laundering operation. To service the debt, the Fed purchased $4.7 trillion in additional assets in less than a year, including $2.5 trillion in mortgage-backed securities. Central bankers invested this money in the form of long-term loans at very low interest rates.
Then came the inevitable inflation caused by that very same COVID spending.
The Federal Reserve was forced to auction so many government bonds on the market that it had to offer higher interest rates. Many would also argue that Federal Reserve Chairman Jerome Powell raised interest rates too quickly under the false assumption that this would stem the tide of inflation he created.
Well, since interest rates are now so much higher, the bank is forced to borrow heavily compared to all previous loans (investments) which were made at a much lower interest rate. We now have the ultimate reversal causing severe deficits. In the first two quarters of 2023 alone Fed has emerged a net loss of $53.5 billion in interest expense, a trend that will only worsen with higher interest rates, a slowing economy and a tighter credit market.
The $53 billion loss in the first half of 2023 comes on top of the $15.8 billion net loss in the final quarter of 2022.
This is a big deal. For the first time The money god himself has not been able to free himself from bankruptcy in the more than 100 years of his existence.
Printing more money now will put even more pressure on an already drained consumer and small business with even higher inflation, tightening credit and crushing an already insolvent real estate market.
Adding to the Fed’s capital deficit are more than $1 trillion in unrealized losses on its $7.6 trillion balance sheet of Treasury and mortgage-backed securities purchased through its Open Market Account system. All the assets that the bank bought at a 1% interest rate are now worth much less if the bank were to sell them at a 5.3% interest rate. Ironically, this is the same bankruptcy faced today by other banks seeking bailouts from the Fed.
Still, the Fed is simply writing off the loss by shedding a small portion of its balance sheet (about 9% from its 2022 peak), without using mark-to-market accounting as other banks did post-Dodd-Frank. have to do the law. Mark-to-market uses the actual market price of the bonds, not the irrelevant face value. The Fed ignores the market price of bonds and assumes it is a par value.
If the Fed runs such a large deficit that will lead to further bailouts by the Treasury – rather than the Fed bailing out the indebted Treasury – imagine what the economy will look like in the coming years. The majority of FOMC members announced announced at a meeting on Wednesday that they expect another rate hike before the end of the year. Then they assume that the increased interest rates will remain in place for at least a few years. The capital deficit and unrealized losses on the balance sheet will explode exponentially due to yield inversions, further exacerbating the debt tsunami.
Even if the Fed itself doesn’t raise interest rates, Treasury yields must continue to rise simply because of the sheer volume of issuance the Fed is putting into the market to service biblical levels interest on the debt, which is now expected to exceed $1 trillion each year. There is already a problem attracting enough buyers – with many foreign countries, including China and Japan, divestment of US treasuries. Just wait until these other countries continue their plan to move away from the US dollar as a reserve currency. Yields must rise, causing the cost of servicing the debt and the Fed’s accompanying budget deficit to continue and worsen.
The two-year Treasury yield is at its highest level since 2006. However, 17 years ago gross debt was $8.5 trillion, not $33 trillion. Plus, we had a $200 billion to $400 billion annual deficit, not a $2 trillion deficit. Not to mention the fact that we haven’t had nearly as much of the private sector and household debt and credit crunch that is weighing down banks and individuals to the point of insolvency. Oh, and we’re not officially in a recession and have relatively low unemployment. Wait until the fun begins in 2024 and the cost of social programs skyrockets. Even without new debt, $7.6 trillion of existing debt will come due within the next year at significantly higher interest rates.
In other words, the Fed, which has been the government’s lifeguard for several generations, is now drowning in the very pool it created with corrupt politicians in Congress and the Treasury Department. Who will then save the money printer?
