Is The Federal Reserve Bankrupt?

The U.S. Federal Reserve is tasked with maintaining a healthy and stable economy by managing the nation’s money supply. In 2011, to ensure it never goes into deficit territory, the Federal Reserve implemented new accounting methods that allowed it to remain solvent while providing the necessary monetary stimulus to keep the economy functioning as usual.

One of these measures was a process known as “monetising debt,” which involves buying up government bonds or other securities (such as mortgage-backed securities) from banks and other financial institutions. By doing so, the Fed increases its assets and reduces its liabilities, thus avoiding deficit spending. Monetisation also enables the Fed to inject more money into circulation more quickly.

Another measure the Federal Reserve took in 2011 was increasing its balance sheet through quantitative easing (Q.E.). Through Q.E., the Federal Reserve buys large amounts of government bonds and other assets from banks and replaces them with cash reserves, injecting new liquidity into the banking system. Q.E. aims to increase the money supply to stimulate economic activity when traditional tools, such as interest rate adjustments, cannot do enough on their own.

Both measures have helped shore up America’s financial stability since 2011 and have enabled economic growth without any risk of legally going bankrupt. These two instruments have successfully kept inflation low while providing enough stimulus for economic growth. Despite some concerns about potential risks associated with them, such as inflationary pressures caused by too much money in circulation or bubbles forming within assets bought up through Q.E., they have nonetheless played an essential role in helping maintain America’s economic stability since 2011.

Over a Decade Later, The Fed is Technically Bankrupt; the reality is that the Fed’s assets are losing value. The purchasing power of the money it holds has steadily declined due to inflation and other economic factors. These economic factors have caused the Fed’s total liabilities to exceed its total assets, thus making it officially bankrupt by any standard definition.

The Federal Reserve must find ways to replace lost asset values or reduce liabilities to remain solvent. Unfortunately for the nation, this means further tightening monetary policy or increasing taxes. These measures will likely slow economic growth, lower consumer spending, and ultimately hinder job creation.

One option available to the Federal Reserve is implementing more quantitative easing (Q.E.). Through Q.E., the central bank can inject more money into circulation and buy up government bonds or other assets to stimulate economic activity when traditional tools, such as interest rate adjustments, cannot do enough. While this may provide short-term stimulus, Q.E. has potential risks, such as creating asset bubbles or fueling inflationary pressures due to too much money in circulation.

Another option is for Congress and the President to pass legislation allowing the Federal Reserve to borrow directly from the Treasury – essentially replacing its liabilities with debt (instead of liquid assets such as gold or foreign currency reserves). While this would help boost liquidity and enable faster economic growth, Congress would have little control over how quickly such funds would be spent. It could also prove challenging to ensure that funds would not be wasted on ineffective infrastructure projects or military-style ambitions rather than productive investments that create jobs and sustain long-term growth.

With no easy solutions available, exactly how America will come out of this deficit territory remains to be determined. However, whatever measures are taken will likely have far-reaching implications for global economic activity(both good and bad). Ultimately, navigating this problematic situation requires careful consideration of both short-term stimulus needs and long-term economic sustainability goals.

Despite the Federal Reserve’s original bullish forecast in early 2021, things worsened as they came to terms with their record-breaking deferred asset of $18.8 billion at year’s end – cleverly interpreting the loss of income as deferred assets instead of negative returns. As we are well into the first quarter of 2023, this trend will likely stay unless more drastic tactics are taken, such as an even lower interest rate policy stance than planned.

If it feels like the Fed has been fighting a losing battle lately, here is why: since 2008, they have injected trillions of dollars into mortgages and Treasury debt to keep Wall Street alive. Unfortunately for them, those fixed-rate investments will not get much more valuable as interest rates climb. However, their payments have become remarkably volatile — just another spanner in the works in an already uncomfortable situation.

A perfect storm of economic factors has descended upon the Federal Reserve; government bonds, mortgage-backed securities and Treasury debt have all seen their value erode as interest rates rise. Unfortunately for the Fed, its expenses are on a different trajectory – surging outflows in interest payments mean that income is not keeping pace – leaving it desperately trying to defer promised payments to the U.S. treasury.

Even a powerful institution like the Federal Reserve (which seemed well prepared with fixed low-interest rates) can be left feeling somewhat sunken when interest rises to take hold as it did in the early 90s to Savings and Loans. An event that’s now replicating itself onto its balance sheet today! Never underestimate the power of repeating history.

When most other institutions run into money troubles, they flounder, but the Fed is unique. It has a get-out-of-jail-free card: printing more cash to bail itself out – nevertheless, repercussions are bound to be felt. The question is, who bears the brunt of the pain? The little guy sure does not come away unscathed; rising prices mean real wages fall, and spending power diminishes. Moreover (unsurprisingly), even in times of catastrophe, some still benefit, the all-mighty Federal Reserve (and naturally, its accomplices).

The Fed’s hidden strategies are to utilise “monetary inflation,” allowing them to keep their promises of “free” benefits and corporate welfare. Unfortunately, these tactics line the pockets of those who need it least, leaving behind millions in productive classes who do not profit from this grand scam.

The increase in inflation caused by the Federal Reserve going into deficit territory will significantly impact global businesses. As currency wars persist, businesses will face an increasingly complex economic environment.

Inflation can cause prices of goods and services to rise, making it harder for people to make ends meet and reducing their purchasing power. Purchasing power reduction could decrease business demand for products and services, resulting in lower sales revenues and reduced profits. In addition, higher prices of imported goods from abroad due to exchange rate fluctuations can further drive up business costs, eroding their profitability.

On top of that, higher inflation rates can lead to increased borrowing costs for businesses as lenders seek to protect themselves from the risk of rising prices. The impacts could mean that companies need help accessing credit for expansion projects or other investments, which could result in slower growth or even retrenchment of staff. The tech industry, for example, has been shedding human resources at an accelerated pace recently.

Furthermore, higher inflation can also distort investment markets as investors seek assets with higher expected returns that offset future price increases due to currency devaluation or other factors. These steps could mean investors may be willing to take more risks than before, ultimately forming bubbles within specific sectors or asset classes such as stocks or real estate.

Lastly, currency wars between countries can further complicate matters for global businesses when nations fight over competitive trade advantages or attempt to gain an advantage by devaluing their currencies against others. These activities add greater complexity for large multinational organisations, and their dependency on international trade flows, pricing models, and customer expectations will be more volatile than usual.

Overall, while no single solution can address the threat of rapid inflation caused by the U.S. Federal Reserve going into deficit territory, careful consideration must still be given to economic stimulus measures to minimise potential impacts on global business operations.

Cost reductions, focusing on the core drivers of business and diversifying risk may help immensely. However, every company is unique and requires a unique approach to deciphering risk. For businesses seeking alternative perspectives on how to adapt their strategies and business models or searching for insights on reducing their pain within a downturn market, contact Strategy Hubb.

Strategy Hubb is holding a bespoke workshop in South Korea from June 12th till June 18th to help businesses diversify their risk and find alternative markets for their goods and services.

Disclaimer: Please note that the information provided in this article is not to be considered as financial advice. Please seek advice for your personal or business matters from a qualified professional or make contact with myself or one of the team at Strategy Hubb to tailor custom solutions to accommodate your circumstances.