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The Fed’s Concerning Insolvency Problems

Financial expert George Gammons says that the Federal Reserve has been “selling assets at a loss, and this, combined with increasing interest rates, will only make matters worse.”

He also warns that an accounting gimmick called deferred assets makes it seem like the Fed isn’t insolvent, a gimmick that won’t last forever.

The Federal Reserve may, yet again, be on the brink of bankruptcy.

At the Fed’s last meeting, which was held from December 13-14, interest rates were bumped up 0.50 percentage points. Slightly smaller in size than the three previous hikes.

What’s Happening?

The Federal Reserve is reducing its balance sheet by allowing securities to mature and selling some of them.

The Fed bought these assets at lower interest rates, which resulted in higher purchase prices. This means that when they are sold, they take on a loss that can be seen reflected in remittances back to Treasury.

Selling securities, even at a loss, will only further reduce their assets and increase liabilities beyond the point of insolvency.

The Fed is currently losing money because of selling assets on its balance sheet at a lower price for quantitative tightening.

This means the loss they will absorb will grow bigger with interest rate increases.

The Insolvency Issue

The Fed could easily print more money to help solve their problems, but it would just make matters worse and become a huge liability.

Experts say they may pull an accounting gimmick called “deferred assets” to make it seem like they are not insolvent. Basically giving themselves IOUs on future profits.

They are currently booking profits that don’t exist

Gammons says that about $13 billion of its balance sheet has been created through this tactic.

Within about two to three months since the Fed’s quantitative tightening, they have taken a $13 billion loss which threatens not only to exceed but also outstrip their total equity and capital holdings at $35 billion, which places them in insolvency.

The Federal Reserve’s losses could go as high as $50 to $100 billion or more.

What The Experts Say

Joseph Wang, a former Federal Reserve insider who previously worked with the Federal Reserve in charge of the New York Feds trading desk, ran quantitative tightening and quantitative easing, which was the management system for the Fed’s balance sheet.

Wang says that the Federal Reserve is spending a trillion dollars in deficit annually, printing treasuries to pay for that.  “The Fed is printing money to pay interest rate payments, the federal government is printing treasuries to pay for their purchases.”

“This is not sustainable and probably will bring some kind of disruption in the near to medium term,” Wang remarked.

Economists also indicate, even without big Fed rate increases, that inflation is expected to slow as supply-chain bottlenecks ease, commodity prices fall, a strong dollar lowers import costs, and retailers offer discounts to unload swollen inventories.

The Federal Reserve is the largest bank in the world.

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“The decisions that the Fed makes ultimately impact the interest rates that are relevant for everything that we do,” says Eric Sims, an economics professor at the University of Notre Dame.

World & U.S. News