(Schiff)—The Federal Reserve is losing money. That means the American taxpayer is losing money.
In most instances, a business bleeding red ink has a big problem and could ultimately go under. Not so for the Fed. In fact, losing money isn’t a problem for the central bank at all. But it is a big problem for the US government.
According to the Federal Reserve’s quarterly report for Q2, the central bank reported a loss of $57.3 billion through the first half of the year. The Fed is on pace to lose over $100 billion in 2023.
Rising interest rates are a big problem for the Fed, as they are for other banks. The central bank earns interest income on the bonds it holds on its balance sheet. But the Fed also pays out interest to other financial institutions that park money there. The bonds it bought during multiple rounds of quantitative easing (QE) and still holds on its balance sheet were relatively low-yielding. But with rates much higher today, it is paying out interest at a much higher rate.
According to the Fed report, as of June 30, the central bank held roughly $5.5 trillion in US Treasuries with an average yield of 1.96%. It also held $2.6 trillion of mortgage-backed securities with an average yield of 2.20%. Meanwhile, the average interest rate the Fed paid on money it held, along with repo agreements and other operations averaged around 5%.
It’s also important to note that the Federal Reserve has shed almost $1 trillion from its balance sheet in quantitative tightening.
The results were predictable. Through the first half of the year, the Federal Reserve reported $88.4 billion in interest income. But it paid out $141.8 billion in interest expense. That adds up to a lot of red ink.
It’s also interesting to note that like many commercial banks, the Fed has substantial unrealized losses. If you mark all of the bonds held by the Fed to market value, the loss on paper is over $1 trillion. That’s more around 23 times the value of the central bank’s stated capital.
Bond portfolio losses are exactly what kicked off the financial crisis last March. But none of this matters to the central bankers at the Fed.
Big Losses! So What?
The last time the Fed reported net operating losses was in 1915.
To put this net loss in perspective, the largest yearly gain over the last 10 years was in 2021 when the Fed reported a $104 billion net income. In other words, the central bank is on pace for a loss as large as the biggest gain in at least a decade.
Who suffers when the Federal Reserve loses money? In most cases, a business feels the pain when a business loses money. But when the Fed loses money, the US government feels the pain. And ultimately, you and I foot the bill.
Under the Fed’s charter, the Fed remits its profits to the US Treasury. This helps pay down the massive federal budget deficits. When the Fed loses money, the Treasury loses its payday. That means even bigger budget deficits.
Bigger deficits mean the government has to raise taxes or borrow even more money. Either way, we pay. You either get a bigger tax bill or you pay the inflation tax when the Fed prints money to monetize the debt.
But what about the Fed? Isn’t losing money a problem for the central bank? It certainly would be for a normal bank. But the Fed isn’t a normal bank.
As Mises Institute Senior editor Ryan McMaken put it, “The de facto reality of the Federal Reserve is that it is a government agency, run by government technocrats, that enjoys the benefits of being subject to very little oversight from Congress.”
If a normal business loses money, it must cut costs, sell assets, borrow money, or take other actions to stop the losses. If it loses enough money, it will eventually eat away at the company’s assets. If this goes on long enough, the company will become insolvent. Sustained losses ultimately mean bankruptcy.
The Fed doesn’t have to do any of these things. In fact, it can lose money year after year and go right on doing business as if there were no losses.
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How? Because we live in a world where the Federal Reserve gets to make its own accounting rules. And according to its own accounting rules, any net loss magically turns into a “deferred asset.”
[I]n the unlikely scenario in which realized losses were sufficiently large enough to result in an overall net income loss for the Reserve Banks, the Federal Reserve would still meet its financial obligations to cover operating expenses. In that case, remittances to the Treasury would be suspended and a deferred asset would be recorded on the Federal Reserve’s balance sheet.”
Under this scheme, an operating loss does not reduce the Fed’s reported capital or surplus. The bank simply creates an “asset” on its balance sheet out of thin air equal to the loss and business continues as usual. (This is kind of like money printing.) As losses mount, the size of this “asset” will grow.
There is no limit to the size of this “deferred asset” and no time limit on its existence.
Once the Fed returns to profitability, it will retain profits in order to reduce the amount of this imaginary asset. In other words, the US government won’t get any money from the Fed until this “asset” is zeroed out. At that point, the Fed will resume sending money to the federal government.
This has no real impact on the Fed, but it does mean the US government will see a long-term reduction in revenue resulting in a budget deficit higher than it otherwise would have been as long as the Fed is losing money.
A recent article by Alex Pollock published by the Mises Wire breaks it down using the Fed’s most recent balance sheet.
The CQFR reports a total capital of about $42 billion ($35.6 billion of paid-in capital from the member commercial banks and $6.8 billion of retained earnings, called “surplus”). But note: This total capital is much less than the $57 billion reported loss for the six months of 2023, to which must be added the loss for the later months of 2022 of $17 billion. This total $74 billion of accumulated losses by June 30 must be subtracted from the retained earnings and thus from total capital. But the Fed does not do this—it misleadingly books its losses as an asset (!), which it calls a “deferred asset”– a practice highly surprising to anyone who passed Accounting 101. Why does the Fed do this? Presumably it does not wish to show itself with negative capital. However, negative capital is the reality.
Here are the combined Fed’s correct capital accounts as of June 30, based on Generally Accepted Accounting Principles. They result in a capital of negative $32 billion:
Paid-in capital $36 billionRetained earnings ($68 billion)Total capital ($32 billion)
I sure do wish I could use my own accounting system when doing my taxes. But alas, I’m not special.
Conclusion
This isn’t good news for a government already buried in debt and running massive budget deficits month after month. It means the US government will have to borrow even more money that the Fed will ultimately have to monetize.
This is yet another reason the Fed’s inflation fight is doomed to fail. Raising rates and shrinking its balance sheet to tame the inflation dragon means more federal government debt. That puts more pressure on the central bank to prop up the government’s borrow-and-spend policies. At some point, the Fed will be forced to cut rates and return to QE in order to manipulate the bond market so the government can keep borrowing. In other words, it will have to create more inflation.
Five Things New “Preppers” Forget When Getting Ready for Bad Times Ahead
The preparedness community is growing faster than it has in decades. Even during peak times such as Y2K, the economic downturn of 2008, and Covid, the vast majority of Americans made sure they had plenty of toilet paper but didn’t really stockpile anything else.
Things have changed. There’s a growing anxiety in this presidential election year that has prompted more Americans to get prepared for crazy events in the future. Some of it is being driven by fearmongers, but there are valid concerns with the economy, food supply, pharmaceuticals, the energy grid, and mass rioting that have pushed average Americans into “prepper” mode.
There are degrees of preparedness. One does not have to be a full-blown “doomsday prepper” living off-grid in a secure Montana bunker in order to be ahead of the curve. In many ways, preparedness isn’t about being able to perfectly handle every conceivable situation. It’s about being less dependent on government for as long as possible. Those who have proper “preps” will not be waiting for FEMA to distribute emergency supplies to the desperate masses.
Below are five things people new to preparedness (and sometimes even those with experience) often forget as they get ready. All five are common sense notions that do not rely on doomsday in order to be useful. It may be nice to own a tank during the apocalypse but there’s not much you can do with it until things get really crazy. The recommendations below can have places in the lives of average Americans whether doomsday comes or not.
Note: The information provided by this publication or any related communications is for informational purposes only and should not be considered as financial advice. We do not provide personalized investment, financial, or legal advice.
Secured Wealth
Whether in the bank or held in a retirement account, most Americans feel that their life’s savings is relatively secure. At least they did until the last couple of years when de-banking, geopolitical turmoil, and the threat of Central Bank Digital Currencies reared their ugly heads.
It behooves Americans to diversify their holdings. If there’s a triggering event or series of events that cripple the financial systems or devalue the U.S. Dollar, wealth can evaporate quickly. To hedge against potential turmoil, many Americans are looking in two directions: Crypto and physical precious metals.
There are huge advantages to cryptocurrencies, but there are also inherent risks because “virtual” money can become challenging to spend. Add in the push by central banks and governments to regulate or even replace cryptocurrencies with their own versions they control and the risks amplify. There’s nothing wrong with cryptocurrencies today but things can change rapidly.
As for physical precious metals, many Americans pay cash to keep plenty on hand in their safe. Rolling over or transferring retirement accounts into self-directed IRAs is also a popular option, but there are caveats. It can often take weeks or even months to get the gold and silver shipped if the owner chooses to close their account. This is why Genesis Gold Group stands out. Their relationship with the depositories allows for rapid closure and shipping, often in less than 10 days from the time the account holder makes their move. This can come in handy if things appear to be heading south.
Lots of Potable Water
One of the biggest shocks that hit new preppers is understanding how much potable water they need in order to survive. Experts claim one gallon of water per person per day is necessary. Even the most conservative estimates put it at over half-a-gallon. That means that for a family of four, they’ll need around 120 gallons of water to survive for a month if the taps turn off and the stores empty out.
Being near a fresh water source, whether it’s a river, lake, or well, is a best practice among experienced preppers. It’s necessary to have a water filter as well, even if the taps are still working. Many refuse to drink tap water even when there is no emergency. Berkey was our previous favorite but they’re under attack from regulators so the Alexapure systems are solid replacements.
For those in the city or away from fresh water sources, storage is the best option. This can be challenging because proper water storage containers take up a lot of room and are difficult to move if the need arises. For “bug in” situations, having a larger container that stores hundreds or even thousands of gallons is better than stacking 1-5 gallon containers. Unfortunately, they won’t be easily transportable and they can cost a lot to install.
Water is critical. If chaos erupts and water infrastructure is compromised, having a large backup supply can be lifesaving.
Pharmaceuticals and Medical Supplies
There are multiple threats specific to the medical supply chain. With Chinese and Indian imports accounting for over 90% of pharmaceutical ingredients in the United States, deteriorating relations could make it impossible to get the medicines and antibiotics many of us need.
Stocking up many prescription medications can be hard. Doctors generally do not like to prescribe large batches of drugs even if they are shelf-stable for extended periods of time. It is a best practice to ask your doctor if they can prescribe a larger amount. Today, some are sympathetic to concerns about pharmacies running out or becoming inaccessible. Tell them your concerns. It’s worth a shot. The worst they can do is say no.
If your doctor is unwilling to help you stock up on medicines, then Jase Medical is a good alternative. Through telehealth, they can prescribe daily meds or antibiotics that are shipped to your door. As proponents of medical freedom, they empathize with those who want to have enough medical supplies on hand in case things go wrong.
Energy Sources
The vast majority of Americans are locked into the grid. This has proven to be a massive liability when the grid goes down. Unfortunately, there are no inexpensive remedies.
Those living off-grid had to either spend a lot of money or effort (or both) to get their alternative energy sources like solar set up. For those who do not want to go so far, it’s still a best practice to have backup power sources. Diesel generators and portable solar panels are the two most popular, and while they’re not inexpensive they are not out of reach of most Americans who are concerned about being without power for extended periods of time.
Natural gas is another necessity for many, but that’s far more challenging to replace. Having alternatives for heating and cooking that can be powered if gas and electric grids go down is important. Have a backup for items that require power such as manual can openers. If you’re stuck eating canned foods for a while and all you have is an electric opener, you’ll have problems.
Don’t Forget the Protein
When most think about “prepping,” they think about their food supply. More Americans are turning to gardening and homesteading as ways to produce their own food. Others are working with local farmers and ranchers to purchase directly from the sources. This is a good idea whether doomsday comes or not, but it’s particularly important if the food supply chain is broken.
Most grocery stores have about one to two weeks worth of food, as do most American households. Grocers rely heavily on truckers to receive their ongoing shipments. In a crisis, the current process can fail. It behooves Americans for multiple reasons to localize their food purchases as much as possible.
Long-term storage is another popular option. Canned foods, MREs, and freeze dried meals are selling out quickly even as prices rise. But one component that is conspicuously absent in shelf-stable food is high-quality protein. Most survival food companies offer low quality “protein buckets” or cans of meat, but they are often barely edible.
Prepper All-Naturals offers premium cuts of steak that have been cooked sous vide and freeze dried to give them a 25-year shelf life. They offer Ribeye, NY Strip, and Tenderloin among others.
Having buckets of beans and rice is a good start, but keeping a solid supply of high-quality protein isn’t just healthier. It can help a family maintain normalcy through crises.
Prepare Without Fear
With all the challenges we face as Americans today, it can be emotionally draining. Citizens are scared and there’s nothing irrational about their concerns. Being prepared and making lifestyle changes to secure necessities can go a long way toward overcoming the fears that plague us. We should hope and pray for the best but prepare for the worst. And if the worst does come, then knowing we did what we could to be ready for it will help us face those challenges with confidence.
