The Federal Reserve is losing billions of dollars every month. And do you know whose problem that is?
Yours.
In this episode of the Money Metals’ Midweek Memo, host Mike Maharrey explains why the Fed is losing money, why it matters, and why you — the American taxpayer — are on the hook for the bill.
He also covers the recent correction in gold and silver prices and explains why it was a bit of an overreaction.
Mike opens the show with a question to ponder: What do you think would happen if I were to use, shall we say, creative accounting on my taxes?
“I think we all know what would happen. It would cost me a lot of money if I got caught. It might even land me in jail. Well, here’s a crazy thing. The Federal Reserve gets to make up its own accounting rules. If it didn’t it would be bankrupt right now, because, The Fed, as we would say in the private sector, is broke. No joke. The Fed is bleeding red ink. If it was a commercial bank or a private business, it would be in big trouble. But it’s the government, so, you know, nothing to see here. Well, I think there is something to see, so I’m going to explain to you exactly why the Fed is broke and how they get away with it no questions asked.”
Before delving into the subject of the Fed, Mike provides a little insight into the gold and silver markets since the “Trump shock” sell-off, noting that things seem to be settling down since the post-election correction.
“I think it’s notable that gold has held $2,600 despite there being a lot more hawkishness about Fed rate cuts. It’s not that they are going to stop cutting rates, but most people in the mainstream think Trump’s policies might be more inflationary, therefore the Fed will cut rates.”
Mike said he agrees that there is still plenty of inflation in the pipeline, but it has little to do with Trump. In fact, calling tariffs “inflationary” isn’t technically correct.
“Yes, tariffs can drive up prices of taxed goods. So, it is fair to say it might boost price inflation. But if some prices go up, others will go down to compensate as people shift their spending patterns. … The only way you get a rise in ALL prices is money creation. It’s more dollars chasing the same amount of goods and services. Remember what Milton Freidman said – Inflation is always and everywhere a monetary phenomenon.”
Mike reiterates a point he often makes on the show: the Fed broke the economy and financial system with more than a decade of easy money. Recent rate hikes put more strain on the system. It’s only a matter of time before problems surface.
“The bottom line is when the next crisis manifests, the Fed is going right back to QE and zero percent interest rates. That’s the fork it knows. That means more inflation.”
Mike then pivots to the subject of the Fed’s financial situation. It’s not good. The central bank lost $19.9 billion in Q3. That’s a continuation of a trend. Since the fourth quarter of 2022, the Fed has lost over $200 billion.
“Now, you might think who cares? Well, you should, because Fed losses ultimately become your losses. The taxpayer is on the hook for the central bank’s shortcomings.”
Mike explains why the Fed is losing money. In a nutshell, the policies that it enacted to fight the price inflation it caused have hurt its own bottom line.
“The Fed’s financial condition offers a glimpse behind the curtain into the unseen consequences of its attempt to ratchet down the price inflation it created with quantitative easing and artificially low interest rates since the 2008 Financial crises, including the monetary malfeasance of the pandemic era.”
But how is it that the taxpayer must foot the bill?
“While a normal bank losing billions every quarter would be in big trouble, central bankers at the Fed can rest easy. It doesn’t matter at all. They can run losses from now until the end of time, and things will go on business as usual. But somebody feels the pain. That somebody is Uncle Sam. And when Uncle Sam feels pain, we the people feel pain.”
That pain comes in the form of taxes.
Under the Federal Reserve charter, it remits any profits to the U.S. Treasury. This is a source of income for the federal government. When the Fed stops making money, the government doesn’t get its payday. That means federal budget deficits are higher than they otherwise would be.
“And who pays for budget deficits? Yes. Taxpayers. Never forget that the government doesn’t have any money of its own. It takes every dime it spends from somebody else. Ergo, bigger deficits mean Congress either has to raise taxes to cover the shortfall or the Treasury has to borrow even more money. Either way, taxpayers pay. They either get a bigger tax bill, or they pay for the borrowing via the inflation tax when the Fed eventually prints money to monetize the debt.”
But why doesn’t it matter to the bankers at the Fed?
Because they get to write their own accounting rules that effectively paper over the losses. Losses go on the balance sheet as a “deferred asset.”
“This ‘differed asset’ has no upper limit. The Fed can keep losing money into perpetuity, and it won’t matter – at least as far as the central bank is concerned. The ‘asset’ will just continue to grow. Once the Fed starts making money again, it will reduce the amount of this imaginary asset. That means the U.S. Treasury won’t see another dime from the Fed until this ‘asset’ is zeroed out.”
The U.S. government won’t likely see a dime from the Fed until 2027 or 2028.
“A revenue cut is less than ideal when Uncle Sam is already buried in over $36 trillion in debt and continues to run massive budget deficits every single month. It means the U.S. government will have to borrow even more money that the Fed will ultimately have to monetize. And it’s less than ideal, for the U.S. taxpayer will ultimately foot the bill for higher interest expense and the price inflation created as the Fed ultimately monetizes the debt.”
Mike said this is a great reason to “End the Fed!” But Congress isn’t likely to do that given the central bank enables the government’s excessive borrowing and spending.
Mike quotes Money Metals CEO Stefan Gleason, saying he hit the nail on the head.
“It is up to individual citizens to protect themselves from the risks of a debt crisis that could cause the currency to depreciate even more rapidly than it has been in recent years. That means holding sound money in the form of physical precious metals will be no less important in the Trump years than it was in the Biden years.”
That leads to a call to action – get sound money while you can! Call 800-800-1865 and talk to a Money Metals’ precious metals specialist.
********
