Fed Posts Largest-Ever Annual Operating Loss - WSJ

Don’t panic!

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When you can simply edit your balance in the excel spread sheet recording you balances what is to panic over,.

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You are certainly correct that it is nothing to panic over.

It is, however, a sign/symptom of just how very very extraordinary the times are.
The (economic) times we live in are not safe.
The economy is weak.

Miners don’t die because the canary died.
They are killed by the same cause.

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There will be a reconning.

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The market can be restrained from seeking equilibrium for only so long.

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This is not normal

Long-term view:

Didn’t look like this during the War on Terror, During the “housing” crisis, nor during COVID

That graph appears to indicate aggressive deflation, driven by a repeating loop of economic contraction.

I, of course, would give a 5,000-word explanation of what’s going on.

The WSJ keeps it in a nutshell and explains in the above article:

The central bank paid more to financial institutions on interest-bearing deposits and securities than it earned from securities that it bought when interest rates were lower. That’s a result of it raising its benchmark short-term interest rate to a two-decade high, above 5%, last year.

Previously, the Fed bought a bunch of medium and long-term bonds (“Quantitative Easing”) and paid so much for them that the Fed was, and still is receiving 2, 3, or 4% interest on them. Great! they flooded the economy with money saving us from hard times. Yay!

But the Fed also pays interest on two forms of short-term deposits, the Fed Funds rate and a temporary program called “Reverse Repo.” Nevermind for the moment, that the interest rate on those two are out-of-whack with each other (that is a separate issue.)

Right now, in total, it is paying more interest out on those short-term deposits than it is receiving from on those medium and short-term bonds thus they are running an operating loss. It’s a paper loss. We don’t cone cares about the dead canary. We care about what killed it.

Which means that they are still in essence feeding a QE stream into the economy.

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I don’t think the Fed really is still expanding. But there certainly are people who make that argument

One group who does so are the gold-standard types and Fed bashers.

They point to the fact that the monetary base has expanded (about 6% Y-o-Y).
the fact that the monetary base expansion comes at a time when it is already far far above historic norms.
They are saying in effect “A six percent increase in monetary base may not sound like much but consider: A 1° increase in body temperature matters a lot when your temperature is already 105°.”

The economic mainstream, myself included, focuses on M2 which has leveled-off in the past 7 mos or so.

Is the fed still easing?

Well in the past it borrowed longish-term money at a low rate,
and today it pays a higher rate on short term deposits (FFR)
The Fed is def. a victim of the yield-curve inversion
It pulled the rug out from under itself.

Imagine buying bonds at 2 and 3% then years later while still relying on that income, trying to use that money to pay banks 4 and 5%.

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In case I lost anyone in my wordiness:

  • For a long time, the Fed sold bonds at 2-3%.

  • Currently it is paying 5.5% for overnight deposits (FFR)

  • When you do that too much, there comes an imbalance, a point where you are paying out more than you are taking in.

  • The Fed has passed that point. It does not necessarily cause trouble, but it is a very troubling sign.

The same issue the banks they are supposed to regulate were caught in earlier last year. Too many reserves in low yield, longer term assets no longer able to cover the current rates for deposits. And no one stress tests the fed’s assets because they can just create assets on the books to pay their obligations, carrying the loss

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The banks (the ones that are in trouble) have the aforementioned problem plus an additional one.

More late tonight.