The Fed is Bankrupt: Is This the Next Big Crisis?

Today we examine an impending financial crisis involving one of the most secretive and influential entities in modern history, the Federal Reserve.

We will reveal how, since September 2022, the Fed has quietly gone bankrupt. It’s balance sheet is in shambles as it writes massive IOUs to the U.S. Treasury and must pay out billions in interest to the biggest U.S. banks.  Unfortunately, as is too often the case, it’s the tax payers like you and me that will feel the brunt of this crisis.

The 2008 economic changes set this crisis in motion, snaring the Fed in a “death spiral”  which some think will become the greatest financial crisis in history. We don’t know exactly when it will finally blow up, it could be weeks, months, or years, but the good news is there are ways you can protect your portfolio for when the inevitable happens. More on that in a minute.

For additional details on how the Fed was formed, how it works, and where interest rates are headed and why, we highly encourage you to watch our enlightening Fed Masterclass.

Now, before we get into the details and dive into some shocking charts showing exactly when and why the Fed went bankrupt, we need to do a quick primer. The Federal Reserve is a vast and complex system, but we’ll do our best here to keep it simple while providing the necessary information.

Formed in 1913, the Fed is the central bank of the United States and arguably one of the most influential economic institutions in the entire world.

 

How the Fed Injects Money into the Economy

There are three types of money in the economy. Commercial bank money is created by private commercial banks, usually by making loans.

Currency created by the Fed is called base currency, it has 2 forms:

• Federal reserve notes.
  This is the paper currency in circulation that we use everyday.

   

• Bank reserves in the checking accounts of the Fed member branches.
  The bank reserves never go into circulation. Think of it like a separate monetary system only used by the Fed and it’s member banks. You’ll see why these bank reserves are critical in a minute.

After the Fed pays it’s expenses, it remits profits to the Treasury where it is used to pay down the General Fund and offset the huge deficits we are running.

 

The Mechanics of 2008 Quantative Easing (QE)

The Federal Reserve Act of 1913 restricts the Fed to buying assets with the principal and interest guaranteed by the US government (via tax payers). This includes Treasury bonds and mortgage-backed securities (MBS). These purchases allow the Fed to inject currency into the economy. 

In 2008, the Fed’s QE program was making massive purchases. To pay for the bonds and MBS the Fed had to create currency in the form of Federal Reserve IOUs in member bank reserve accounts.

The reserve bank had to purchase bonds from a primary bond dealer (Goldman Sachs, JP Morgan, etc) so a bank IOU was created in the primary bond dealer bank account by the federal reserve bank. 

For every dollar the Fed writes an IOU for it actually creates $2 in the system:

• A dollar of bank reserves in the federal bank reserve account
• A dollar of bank IOU (credit) in the primary dealer bank account

The money in the primary dealer account stimulates the financial markets and lifts real estate, stocks, bonds, etc. 

The Big Problem

In 2008 the Fed started paying interest to Fed member banks on their reserves, which had unforeseen consequences and put the Fed in a trap. It made the Fed bankrupt and dragged you and I along with it.

This was the first time in history this was done, so why did the Fed start paying this interest? By paying the banks interest, the bank reserves built up. The more they built up the more the Fed banks received in interest. This interest is injected into circulation and stimulates the economy, which is a good thing.

However, now that the Fed was paying out interest, it had less profit to send to the Treasury to pay down the General Fund, placing more of a burden on tax payers.

The higher the bank reserves, and the higher the interest rate, the more the Fed pays out in interest.  This is why the interest rate increases in 2022 and 2023 have been so deadly.

In 2022, the Fed’s interest rate hikes caused payments to banks to catapult from $150 billion to $483 billion, essentially creating a “death spiral” with no apparent mathematical way out. Remember, prior to 2008 the Fed paid $0 out in interest.

Scary Charts

Let’s take a look at some charts that will make the scope of this crisis crystal clear.

For each chart, we are going to look at two timeframes, up to Q1 of 2022 (before the interest rate increases started), and up to 2024.

Let’s start by looking at bank reserves.

The main thing to note about bank reserves, is that they were non-existent prior to 2008, and then soared.

Now let’s look at how the interest rate paid to Fed member banks changed over time.

Here we can see that prior to 2022, the highest interest rate paid out was ~2.5%, and that was for a short time span. Then in 2022 the interest rate paid shot up quickly, reaching ~5.5% in 2023 and 2024, more than double the highest rate prior to this.

So we have bank reserves increasing rapidly over time and then interest rates shooting up.

Next let’s look at the resulting interest paid to banks. Remember, 

Bank reserves X interest rate on reserves = interest paid to Fed member banks

 First, prior to 2008 the amount paid to banks was $0. As bank reserves increased, the amount of interest paid out to the banks increased.  But look at the period from 2022 to 2024 when interest rates soared, the amount paid out increased from ~$150 billion to ~$480 billion, a 3.2X increase in 2 years!

We have one more chart to look at, Fed payments to the Treasury for the General Fund to pay down the deficit. We will break this one down into 2 charts…

We can see that prior to 2022, the Fed had a profit almost every year and was able to give the Treasury $.6 billion up to $3.6 billion most years.

Now look at the shocking second chart that contains 2023 and 2024. This one is the most scary. With the higher interest rates, the Fed became massively insolvent and had no profits left over to pay the Treasury.  As a result, the Treasury is not able to help pay down the deficit, and the tax payers have to shoulder more of the burden.

The negative values and steepness of this trend is truly alarming.

SCARY FACTS

The Federal Reserve experienced a $114 billion loss in 2023, a stark contrast to its $58 billion net income in 2022, primarily due to the increase in interest expenses.

According to 2023 annual financial statements, the Fed has just $51 billion in equity, versus a whopping $948 billion in mark-to-market losses. This means the Fed is insolvent 19 times over! It has to rely on loans and deficits just to maintain operations. If it were a corporation it would be called a zombie enterprise. Why this isn’t front-page news is shocking.

This is a big scary problem because the Fed is still a bank and it has financial obligations, liabilities, and depositors that it needs to pay: 

• Commercial banks like JP Morgan and Bank of America have deposited a total of $3.4 trillion of their customers’ money, i.e. YOUR money, with the Fed. 
• The Treasury Department holds $700 billion of deposit at the Fed.
• The Fed owes trillions of dollars to banks anof businesses globally.
• The Fed owes money to foreign governments.

Bottom Line

We think the insolvency of the Federal Reserve is a big deal, yet very few people are talking about it. The likely outcome is a reduction in the value of the dollar, increased inflation, and the potential for the U.S. dollar to lose it’s status as the world’s reserve currency.

The cold hard facts are not pretty, but you can’t argue with the data. We are not going to make a bet on when the dollar will collapse as a result of it’s insolvency, but we think it makes a ton of sense to get out of fiat investments and hedge against these risks by owning real assets which are scarce, valuable, and uncorrelated to the U.S. dollar.

What You Can Do

For investors looking to invest in real assets that provide a hedge against inflation and the decline of the dollar, the Saint Income Fund presents a highly attractive option. Its combination of high returns, asset-backed security, and professional management aligns well hedging against the devaluation of the dollar. Whether you are seeking regular income or aiming for compounded growth, this fund offers a unique and secure way to enhance your investment portfolio.

Invest today with Saint Investment and take advantage of our robust returns and strategic benefits offered by the Saint Income Fund. For more information, explore the Saint Income Fund here or schedule a call with a team member to learn how you can start benefiting from this exceptional investment opportunity.

For additional details on how the Fed was formed, how it works, and where interest rates are headed and why, we highly encourage you to watch our enlightening Fed Webinar Replay.