Today James Turk told stunned King World News when he warned, “… the Federal Reserve is already insolvent.” Turk also stated, “Because of the intense leverage that the Federal Reserve employs, this means the mark-down on its $2.844 trillion of securities is, in reality, a staggering $57 billion loss.” Here is what Turk had to say in this extraordinary interview: “There was an interesting article in The Telegraph here in London over the weekend, Eric. It highlighted a study just released by former a Federal Reserve governor that examined the Fed’s solvency.”
“As The Telegraph explains, “The Federal Reserve is acutely vulnerable because it has stretched the average maturity of its bond holdings to 11 years, and the longer the date, the bigger the losses when yields rise.” The paper then went on to say that “trouble could start by mid-decade and then compound at an alarming pace, with yields spiking up to double-digit rates by the late 2020s.”
I have been watching the yield on the 10-Year T-note and long-bond carefully here. It is significant that yields have been rising fairly steadily over the last several months, and yields are already well above the record low they made back in June. So I decided to read the study….
“It was loaded with a lot of math, but the gist of it is clear. The study concludes that there is a possibility of a “fiscal risk shock occurring within the next five years…leading to possible substantial losses on the Fed’s balance sheet” because federal government spending is not “shifting in the right direction.”
The study can be boiled down into some simple facts, Eric. The Fed owns $2.844 trillion of long-term debt securities. It also has $253 billion of other assets for which is does not disclose a detailed breakdown, but there is probably not much liquidity to them. But let’s focus just on the securities.
The price of these securities have declined about 2.5% since their high prices and low yields were reached in June. But let’s use a smaller percent price drop because the Fed has been purchasing long-term debt for a while, meaning that some of their paper has higher yields. This is also a conservative approach to take.
So instead of a 2.5% decline, let’s assume the average price of the long-term paper owned by the Fed has declined by just 2% since June. Because of the intense leverage that the Federal Reserve employs, this means the mark-down on its $2.844 trillion of securities is, in reality, a staggering $57 billion loss, which is actually greater than the Federal Reserve’s $55 billion equity. Because the loss on the Federal Reserve’s securities is already greater than its equity, this means that the Fed is already technically insolvent.