The Fed Is Almost Insolvent…”This is where things quickly get out of control. Two words: Own gold.”
SilverDoctors.com
March 31, 2017
This is where things quickly get out of control.
Two words: Own gold.
From Simon Black, Sovereign Man:
September 10, 2008 was one of the last “normal” days in the world of banking and finance.
That afternoon, the US Federal Reserve published its routine, weekly balance sheet report, indicating that the central bank had total assets worth around $925 billion.
Just a few days later, Lehman Brothers filed for bankruptcy, kicking off the most severe economic crisis since the Great Depression.
And almost immediately the Fed launched a series of unprecedented measures in a desperate attempt to contain the damage.
They called it “Quantitative Easing”, which was a fancy way of saying the Federal Reserve was printing money and giving it to the banks and US government.
When the commercial banks needed to sell their non-performing toxic assets, the Fed printed money to buy that garbage.
When the US government needed to borrow trillions of dollars to bail out failing companies, the Fed printed money and loaned it to Uncle Sam.
By January 2015, the size of the Fed’s balance sheet had more than quadrupled to $4.5 trillion.
It was an astonishing increase; the Fed had essentially conjured more than 3.5 trillion dollars out of thin air.
In exchange for all at printed money, the Fed had purchased a bunch of assets, including about $2.4 trillion worth of US government bonds.
This ranks the Fed as one of the top owners of US government debt, just behind the Social Security trust funds.
In fact the US government owes more money to the Federal Reserve than to China, Japan, and Saudi Arabia combined.
Now, remember that interest rates were at historic lows during the time that the Fed was buying up all that US government debt.
From the start of the financial crisis in September 2008 until the day the Fed’s balance sheet peaked in January 2015, the average yield on the 10-year US Treasury was about 2.6%.
That’s close to where the 10-year yield is today; just last week it was 2.62%.
This is where things quickly get out of control.
If you don’t know anything about bonds, there’s just one important principle to understand: as interest rates go up, bond prices go down.
Just like shares of Apple or Exxon, bonds are financial securities.
Investors pay a certain price for bonds just like they pay a certain price for Apple stock. And just like stock prices, bond prices go up and down.
Think about it like this: let’s say you own a government bond that pays $25 per year in interest.
That $25 per year is set in stone. It’s a contract.
And today, the market price for that bond is $1,000.
So, in very simple terms, an investor is paying $1,000 for the bond’s $25 annual income stream.
That works out to be a 2.5% annual return (not including maturity).
At the moment, investors are happy to receive 2.5% because that’s the current rate across most of the market.
But let’s say tomorrow the Federal Reserve jacks up interest rates to 10%.
The Rest…HERE
