Many individuals have already forgotten that less than ten years ago, the U.S. Federal Reserve had no choice but to bail out the American banking system. Thanks to the collapse of Lehman Brothers, the most devastating economic and financial crisis since the infamous Great Depression erupted.
The Federal Reserve was forced to launch its first of several Quantitative Easing programs in order to save collapsing investment and commercial banks throughout the country. Despite their best efforts, several of the largest still went down. Remember Washington Mutual Bank, Wachovia, Bear Sterns, and Merrill Lynch? Each of these became casualties in the carnage that ensued despite the Fed’s best efforts.
In order to save the other banks from their mistakenly made, irresponsible loans the Fed stepped in and bought their toxic books in exchange for a significant part of a freshly printed $3.5 trillion. The U.S. Federal government also required trillions of dollars in capital to bail out failing firms like AIG and the Big 3 Detroit automakers.
So the Fed dutifully sank $2.4 trillion dollars from their newly printed money into U.S. Treasuries to help the government meet these extraordinary operating expenses. The Federal Reserve balance sheet had risen from a mere $925 billion on September 10, 2008 to $4.5 trillion by January 2015.
Today this makes the Federal Reserve the second largest U.S. debt holder after the Social Security trust funds. In fact, the Fed today owns more government debt than the combined nations of China, Japan, and Saudi Arabia. They acquired it when the interest rates on U.S. 10 year Treasuries averaged 2.6 percent. Last week it hovered around the same level.
Unfortunately for the Federal Reserve (and the banking system as a whole), the Fed’s largess as lender of last resort has left it with only $40 billion in capital buffer. This means that the Federal Reserve can not afford to realize much in the way of losses. While $40 billion might sound like a huge number, when you measure it up against the $2.4 trillion in Treasuries they hold, it is really chump change.
This is where the danger comes in today. The Fed has begun to raise interest rates to normalize the economy a decade after the tragic Financial Crisis. As they increase the rates another two times this year (per their own target) and several more percentage points in the years after (their stated goal), they are impacting their own massive government bond holdings.
The problem is that as they raise the interest rates, this decreases the value of current bond holdings which move inversely to the direction of interest rates. It simply means that with every interest rate increase they put through, the Fed’s own portfolio of bonds declines a little more in value. These are called “unrealized losses.”
Since the Fed is now down to their paltry $40 billion in capital buffer, they can not afford much in the way of such unrealized losses though. The losses are already mounting too. Since they raised rates by only a quarter point a few weeks ago, bond prices have begun falling, and they have already suffered $14.2 billion worth of net unrealized losses per their own records.
Is Your Retirement Portfolio Protected by Precious Metals Against an Insolvent Federal Reserve?
With the Fed’s balance sheet where it is now, they can only suffer another $26 billion in losses before they are officially insolvent. That only needs bond prices to decline by just over one percent as interest rates rise by the same amount. At that point, the Fed will need a bailout from the over $20 trillion in debt Federal Government.
It would be crazy and short-sighted to ignore the imminent and inevitable insolvency of the Fed, which happens to be the most systemically critical central bank in the world. Gold is the only insurance you need to protect yourself from the financial chaos which this and other U.S. government financial problems are bound to inflict on the markets. You can learn all you need to know about the ultimate safe haven by clicking here to reserve your no- obligation, free rollover kit from Regal Assets. It will show you the essential strategies for protecting your retirement assets with a partial diversification to tangible gold.