WORD OF THE DAY – DEBT LIMIT – a note

The Fed creates its own money. It won’t go bankrupt. But every year the Fed sends all the income it made to the Treasury Department.

The Fed made around $5.2 trillion from (REPOs (overnight loans to banks, credit unions, money makers, etc.) in 2022. At the end of 2022, the Fed had a net income of $58.4 billion.

The Fed’s problem is that interest rates on the REPOs (bank overnight loans) that the Fed charges now have begun to exceed the Fed’s interest rates on those securities (stocks & bonds, etc.) that it bought way back when Fed REPO interest rates were much lower than today.

Also lagging, because the Fed is using (QT) “Quantitative tightening” i.e. selling off its assets for income which it has to pay to the Treasury each year, this way of QT selling off of securities can take a long time to amass the income the Fed needs for paying off our Treasury Department spending on past U.S. debts.

At the end of year 2022 the Fed sent the Treasury Department $76 billion. However, interest expenses of the Fed exploded a factor of 19 to $102.4 billion in 2022, up from $5.7 billion in 2021.

So, the issue is that right now in 2023 the the Fed is losing income and running into the red, and the Treasury is not allowed to print money.

Once the debt limit is exceeded, our government will lose all trust in faith in it. And there will be little consensus possible to discuss future plans for spending. That’s just a waste of time. Ask anyone who has wound up dealing with a high interest rate money lender!

The Fed maybe could make a RRP promise ( reverse repurchase agreement) with (banks and money market-makers) offering to buy back its securities at a higher price in the future, but this seems to me to be “going from the pot into the fire or as they say “Kicks the can down the road”. And dangerous! As buybacks have just put the store, Bed, Bath and Beyond out of business.

I’m really sorry to say this, but the image I have in my head today is the serpent swallowing and eating its tail and insides. I sure hope I’m wrong!

And I hope everyone of you has been saving during our Covid era for a better economy, because I still believe that could be the case of what our bipartisan Congress has done for us in the past two years.

Source: Wolf Street Despite Losses since September, the Fed Still Made a Profit for the Whole Year 2022, Remitted $76 billion to US Treasury Dept.

 

WORD OF THE DAY—QT (Quantitative Tightening)

If you are worried about what the Fed is doing in the future, it will probably follow Britain’s central bank and start using QT (Quantitative Tightening). QT is where the Feds will seek to sell off assets, (mainly bonds) from their balance sheet. This practice will affect corporations, stockholders and the bond market.

QT is what ultimately ended the 2007-2008 BIG RECESSION. By its end, the Fed had bought 9 trillion dollars on their balance sheet.

The BIG RECESSION occurred because the big financial markets didn’t have liquidity (the ability to buy and sell assets easily). So our Fed bought assets in order to save big corporations and banks.

If I recall right over 500 banks had closed their doors in 2007-2008. That was because giant banks, corporations, etc. had built humongous houses of cards. When the bubble burst on their so-called ‘insurance’ derivative IOU’s, they didn’t have enough money to cover their debts. Everyone was hurting. Continue reading →

WORD of the DAY – Runaway Inflation

Economics Has “Long Been Called “The Dismal Science”.

However, In My Opinion It Should Be Called “The “Magical Thinking Science”

So many calculus formulas and jargon words are mis-used to promote economic policies that seem nuts.

This week I’m using an example of “Wolf Street’s Stories behind Business, Finance & Money” post  about Runaway Inflation for their chock-full-of-data about how Economics really works.

Wolf defines this phrase. Runaway Inflation is when “‘Temporary’ inflation” (or a “spike in inflation” is suddenly called “Runaway Inflation”).

Wolf shows in an easy-to-see Eurostat chart that “Runaway Inflation” in the Eurozone jumped to 9.1% in August 2022, a percentage that in Europe hadn’t been seen since 1997.

Ignoring reality, back in mid-2021 our Fed announced that inflation was just temporary, and the ECB followed suit.

For decades while printing money, both our Central Banks and the Eurozone Countries Central Banks had been getting away with using a policy called “Negative-Interest-Rates”

The Central Banks in Europe and U.S. told their big money-market customers that even though their clients’ accounts were losing money, their customers were safer with them than with other kinds of assets.

Those Central Banks were accually claiming that going and staying below zero was gaining their customers some kind value – the value of peace of mind. Continue reading →