Calculate This! Discussion of Fed Potential Losses Is Beside The Point

Bloomberg’s summary of the issues the Fed faces when interest rates start to rise ignores the real problems with current Fed policies of QE and ZIRP–the very real costs which they impose on the economy right here and right now.

Federal Reserve Chairman Ben S. Bernanke’s efforts to rescue the economy could result in more than a half trillion dollars of paper losses on the central bank’s books if interest rates rise abruptly from recent levels.

That sum is the difference between the value of securities in the Fed’s portfolio on Dec. 31 and what they may fetch in three years, according to data compiled by MSCI Inc. of New York for Bloomberg News. MSCI applied scenarios devised by the Fed itself for stress-testing the nation’s 19 largest banks.

MSCI sees the market value of Fed holdings shrinking by $547 billion over three years under an adverse scenario that includes an economic contraction and rising inflation. MSCI puts the Fed’s mark-to-market loss at less than half that, or $216 billion, if the economy performs in line with consensus forecasts of gradually rising growth, inflation and interest rates.

via Fed Faces Explaining Billion-Dollar Losses in QE Exit Stress – Bloomberg.

This exercise is ridiculous. It ignores the $430 billion worth of gold that the Fed carries at a book value of $11 billion. In addition, as the article points out, the Fed has nearly $250 billion of unrealized gains on its securities holdings on the books now.

Furthermore, where would gold be in an environment that of rising growth and inflation? The value of the Fed’s stake could easily rise to a trillion dollars in such an atmosphere. The Fed has a built in inflation hedge already, one that it will never mark to market.

The Fed and the media will just go on pretending that the Fed might take a loss and cut its remittances to Treasury, which are really just an infinitesimal, insignificant reduction in the government’s interest cost. The mainstream media will pretend this is a big deal, and Congress will have show hearings with the usual whining, but nothing will be done.  If the Fed doesn’t remit the current $6-7 billion  a month to the Treasury for a few years, no one will even notice. It isn’t even a rounding error compared to the monthly government deficits.  The “losses” will have no impact on the budget and no impact on monetary policy.

So the  Fed faces uncomfortable Congressional hearings. Big effing deal. The Fed’s “profits” and “losses” are not even real. The Fed is little more than a gimmick to print money to pay the government’s bills when the government doesn’t collect enough taxes to pay them, which is all the time, and when the rest of the world won’t lend the government enough to cover the increase in the debt. The profits aren’t real, and neither would the losses be when they occur. They would just flow through the government’s budget like any other line item expense. In the end, this issue will have no impact. The Fed will continue its delusional and destructive economic policies until Congress gets the balls to stop it, which means until forever.

Meanwhile no one is asking the right questions. Like when Bernanke says that the benefits of QE outweigh the risks, he and the media talk about the risks as if they are something that might happen in the future. Bernanke doesn’t dare mention the current costs.  How can we know whether the benefits outweigh the risks of the policy if no one has actually measured the current cost of the policy and done a full cost benefit analysis. If the US economy follows the rules of double entry accounting, then the benefits to one party, in this case the banks, are a cost to somebody else. Why isn’t QE at best  just a zero sum game transferring value from one sector of the economy to another? No one has asked that question, so no one has attempted to answer it.

There are so many costs of this policy that no one ever analyzes in specifics, referring to them in only bland generalities.

For example, lets look at the vast US senior citizen cohort. How much income and spending power have they lost, impacting not just them, but  the entire US economy, thanks to  this crime, ZIRP Bernankecide,? Why doesn’t someone calculate that?


How much has ZIRP and QE contributed to bank profits while ruining the lives of millions of US seniors who never sought and could not afford to take risk? Why doesn’t someone calculate their losses?

How much has it cost US taxpayers in increased Medicaid and other benefit costs for long term senior care because these people have had their savings wiped out? Why doesn’t someone calculate that?

How much income have boomers lost who have been forced to quit their jobs or to take care of aged parents in poor health whose savings have been depleted because of ZIRP?  Why doesn’t someone calculate that?

On the business side, how much have pension funds lost from being unable to earn an adequate investment return thanks to Bernanke’s financial repression? How much income and spending power has been lost in the present, and how much will be lost in the future due to low investment returns. Why doesn’t someone calculate that?

How much has ZIRP contributed to low investment returns of insurers, raising the costs of all kinds of insurance to consumers and businesses? Why doesn’t someone calculate that?

How much will be lost to the malinvestment that ZIRP causes, the impact of which may not be apparent until asset prices inevitably adjust to the misallocation of capital. Why doesn’t someone calculate that?

No one is calculating those costs. I’m sure there are many others that I have not thought of.  Instead of worrying about future potential Fed fictitious losses, why aren’t we calculating the losses that ZIRP is imposing on the US economy right here and right now, not just current costs, but the present value of future costs of this policy continuing as far as the eye can see? This is the real issue.

Read Bloomberg Reports Biggest Story of All Backwards As Fed Blows Dangerous Deposit Bubble

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also provide analysis and charts for David Stockman's Contra Corner which I developed for Mr. Stockman. I’ve had a wide variety of finance related jobs in the past 44 years, including a stint on Wall Street in both analytical and sales capacities. Prior to starting the Wall Street Examiner I worked as a commercial real estate appraiser in Florida for 15 years. I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. My perspective is not of the Ivory Tower. It is from having my boots on the ground and in the trenches of the industries that I analyze and write about today. 

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