Re. funny money... James Turk Warns The Federal Reserve Is Already Insolvent
February 25, 2013
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.
What's more, I am making the assumption that the Fed will not suffer any losses on the toxic mortgage securities it still holds, and that its other assets are recorded at a fair market value. Both of these generous assumptions would mean that the Fed is probably in worse financial shape than I am indicating.
So the Fed governor's study is off-the-mark. So, again, the Federal Reserve is already insolvent, but like all banks, they get around this reality with accounting gimmicks. A bank only marks assets to market if they are in the bank's “trading” portfolio. If the bank claims it will hold the asset to maturity, the asset is put into its “investment” portfolio and does not need to be marked to market. Of course this accounting gimmick only masks the true value of the asset.
But the simple analysis above reveals that the Federal Reserve is insolvent. Like many zombie commercial banks that are still operating by being propped up with government handouts, the Federal Reserve is liquid, but not solvent. What is important for investors to understand here is that this is dire news for the dollar.”
When asked about gold and silver Turk responded, “It is good to see the precious metals starting off the week on a positive note, especially after the pounding they took the last few weeks. Both gold and silver are very oversold. So the question we need to ask is whether we are just seeing a relief rally to work off the oversold condition, or is the low finally in place?
I think Andrew Maguire answers that question in the insightful interview with you this weekend. I recommend that every KWN reader listen to that wonderful audio interview. I have already listened to it once very closely, and I intend to listen to it again tomorrow.
I would also like to note that Open Interest on the Comex silver contract rose again on Friday, which is astounding. While the professional traders switched to the short side in gold, the silver longs have not capitulated. They are taking the shorts head-on.
A massive short covering rally that sends silver and gold rocketing higher could be just around the corner, as the professional traders cover their gold shorts, and the central planners controlling the paper market rush for the exits to cover their shorts in silver.”