How the Fed Bankrupted Congress | QPOL Issue #46
How Powell’s negative liability became a strategic asset for QT.
The fight for the Fed’s monetary independence drags on, especially amidst the looming debt ceiling debacle. Congress will once again have to decide if they’ll default on the debt (or even more politically unpopular, cut spending), or more commonly raise the ceiling to kick the can down the road. The latter is what Davos would prefer, as their goal (as attempted via the CARES act), is to deficit spend the US economy into oblivion and completely ruin its credibility. This would cause capital flight out of America and “back” into an insolvent Europe that’s barely hanging by a thread as Lagarde desperately tries to protect both the Euro and German credit spreads while their over-leveraged offshore dollars are exterminated by Powell’s monetary policy of hiking rates.
It’s critical to remember that while the Fed conducts monetary policy, they are forced to react to Congress’s fiscal policy. Should the debt ceiling be raised once again, the Fed could be forced to monetize more debt just as they were forced to during the Covid crisis in 2020 under the CARES Act. This would essentially unwind all the progress of Powell’s monetary policy and lose all the credibility the Fed has recovered and gained since June 2021 when he began stealth QT via raising the reverse repo facility (RRP) by 5 basis points further strengthening global demand for dollars.
There is however a dilemma Congress and the Treasury face in their plan to raise the debt ceiling. Treasury Secretary Yellen’s piggy bank (the Treasury General Account, or TGA), is running dry after receiving “weaker-than-expected tax collections in April,” and hinting that “the federal government will exhaust its ability to pay all of its obligations without an increase in the federal debt ceiling …" The bottom line is Yellen needs more dollars and Powell needs leverage over her to prevent that from happening. Raising the debt ceiling is how she re-fills her loving cup of fiat. The problem however, is that loving cup’s not filling up any time soon if the Fed’s balance sheet has anything to say about it.
The Fed is bankrupting the government, and that’s a good thing…
Lyn Alden recently wrote a piece entitled How the Fed “Went Broke”. Alden explained that the Treasury doesn’t get paid to fund the government until the Fed covers their bottom line first. Only then does the Fed send a remittance payment to the Treasury.
The Fed started operating at a loss in September 2022 as they aggressively raised rates. This meant that the liabilities on their balance sheet were affected as well as their assets, and therefore hurt their previous income stream of $100 billion (which would ultimately get paid to the government under normal operational circumstances)
How?
“most of their assets are long-duration, meaning that their various U.S. Treasuries and mortgage-backed securities are locked in at lower fixed-rate interest rates and don’t adjust upwards. As a result, the Federal Reserve is now paying out more interest on its liabilities than it is earning on its assets.”
Therefore, the Fed’s liabilities will soon exceed its assets. Thanks to the magic of accounting trickery however, their reported equity is basically unchanged because when the Fed operates at a loss, it doesn’t send a remittance to the Treasury…
Plus, the Fed makes note of how much they lost, and gets to pay back those losses to themselves as soon as they start turning a profit again. So unless the Fed is profitable, the Treasury doesn’t get squat.
“Normally, when the Federal Reserve’s net income is positive, the amount of money that they owe to the Treasury Department is listed as a liability, since they are about to hand it over as a remittance. However, by accumulating losses, this liability becomes negative. And what is a negative liability? An asset!”
The Fed’s accounting wizardry is turning their liabilities into assets, starving the Davos-backed Congress of more money to spend on God knows what…
What this Actually Means…
In addition to the Fed not paying the treasury remittance, as the Fed continues to roll off its balance sheet, those assets generating interest are also no longer going to the treasury. So QT is basically the Fed forcing the Davos-backed government into bankruptcy and to tighten their belt, so long as they don’t raise the debt ceiling.
The Fed is basically slaughtering O’Biden’s/Yellen’s cash cow.
A better question would be “did the Federal Reserve go ‘broke’? Or did the Fed force the Treasury to go ‘broke’ and why?…”
Then ask yourself whose ox gets gored and why. Incentives matter here. And if they do raise the debt ceiling, they’ll be forced to cut spending in some areas. At least, that's the hope - for spending cuts to happen in any debt ceiling deal.
So in a way, Lyn Alden’s piece on How the Fed “Went Broke” is misleading because it’s the treasury that went broke, especially considering it’s just deficit spending as it is... Was that Lyn’s intention? To make the delineation of the Fed vs Treasury? Reasonable monetary policy vs a heroin-junky government with poor fiscal management? I can’t speak for Lyn, but the piece really makes you think about the motives and incentives of both the Fed and Treasury, especially with headlines like this…
Beyond the Hill
A crucial factor at play here is that the money that would be going to the government is now flowing into the commercial banking sector. You know, that thing Davos tried to take out in retaliation to the collapse of SVB (eurodollars) and tried to cause a “banking crisis” to happen by plastering doom-porn headlines on Twitter? Looks like that back-fired. This Mexican stand-off between the Fed and Treasury is simultaneously giving a financial life-line to the banks (no “bailout” necessary).
Alden explains it as such:
The money that used to flow to the U.S. Treasury in remittances is now instead flowing to the U.S. commercial banking system and money market funds. The interest-bearing liabilities for the Federal Reserve are interest-bearing assets for U.S. banks, money market funds, and entities like that.
Of course the infighting between the Fed and Treasury extends far beyond what’s happening in Washington. It’s all connected. In fact, the tweet above clearly states Yellen wants shadow banks to be classified as SIFI (systematically important financial institutions), so they can get similar bailout treatment as the primary dealers. AKA: give BlackRock the same protection as JPM, which completely undermines the authority of the major banks.
Tell me Yellen and Powell are at odds with each other without telling me Yellen and Powell are at odds with each other…
Funny things start to happen when the Fed lead by Powell isn’t running the show with rates at the zero bound. The Fed Put is dead. Raising rates is the Fed’s ticking time bomb on over leveraged shadow banking money like BlackRock.
Now, more shadow institutions like Blackstone are in talks to help regional banks with lending. Of course they’re having talks. They need more money from interest coming in to pay their investors of whom they refused withdraws as they tried to abandon the B-REIT/CRE ship. Also, they wanna compete with JPM, who as I posited wants to step into lending in the private markets to PREVENT these shadow institutions that are coming after the primary dealers’ lunch 🥪 …
The Outcome?
The Fed has the treasury by the balls and dangling $100b + over their heads and rolling off their balance sheet to force them to cooperate and decrease the budget. Will it work? Slim chance, but it clearly paints the picture that there’s without a doubt a war between Powell and the globalist sellouts in the USG.
There won’t be a “default” as long as the Fed can hold these globalist sellout politicians’ feet to the fire and force them to cut the budget. A pipe dream? Perhaps. We certainly can’t cut the budget 80%-90% overnight, but as Vince Lanci (VBL) and Tom Luongo say, we can “throw gold out onto the yield curve.” Meaning, we essentially re-monetize US treasuries to gold and have a small percentage of the coupons be paid out in bullion.
Sadly, it all boils down to who’s in charge and putting faith in our favorite people: politicians. Specifically, the Republicans in Congress and their House Speaker, Andrew McCarthy. As Danielle DiMartino Booth has said though, these Republicans will get their pound of flesh. Just as the Fed is holding $100 billion over the Treasury’s head, it seems House Republicans might hold McCarthy’s feet to the fire. Only time will tell, but it seems very clear where the incentives lie. This is a turf war, and it’s blatantly evident the odds are in the Fed’s/Commercial banks’ favor.
~ Phil Gibson
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