Monday, January 11, 2016

Federal Reserve’s “Net Worth” Collapses 33% In Two Weeks

In the following article, Simon Black explains how a bank's net worth is calculated and why this number is important in determining its health. 

Of course, in contemporary times, banks have lost any normal semblance of solvency, as they loan out money they do not have. However, even within this defunct system, a bank still must maintain adequate levels of capital in order to service debt and handle withdrawals from depositors.

As Black suggests, the Fed actually lost 33% of its total net worth over the past month, and by all accounts, it will continue to lose capital.

In researching this story, I discovered a change in fed policy which actually requires that it pay surpluses back to the US Treasury, which explains the loss in capital. 

Apparently the Fixing America’s Surface Transportation (FAST) Act, which was passed in late 2015, has a provision stipulating the new policy. Under act, the Federal Reserve is required to send payments to the US Treasury for any surpluses which exceed $10 billion. 

Here is an excerpt from the Federal Reserve website clearly stating the policy change, and that a payment was issued on December 28th:
Change to H.4.1 to reflect the passage of the FAST Act 
"The Board's H.4.1 statistical release, "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks," has been modified to reflect the policies under which Federal Reserve Banks make payments of their residual net earnings to the U.S. Treasury. The Fixing America's Surface Transportation Act (FAST), which was enacted on December 4, 2015, requires that aggregate Federal Reserve Bank surplus not exceed $10 billion. Therefore, any amount of aggregate Reserve Bank surplus that exceeds this limit will be remitted to the U.S. Treasury. The line "Interest on Federal Reserve Notes due to U.S. Treasury" on table 6 has been replaced with "Earnings remittances due to the U.S. Treasury" and footnotes to tables 1, 5, and 6 have been similarly modified. The amounts of the line items "Other liabilities and capital" on table 1, and "Surplus" on tables 5 and 6 reflect the payment of approximately $19.3 billion to Treasury on December 28, 2015, which was necessary to reduce aggregate Reserve Bank surplus to the $10 billion limitation in the FAST Act."
This could indicate, as Black and others have suggested, that the Fed is about to go bankrupt and that the US government is similarly involvement. The provision in the FAST act, on paper, was intended to fund the highway trust. In other words, the US government is so insolvent, it is now receiving direct funding from the Fed.

Related The Fed Directly Funds FAST Act, Violating 100 Years of Policy | The Treasury Received A Record $19 Billion At The End of 2015

This development, in addition to the market downturn in the beginning of this year, could suggest that 2016 may finally be the year of economic collapse.

Related CNN: Dow Has Worst Four-day Start to a Year On Record

Related As Stocks Plunge in 2016, Swedish Central Bank Holds Extraordinary Meeting, Says Will "Instantly Intervene" If Necessary

If so, the need for a well-educated people that is capable of developing replacement financial tools to service society's need will be great. Let us take the time now to gain key knowledge and understanding for a better future.

Related How and Why "The Money Masters" Took Control (Full Documentary)

- Justin

Source - Sovereign Man

By Simon Black

In case it weren’t completely obvious how completely screwed up the financial system is, please allow me to introduce Exhibit A: the Federal Reserve’s own balance sheet.

First we need a quick accounting background. And, stay with me, because this is important.

Think about your own finances. You, me, everyone… we all have assets and liabilities.

Your assets might be things like cash, your house, car, baseball card collection, etc.

And your liabilities are loans, credit card debt, etc.

The difference between the two can be thought of as your ‘net worth’. And hopefully it’s positive, i.e. your assets exceed your liabilities.

In accounting, this concept of net worth is known as ‘equity’. A company like Apple that has a lot of assets but not a lot of debt has substantial equity.

(As an investor, I typically look for opportunities where I can buy a great business or its shares for less than its equity. But we’ll save that for another time.)

Banks, too, have assets and liabilities.

But while the balance of your savings account may be an asset for you, or the mortgage balance you owe to the bank is your liability, for the bank it’s actually reversed.

Your savings account balance is actually money that they OWE you.

So while your savings is an asset for you, for the bank it’s a liability.

Similarly, your loan balance might be your liability.

But for banks, the loans they make to customers are actually assets because they’re on the receiving end of the loan payments.

For a bank, net worth (known as a bank’s ‘capital’) is a massively important indication of its financial health.

Think about it– if a bank has a negative net worth, this means that it doesn’t have enough assets to repay its customer deposits.

This is how banking crises start. It’s precisely why Lehman Brothers (and a whole lot of other banks) went bust in 2008/2009. The banks’ liabilities exceeded their assets.

Conservative banks hold vast amounts of capital, i.e. have substantial net worth where the value of their assets drastically exceeds liabilities and customer deposits.

One way of looking at this is by measuring a bank’s capital as a percentage of its total assets. (Conservative banks have a high percentage.)

Let’s say a bank has $1000 in assets like cash and loans, and $200 in liabilities (customer deposits).

This means that the bank has $800 in capital, which constitutes 80% of its total assets.

In other words, the value of the bank’s assets can fall by 80%, and the bank would still be able to repay its depositors.

This is a huge margin of safety that is unfortunately almost unheard of in banking.

Right before the crisis, in fact, Lehman Brother’s capital was just 3% of its total assets.

And that leads me to central banks.

Just like regular banks and businesses, central banks also have assets and liabilities.

In the US, the Federal Reserve’s assets total $4.486 trillion, including more than $2 TRILLION in US government debt.

The Fed also has total capital (i.e. net worth) of $39.5 billion.

That sounds like a lot. Until you realize that it constitutes just 0.88% of its total assets. Not even 1%!

This is a tiny, almost nonexistent level of capital at the Federal Reserve.

Put another way, the issuer of the United States dollar, the most widely used currency on the planet, and the central bank of the largest economy in the world, has almost no margin of safety.

This puts the entire global financial system at a tremendous level of risk.

Central banks can and do go bankrupt. It happened most notably in Iceland back in 2008, causing an epic currency crisis in that country.

So running the Fed’s balance sheet down to the nub like this is not exactly a consequence-free course of action.

But what’s really astonishing about all of this is how quickly the Fed’s balance sheet deteriorated. And why.

Just two weeks ago, the Fed’s total capital was nearly $59 billion. And even that wasn’t very much given the size of its balance sheet.

Today it’s $39.5. This is an incredible 33% drop in just two weeks!

Imagine your net worth collapsing by 33% in two weeks; it would probably be a huge personal crisis. Yet the Fed seems completely cool about it.

I did some digging and found out why this happened.

It turns out that Congress and the President passed a law last month called the Fixing America’s Surface Transportation (FAST) Act.

We’ve talked about this one before– the FAST Act is supposed to provide funding for America’s highway system.

But one of the provisions is that a US citizen can have his passport revoked if the government believes in its sole discretion that he owes too much tax. Crazy.

And, buried deep within the nearly 500 pages of legislation is a neat little section demanding that Federal Reserve bank surpluses above a certain amount must be turned over to the United States Department of Treasury.

In other words, the US government is so broke that they’re now confiscating assets from the Fed, putting the entire global financial system at even more risk.

It’s genius!

You just can’t make this stuff up. It’s so absurd it would be comical if it weren’t true.

So, yes, it should be completely obvious by now that there is a tremendous amount of risk in the system.

Governments are completely bankrupt. And even central banks now are being pushed into insolvency by the bankrupt governments they support.

Related The National Debt Is Not For Americans To Payback | History of The Corporate Takeover of The Continental United States

This is not a story that has a happy ending. And whether the consequences arise today, tomorrow, or five years from now is irrelevant.

This is a major risk. And for any thinking, rational person paying attention, it’s imperative to have a Plan B.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

Multiple times every week, we help over 100,000 Sovereign Man subscribers who are taking their family's liberty and prosperity into their own hands with our free publication, Notes From The Field.

Activate your free subscription today, and get fresh intelligence delivered securely to your inbox as we travel the world discovering the biggest opportunities available to smart, enterprising individuals like you.

About the Author

Simon Black is an international investor, entrepreneur, and founder of Sovereign Man. His free daily e-letter Notes from the Field is about using the experiences from his life and travels to help you achieve more freedom, make more money, keep more of it, and protect it all from bankrupt governments.




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