Can the mismanagement of the Federal Reserve lead to much bigger problems?

May 29, 2024

Can the mismanagement of the #FederalReserve lead to much bigger problems?

Remember September 15, 1992 ? The two most powerful financial officials in the British government held an urgent meeting that night to review their plan for when the markets opened the next morning. The major reason being that the value of the British pound had been falling for weeks.

Investors and speculators were rapidly losing confidence in the UK government, mostly due to the ridiculous “Exchange Rate Mechanism” (ERM) which essentially pegged most European currencies to the German Deutschemark. By the summer of 1992, inflation in Britain was more than 3x Germany’s. Plus, Britain had a major budget deficit.

So, traders began short selling the British pound, i.e. betting that the value of the pound would fall because the British government would devalue its currency.

One of those speculators was George Soros, (The Man Who Broke the Bank of England) who famously bet $10 billion against the British pound… far exceeding the Bank of England’s financial resources and made over $1 billion in profits out of his astute play.

By the end of that day, the British central bank was essentially bankrupt.

The Federal Reserve is already insolvent. According to its most recent annual financial statements, the Fed has just $51 billion in equity, versus a whopping $948 billion in mark-to-market losses. This means the Fed is insolvent by roughly $900 billion.

Remember that the Fed is still a bank, i.e. it has financial obligations, liabilities, and depositors that it needs to pay. For example, commercial banks like JP Morgan and Bank of America have deposited a total of $3.4 trillion of their customers’ money, i.e. YOUR money, with the Fed. The Treasury Department holds another $700 billion deposit at the Fed. Also, the Fed owes money to foreign governments. They owe trillions of dollars from repurchase agreements to banks and businesses across the global financial system.

So, yeah, the insolvency of the Federal Reserve is a pretty big deal. And just like the Bank of England in 1992, sooner or later, I believe some big shot financiers are going to start betting against the dollar… just like speculators bet against the pound three decades ago. And that would ultimately reduce the value of the dollar, increase inflation, and trigger a new ‘Bretton Woods’ agreement in which the US dollar is no longer the world’s reserve currency.

This is why I believe it makes so much sense to hedge these risks by owning real assets which are scarce, valuable, and uncorrelated to the US dollar.

Gold is a great example. And as I have argued before, even though it’s already near its all-time high, I believe it can go much higher from here.

What do you say?

Come to the Financial Policy Council https://lnkd.in/eZU2UgYd, be a part of decisions that will shape the country’s future & share your thoughts.

#Fed
#Credit
#Bankruptcy

Blackhawk Partners, Inc.
Brain Expansion Group
Hedge Fund Group (HFG)

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