Federal Reserve Out of Ammunition

Anyone worthy of their credentials knows that the Federal Reserve has been severely weakened with its overt accommodative policy since the eruption of failed markets that began in the fall of 2007. The political failure for the Fed to tutor Congressional Fiscal responsibility points to a complete lack of both institutional leadership and failure of imagination, the twin goals for any politically inspired institution.

During and throughout this crisis, The Federal Reserve and by extension Congress welcomed the mythical authority of over-specialization as political relief from having Congress actually do its job. But the failure here is political and cultural.

Everyone knows that Buzz Ben at the Fed will keep interest rates artificially low for a decade, easing the federal purse strings as it finances more debt ad nauseam.

We should note that as of this writing, any increase in the yield would completely wipe out the Fed’s ability to maneuver. In effect, leaving the Federal Reserve without any ammunition at all. Look at the Fed’s portfolio and we’ll see what’s left.

The Fed’s own equity is leveraged 40 to 1. An increase in the yield would wipe that out. The Fed though carries over $11 Billion dollars in gold on its balance sheet. Make note, it has appropriated the value of this gold at $43.22 an ounce. If we were to mark the price of this gold at today’s value ($1,710) the balance sheet of the Federal Reserve would show over $447 Billion, a corresponding increase in equity ratio of about 6 to 1, effectively growing the Fed’s capacity.

The news is this: before the Fed goes bankrupt, it should mark-up the value of this gold equity reserves. Our guess here at Group Lumaj is that the Federal Reserve will continue marching along the fiscal Keynesian cliff without ever having to touch its gold reserves.

Institutions will be bailed out. Spending and taxation will not be cut. But individual citizens continue to finance an out of control govmint.

Sic semper tyrannis!

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About William Holland

Systematic Theologian/International Relations
This entry was posted in Economics and tagged , . Bookmark the permalink.

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