Thursday, January 14, 2010

Federal Reserve Risking a Negative Net Worth for the United States

Much has been reported by the mainstream (and economically ignorant) media that the Federal Reserve earned $52.1 billion last year, actually showing a profit despite the near economic collapse of the U.S. financial system.

This is a 47% increase from 2008, making it appear the Fed is doing a wonderful job managing the current crisis.


So what is the unvarnished truth that the mainstream media and its Obama Administration cheerleaders is missing?

Anyone who can print hundreds of billions of dollars of crisp brand new Treasury bonds and then buy interest paying assets could earn an infinite amount of profit doing exactly what the Fed did. A brain damaged chimpanzee high on PCP could make a fortune this same way. Every new bond that rolls off the printing press means an instant new profit for the Fed. Wouldn't you like to be able to create debt paper out of thin air and then instantly record all the interest payments yet to be received as current income?

(By the way, you can. Become a central banker.)

The Fed has printed up so much new debt paper to earn that $52.1 billion that its balance sheet is risking a negative net worth for the United States.

Currently, Goldman Sachs has assets about 15 times its capital.
Bear Sterns went bust with assets about 33 times capital.

Today, the Fed has assets FORTY-THREE TIMES its capital base---and the spread is growing.

Do the math. Less than a 3% decline in the asset value of all the Fed's Treasury bonds and its current holdings in Fannie, Freddie, and TARP paper would WIPE OUT THE EQUITY OF THE FEDERAL RESERVE BANK OF THE UNITED STATES.

The Fed has, to be blunt, shot its wad in the economic arena. It has bought assets and sold paper to such an extent that it cannot do much more. If the U.S. should experience a double-dip recession or, more likely, years of stagflation, what can the central bankers do but look helplessly from the sidelines, or worse, start monetizing the debt?

Even worse, what has all those asset purchases and bond sales given the United States these days?

The dollar is weak and falling.

A new class of zombie corporations have been created (like AIG, General Motors, Fannie Mae, Freddie Mac, and Chrysler to name but a few) that are now addicted to public money and cannot survive without still more Federal spending.

Asset values, such as in the commercial real estate and stock markets, are held aloft in the froth of super cheap and almost free money from the Fed, preventing the natural adjustments in price that a robust capitalist society requires.

And new bubble markets are appearing, supercharged by the Fed's cheap money program. Two examples of many are in bonds and stocks. Alcoa, for instance, is trading at 23 times estimated 2010 earnings, a company that actually lost $2.31 per share in 2009. Some REIT ETFs trade with P/E ratios of 50 to 70 or even more. VNQ looks like a relative bargain at a mere 28 times 2009 earnings---when most observers like me feel the commercial real estate market is yet another bubble market overripe and ready to fall.

If none of this interests you, take note.

How do you expect to prosper as a real estate investor in this environment? Real estate is a capital intensive business dependent on income gains by tenants to build property values for you.

Does the potential negative net worth of the U.S. central bank really make you feel our national economy is turning around? Does it inspire new investment in jobs, in plant and new equipment? Does it inspire consumers to go out and spend money in the face of still rising unemployment?

Um, no.

Robert J. Abalos, Esq.