Monday, February 20, 2023

If The Fed And ECB Were "Regular" Banks They Would Be Bust

 The Fed and ECB are now running huge operating losses PLUS enormous mark to market losses. To wit:

  1. There is a wide gap/mismatch between paying high short term rates (eg on the Fed's reverse repo) and low returns on their bond portfolios.  This is a classic borrow short - lend long problem, exactly the same as the Savings and Loan Crisis of the late 1980s.
  2. Central banks are holding long term bonds on their balance sheets that are now priced much lower than what they bought them for.  The unrealized mark to market losses are in the trillions of dollars/euros.
This article explains things pretty clearly.  I wonder how much longer the monetary world will continue to operate as if the Emperor's clothes are real...



  1. The Fed 'losses' and government deficits are basically one and the same. Until we can get government spending under control, there is no hope for a sound balance sheet at the Fed and ECB.

    1. I truly believe the deficit problem is more of a revenue issue than a spending one. Yes, the US govt. is spending too much on certain line items (eg ridiculously high pharma prices) but with tax rates at historic lows there's no way to close the deficit gap via spending cuts alone.

    2. I disagree that the US has a revenue problem. According to Treasury data below, the Federal revenue as a percentage of GDP is the highest at 20% in FY2022 in the last decade.

      Federal spending as a percentage of GDP during the pandemic is the highest in the high 20% compared to 20%-21% pre pandemic.

      Of course US spending is 'low' compared to the welfare states in EU but EU's GDP growth has been 'nonexistent' relative to the US for decades.

    3. Actually, federal revenue data is a more nuanced than the single data point of 2022.

      For one, 2020-22 saw an enormous pumping of cash from the federal government itself, meaning the government "created" more GDP than otherwise, so it is only logical that it would get a bigger slice back as taxes.

      For another, if you look at a longer term chart of revenue/GDP you will see that it has trended down from 20% in 2000 to a low of 14.3% in 2010.

      For yet another, the makeup of revenue has become more one-sided towards individual middle income taxes vs. highly paid individuals and corporations. High bracket and corporate tax rates came sharply down in the last decades.

      It is not a coincidence that Trump's electoral motto MAGA was directed towards formerly middle class Americans.

    4. paraphrasing Hell.

      It would seem that the current (simplistic) debate on higher or lower taxes is a con by the rich to push their agenda of lower taxes for themselves.

      The truth is income taxes should be much lower, as income tax tends to represent a tax on productive activity. In contrast tax on rental incomes need to be much higher, as rent is an unproductive activity.

      Therefor, high non owner occupied property tax; higher inheritance tax (80%?); higher import taxes; higher taxes on wall street trading. At the upper wealth bracket, possibly a (1%?) wealth tax.

      I'm not saying anything new... problem really is getting politicians that are prepared to implement such policies elected... so the problem boils down the the electorate... see below. =)

    5. Here is the chart of Federal Receipts as Percent of Gross Domestic Product since the Great Depression. The percentage has held pretty stable post WWII. Year 2000 and 2010 were anomalies probably a result of Internet bubble and Great Recession.

      As to the makeup of revenue, I agree that they are dependent on the political party in power. But overall tax receipts has been quite stable (taking into consideration stock market and economic conditions.)

      On the other hand, government spending is totally out of control...


  2. It is common to say that all politicians are corrupt. This excuses the voter and places the blame on the govt, allowing the voter to fill smug and self contented.

    Truth is current voters are blind to their own self interest; and thus refuse to elect non corrupt politicians.