For a while now I have been warning people that even a slight rise in interest rates could render the Fed technically insolvent, because the market value of its assets would be lower than its outstanding liabilities. In terms of accounting, therefore, it would have negative shareholder equity.
Now in early 2011, there was a rule-change that would possibly rescue the Fed from officially declaring bankruptcy: In the event of a big capital loss emanating from a crash in the bond market, the Fed could conceivably argue that it owed the Treasury a negative amount of money. I walk through all of this hocus pocus here.
Yet this had all been theoretical. I was just made aware that back in December 2013, the Fed in practice came very close to actual insolvency (if it marked its assets to market). Specifically, as of 12/31/2013, the Fed reported equity capital of $55.0bn and unrealized portfolio losses of $53.3bn, meaning there was a net (mark-to-market) equity of $1.7bn supporting $4 trillion of assets. (I have seen an official auditor’s report with these figures, but I can’t find an online source to link you to.) That’s pretty leveraged.
If you want to think through what it “means” if the Fed literally goes bankrupt, read my earlier article. By no means will the government say, “Aww shucks, I guess we’ll get out of the fiat money business.” But it might spook investors and pop what I believe is our massive bubble in dollars and Treasury debt.
Here’s my response to Noah Smith. An excerpt:
So note the contradiction: On the one hand, mainstream economists ridicule Misesians for their “medieval” approach to economic theory, in which they deduce results logically rather than producing falsifiable propositions. But then these same critics tell the world that the outcome of a CPI movement destroys the foundations of Austrian theory. Huh?
Really, that was his recent argument. Details here.
…I need you guys to explain something to me. The Order of the Phoenix debated whether I should respond to Noah Smith’s balanced and judicious essay on Austrian economics, and the ayes have it.
But before I write it up, I am genuinely confused on one point: Noah refers to the Austrians’ “antiSemitic overtones” and links to a this YouTube video, which has been out since 2013 and has “301+ views.” I can’t even figure out who released the video, let alone verify that it is someone associated with Austrian economics.
Am I missing something?
Sorry for the scant posting lately. Last week I was in New Hampshire, this week I’m at my parents’ house, and next week I’m at FreedomFest. Anyway:
==> Speaking of which, Tom Woods reaches out to the Christian Right. He’s so inclusive, that big softie.
==> A post on the “lost” IRS emails if you’re shocked, shocked that people in DC lie.
==> Interesting take on the Redskins’ ruling.
==> Rob Bradley talks about Henry Paulson‘s latest concern over climate change. (The man is a saint.) At IER I have a post coming out on this, probably next week.
==> My 9-year-old son is writing a novel and actually cares what you people think of it. I don’t know where I went wrong with the kid.
My latest LibertyChat post on the Hobby Lobby ruling:
The conservative supporters of the Hobby Lobby decision are correct when they say no employer should be forced to pay for contraception against his or her religious beliefs. The liberal opponents of the Hobby Lobby decision are correct when they say this principle would imply that religious pacifists shouldn’t have to pay for war.
If only these two camps would drop their petty sniping and see the beautiful vision of a truly free society: A prosperous world without stupid and stifling regulations on business, and a peaceful world without a snooping NSA and a fleet of flying killer robots controlled by megalomaniacs in DC.
I was traveling and had to miss a lecture on free trade for the last Mises Academy class I taught, so I pre-recorded them. (Yes, as George Carlin would complain, this means I recorded them before I recorded them.) Now that the class has been closed for a bit, I thought it would be OK to show you guys the lectures so you will have the common sense to sign up for my next Academy course: