FED has effectively been broken!

Let me first share with you what I have seen about the total debt stats: “Over the past 10 years, corporations, consumers, and even governments themselves have taken advantage of record-low interest rates to borrow like never before. Here in the U.S., total government debt has doubled to nearly $22 trillion over that time. Corporate debt now totals more than $9 trillion, an all-time record in both nominal terms and as a percentage of U.S. GDP. And households now owe more than $13.5 trillion, including a record $4 trillion in consumer debt like auto and student loans.”

If we add unfunded entitlement programs like Social Security, Medicare, and Medicaid, we are talking about mindboggling numbers estimated over $200 trillion. But no one seems worried about debt at all. Indeed, why bothered? US dollar is the global reserved currency and as such the US government can print any amount it wants and all the other countries have to share the burden. We have the Fed standing behind effectively babysitting to save us each time there is any sign of crisis. But can this continue forever? Here is a good note I got from a friend about this topic: “The truth is that our financial system is completely addicted to debt, and needs to add more and more of it to keep everything from collapsing. We need low rates and loose monetary conditions for that to happen. We're many cycles into this multidecade debt bubble now, and it's getting harder to maintain. As I wrote a few weeks ago, the Fed has met nearly every major market correction in the past three decades with drastic measures to "save" the economy. Well, all that economy-saving has left our economy weak and fragile, burdened by unpayable debt loads.”

So basically the Fed rescue has become less and less effective and it needs to print more and more money to do so. When the Federal Reserve bailed out banks, it lent them untold gobs of money. It also bought a lot of their worst mortgage bonds. Now the effect of these assets having on the Fed's balance sheet is beginning to show up, and it is not pretty at all. . 

Alex J. Pollock of R Street Institute has done an excellent job assessing the implications:

The Fed disclosed in December that it had $66 billion in unrealized losses on its portfolio of long-term mortgage securities and bonds (its quantitative easing, or QE, investments), as of the end of September. Now, $66 billion is a big number - in fact, it is equal to 170% of the Fed's capital. It means on a mark-to-market basis, the Fed had a net worth of negative $27 billion. If interest rates keep rising, the unrealized loss will keep getting bigger and the marked-to-market net worth will keep getting more negative. The net worth effect is accentuated because the Fed is so highly leveraged: Its leverage ratio is more than 100 to 1. If long-term interest rates rise by one percentage point, I estimate, using reasonable guesses at durations, the Fed's mark-to-market loss would grow by $200 billion more.

We can say the Fed is effectively broken by now! The situation will only become worse as the time passes by. Eventually it will come to the point that even Fed cannot save us anymore. Then we will see the moment of Greece, Portugal, Italy or even Venezuela! After all, there is no free lunch and the financial system has its own intrinsic rules that must be satisfied. If printing money can really work, why bother to work for anyone? The reserve currency status can indeed help US tremendously to delay the reckoning day but eventually the reckoning day will come and the debt must be paid! Is there any chance the ever increasing debt can be paid by now?

I’m not smart enough to figure out where is an easy way out. A tsunami financial crisis is inevitable in my mind. It is not if but just when! Of course nothing is imminent but risk is increasing every day, especially when the long term interest rates start to substantially move up. We are not there yet but it will come probably much sooner than most people would think. No rush but be prepared starting from now. Buying some gold is one easy way to be prepared for such a dire situation! You may not believe even governments around the world has become increasingly uneasy about the debt situation and has been actively buying gold as well: Central Banks Buy More Gold In 2018 Than Any Year Since 1967! Just think about it!!