The Most Insolvent Bank In The History Of The World Is. …..
The Most Insolvent Bank In The History Of The World Is. …..
Notes From the Field By James Hickman (Simon Black) December 12, 2024
As the 1800s came to a close and the world propelled itself full of innovation and optimism into the 20th century, there was perhaps nowhere else on the planet more admired and envied (except for the United States) than Argentina.
In fact, just like America in the late 1800s and early 1900s, Argentina was overflowing with immigrants from all over the world looking for a better way of life in that land of opportunity.
Argentina had already become a rich country at that point. And it was becoming richer so quickly that its economic growth was outpacing even that of the United States.
By 1900 Argentina’s economy was larger than the rest of Latin America combined, and roughly as large as all of Western Europe combined. It seemed like there was nowhere to go but up.
Plus the country was teeming with natural resources— everything from fresh water to some of the world’s most fertile soil, to vast oil and gas reserves. Argentina should have been unstoppable.
(This is still true today; Argentina still boasts one of the largest shale reserves in the world, having quadrupled its output over the last five years.)
You’d have to work really, really hard to screw up such wealth potential. And they did!
For much of the 20th century, Argentina slid into severe economic decay, and it remained that way for decades, mostly due to corrupt, excessive, outrageously irresponsible government spending and idiotic central planning.
Hyperinflation took hold, the banking system collapsed, and the economy has been in an extended depression.
Yet when the new chainsaw-wielding President Javier Milei took over last year, he pledged to change everything. And so far the results are pretty hard to argue with.
Earlier this week, Milei announced that Argentina has just posted a budget surplus— its FIRST surplus since those golden years in the early 1900s.
It’s not an accident. Milei has eliminated entire government departments, fired ministers, and dramatically reduced the size and scope of government.
In his announcement, Milei didn’t hold back, calling his predecessor a “fiscal degenerate” for ballooning the national debt and running massive deficits. These deficits, of course, were essentially funded by Argentina’s central bank, which printed all the money and created inflation.
Milei said that, just last year, his predecessor printed so much money that it was equal to roughly 13% of Argentina’s GDP.
Well, if printing 13% of GDP qualifies as fiscal degeneracy, then the Federal Reserve in the United States is guilty of the same thing— TWICE.
The first instance was in 2009, during the global financial crisis. Under then Chairman Ben Bernanke, the Federal Reserve created trillions of dollars of new money, roughly equivalent to 15% of GDP, to bail out the big Wall Street banks.
The second instance was during the pandemic in 2020 and 2021, when the Fed printed roughly 14% of GDP.
This reckless money printing not only engineered historic inflation in the US, but it also has created enormous problems for the Federal Reserve itself.
The Fed is now wildly and hopelessly insolvent. And that’s not some wild conspiracy theory; it is a fact straight from its own financial statements.
Here’s how it happened:
Going back to 2008, and most significantly during the 2020-2021 pandemic, the Fed created trillions of dollars, then used that money to buy government bonds. They concurrently slashed interest rates to zero.
The net result was that the Fed is now holding trillions of dollars worth of bonds at the lowest yields in recorded history.
But then they suddenly reversed course in 2022, hiking rates rapidly from 0% to more than 5%.
Well, if there’s one thing to understand about bonds, it’s that higher rates cause bond prices to fall. So when the Fed raised rates, they simultaneously caused the value of their bond portfolio to plummet.
And “plummet” is being rather polite.
As it stands today, the Fed faces $818.4 billion in net unrealized losses from all the bonds that it purchased during the pandemic— far exceeding the mere $44 billion it has in equity capital.
Literally according to its own financial statements, the Federal Reserve is totally insolvent. In fact, at nearly $1 trillion, the Fed is the most insolvent bank in the history of the world.
Talk about fiscal degenerates.
Now, the Fed has only a few options:
One, ignore the problem. Continue to pretend that the insolvency of the largest and most systemically important central bank on the planet is no big deal.
Two, request a bailout: Go to the Treasury with hat in hand.
The problem is, the Treasury doesn’t have any money; in fact, the US government already overspends by $2 trillion per year and has to borrow most of that money from the Fed.
So a bailout would first require the Fed to print money, loan that money to the Treasury, and the Treasury then gives it back to the Fed. Talk about bizarre.
The third option is to cut interest rates. Lower rates mean that its bond portfolio will increase in value, thus reducing the Fed’s near trillion-dollar insolvency.
But cutting rates would only invite more inflation.
Inflation is already creeping back. Just yesterday, the latest report showed an increase in the inflation rate with signs it will rise further. Yet the Fed has all but promised to cut rates again next week.
What’s clear is that the Fed is abandoning its responsibility to rein in inflation and maintain a sound currency. Instead, it’s inflating its way out of insolvency.
The result? Every single person who uses US dollars will end up bailing out the Federal Reserve through higher inflation.
And this is why we continue to maintain that real assets— which are an excellent inflation hedge— make so much sense, especially given that so many high quality real asset producers are selling at laughably low valuations.
To your freedom,
James Hickman Co-Founder, Schiff Sovereign LLC
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