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Do you remember all the talk back in 2009 and early 2010 about the Fed’s “exit plan?”  How the economy was recovering and the Fed would need to tighten and reduce their balance sheet?  Did you laugh when you first heard the words “exit plan” as I did?  Here we are nearly 3 years later with the Fed balance sheet more than 50% greater than it was back then.  The economy is still stuck in the mud, the financial markets walking a precarious tightrope and now not only are banks in trouble but sovereign governments as well… including the U S of A.  Exit plan?  EXIT PLAN???  In what world could the Fed even consider withdrawing ANY stimulus?

I do want to add that the Fed is a “little bit” levered themselves.  Their $3 trillion balance sheet is supported by a WHOPPING $55 billion!  They are levered over 50 to 1, another way to look at it is that they have 2% equity carrying over 98% of the load.  The load you ask?  Yes, it is a load and becoming “loaded” with more and more “other” assets every day.  They now carry $210 billion of these “other assets” and you can pretty well bet that they are not of the AAA variety.  My point is this, if (when) interest rates rise it will only take a drop of 2% of their assets held to actually wipe out their equity.  Or, if their “other assets” were to drop by 25% (think junk bonds and how far many of these have dropped), again their equity would be wiped out.

I understand, the Fed cannot “go broke” because they own and operate the printing press but they are truly undercapitalized in a paper system that is… and must continue to get ever larger.  …which means their capital will continually become a smaller percentage of their carry.  Please remember that the Fed is “the lender of last resort.”  Not only to the entire U.S. banking system but to the ENTIRE WORLD.  They are not really supposed to be but all you need to do is go back to 2008-09 and remember the $16 trillion they spread all over the world like free peanut butter and jelly.

But wait, it does get better!  The Treasury is now borrowing 46 cents of every Dollar that they are spending! Does this even make sense?  In any world?  How long could any individual, any company, any financial institution (or any country) do this and remain solvent?  How long before the markets shut them off as a credit?  How long before auditors or regulators would blow the whistle and shut an institution like this down?  Is there ANY difference between “borrowing” 46 cents of every Dollar spent and running a Madoff scheme?  …and yes, it gets even “betterer!”  It looks like after next weeks Fed meeting that they will be purchasing 90% (or maybe even more than 100%) of the Treasury’s newly issued debt.

Let me wrap this up in a nice neat nutshell for you and please keep in mind that the “product” that we are discussing is the DOLLAR.  The Dollar is THE reserve currency of the world.  It is what central banks EVERYWHERE hold as their “foundation” to THEIR banking systems.  The Dollar is the “base” for everything paper …everywhere.  So, the Fed who has a whopping $55 billion of equity on their balance sheet is currently carrying $3 trillion of assets which works out to less than 2% equity …and one must wonder if it is truly much much more as it took about 3 years to find out about their $16 trillion global bailout.  They are nearly buying ALL of the newly issued bonds from a Treasury that is borrowing 46 cents of each and every Dollar that they spend who admits to owing $16 trillion while really on the hook for over $100 trillion.  Put bluntly, a grossly undercapitalized lender, lending to a grossly BROKE borrower!  What could possibly go wrong here?

Yet here we are with a public that is soiling its pants on a daily basis regarding the ownership of Gold and Silver which are real monies, no one’s liabilities and cannot go bankrupt.  On the other hand, we have investors piling in without a fear in the world to papers that pay no interest at all, are issued by mathematical bankrupts and supported by a nearly barren lender.  This can all be described as a drunken global party where the two biggest drunks are holding each other up while egging everyone else on to toast with another round of cheer!  Before this is all over, people will come to understand that “a little bit broke, technically broke and totally broke” all mean the same thing and there never was an “exit plan” other than the fairy tale spun for public consumption.