How the Fed “Went Broke” with Lyn Alden - WBD627

Lyn Alden is a macroeconomist and investment strategist. In this
interview, we discuss her latest article: How the Fed “Went
Broke”. Lyn explains how for the first time in modern history the
Federal Reserve is operating at a loss. We talk about the
ramifications in terms of continuing high inflation, the
bankruptcy of government agencies, and the impacts on the Fed’s
independence.


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Bitcoin was born when the global economic machine was showing
signs of a terminal illness. Since then, governments around the
world are trying to keep the system alive, using measures that
will in fact hasten its demise. Due to misaligned political
incentives, greed and ignorance, the world’s economy is now
entering an unprecedented period of serious economic trauma.


Government bailouts are not new. Alexander Hamilton in 1792 used
federal funds to prevent the collapse of the securities market.
However, it was the use of Quantitative Easing (QE) to prop up
the financial system during the Global Financial Crisis (GFC)
when the Rubicon was crossed. The Fed bought over $2 trillion of
commercial bank assets in 2008/9, paid for through an increase in
the monetary base.


The main problem with the GFC was governments became tolerant of
the new drug of choice: QE leading to an erosion of market
discipline. QE3 started in late 2012, was nicknamed “QE
infinity”. It result in $4.5 trillion of commercial bank assets
being bought by the Fed. QE4, in response to the Covid pandemic,
resulted in the Fed purchasing another $2 trillion of assets.


Since 2008, the monetary base in the US has increased by 750%.
The inevitable result is inflation. The response by central banks
is to increase interest rates, a tool that doesn't apply to the
problem at hand: unsustainable levels of debt. Higher interest
affects the cost of their liabilities, such that they are now,
for the first time ever, in negative equity. They are “broke”.


What the markets know but politicians aren’t willing to accept is
that this is a new paradigm. The UK Prime Minister Liz Truss was
ousted after only 49 days when markets decided unfunded tax cuts
with debt to GDP over 100% were irresponsible. The growing
realisation is that budget deficits need to be cut. Smaller
governments are likely whether people want them or not.