Central Banks are broke. They’re losing billions and even a trillion for the Federal Reserve Banks with the magic money printer suddenly requiring a taxpayer funded bailout.
In the little noticed Out-of-Turn Supplementary Estimates for 2022-23, the UK Treasury revealed this October a payment to the Bank of England of £11.2 billion. In explaining, the document said:
“On 19 January 2009, HM Treasury authorised the Bank of England to purchase high quality private sector assets and UK Government debt purchased on the secondary market.
The Government has indemnified the Bank of England and the fund specially created to implement the facility from any losses arising out of or in connection with the facility.”
Losses by outright printing money can only be explained by a very convoluted monetary system that privileges the private banking sector.
The European Central Bank (ECB) for example holds €5 trillion in government bonds and other securities. They did not buy these bonds from the government directly, but on the secondary market. That usually means commercial banks.
Those commercial banks were flooded with, as of this month, €4 trillion of deposits by the ECB to buy those bonds. The banks just sent those deposits back to ECB to earn interest. That interest is paid by the ECB on the money it itself printed, and not to itself or the government, but to commercial banks like JP Morgan.
This was fine when the deposit rate was -0.5% and the bond yield stands at an average of 0.5% across ECB’s bond portfolio.
ECB however intents to further increase the deposit rate to 2.5% on Wednesday, so the shortfall between the amount it pays to banks in interest and what it earns in bond yields is 2%.
Considering markets expect ECB to further hike to 3% later this year, Daniel Gros, a member of the board at the Centre for European Policy Studies, estimates ECB’s losses will amount to $600 billion.
The Federal Reserve, which has been the most transparent on this matter, has explicitly stated their losses amount to $1.25 trillion for the first three quarters of 2022 in their September financial statement.
Most of these are paper loses due to the crash in bond markets which does not matter for Fed because they hold to maturity, so it is not quite a real loss.
But, the difference between what they earn in yield and what they pay to banks in interest is an actual loss of money, and that means Fed will not be making any contributions to the treasury until 2026 by some estimates.
It paid as much as $100 billion a year when interest rates were low and bond yields were higher than those interest rates. Now it has lost $25.9 billion in a steep decline since September, and in theory the US Treasury is meant to pay for it.
In practice, Fed uses a deferred scheme where they put these losses in a sort of IoU to itself to be repaid by future profits, with no payment made to the Treasury from any profits until that IoU is paid first.
But, Fed still has to pay the interest to these banks and it has no money to do so because it is losing money. It therefore outright prints to make such payments, it creates new reserve money, once its own capital buffer runs out.
That printing is itself inflationary, and Fed is raising interest rates to combat inflation. A doom loop is therefore possible where a further raise in interest rates is required, which itself increases Fed loses as they have to pay these banks even higher interest, which requires more printing, until at the very extreme it goes bankrupt through hyperinflation.
The deferred scheme therefore is at best a soft bailout, and at worst just a band aid as to stop a spiral the Treasury might just have to cough up the money.
Some countries therefore, like UK as mentioned above, don’t defer it at all with the Treasury instead directly required to pay the central bank to cover the losses for its close to £1 trillion bond purchases which, as it turns out, rather than bought with printed money are actually loopholed to effectively a double loan: one in the bond itself that has to be repaid, and two in the interest that has to be paid to banks for the deposits that were given to them for free out of inflation causing printed money. A loan squared at its worst combination.
The European Central Bank might also follow UK’s approach rather than Fed’s. As part of the ECB, the President of the Dutch Central Bank (DNB), Professor Klaas Knot, writing to his Minister of Finance in informing him of loses, said:
“While a temporary negative capital is permissible and workable, the Eurosystem’s rules stipulate that this should not be the case over an extended period. The possibilities for DNB to supplement its buffers are currently limited.
In principle, DNB supplements these by retaining future profits. However, should the deficit be too large or expected profits too low, additional measures may be necessary to restore the balance sheet to solidity.
In an extreme case, a capital contribution from the shareholder may be necessary, as you also mentioned in your annual information letter to the House of Representatives about DNB’s risks.”
The shareholder in this case, which potentially has to make a capital contribution, is the Ministry of Finance.
The Targeted Longer-Term Refinancing Operations (TLTRO), which gave banks preferable terms to borrow from the central bank for much of last decade, has contributed to these loses as banks just borrowed cheaply from ECB and then deposited at ECB to earn interest on that cheap money, a loophole that has now been closed since October.
That led banks to reduce their loans from ECB by €63 billion just this month and about €1 trillion overall since last year. They still hold €1.2 trillion, but most of it will mature in June. So bringing ECB’s balance sheet down to €7.9 trillion from the peak of €8.7 trillion in September.
This particular TLTRO facility was subject of some political debate as the arbitraging was an obvious cheating, though legal.
The wider matter however of continued losses on money printed in a very convoluted way, with such loses expected to increase as interest rates rise even higher, has not quite been subject to much scrutiny.
That’s despite the public in effect paying the banks twice, not to mention through inflation too, and according to bankers that’s needed so as to not monetize debt where the government prints as much as it wants.
The debt has been monetized however as these trillions in bond holdings by the central banks show, it just has been done so in a very punitive way whereby the public not only sees little benefit from the privilege of outright printing, but is actually punished by such printing to pay it back twice and thrice.
One solution in the current fiat system is for central banks to just not pay interest to banks on their deposits. Banks instead can get such interest from making loans, but lending is no longer based on deposits for banks.
A fixed limit currency can be another solution, or one with a variable rate like ethereum that manages supply based on the velocity of money, and although it wouldn’t be as flexible, it would be less fragile to the money printer itself being at risk of bankruptcy or needing bailouts.