How Does a Bank with A Printing Press Lose Money? Leave It to The Fed.

Here’s a headline that caught me off guard (although I can explain it): “Fed Posts Largest-Ever Annual Operating Loss.”

How, exactly, does a bank with a printing press in its basement manage to lose money? Leave it to the Federal Reserve.

Here’s how: in the first place, the printing press prints dollars, but those are not assets; they’re liabilities. If you look at the Fed’s balance sheet (which is publicly available on their website), you’ll see that cash and currency are entered on the liability side of the balance sheet.

If you pull a $20 bill out of your purse or wallet and read it, you’ll see that it says “Federal Reserve Note.” A note is a form of debt and, therefore, a liability. It may be an asset to you when you have one but not to the Fed. So, the printing press doesn’t help.

Otherwise, the Fed is like any other bank. They earn interest on their assets (mostly U.S. Treasury securities that pay interest), and they pay interest on their liabilities (mostly excess reserves deposited by banks that are members of the Federal Reserve system). The Fed has raised interest on excess reserves (IOER) to around 5.5% in line with the fed funds policy rate. But the interest they receive is often only 2% or 3% because they bought their Treasury securities a few years ago when that was the going rate.

From there, a sixth grader can see the problem. If you pay more than you receive, you lose money. And that’s the Fed’s situation.

The next question is: will the Fed go broke? When you lose money long enough, you have a negative net worth, and then you’re technically insolvent. Bankruptcy is just a step away. However, the Fed is not a normal company (even though it is privately owned). It can always get loans from the Treasury to keep the lights on.

I had a private dinner in Vail with a Fed governor once, and she told me, “Central banks don’t need capital.” So, there you have it. The Fed is losing money, slowly going broke, and nobody notices or cares. Keep that in mind the next time you see some gold for sale. You might want to buy some… just in case.

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