Fed Needs To “Stress Test” Itself As Balance Sheet Balloons To $4.3 Trillion

GoldCore's picture

Friday’s AM fix was USD 1,295.75, EUR 944.15 and GBP 779.68 per ounce.              

Thursday’s AM fix was USD 1,295.00, EUR 942.09 and GBP 779.14 per ounce.  

Gold in U.S. Dollars, 1 Month - (Thomson Reuters) 

Snapping its four-day losing streak, gold prices recovered very marginally yesterday. Traders said there was a revival of buying by retailers at these lower levels and this contributed to a marginal recovery in gold prices.

Gold climbed $6.19 to $1298.69 at about 4AM EST before it fell back to a new 6-week low of $1285.81 in the next six hours of trade. It then bounced higher into the close and ended with a marginal gain of 0.02%. Silver slipped to as low as $19.649 before it also bounced back higher and ended with a gain of 0.2%.

Gold in Singapore, which normally sets price in the important Indian gold market, rose 0.4% to $1,296.80 an ounce and silver by 0.8% to $19.86 an ounce. Among other precious metals, palladium gained nearly 1% today to $765/oz but is lower for the week.

Gold remains near six week lows and is on track for a second straight weekly decline. Gold has dropped about $100 an ounce from a six-month high in the last nine trading sessions despite increasing concerns about the U.S. and global economy.

There remain concerns that the manipulation of gold prices being investigated by the FSA and Bafin may be ongoing and a factor in recent price weakness.

Gold’s technical position is now negative and the close below $1,300/oz yesterday opens up the possibility of further falls to $1,270/oz and $1,200/oz. The sharp drop in prices in the last few days should bring physical buyers back into the market and support gold.

Gold in U.S. Dollars,  5 Year - (Thomson Reuters) 

Demand for gold in Japan surged 500% in the last month as Japanese buyers bought ahead of a sales tax increase and due to concerns about Abenomics and the ongoing debasement of the yen.

A man who has been a trader for 33 years and works at a foreign-owned brokerage told the Financial Times that the tax increase represented a “good opportunity” to buy more gold as he was worried about holding too many yen-denominated assets.

“I plan to hold it for a long time until there is a good time to sell, when the yen collapses or something,” he said.

The surge in Japanese demand is small in tonnage terms in a global context and small vis a vis huge demand from India & especially China and from central banks but shows increasing concerns regarding currency debasement.

Fed Stress Tests “Rattle Banks Around The World”

Yesterday, the Federal Reserve’s stress tests led to jitters in financial markets and in the words of the Financial Times “rattled banks around the world.” Citigroup’s share price was hammered and fell 5.4%


The aftershock of the stress tests was felt beyond U.S. shores for the first time. The U.S. subsidiaries of Royal Bank of Scotland, Santander and HSBC all failed on “qualitative” grounds, which includes failing to project losses rigorously when contemplating a severe recession or market meltdown.

The Fed said that the banks management practices or capital cushions are not robust enough to withstand a severe economic downturn. Not surprisingly, the banks themselves accused the  stress tests as being “opaque”.


Twenty five other banks took part in the Fed's annual "stress test" and received a green light for their planned dividend payouts and share repurchases. Bank of America and Goldman Sachs initially fell short of minimum capital requirements. However, they met the standards after reducing their planned dividend payments and share buybacks over the past week.


The banks now have 90 days to address the weaknesses and risks identified by the Fed and resubmit their dividend and share buyback plans.


The Fed's decision was part of the annual checkup it requires of banks with more than $50 billion in assets. Banks must now undergo tests to ensure they can endure shocks like those that upended the banking system and led to the massive government bailouts in the 2008 financial crisis.

In what the Fed sees as the extreme scenario, the test assumed a rise in the 6.7% unemployment rate to 11.2%, a 50% drop in stock prices and a decline in home prices to 2001 levels. All of which appear a strong possibility given debt burdened state of the tapped out U.S. consumer and the poor fundamentals of the U.S. economy.

Indeed real levels of unemployment in the U.S. are likely well over 11% already.

St Louis Federal Reserve

It is important to note that if the Federal Reserve’s assets were marked to market, it itself is insolvent.

The Fed's balance sheet has ballooned to $4.3 trillion from $800 million in the past five years as the central bank has electronically created trillions of dollars in order to buy their own government bonds and mortgage-related bonds in a radical and indeed reckless attempt to kick the can down the road and prevent a systemic event or a recession or depression.

The Federal Reserve is likely to suffer significant losses on its Treasury holdings once interest rates rise from historic lows. Indeed, the researchers at the San Francisco Fed have recently called for "stress tests" on the Fed itself and it’s assets and income, an echo of the central bank's annual exercise for the nation's largest banks.

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Bail-In Guide: Protecting your Savings In The Coming Bail-In Era (10 pages)

Bail-In Research: From Bail-Outs to Bail-Ins: Risks and Ramifications (50 pages)  


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Herdee's picture

If rates rise then the Government is a victim because the deficit grows exponentially from 17t.Where do you get the tax money from to pay the interest on the debt?They are at a point of desperation to kick-start the economy.Trying to generate inflation boxes them in.This is why I'm saying that this has been and is an ecnomic war against the United States.It's very long and drawn out.You don't think Russia & China know that the U.S. is vulnerable through its defence spending and its goulag of prisons along with all the run down Cities?It's a society in decay and this is the World's Reserve Currency?I can't believe that they still let people buy gold with a U.S. Dollar or better still let Americans use their Visas and MasterCards to buy gold.Gold is on sale right now,so defeat the enemy.

Hovel Downs's picture

I hate this place.

EggSlayer's picture

Is there any situation where the Fed could go "bankrupt"???

the grateful unemployed's picture

a mere .25% rise in interest rates is (said to be) enough to turn the fed balance sheet red. their balance sheet assets would (in theory anyway) revert to UST and taxpayers. (we're broke so what?) the real question is how much affect a steep loss in balance sheet asset value would have on the feds ability to manage the economy. the fed is governments off balance sheet relief valve, now if the fed went off balance sheet (how many times can they do that?) the charade could continue until as friedman says, we're all dead

Kayman's picture

It is all perception.  To the extent that excess reserves shore up all the shit on balance sheets then perception is good.  When/if the Fed actually takes a loss (and when and if it becomes public knowledge) then perception is not so good.

The minute there is a question about sound money, the game is up. There won't be enough fingers and toes for the dike.

kchrisc's picture

I checked my stress today. Inventoried the gold, silver steal and lead.

Nope, no stress.

TrustWho's picture

If the FED holds to maturity, the FED will never lose a penny. Bernanke has already implied this hold to maturity policy. Of course, Bernanke believes the FED has the power of Allah and the FED will stop QE some day once the FED has fixed the world's economy that the FED futted up in 2004-2008.

I Write Code's picture

So they show a loss, so what?

In fact, now that you mention it, it occurs to me ... as interest rates spike and the poor Chinese and Saudis (and Canadians and British ...)(and Russians? ...) start to lose major value in their fed holdings and decide to dump, GET READY for the fed to print another $10,000,000,000,000 overnight to soak it up.

Isn't that just about the only possible scenario?

Gonna be a whole lot of Yellen going on!

moneybots's picture

"The Federal Reserve is likely to suffer significant losses on its Treasury holdings once interest rates rise from historic lows."


At 50 to 1 leverage, a 2% loss bankrupts.

the grateful unemployed's picture

the fed is a GSE. if there was no fed what would happen? the UST would put all of the current paper the fed is holding in an off balance sheet account. poof, gw bush ran a war that way, and somebody will do it. even if the fed were abolished, rather if the fed were abolished this sort of chicanery would be in public view for everyone to see

q99x2's picture

Arrest the FED. Make them stand trial for treason.

Chupacabra-322's picture

4.3 Trillion that we know of.

Comte d'herblay's picture

Having worked for a Big 4 (8) (6) (5) accounting firm, and observing the Treasurer of a Fortune 400 corporation, smoking his cigar at the final audit review with the General Partner---- where we had multimillions of dollars of material exceptions that would lower profit for the year---- I learned early on that published numbers, even "audited" ones are highly suspect.

His answer to our orders to lower profit by the amount of our exceptions:  "Thanks, Oscar, but we'll just go ahead and book the budget". 

And the partner didn't do shit about it. 

I'll believe government and FED numbers when Brooklyn Decker returns my calls (after she got a 500 yard no stalking order taken out against me and a Cease and Desist harassment injunction). 

I'm pretty sure Howdy Doody was a puppet.


Downtoolong's picture

The Federal Reserve is likely to suffer significant losses on its Treasury holdings once interest rates rise from historic lows.

And, that’s assuming the Fed could sell even 10% of its holdings at market without driving it further down into the gutter, which they can’t possibly do.

Even mark-to-market is an illusion when you are dealing with a position of the size and scale the Fed holds. If you think the London Whale had problems, he was a minnow by comparison.

The Feds only option under a rising rate crisis is to print more, so they can buy more, so the government can borrow more to keep the circular flow of cash moving between them, which proves that it’s all funny money.

philipat's picture

The Fed would simply let the Treasuries mature and print more fiat to buy more. Then write off the toxic MBS crap it bought from its shareholders. Which was the purpose of the exercise from the outset.

whidbey-2's picture

Stress tests are window dressing between the Fed and the Money Centered banks.

Scene: Opens at the FRBNY as Dr. Yellen adresses the Money Center Banks, minus Citi. The Chair is speaking.


"let us see what you would do if all your loans were useless! It is just a stress test. Don 't be bashful, please speak slowly I am writing this down."

 JPM speaks. "Will, we would come to the FED and come clean: "NO Mon, NO Fun" , then you would wire us a pile of money, and we would promise to never to make loans to anyone who needs one again."

 The Chair stops writing. "What?  That is what you said last crisis. No more of this 'too Big to fail ' pleading You naughty boys" Now show us the plan for dealing with adversity."

"OK, BUT we have not got a plan besides you DR. Yellen".

The chair stands in her chair and says."you must be crazy, what the hell do I know about running a bank managed by criminals?  Besides, I have my hands full with these gutless 'govenors" the President finds to help me confuse the public."

Scene two. Dudley sends in Coffee and a round of shots.




Kina's picture

Petrodollar stands between US struggling along and total economic oblivion.


Not good to have printed trillions if the petrodollar fades away......and on that front the fading has begun.


If disruptions in Saudi now will give the US a bleeder

Notsobadwlad's picture

Do stress tests actually mean anything when the only legal money is debt created fiat money? Debt created fiat money has no substance and no inherent value. When a loan is created the money comes into existence. When the loan is paid back, the money is destroyed (or is supposed to be destroyed). Banks profit only from the inerest income.... in theory.

In theory if there is a default on a loan that cannot be paid back, the bank suffers the full loss of the loan against its interest income. And, if this is true then a small percentage of nonperforming loans will destroy a bank. Hence the idea of a stress test.

However, I don't see how (all) banks could possibly be playing by these rules. It seems as if the paid back money that was created with the debt is finding a way to stay in existence instead of being detroyed. Similarly, if the game was being played correctly, every time the Fed purchased a portfolio of debt from a bank the money paid to the bank would disappear because from the bank's perspective the loan has been paid off. I see no evidence of this happening...

The Fed is the ultimate creator of money out of thin air. A stresss test on the Fed is a stupid concept because what they can create out of thin air they can return to the same place. End of story. The Fed and most likely the large banks do not have to play by rules. What does not exist impacts nothing when it is destroyed.

DerdyBulls's picture

"When a loan is created the money comes into existence."

Good post. Everyone talks about the MS MB but if it's not loaned, so what? Parking it at the fed does nothing but earn 25 basis points. Credit equals money when it is loaned into the general economy. Then inflation cometh.

philipat's picture

Indeed inflation would cometh very quickly because such lending would reflect an expanding economy in which the velocity of money would also increase. It is only low velocity which has been holding inflation down to date.

disabledvet's picture

"forced savings"...on banks.

why have so much trillions in excess reserves on their balance sheets "and refuse to lend them out"?

Because you're going to have to pay ou those "reserves" in the form of interest rates to savers.

Gold? Sure, okay. But when propane prices double in one winter then I think it's the economy that has the problem not "the consumer."

And now "forget doubling down on Iraq" but "War with Russia"?

As usual the "command and control" aspects to the US Military to perhaps the greatest in her History. The sacrifices to be made in such a maelstrom do indeed defy description.

And of course what we are doing is "Drowning...in a sea of love.

Where everyone...would love to drown.
But now it's gone. It doesn't matter no more.

When you build your house....

please call me

GetZeeGold's picture



No need to stress test......the new printers will be delivered next week.


We shall go on to the end, we shall print in France, we shall print on the seas and oceans, we shall print with growing confidence and growing strength in the air, we shall defend our socialist state, whatever the cost may be, we shall print on the beaches, we shall print on the landing grounds, we shall print in the fields and in the streets, we shall print in the hills; we shall never surrender...