When The Fed Has To Print Money Just To Print Money

Tyler Durden's picture

While the topic of net Fed capital flows, and implicit balance sheet risk has recently gotten substantial prominence some three years after Zero Hedge first started discussing it, one open question is what happens when we cross the "D-Rate" boundary, or as we defined it, the point at which the Fed's Net Interest Margin becomes negative i.e., when the outflows due to interest payable to reserve banks (from IOER) surpasses the cash inflows from the Fed's low-yielding asset portfolio, and when the remittances to the Treasury cease (or technically become negative). To get the full answer of what happens then, we once again refer readers to the paper released yesterday by Morgan Stanley's Greenlaw and Deutsche Bank's Hooper, which discusses not only the parabolic chart that US debt yield will certainly follow over the next several decades, but the trickier concept known as the Fed's technical insolvency, or that moment when the Fed's tiny capital buffer goes negative. In short what would happen is that the Fed will be then forced to print money just so it can continue to print money.

From Crunch Time: Fiscal Crises and the Role of Monetary Policy, first the big picture:

Departures from the baseline, such as large-scale purchases continuing past 2013, or a more rapid rise of interest rates (a distinct possibility given the analysis presented in Section 3) would saddle the Fed with losses beginning as early as 2016, and losses that in some cases could substantially exceed the Fed’s capital. Such a scenario would at very least present public relations challenges for the Fed and could very well impact the conduct of monetary policy.

And more to the point, what happens when the Fed's Net Interest Margin goes negative. For the sake of simplicity, in the section below "creating new reserves" means quite simply "printing money" (purists will argue it is low-powered, base money, but realists will respond that since all money is fungible and a dollar is a dollar when buying a share of AMZN, as we have shown previously, it doesn't matter one bit how money printing is defined).

What would a negative remittance from the Treasury to the Fed look like? That is, if the Fed’s net income fell below zero, how would it fund its interest payments on reserves, and its operating expenses? Would it have to draw down its capital or take out a loan from the Treasury, asking the Treasury to issue new debt to do so? No, under the Fed’s new accounting practices adopted in January 2011, when net income available for remittance to Treasury falls below zero, this does not eat into the Fed’s contributions to capital or threaten the Fed’s operating expenses. Rather, the Fed would create new reserves against an item called the Fed’s “deferred asset” account on the asset side of its balance sheet. For example, to pay interest on reserves, it would simply credit the payee bank’s account at the Fed with the interest being paid, thus creating new reserves. The deferred asset account being run up in the process would serve as a claim on future earnings or remittances to the Treasury. The idea is that when the Fed subsequently returns to earning a profit, rather than return that profit to the Treasury, it would use the funds to run down the deferred asset, and the extra reserves having been created in the process would be run down as well.

Ok: so the Fed can't technically go broke - after all it can print money all it wants right, or as the paper says "create new reserves" (just so it can go back to its baseline operation since 2008 which is... creating new reserves)? Well, not really.

The Fed's (low-powered) money is good and accepted by banks only as long as these banks deem it appropriate and profitable to onboard the Fed's liability on their balance sheet. And to do that, the Fed will have to offer ever higher and higher rates on excess reserves. To wit:

In the present environment, when the demand for excess reserves is infinitely elastic, the creation of new reserves would not be a problem. But in the baseline exit scenario we are discussing, short-term assets have a positive yield and the demand for reserves would not be infinitely elastic. To persuade banks to hold a higher volume of excess reserves in such an environment, the Fed would need to increase the interest rate paid on excess reserves, otherwise the new reserve creation could, on the margin, become inflationary. It should be noted that this reserve creation is a second-order effect of the selling of assets by the Fed with the aim of running down excess reserves (and raising longer-term rates) in our baseline scenario. The capital losses incurred in this case would push up the deferred asset account enough to offset only a relatively small part of the intended reduction in reserves. However, even if the Fed were able to create additional reserves with no effects on the interest rate on those reserves, a cessation of  positive interest payments from the Fed to the Treasury for a significant period could bring Fed policy decisions under greater public scrutiny, potentially leading to controversy that could even threaten central bank independence.

In other words, as the MS and DB strategists put it so tongue-in-cheekly, once it becomes public knowledge that the Fed itself is broke in all but one technicality, and the resolution to said technicality is to go fully Weimar retard, the only hope the Fed will have to keep demand for dollars is if it gets caught in a closed loop of hiking rates ever higher just so banks keep onboarding reserves allowing the Fed to preserve the myth it is solvent, in the process pushing its NIM even lower, and needing to create even more "new reserves", rinsing and repeating.

Or, said otherwise, print more money just to be allowed to print more money.

In simple terms: a positive feedback loop which starts once rates begin ratcheting ever higher, and which ends, well, once the dollar loses it reserve status, and the initial goal of the Fed - to inflate away some $40 trillion in global excess debt is attained.

Ok, but this who knows when this happens right?

Well, yes and no. 

As we showed last week, the rate at which NIM goes negative and the above feedback loops begins would be at approximately 4.5% on December 31, 2013. The "breakeven" rate unleashing the inflationary cycle would then decline by about 1% each year assuming the Fed's balance sheet continues rising at a pace of $1 trillion per year.

So the good news for all those who have been wondering just how much longer the Fed can continue doing more of the same while providing a free lunch for all is that we now know there is a temporal bound: the longer the Fed does nothing to change the status quo, the lower its "rate buffer."

Of course, there is a resolution: the Fed simply begins to sell its assets, and in doing so, destroys the reserves created when said assets were onboarded on the Fed's balance sheet. But there lies the rub: because the second the Fed enters open deleveraging mode, everyone will sell everything they can to lock in the profits generated from the past 4+ years of Fed balance sheet expansion. Furthermore, at that moment, the market will begin pricing in the unwind of some or all of the $15 trillion in central bank liquidity which is the only reason the S&P is where it is today. The result would be a market crash so epic it would make the market response to Lehman and AIG's failure seem like a walk in the park by comparison.

Which is where you come in dear retail investor, and the whole myth of the "Great Rotation." Because unless there is someone who will start providing a bid into which the banks can offload their securities in exchange for cold hard cash, as was explained earlier, the entire stock market ramp of the past 4 years will have been for nothing. It is also why day in and day out the media bombards everyone, as it has in the beginning of every year for the past three, that the time to enter the market is now, and there has never been a better time (ignoring that the market is now more expensive on a forward multiple basis than it was at the last market peak in 2007). Of course, one of the amusing tangents here that the media and the Fed hope and pray everyone forgets is that the Fed is monetizing debt not equities: and that to do what the Fed does one should be buying the 30 year, not some Div/0 P/E stock.

Either way, unless the greater fool comes in and is once again willing to become the bag holder of last and only resort for the smart money, then all those firms, such as the abovementioned Morgan Stanley and Deutsche Bank, whose chief strategists penned the paper referenced above, will start getting nervous, and asking themselves: how much time is there before everyone else appreciates the risk of the D-Rate and sells first.

Because while as a ponzi scheme works on the way up as long as there is at least one more marginal buyer, the inverse is far more troubling, and it is here that the old bastardized Prisoner's Dilemma comes into place: "he who sells first, sells best."

And the biggest irony is that soon it will be the very act of the Fed continuing to expand its balance sheet at the current breakneck pace of $85 billion per month (or more), that is what will make banks ever more and more nervous.

Could it be that we are finally approaching the end of the lunch, and suddenly the realization that it was never free hits everyone at the same time?

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flacon's picture

MC Escher depicted the incestuous relationship between the Fed and the Treasury - it's still an optical illusion and a paper trick:


disabledvet's picture

and here's some music for my comment down below "because i think i'm finally getting a handle on this whole new media gig" that the creators have...truly in amazing fashion...created: http://www.youtube.com/watch?v=VpgE8CpxZFI

flacon's picture

Khan Academy educates on

"Prisoners' Dilemma and Nash Equilibrium"



Matt's picture

Beautiful example of how theory and real life are drastically different. In real life, snitches get killed, so both sides denying is generally what will happen.

markmotive's picture

Money, money everywhere but not a drop to drink...

Chris Martenson interviews Eric Sprott (Feb 23): http://www.planbeconomics.com/2013/02/23/eric-sprott-is-the-west-dishoar...


GetZeeGold's picture



We can stop using heroin at any time......we just choose not to right now.


I would point out that is almost always the case.....which is what makes it fairly normal.

kill switch's picture

This is what will happen when the sheeple realize whats been going on.



NotApplicable's picture

War is coming to an unsustainable society near you.

natronic's picture

Sheeple will not realize what is going on until it's crumbling down around them.

dadichris's picture

the sheeple may notice the crumbling down but they will never see or acknowledge the root cause, blaming a scapegoat instead, thus perpetuating the same power structure

Buck Johnson's picture

Of course not, the game is about to end and they know it.

Parabolic's picture

If you combine MS and DB, you get MDB--the conglomeration of the farce that is the financial state of today.  As Tyler always says, "he who defects first....defects best...."....i will add: he who defects first....defects best....bitchez!

diogeneslaertius's picture

that incestuous feedback loop is the fraud engine itself


and for those with the power to create and switch-over real value onto the simulation, power and control over the planet and its life


the hologram fraud engine is actually kind of impressive and i almost admire the cold-blooded cunning (not intelligence) behind it - but only because one must know one's enemy and have respect for him.

diogeneslaertius's picture

if everyone got up tomorrow and took one ounce of physical metal off the market it would expose the rigging

Dingleberry's picture

I love PMs, but looks to me like the Brent vigilante is more real than the gold one.  We now know there was never really a bond vigilante.  That was all a scam. Ben proves it.  

Inflation has got to be north of 5%, judging by the bills I pay and things I recently bought that have risen in price and/or shrunk (again).

But don't tell the Fed.

Ignatius's picture

"the Fed will be then forced to print money just so it can continue to print money"

That's about as good of a definition of hyperinflation as I've heard today.

fonzannoon's picture

This article was also authored (unless I am wrong) by the same Fred Mishkin that was blasted apart in the previous link. what am i to make of that and why was he not mentioned as an author here?

ekm's picture

Mishkin is not stupid. Actually he's extremely smart.

The problem is that does NOT want to remain unemployed, if he speaks the truth.

Tyler Durden's picture

Neither Mishkin's insight (who was the 4th author out of 4 and thus completely irrelevant), nor that of MS or DB is relevant: as noted what the paper said is what ZH has said for 3 years now.

It is common sense.

What is relevant is that two of the biggest banks: MS and DB, are finally voicing it. These banks never put pen to paper on anything that is counter to the prevalent, nonsensical (such as any thought experiment that sends the Fed's balance sheet to infinity +1, which in the process also destroys MMT and other socialist theories of money which sadly are unable to put the concept of reserve currency into mathematical equation format) and very idiotic groupthink unless they have a very specific purpose to do so.

As for Mishkin, he is a very discredited Columbia professor. His name was merely added as a courtesy.

francis_sawyer's picture

Print [the COUPON] til it hurts bitchez!...


The longer it goes ~ the more of granny's tea set you scare out of the cupboard...

ekm's picture

As long as Mishkin's bank account gets larger and larger, I don't think he really cares about being discredited.

All Risk No Reward's picture

They don't "print money," they issue credit.

There is a big difference.

I get that some versions of QE disassociate the debt from the cash for a period of time, but there is a link.

When the losses on the Fed's books are revealed, the establishment will come to society and demand to be repaid.

The Fed speaks and everyone calls them liars.  The Fed speaks and everyone giggles and repeats "print, print, print."

The trick is - when is the Fed lying, when are they telling the truth and how do you know?

Some lies are obvious, but others not so much.

A debt laden society hopes for hyperinflation on a deep emotional level.  If the Fed is setting up a deflationary spiked pit to asset strip society, they'd lie about it to set up their play.

Why are the corporate banking fronts lending 30 year money at 3% if they plan to hyperinflate?  Isn't that financial sucide?

Is that a contradiction that belies the stated objectives?

The people with trillions in looted cash and trillions in USD debt holding aren't going to hyperinflate their wealth away and bail out debtors.




The end game is likely serious to hyperinflation, but it will happen on a Big Finance Capital time frame and they will be "all in" on hard assets by the time the do it.

Winston Churchill's picture

And that is the bonus to them in keeping PMs down by rigging the

paper market.They don't care how much fiat they lose on naked shorts.

Its only fiat,and they realize its transitory.

Bicycle Repairman's picture

"The end game is likely serious to hyperinflation, but it will happen on a Big Finance Capital time frame and they will be "all in" on hard assets by the time the do it."

What keeps them from being "all in" right now?  How much warning do they need?

Tyler Durden's picture

All money is credit.

Most money is formed when banks create loans. When banks don't create loans, such as now when total commercial loans as of the week ended February 13 is $7.247 trillion or lower than when Lehman filed (whether it is a supply or demand issue is irrelevant), and when the shadow banking system's liabilities are contracting at a pace of over $150 billion per quarter, the Fed has no choice but to create money, i.e., reserves, i.e., a liability of the Fed, and the matched "asset" is the monetized debt of the US.

And yes, this is the reason why we warned that "purists" would not comprehend that all money, base money, low-powered money, inside money, whatever you want to call it, is perfectly fungible.

KickIce's picture

Not when it's issued without cost. Ben is creating imaginary money and these bankers are buying real assets with os and 1s.  This is the biggest scam of all time as they are buying the world with computer generated money.

francis_sawyer's picture

EXACTLY!... [which is WHY the 'print the coupon' game will go on for the duration of the time that everybody has their head in the sand ~ OR, what's liely to come first, OTHER printers challenge them at their same game]...


Things are going to accelerate...

Tango in the Blight's picture

"Gold is money. Everything else is credit."

-- John P. Morgan


All Risk No Reward's picture

Hi TD, coins are legal money but not credit, but that's a clarification that has minimal impact because coinage as a percent of the total is minimal.

I'm sure you know that, but I'm clarifying for others.

The point still stands, though.

Money isn't "printed" - that gives a false mental construct of what is actually occurring  No doubt, the criminal Debt Money Tyrants push this false narrative in order to hide the fact they will eventually turn around and demand all this debt be paid back with interest - and society is not TBTF&Jail.

Please use correct terminology going forward in order to minimize confusion - money is issued as debt with the expectation that it be paid back with interest.

In a debt saturated society, everyone is psychologically lusting after inflation (money supply "printing" inflation that cheapens every dollar, as opposed to a debt based system that creates mutually exclusive claims on the very same underlying asset - claims that will be extinguished en masse at some point), so it is an easy sell.

The Debt Money Tyrants (DMTs) don't want people to fully fathom what deficit spending truly means...  debt slavery for eternity if the DMTs have their way.

Debt Money Tyranny


This is the Machiavellian incarnation of the 4th Reich - and I'm serious as a heart attack.  That is not hyperbole - it is WHO and WHAT the Debt Money Tyrants represent.

"War is all about deception." Sun Tzu, Art of War

Deflation is the zeroing out of the excess claims on the limited underlying assets.  That means that, for example, if there are 100 claims on a single assets, 99 will walk away with nothing and only 1 will actually get to keep that asset.

Once the power structure lifts the needle off the record and the music stops, after they have taken all the seats, of course, then they will likely hyperinflate in order to balance their books.

But by then, society's claims on assets will have been extinguished and we will truly enter what Bush referred to as "The Ownership Society."  Double entendre, bitchezzzzzz - that piece of trash wasn't as stupid as he led you all to believe.

"Pretend to be weak, that he may grow arrogant."  Sun Tzu, Art of War


Pseudolus's picture

"When the losses on the Fed's books are revealed, the establishment will come to society and demand to be repaid". 

I agree. Theyre not hiding the fact either - it's vintage Krugman: - "It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public."

You think the plebs will swallow the debtload or go all out for OPPT? Of course they'll be lap it up...

All Risk No Reward's picture

I'd say the erection of the police state, the 2 bilion bullets worth of purchase orders, the NDAA American citizen on American soil assassination claim, the full on effort to disarm anyone with a "battle rifle," the creation of Army re-education camps and the "how do you feel about firinig on American citizens" question provides enough insight into what the Debt Money Tyrant Establishment is expecting.

The time to address these issues is the here and now - that's why I cringe when people simply repeat whatever false narrative the system throws their way.

JP Morgan IS NOT loaning 30 year money at 3% ahead of a hyperinflation that will be caused by the very people that own and control JP Morgan.

They know this facade is gonna collapse - they engineered it to collapse.  The collapse is the mechanism by which they snatch all the physical wealth created during the bubble FOR THEMSELVES!

This operation is easy to identify - just run a basic cost / benefit for the dElites and it comes out the same way every time.

holdbuysell's picture

The table's set. When a real and needed good becomes scarce, even in perception, M2 will flood into it, driving up its price. Next substitute goods will feel the M2 flood as well. And so on.

Hoarding will exacerbate the situation.

The drought of last year may very well have created this checkmate situation, but we just don't know it yet.

Time will tell.

flacon's picture

Maybe we'll run out of time, a very important commodity. 

aleph0's picture


“The bureaucracy is expanding to meet the needs of the expanding bureaucracy.”
-Oscar Wilde-

km4's picture

The key nugget of your post

the second the Fed enters open deleveraging mode, everyone will sell everything they can to lock in the profits generated from the past 4+ years of Fed balance sheet expansion.

Furthermore, at that moment, the market will begin pricing in the unwind of some or all of the $15 trillion in central bank liquidity which is the only reason the S&P is where it is today.

The result would be a market crash so epic it would make the market response to Lehman and AIG's failure seem like a walk in the park by comparison.

Bingo !

buzzsaw99's picture

which is why it will never happen. There will be no deleveraging, there will be no bond crash. It is all the same hot air blather I've been reading for the past ten years and will have to endure for another ten. Total bullshit.

kaiserhoff's picture

Just so, Buzz.  There is no exit plan.  This will end when they are hauled out feet first.

Love that deferred asset thingy.  No one blows his trust fund in Vegas.  He creates a deferred asset, which will take the charge as soon as he inherits more fucking money.  Yeah, that works.

Deacon Frost's picture

As far as I can tell, the Fed can run their ‘Balance sheet’ to infinity and carry it as an ‘asset’ as long as no one calls them on it. Your ‘asset’, that is, the green dollar bills in your pocket, get reflected as a liability on the balance sheet at the Fed.











KickIce's picture

Self interest always prevails, The bad news is the world is being run by a bunch of power hungry sobs, but that's also the good news because one of these days one of these sobs will attempt a hard takeover.  Could even be Obama, sob wants to be a dictator so bad it's not funny, I don't think he relinquishs power so easily.

ISEEIT's picture

Almost as if it was all planned huh? Kinda weird huh?

Almost like one of them conspiracy theories or something...Creepy:)

putaipan's picture

like there was some super secret meeting with false names on a secluded island somewhere ....

All Risk No Reward's picture

You haven't figured out that QE looting isn't about saving the economy yet?

They are looting us and the saving the economy is the false narrative.

JP Morgan said a man has two reasons to something - the good reason and the REAL REASON.

They tell you the good reason, NOT THE REAL REASON.

If they collapse the economy, the TBTF&Jail banksters will survive it, by definition.  Their competition will get wiped out and they will buy up society for pennies on the dollar.

Once they suck the nation dry, they will likely hyperinflate at that point.

They aren't giving out 3% loans for 30 year loans because they are going to hyperinflate.  That's a contradiction that is left unaddressed.

Perhaps the biggest contradiction to the "straight to hyperinflation" meme is the trillions in USD cash and the trillions in USD debt holdings controlled by the people who decide the future of monetary policy - and it ain't government.

If you were sitting on those trillions would you hyperinflate?  Or would you get eveyrone long in paper and pull the rug out while your assets are protected?

The Rothschilds pretended to sell in England after they lied about the French beating the British.  Come on, people, these people are liars, liars, liars.

They are setting you up.  They are setting us all up.

Remove the 3% 30 year mortgages and the trillions the dElites have to lose contradictions and then you can lay down an argument based on logic - not the word of liars.

Bicycle Repairman's picture

"Once they suck the nation dry, they will likely hyperinflate at that point."

So we aren't sucked dry now?  What's left?

Diogenes's picture


"So we aren't sucked dry now?  What's left?"

Granny's retirement. As soon as they talk you into throwing her under the bus, they are done.

LawsofPhysics's picture

Almost, but not quite. This is all about power and control of resources. Tell me, what is the price of something you need to survive, but that is not available or that I refuse to sell?