Peter St Onge gives us a brief tutorial on bond pricing, and why the global economic system is poised to blow up. Unrealized losses at The Fed, as well as global governments and corporations is in the $$$ Trillions. No sh*t. This is all hidden from view, but is real financial damage.
How did this happen. The Fed printed Trillions of dollars during the Covid lockdowns. This was during an interest rate regime of 0%. Then, when inflation got out of control, they had to raise interest rates.
Let me explain further:
Bond prices are an inverse function of interest rates. As interest rates go up, bond prices go down. Consider you buy a 10-year T-bill (treasury bond) at 1%, i.e. you get 1% interest every year for 10 years, at which time the bond matures and the entire bond value must be paid. So, the value of the bond is the net present value (NPV) of all interest payments over the life plus the redemption value at the end of the bond’s life.
NPV takes into account the value of money, ie inflation decreases the value of money. In an inflationary environment, $1 today is worth more than $1 tomorrow by the amount of inflation.
If interest rates go up, say to 4%, that means that the bond you are holding at 1% is worth less money, since the NPV of all the interest payments plus the redemption value.
Which is where we are at today. Trillions of dollars in bonds have been bought at low interest rates (basically 0%), and we now have 10-year T-bill rate of about 4%. This means the total global inventory of 0% T-bills has depreciated SIGNIFICANTLY due to rising interest rates and inflation.
As Peter St Onge is reporting, The Fed has officially a $114B UNAUDITED loss. The actual unreported loss is likely more than $1 Trillion. Globally, the bond loss is in the $$$Trillions.
The Fed can hide the actually loss, as it is wholly unaccountable and unaudited. They do this by printing money, which manifests itself in INFLATION. Yes, The Fed money printing is DIRECTLY responsible for inflation. Hence, The Fed balancing act between fighting inflation and bankrupting the US by destroying its balance sheet. Inflation is the greater of the two evils, since it directly affects voters with immediate consequences to politicians. The destruction of the balance sheet is the bankruptcy of The Republic. The Fed balance sheet calamity is hidden, but can only go on for so long.
When does the piper get paid? The losses are unrealized until the holder actually sells the bond. “Mark to Market” accounting would recognize the current value of the inventory of bonds being held, but that accounting is not mandatory. The losses are real.
Eventually, soon, the bond calamity will be unleashed on the global financial system. Remember the SVB (Silicon Valley Bank) collapse? This is what got them. There are many others that have gone unreported. Banks, hedge funds, pension funds. The damage is profound. But, this can only be hidden for so long. The big reveal is coming.
Oh, and the “official” US debt = $275,000 per American household. In what reality is this sustainable?
Ed Dowd: “I have decided to unilaterally rebrand Disease X! It is now Disease DIC! Debt Implosion Coverup.”
End of Times.
Bonus link: