While you sometimes see decent stories on economics in The New York Times and The Washington Post, The Wall Street Journal is really the place to go.

Higher Interest Rates Fuel Losses at the Federal Reserve

The central bank is now paying out more in interest expenses than it earns in interest income

by Nick Timiraos | Hallowe’en, October 31, 2022 | 5:30 AM EDT

The Federal Reserve’s aggressive interest-rate rises to fight inflation are leading the central bank to do something it has never consistently done before: lose money.

The central bank’s operating losses have increased in recent weeks because the interest it is paying banks and money-market funds to keep money at the Fed now exceeds the income it earns on some $8.3 trillion in Treasury and mortgage-backed securities it accumulated during bond-buying stimulus programs over the past 14 years.

The paywall hits right here; aren’t you glad you have a writer shelling out his hard-earned money to subscribe for you?

Of course, that $8.3 trillion in Treasury and mortgage-backed securities it accumulated were accumulated via ‘quantitative easing,’ in which the Fed spent money it didn’t actually have, but, with no one to bounce the ‘checks’ — not that checks are written anymore; it’s all done with electronic funds transfers — the money was just ‘created.’

The losses don’t interfere with the Fed’s ability to conduct monetary policy, and they follow years in which the central bank earned profits of around $100 billion, which it sent to the U.S. Treasury. Those remittances reduced federal deficits, and as they end, the federal government could face marginally higher borrowing needs.

If the Fed runs sustained losses, it won’t have to turn to Congress, hat in hand. Instead, it will simply create an IOU on its balance sheet called a deferred asset. When the Fed runs a surplus again in future years, it would first pay off the IOU before sending surpluses to the Treasury.

And there you have it: unlike regular banks, which would have to borrow money from someone else, incur a real liability that they’d hope to be able to pay off in the future, our central bank simply creates “a deferred asset,” something that you or I or commercial banks can’t just do. If a If for some reason the Fed didn’t run a surplus again, the deferred assets would simply be deferred longer.

In accounting for real people, a deferred asset is something very different:

A deferred asset is an expenditure that is made in advance and has not yet been consumed. It arises from one of the following two situations:

• Short Consumption Period: The expenditure is made in advance, and the item purchased is expected to be consumed within a few months. This deferred asset is recorded as a prepaid expense, so it initially appears in the balance sheet as a current asset.
• Long Consumption Period: The expenditure is made in advance, and the item purchased is not expected to be fully consumed until a large number of reporting periods have passed. In this case, the deferred asset is more likely to be recorded as a long-term asset in the balance sheet.

In other words, a deferred asset in the real world is something completely opposite of what the Fed could do. In the real world, a deferred asset is created when an individual or business spends money it already has for something before that something is actually acquired. What the Fed would do is claim that money that it is spending that it does not have is an asset it will have in the future. A private business could take out a loan, based on anticipated future revenues, but to simply declare that the asset is there just doesn’t work.

If a private business did that, the Chief Financial Officer would go to jail.

The arrangement is akin to an institution facing a 100% tax rate and offsetting current losses with future income, said Seth Carpenter, chief global economist at Morgan Stanley.

The losses stem from some obscure monetary plumbing. The Fed’s $8.7 trillion asset portfolio is full of mostly interest-bearing assets—Treasury and mortgage securities—with an average yield of 2.3%. On the other side of the ledger—the liability side of the Fed’s balance sheet—are bank deposits held at the Fed known as reserves and overnight loans called reverse-repurchase agreements.

Before the 2008 financial crisis, the Fed kept its portfolio relatively small, at less than $1 trillion. Its main liability was the amount of currency in circulation. The Fed shifted reserves up and down in incremental amounts if it wanted to lower or raise short-term interest rates.

After the crisis, the Fed cut interest rates to zero and purchased large quantities of bonds to provide additional economic stimulus. Those purchases flooded the banking system with reserves. To maintain control over interest rates with a larger balance sheet, the Fed revamped the way it manages rates. The new system, which was already in use by many other central banks, controlled short-term rates by paying interest on bank reserves.

For the past decade, relatively low short-term interest rates meant the Fed earned more on its securities than it paid out as interest on reserves or other overnight loans. After covering its expenses, the Fed last year handed back about $107 billion to the government.

Did you understand all of that? Well, the WSJ commenters were almost all laughing at the article, with at least one CPA noting that this was the way to jail for a private corporation.

The United States gets away with this because the dollar is the world’s reserve currency, and our debts are all denominated in dollars. Five American territories and eleven independent nations use the dollar as their official currency. We can always pay our debts, because we control our own currency, and the ‘checks’ are all written on a ‘bank’ that doesn’t bounce them. But I’m old enough to remember when OPEC floated the trial balloon of requiring payment in euros rather than dollars, and the panic concern to which that led. In one way, the entire world’s economic system is being propped up by the United States Federal Reserve. But if we keep up with the acco9unting tricks, that could change.