U.S., CA could be hit by Federal Reserve potential massive loss

Bernanke testifying, wikipediaFeb. 28, 2013

By Chriss Street

Last week in my article here, “Misery Index about to soar in CA, US,” I warned that a rise in a combination of inflation and unemployment, known as the Misery Index, could “distort financial markets.” And it could result in “significant capital losses” on their huge bond investments of the U.S. Federal Reserve. These distortions and losses would slam the economy, especially in California.

This week, Morgan Stanley heightened those concerns by stating that, if the economy contracted and inflation continued to rise, the U.S. government could suffer a loss of $547 billion on the Fed’s massive portfolio.

Given California’s heavy dependence on federal spending, the state’s treasury would be hit hard. According to a study by the California Budget Project, “In federal fiscal year (FFY) 2010, which ended September 30, 2010, $333.8 billion in federal funds came to California. Most of those dollars went directly to Californians without passing through the state budget.” Most of that money went to Social Security, Medicare, military pensions and other direct payments to persons.

Also, the study found that, for the state government, federal spending was “$91.5 billion in the 2010-11 budget — approximately 40 percent of total state expenditures.”

If the Fed’s portfolio loss leads to reduced federal-budget expenditures, California would lose the most of any state.

Bernanke testimony

In his semi-annual testimony to Congress on monetary policy and the economy this week, Federal Reserve Chairman Ben Bernanke was forced to try to reassure financial markets that there was only a very low possibility of an imminent financial crisis.  He calmly said, “Where the problem still remains unaddressed is in the longer term. And so it doesn’t quite match to be doing tough policies today when the real problem is a somewhat longer-term problem.”

Bernanke went to great lengths to make the case that central bank money printing and bond speculation were prudent stimuli to reinvigorate the American economy. He specifically pointed out that Fed’s easy-money policies have held down interest rates and helped a revival in the housing market and car sales.  The chairman also pointed out how a weak job market was more responsible than the Fed for keeping inflation low.

But as I had pointed out, the low inflation rate reported in of the Consumer Price Index has been dramatically understated because 41 percent of the index is real estate returns, which have been down over the last four years. And according to the McKinsey Global Institute Commodity Price Index; the prices for food, raw material, metals and energy prices rose over the last four years to historic highs.

During the same period, the price of a gallon of gas rose by 132 percent. And recently the costs of food rose by 8.1 percent. Now that the Fed money-pumping is providing below-market interest-rate financing, real estate inflation is jumping and the CPI will soon spike higher.


President Obama has been desperate over the last two weeks to try to avoid the 2 percent federal spending cuts that are part of the financial sequester.  But even after this modest reduction is implemented, the Congressional Budget Office projects that, over eight years, his administration will have engaged in $7.5 trillion in deficit-spending  and the national debt will almost have doubled.

Bernanke tried to help the president’s cause by uttering the usual concerns that suffering by millions of long-term unemployed was good reason to not make cuts until the economy recovered.

Bernanke was given good marks for his congressional performance.  The stock market rebounded and Diane Swonk, chief economist at Mesirow Financial in Chicago, said of Bernanke’s testimony, “Those worried that the Fed may end large-scale asset purchases prematurely should be reassured.”  But as I remember, those nice folks from Chicago were also very positive in November 2008 with the election of Barack Obama.

Wasn’t that right before the last financial crisis, where the stock market lost 50 percent of value and unemployment skyrocketed to more than 13 percent in California?


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  1. RT
    RT 28 February, 2013, 07:49

    “If the Fed’s portfolio loss leads to reduced federal-budget expenditures, California would lose the most of any state.” If this is true, it means that California is the state that relies on federal programs more than any other. How great it is that California must be beholden to the feds for its support? Maybe California needs to become more self-sufficient and not rely on the feds for handouts. Where is Gov Brown on this? Nowhere that’s where !

    Reply this comment
  2. The Modified Ted Steele Methodologies (tm)
    The Modified Ted Steele Methodologies (tm) 28 February, 2013, 08:55


    We’re doomed!
    The Super storms
    losing our automatic weapons
    tri lat commission
    The debt
    the tea baggers
    doooooooomed I tell ya!!!!

    LOL God Bless Glen Beck

    Reply this comment
  3. CJ
    CJ 28 February, 2013, 09:01

    As I see it the USA Financial System Is a Fraud. How can you argue with the facts on this video?


    Reply this comment
  4. surfpunk
    surfpunk 28 February, 2013, 10:43

    CJ,argue facts!just attack there charecter,ask ted for tips

    Reply this comment
  5. Steve L.
    Steve L. 28 February, 2013, 11:04

    RT has it right. Why does nobody care that California is the state that relies on federal programs more than any other ? Could it be that it is because California is all about the takers and not the makers ?
    Sad, just sad.

    Reply this comment
  6. us citizen
    us citizen 28 February, 2013, 12:06

    Yes, Ted’s delusions run rampant, he’s got lots of tips

    Here’s the deal……….this so called sequester is like taking a cup of coffee out of your monthly budget. Is that REALLY going to affect you? Of course not. This federal govt is having a hissy fit that they brought on themselves for not doing the job they were supposed to do. I say let them spontaneously combust.

    Reply this comment
  7. The Modified Ted Steele Methodologies (tm)
    The Modified Ted Steele Methodologies (tm) 28 February, 2013, 12:28

    US Cit— you read me wrong. I am 100% for not spending what we don’t have in the specific context of the sequester— bring it on!

    Reply this comment
  8. stolson
    stolson 28 February, 2013, 17:59

    this so called sequester is like taking a cup of coffee out of your monthly budget.
    Right. I believe I read this will be about 2.4 percent of the budgeted amt to spend. Many many families and singles have had to do much more than that the past years. Why can’t the bloated govt and its parasitic leaders do the same? Think of all the unnecessary fed. agencies (and state agencies) where little is really done. Why not eliminate them? I have written senators on this, and the replies amount to double talk and incoherent long and windy answers.

    Reply this comment
  9. Hondo
    Hondo 1 March, 2013, 09:44

    Teddy finally made a point without calling someone a name. And he made sense. He is actually quite literate, and when he sticks to a subject, and not flaming, he does quite well.

    Reply this comment
  10. Ted Steele, Navigator
    Ted Steele, Navigator 1 March, 2013, 15:16

    MmmmmmmHondo—-mmmmmmm thanks……I do what I can……..

    Reply this comment

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