Many people have a question: Why does the US economy have so many problems and crises, yet its economic data performs better than other countries?

The Federal Reserve, a huge loss?

However, a piece of news today revealed the answer; the Federal Reserve incurred a record loss last year, a staggering loss of $114.3 billion, with interest expenses being twice as much as before.

It is important to understand that the Federal Reserve itself is the largest "decision-maker" in the global financial market, a position that is self-evident, and in fact, it has been profitable for more than 20 years, earning hundreds of billions of dollars each year.

So why would the Federal Reserve incur a loss? In fact, this is the huge price paid for the "prosperity" of the US economy! Today, let's discuss the heavy price paid for the United States' excessive economic stimulus using this example.

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Why did the Federal Reserve suffer a huge loss?

In fact, since 2000, the Federal Reserve has always been making money. As a unique central bank of the United States and the central bank of global central banks, the Federal Reserve's position is self-evident. It doesn't just shake the ground when it stamps its feet; even a sneeze can cause tremors in the financial markets of the United States and the world.

So, starting from 2000 or even earlier, the Federal Reserve has been making money every year, earning tens of billions when less, and more than $100 billion when more.

However, in 2023, that is, last year, the Federal Reserve suffered the largest loss in its history, with a loss amounting to $114.3 billion, setting a record in history.

Federal Reserve's profit and loss statement over the years.Why would the Federal Reserve suffer massive losses? Simply put, it's due to excessive interest expenditures; in 2022, the Federal Reserve paid $102.4 billion in interest annually, but by 2023, interest expenditures skyrocketed by 2.75 times, reaching $281.1 billion. This is the root cause of the Federal Reserve's massive losses.

The reason for the surge in the Federal Reserve's interest expenditures is actually the Fed's interest rate hike policy. Starting in March 2022, the Federal Reserve began to raise interest rates, reaching a peak in July 2023, and to date, the U.S. federal funds rate has remained at a high level of 5.25%-5.5%.

We have said more than once that although interest rate hikes can curb strong inflation in the United States, every economic policy has its pros and cons. If the United States wants to curb inflation, it must pay a higher price in interest.

Therefore, not only does the Federal Reserve have to pay the price of the largest losses in history, but when the U.S. Treasury issues U.S. Treasury bonds, it also needs to pay an epic level of interest as the price. This, in turn, can lead to a crisis in U.S. debt.

Overstimulating the economy? The price of the U.S. economy is U.S. debt?

Recently, the U.S. Treasury Department announced the fiscal deficit for the fiscal year 2024. The data shows that the deficit in the first fiscal quarter of the United States has exceeded $500 billion, a year-on-year increase of 21%, and the deficit in December last year soared by $129 billion, a year-on-year increase of 52%.

The performance of U.S. debt and deficit

So you see, why is the U.S. economy so good? You should know that the total economic output of the United States is very terrifying, why can it beat European developed countries in the fourth quarter of last year? The only answer is that the United States stimulates the economy through borrowing and deficit.

The larger the U.S. fiscal deficit, the greater the economic stimulus investment in the United States, and the higher the amount of Treasury bonds that the U.S. Treasury needs to issue. In the context of high interest rates, the more U.S. debt issued, the higher the interest that the Treasury Department needs to pay, which will lead to the expansion of the fiscal deficit.

Therefore, the United States not only has a U.S. debt problem of $34.5 trillion, but also an increasingly large fiscal deficit. Both of these issues are about a lack of money, but they will plunge the U.S. economy into a death spiral, which is the price the United States has to pay.Every 100 days, the United States increases its debt by $1 trillion.

Therefore, as long as the current high interest rate of 5.5% persists, the Federal Reserve will continue to incur losses. The Federal Reserve is expected to maintain the current interest rate for the first half of this year, and may lower the interest rate by 2-3 times in the second half of the year, with the possibility of a 50-75 basis point reduction in U.S. interest rates. However, the interest rates will still remain high.

Thus, we can also anticipate that the Federal Reserve will most likely continue to suffer losses next year, with the loss amount potentially exceeding $10 billion, and the root cause is still the excessively high interest expenditure.

It is important to note that the Federal Reserve's previous profits were actually handed over to the U.S. Treasury. But now that the Federal Reserve's floating profits no longer exist, this means that the U.S. Treasury has lost a very considerable source of revenue, leading to a larger fiscal deficit and an unsustainable U.S. fiscal situation.

Take the data from the fiscal year of 2023 as an example, the United States had a revenue of $48.87 trillion in 2023, with a net income of $4.44 trillion, a year-on-year decrease of 9.3%. The reduction in U.S. fiscal revenue far exceeds the reduction in expenditure, making the U.S. fiscal situation unsustainable and continuously deficit-ridden.

So we should all understand why the U.S. economy appears to be doing so well. It is because the United States continuously issues debt and increases fiscal deficits to stimulate the U.S. economy. The price paid is the increasingly stubborn inflation, as well as the ever-increasing debt and deficits of the United States.

In fact, China could also do this. We could also directly boost the domestic economy through a large-scale easing and massive money printing. However, we know that every policy comes with a cost.

China's approach is to seek stability, using a series of favorable policies to gradually stimulate the Chinese economy, rather than suddenly creating a major benefit to vigorously stimulate the domestic economy.

Making money, printing money, or borrowing? How should the United States break the deadlock?It is quite evident that the United States is currently caught in a "debt-deficit" spiral. If this continues, the price the U.S. will have to pay will be even more astonishing. Therefore, the U.S. also needs to come up with a solution to the problem.

There are generally three ways to solve the problem: the U.S. itself increases fiscal revenue; the Federal Reserve loosens its monetary policy by printing money; and the U.S. continues to borrow. At present, it seems that the U.S. is actually employing a "three-pronged approach."

What is the most profitable industry in the U.S. now? Traditional manufacturing in the U.S. has long been struggling, so the most profitable industry in the U.S. now is semiconductors. On the one hand, the U.S. raises trade barriers to prevent other countries from dumping goods, and on the other hand, it has enacted the "CHIPS Act" with the aim of attracting global semiconductor manufacturers to produce chips in the U.S.

The U.S. signs the CHIPS Act to encourage countries to build factories in the U.S.

In this way, the U.S. government can collect more taxes, and the U.S. can also increase fiscal revenue through high-end manufacturing.

The second is the Federal Reserve's loose money printing. In fact, historically, every time the U.S. economy has receded, the Federal Reserve has used loose monetary policy to support the U.S. economy. This was the case during the 2008 financial crisis and the 2020 pandemic crisis.

However, the current problem is that the crisis caused by the U.S.'s unlimited quantitative easing in 2020 has not been resolved, and the U.S. is still in the shadow of the inflation crisis. Don't you think the Federal Reserve doesn't want to cut interest rates now? They actually do, and even Biden does.

But inflation is still rampant in the U.S. What about the future economic "stagflation" if interest rates are cut prematurely at this time? Therefore, the interest rate cut is still being postponed.

The U.S. debt crisis will plague the U.S. economy for decades.

So you will find that, in the end, borrowing is the easiest and most convenient for the U.S. After all, the foundation of the U.S. is too solid. Whether it's China, Russia, or the EU, none of them have a foundation as deep as the U.S. At this time, the U.S. borrowing a few more trillion dollars is not a problem.In any case, the President of the United States is elected every four years. As long as there is no explosion of debt during my term, what does it matter if the subsequent President's debt explodes? At that time, the U.S. government that takes the blame, although still the U.S. government, has no connection with the current government that is borrowing money.