SVB Couldn’t Ignore Its Losses, but the Fed Can

Unless the US is willing to redistribute wealth from capital to labor, from the old to the young and rich to the poor it will be difficult for the Fed to sustain high rates of inflation. Rich people can only buy so many cars and the old eventually start preferring security (savings) over consumption.

The massive stimulus combined with the rising millennial generation is driving inflation along with supply chain challenges, breakdown of globalization and a massive increase in the Feds balance sheet. The question isn’t why there is inflation but the question is why is there so little?

Absolutely. Inflation is systemic - aging populations pay more to compete for limited labor and services, and every country is aging at the same time.

To truly keep prices within 2% YoY, they'd have to raise rates so high that the assets held by elderly get curb stomped to oblivion, and now you have a whole set of new problems.

The other alternative is a technological revolution that frees everyone up to do the in-person things driving cost hikes, and frees them to plug the holes forming (due to many factors) in the international trade system.

I don't see an alternative where the not-working, elderly, and needy come out ahead here, even best case is a lesser form of bad for them and the services they demand.

The Federal Reserve can but only by increasing reserves. This exposes the Fed by risk if the bank is shuttered. In that case the Fed is stuck with bonds paying 2.0% while it is paying more on reserves and ends up losing money every month. Today the Fed is paying out more interest than it is earning with an estimated $80B loss for 2023. These losses are creatively booked as deferred assets.

The Fed can also take losses if the bank fails and the assets don’t pay back at par value. Mortgage holders walk away from their homes as prices fall.

And since it is the Federal Reserve it is taking all of these risks on the US taxpayers behalf.