The Fed is losing billions everywhere — except in Miami

The Federal Reserve has traditionally funded its operations by issuing perpetual, interest-free bonds.

You might find one of these in your pocket — they’re green, rectangular and exchangeable for almost anything. 

You probably won’t though, because who pays for anything with cash anymore? We all want our points, airmiles and the convenience of direct debit.

This is a problem for the Fed.

For most of its 112-year history, the 12 Federal Reserve banks met nearly all of their funding needs by issuing 0%-yielding cash and investing the proceeds in government bonds typically yielding 5% or more.

That is such a good trade that the Fed has typically made a return far in excess of its expenses, and sent a substantial profit to the Treasury at the end of the year.

But as detailed by the Bank Policy Institute, that model has recently broken down.

In response to both the Great Financial Crisis of 2008 and the Covid pandemic in 2020, the Fed bought trillions of dollars of assets (the infamous “quantitative easing”).

These assets had to be funded, and not in the Fed’s traditional way, because the world did not need trillions more of perpetual, no-interest loans (e.g., the cash in your pocket).

So the Fed began borrowing instead from domestic banks, foreign central banks and, most recently, money market funds.

Unlike the generous users of physical cash, these lenders demanded interest on their loans, which meant the Fed could no longer finance its operations and balance sheet for free.

As long as interest rates were near zero, this was still a profitable trade for the Fed’s regional banks, which continued to earn more on their assets than they paid on liabilities.

Now, though, they’re all stuck with trillions of assets yielding, say, 2%, while paying over 4% to finance them.

As a result, the Fed is now operating deep in the red, with each of its regional banks reporting huge losses on its investment portfolios.

With one exception.

The Federal Reserve bankers of Atlanta made a profit of $3.8 billion in 2024 — which makes them look a lot smarter than their counterparts in New York, who lost $45.2 billion.

The difference is that while the Atlanta Fed is encumbered by all of the same low-yielding assets that New York holds, the liability side of its balance sheet is distinctly different.

Unlike New York, Atlanta funds most of its balance sheet with no-interest loans in the form of banknotes: 74% of Atlanta’s balance sheet is funded by the physical cash it issues, vs. just 20% for New York.

Every US banknote includes a code that identifies which regional bank issued the note and a disproportionate number of them are coded “F6,” for Atlanta, the sixth district in the Federal Reserve system.

Why Atlanta?

Because the Atlanta Fed’s jurisdiction stretches as far as Miami, which is home to an unusually active cash processing center.

You might have a guess as to why.

Miami is the gateway to Latin America and — possibly because I watched too much Miami Vice as a kid — I can’t help but think a lot of the cash issued there finds its way into the drug trade.

This can really add up.

Pablo Escobar, for example, was said to spend $2,500 a month just on the rubber bands required to keep his stacks of cash neat and tidy, and Escobar’s brother once recounted that "Pablo was earning so much that each year we would write off 10% of the money because the rats would eat it in storage or it would be damaged by water or lost."

In the 1980s, 10% of Escobar’s earnings added up to about $2 billion a year — pure seigniorage profits for the Federal Reserve, which will never have to redeem those notes.

Escobar is no longer in business, of course, and today’s top drug kingpin, featured in this morning’s Wall Street Journal, has a net worth of less than what Escobar lost to rats in a single year.

So issuing cash to drug dealers might not be as good a business as it once was. 

But plenty of people are still making 0% loans to the Fed, and the Miami processing center is still disproportionately busy.

It’s hard to say how busy it is because the processing centers don’t report how much cash they keep in their vaults for distribution.

But when a group of Swiss bankers toured the Miami vaults in 2022, one reported that they’d seen “a shocking amount of money.”

I don’t know exactly how much money it takes to shock a Swiss banker, but I know it’s A LOT.

More scientifically, the Atlanta Fed records $365 billion of physical cash as liabilities on its balance sheet, most of which is almost certainly held abroad.

Dollarized Ecuador, for example, holds an estimated $20 billion of US cash.

Semi-dollarized Argentina is thought to be home to as much as $400 billion, mostly in $100 bills.

This is an incredible, profit-generating business for the Fed at a time when it most needs to make some profits.

As much as 60% of physical US cash is estimated to be held outside the United States, which means foreigners are doing their best to keep the Fed afloat.

But what if they start using stablecoins? 

The US government has promoted stablecoins as a way to extend the dollar’s dominance. 

But they would extend the Fed’s losses, too — because if stablecoins replace physical dollars abroad, the Fed loses its free financing. 

Every $100 bill the Fed can no longer issue at 0% becomes $100 it has to borrow at 4% or more from a bank or a money market fund.

On that trade, even Atlanta would lose money.

— Byron Gilliam

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