For most of the last century, the Federal Reserve was a machine that quietly made the U.S. government richer. Every year it turned a profit, and every year it handed that profit to Washington to spend on things like health care, the military and infrastructure.
On September 2, 2026, the Fed released financial statements showing the machine had stopped. There was no profit to hand over, and the Fed had lost hundreds of billions of dollars - the biggest loss in its history.
Most investors have never heard of this arrangement. Its collapse blew a hole in a national debt that just passed $40 trillion, and it feeds straight into the value of the dollar, your savings and your paycheck.
That last part is also the subject of a free live investor workshop Briefs Finance CEO Jaspreet Singh is hosting on September 29th: how to profit when the dollar is losing value. Spots are limited, so save your seat here.
The Fed Isn't Federal, Isn't a Reserve and Isn't a Bank
The Federal Reserve is the central bank of the United States, and its own website says it is not technically part of the U.S. government. It also isn't a reserve, because it isn't sitting on a pile of cash.
And it isn't a bank in any way that matters to you, since you can't deposit money there. What it can do is create money out of thin air.
That raises the obvious question: how does something that can print money lose money?
How the Federal Reserve Makes Money
Let's break down where the cash comes from, starting with the government's checkbook.
Washington collects taxes and spends them on Social Security, Medicare and the military. In 2025 it spent about $7 trillion and collected about $5 trillion, leaving a deficit - the gap between what comes in and what goes out - of roughly $2 trillion.
That gap gets filled by borrowing, and one of the biggest lenders to the U.S. government is the Fed. It creates new dollars and lends them to Washington by buying Treasuries, which are loans to the U.S. government, and it collects interest on every one.
The interest the Fed earns from the government is called the Treasury rate. The Fed is earning it on money that did not exist a moment before it was lent.
Lending is only half the job. The Fed's second job is setting the federal funds rate, the interest rate banks pay one another when they lend each other money.
That rate is not your mortgage rate, your car loan or your credit card. Banks keep their own savings at the Fed, and the Fed pays them interest on it at that same federal funds rate.
So the Fed has income and it has an expense, and the whole business runs on the gap between the two:
| What it's called | Who pays whom | |
|---|---|---|
| Money in | Treasury rate | The U.S. government pays the Fed |
| Money out | Federal funds rate | The Fed pays the banks |
A 109-Year Free Money Machine
From its creation in 1913, when it was set up to prevent banking crises, through 2022, the Fed's income beat its expenses every single year. In good years the profit ran to hundreds of billions of dollars.
All of it went to the Treasury, and in the decade starting in 2011 that added up to a little under $1 trillion. That was money Washington could spend to stimulate the economy without collecting a dime of it in taxes.
The Pandemic Locked the Fed Into a Losing Trade
The machine broke in 2023, when the Fed lost money for the first time in those 109 years. The 2026 loss is the biggest ever, and both trace back to the same decision.
In 2020, 2021 and 2022, the government spent trillions on unemployment checks, stimulus checks, grants and bailouts to keep the economy alive while nobody was working. The Fed created a huge amount of that money and lent it to Washington.
Interest rates were at the lowest levels in history at the time, so the Fed locked in loans that pay it only about 2%. Then the bill for all that money creation arrived as inflation, and fighting inflation is the Fed's job.
It fought by raising the federal funds rate, so the rate it pays banks is now around 4%. Earning 2% on trillions of dollars while paying out 4% is where the hundreds of billions went.
The Fed Doesn't Call It a Loss
It calls it a "deferred asset," and the reasoning is that the Fed can't go bankrupt. When it runs short, it creates the money to cover the gap and hopes to earn it back someday.
The Fed's own website says a shortfall doesn't affect its ability to conduct monetary policy - its control over interest rates and the money supply - or to meet its financial obligations. That is true, but it is not the same as saying nobody pays, and the first bill lands on the government.
Washington Just Lost Its Free Money
For 109 years the Fed's profit was revenue Washington could count on. Now that revenue is gone, spending hasn't dropped and taxes haven't gone up, so the government has to borrow more.
Government spending isn't the villain on its own. When Washington signs a contract to build military equipment, companies earn revenue, people get jobs and things get built, and that is normally fine.
The problem is spending $40 trillion you don't have. There are only two ways to close a gap like that, and neither one is popular.
Cutting Spending Hurts Someone
Cut the budget and the money has to come out of Social Security, Medicare, Medicaid, military spending or other aid. Every one of those cuts means somebody stops getting paid or loses a job.
Investors got a preview in early 2025, when an effort to eliminate whole government departments put people out of work and made a lot of them angry. Cutting government spending is hard when the country has become addicted to it.
Raising Taxes Isn't on the Table
The other option is collecting more in taxes, which most people like even less. In 2025 President Trump signed the One Big Beautiful Bill Act, the largest tax cut in more than 100 years, so higher taxes are not coming under this administration.
Cutting is painful and raising is off the table, so borrowing is what's left. That is how the debt got past $40 trillion and why it keeps climbing.
What Causes Inflation? It Starts With the Money Printer
Remember that the Fed isn't a reserve. Every dollar it lends to Washington has to be created first, and that is the second somebody who pays: anyone holding dollars.
To see why, go back to 1971. The dollar was backed by physical gold, which meant neither the government nor the Fed could print an unlimited amount of it.
That year the government was on the verge of default, with more bills than tax revenue to pay them. President Nixon's answer was to take the dollar off the gold standard, the system that tied each dollar to a fixed amount of gold.
From then on the dollar was just paper, and the Fed could print as much of it as it wanted. The government paid off its debts, and the 1970s brought a new problem: the highest inflation in modern American history.
Most investors think inflation means prices going up. Rising prices are the byproduct, because inflation comes from the word inflate, as in inflating the amount of money in the system.
Create more dollars without creating more wealth and each dollar is worth less, so it takes more of them to buy the same things. The Fed is running that machine right now to cover its own losses.
If you'd rather be positioned for that than surprised by it, that is the agenda for Jaspreet's free live workshop on September 29th: how to profit when the dollar is losing value. Spots are limited, so save your seat here.
A Loss the Fed Prints Away Is Still Inflation
Put the two problems side by side and you get a loop that feeds itself.
- The government lost the Fed's free money, so it borrows more, and funding $40 trillion of debt takes freshly created dollars.
- The Fed's losses have grown year after year, and it covers them by creating more dollars so it can keep paying the banks.
- Spending isn't slowing and tax revenue isn't rising, so the debt keeps growing and the loop starts over.
Both halves are inflationary, and that raises a fair question: if the government can print unlimited money, why does anyone pay taxes? Printing isn't free - it collects the bill through every dollar getting weaker.
America Is Underwater on Its Own Mortgage
Think of the economy as a $500,000 house. Carry a $400,000 mortgage on it and you have an 80% loan-to-value ratio - debt divided by what the asset is worth - which is considered healthy.
Now put a $600,000 mortgage on that same house. You're at 120% loan-to-value, you're underwater, and that is a problem.
The United States is at 125%. Its debt-to-GDP ratio - the national debt divided by everything the economy produces in a year - puts the country underwater by the same math.
There are only two ways to fix that ratio. The economy grows faster than the debt, or the debt grows slower than the economy, and right now the debt is not growing slower.
The Only Way Out Is to Outgrow the Debt
The Treasury Secretary, President Trump and the White House believe the economy can grow faster than the debt. Their case rests on four things:
- Tariffs to bring jobs back to the United States
- New executive orders aimed at the same goal
- Investment in AI and other industries
- Tax cuts to get people working and productivity rising
The other side of the argument points out that the debt keeps ballooning and nothing so far has fixed that. For now, the only fair answer is that we'll see what happens.
If the economy outgrows the debt, a lot of these problems fade on their own. If it doesn't, the printer keeps running and inflation is what comes out the other end.
For 109 years the Fed made Washington richer quietly enough that most investors never knew the machine existed. Now the cracks are showing, and hindsight is always 20/20 - the edge belongs to investors who understand this while it is still happening, not after.
