The PUNZI Papers Essay Five · The Federal Reserve Has Become A Ponzi

This essay is part of The PUNZI Papers, a series of essays explaining the reason for our project, PUNZI WARS, and the potential we think it points to.

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Advisory: PUNZI WARS is a game and an on-chain research experiment. It is not an investment. Participate at your own risk.

A central bank chartered to stabilise the currency now sets the floor under the price of every asset, and in the spring of 2020 began buying corporations’ debt outright. It is one of the largest subsidies the modern state extends, it runs to whoever already owns the assets, and it has never appeared on a budget or been put to a vote. We ask not whether the arrangement is legal, but how long it can hold, and who is left under it when it collapses.

The Day the Central Bank Started Buying Companies

On Monday, 23 March 2020, the Federal Open Market Committee released its third emergency statement in three weeks. The headline was that the Federal Reserve would purchase Treasury securities and agency mortgage-backed securities ‘in the amounts needed’ to support market functioning. The week before there had been figures ($500 billion in Treasuries, $200 billion in agency MBS); this time there were none, and the coverage reached for the word ‘unlimited’ that the statement had been careful not to use. But the same morning carried a second announcement, and it mattered more for what it broke than for what it spent.

The Fed unveiled two facilities, the Primary and Secondary Market Corporate Credit Facilities, through which it would, for the first time in its history, buy the bonds of American corporations. These purchases would include existing bonds, the exchange-traded funds that hold them, and newly issued bonds direct from the companies. An institution built to lend to banks had made itself a buyer of corporate debt.

Just over two weeks later, on 9 April, it widened the promise to firms that had been investment grade before the crisis and were downgraded after it (the ‘fallen angels’) and to funds holding outright high-yield debt. The central bank that is not permitted, by its own charter, to favour one borrower over another had drawn a circle around the borrowers it would rescue, and that circle had reached into junk.

The market took the point at once, which is the part worth keeping. The S&P 500 closed that Monday at 2,237, having touched an intraday low near 2,191, the lowest point of the entire crisis. The bottom and the announcement arrived together. From the close of 23 March the index did not look back: by the end of 2020 it stood at 3,756, up roughly 68% from the day it was told help was coming without limit, and by the end of 2021 it was 4,766, more than double the March low.

Set those numbers against the thing the money was supposedly for. In February 2020 the United States held 152.5 million nonfarm payroll jobs; by April it held 130.4 million. Roughly 22 million jobs were destroyed in two months, the deepest and fastest contraction in the postwar record, and the unemployment rate reached 14.7% in April, the highest figure published since the survey began in 1948. Between the announcement of unlimited purchases and the close of 2021, asset prices behaved as though the economy were enjoying its strongest expansion in decades rather than its deepest collapse since the 1930s.

The price index and the real economy had come apart, and the agent of the divergence was a public institution whose statutory mandate does not mention asset prices at all, and which had just made itself the buyer of last resort for the corporate bond market. The later recovery in employment would have many authors. The recovery in prices had one.

The Subsidy Beneath the Policy

Strip the institutional language away from post-2008 Federal Reserve operations and a familiar shape appears where the 2020 facilities made explicit what had been implicit since 2008. The central bank creates reserves at no cost to itself. It then uses those ‘reserves’ to buy long-duration assets (principally Treasury securities and agency mortgage-backed securities) from a small set of authorised counterparties. Since 2020 this has also included corporate bonds and the funds that hold them. Long-term interest rates fall. The present value of any asset whose payoff is distant in time (equities, real estate, private credit, a corporation’s future earnings) rises mechanically. Asset prices rise and the cost of corporate borrowing falls, because both are the same lever pulled from the same end.

Who is paid by this, and who pays for it, can be set out plainly. The beneficiaries come first, because they are rarely named first.

1. Corporations that borrow. The compression of long-term rates is, to a company with bonds to issue, a direct subsidy to its cost of capital. In 2020 the subsidy stopped being indirect: the central bank bought corporate debt outright, and through the fallen-angel expansion bought the debt of firms the market had judged too risky to hold at investment grade.

2. The firms that should not have survived. The same cheap credit that rewards a productive borrower keeps the unproductive one alive. On the Bank for International Settlements’ measure, the share of listed ‘zombie’ firms (companies at least ten years old whose operating earnings have not covered their interest for three years running) rose from around 2% of advanced-economy listed firms in the late 1980s to some 12% by 2016. A subsidy to the cost of capital is, among other things, a subsidy to insolvency deferred.

3. The executives whose pay is the share price. A lifted market and a cheaper balance sheet flatter every metric to which executive compensation is indexed, and the debt issued cheaply is frequently spent buying back the issuer’s own shares, lifting the per-share figures again.

4. The households that already own the assets. The gain lands, by construction, on whoever holds the lifted assets when the lifting begins. The top decile of the US wealth distribution holds roughly 80% of directly and indirectly held equities and roughly half of housing wealth net of mortgages; the gain is theirs in that proportion.

Against them stand the people who fund the subsidy without being told they are funding anything.

1. Wage earners, whose compensation adjusts to consumer prices on a lag of twelve to twenty-four months, and who lose real purchasing power in the interval.

2. Savers and currency holders, whose claims are denominated in nominal dollars, whose real returns fall, and during inflation go sharply negative.

3. New entrants (first-time homebuyers, younger cohorts beginning to save) who meet the repriced market and buy in at the levels the subsidy has already lifted.

The participants near the top are paid out of a monetary expansion that draws down the purchasing power of the participants near the bottom. The system creates no goods. It transfers claims on production from those who hold their working lives in wages and cash to those who already hold the assets, and it does so without ever naming the people it draws from.

That, by its very nature, is a Ponzi-like structure in the analytical sense we set out at the beginning of this series. The three structural features are all present: earlier holders are made whole by the inflow the policy manufactures, the operation depends on that inflow continuing, and the structure produces none of the value it distributes. It only moves it upward on a schedule no one votes on.

What the Subsidy Is For

An honest account has to begin with the functions, which are real. The Federal Reserve was established by the Federal Reserve Act of 23 December 1913 to provide a lender of last resort, to keep the payments system running, to stabilise the macroeconomy, and (after the dual mandate was codified in the Federal Reserve Reform Act of 1977) to pursue maximum employment and price stability.

The lesson of the 1930s, established as the institution’s operating consensus by Milton Friedman and Anna Schwartz’s A Monetary History of the United States (1963), is concrete: a central bank that stands aside in a panic and lets a deflationary spiral run presides over something far worse than the outcome it could have bought by acting. Wages and prices fall together, the real value of debt rises, defaults cascade, output collapses, and the collapse feeds itself.

The Fed under Ben Bernanke in 2008 and under Jerome Powell in 2020 acted to prevent that spiral, and prevented worse. The corporate-credit facilities of March 2020 had a real justification too: the corporate bond market had seized, sound companies could not roll their debt, and a wave of liquidity-driven bankruptcies would have cost jobs the pandemic had not yet taken. The facilities were invoked to stop that, and they did, so completely that the announcement alone did most of the work, and the Fed bought only a fraction of what it had authorised before the market reopened on its own.

The argument here is not that the Fed should have stood aside in 2008 or 2020. It is that the emergency tool does not get put back. The balance-sheet expansion reached for once to halt a collapse has instead become the continuous operating mode of monetary policy; the corporate purchases reached for once to thaw a frozen market became a standing precedent that the central bank will be there for the corporate bond market the next time it freezes. A promise that the state will buy the bonds of large employers in a crisis is a subsidy to the cost of issuing those bonds in the calm before it. The instrument was disclosed. The subsidy it became was not.

A History in Four Movements

The arc from 1913 to 2022 can be told in four passages, each a structural break, and each one widening the circle of who the central bank supports and stands behind.

1913 to 1951: founding through wartime financing. The Federal Reserve was created to address bank-run instability and to provide an elastic currency. From 1942 it effectively pegged long-term Treasury yields to support war financing, subordinating monetary policy to fiscal need. The arrangement ended with the Treasury–Federal Reserve Accord of 4 March 1951, generally treated as the founding moment of the modern Fed’s independence on rate-setting.

1951 to 1979: postwar policy and the inflation accident. The Fed under William McChesney Martin and Arthur Burns operated within a framework that emphasised full employment, sometimes at the cost of price stability. By 1979 CPI inflation had reached an annual rate near 13.3%, and the credibility of the dollar was an open question.

1979 to 1987: the Volcker disinflation and the Greenspan transition. Paul Volcker, appointed Chairman in August 1979, raised the federal funds rate to a peak near 20% in 1981. Inflation fell from above 13% to below 4% by 1983, and the price-stability anchor of Fed credibility was re-established. Alan Greenspan succeeded Volcker on 11 August 1987. Two months later, on 19 October 1987, the Dow Jones Industrial Average fell 22.6% in a single session. The Greenspan Fed’s response was a public commitment to provide liquidity, and is generally treated as the founding moment of the ‘Greenspan put’: the implicit assurance that the central bank will act to support markets in a sharp downturn.

The structural effect was to introduce an expectation that has not since been removed, and an expectation of rescue is not a neutral fact. It instructs the behaviour it insures. A market that believes the central bank will catch a sharp fall has every reason to take the leveraged position that would require catching, and the more reliably the put is honoured, the more risk is taken on the strength of it. The safeguard does not merely stand behind the risk. Over time it manufactures it.

2008 to 2022: the balance sheet as operating instrument. In response to the 2008 crisis the Fed launched its first large-scale asset purchase programme, announcing $600 billion of agency MBS and agency debt on 25 November 2008, later expanded. QE2 followed in November 2010, Operation Twist in 2011–2012, and QE3, announced 13 September 2012, ran at $85 billion per month at peak. The balance sheet grew from roughly $870 billion in August 2007 to roughly $4.5 trillion by late 2014. A partial reduction, the 2017–2019 runoff, was interrupted by repo-market stress in September 2019.

Then came 2020. From $4.16 trillion on 26 February 2020 the holdings rose to $7.17 trillion by 10 June 2020, and peaked near $8.96 trillion on 13 April 2022. That was a change from six or seven per cent of national output before 2008 to something nearer 35 to 40 per cent at the 2022 peak, and it included, for the first time, corporate bonds among the holdings. Adam Tooze’s Crashed (2018) is the standard narrative of the 2008 transition; Edward Chancellor’s The Price of Time (2022) extends the argument across the full era. What was emergency in 2008 became framework after 2012, and since 2020 it has become the operating mode of monetary policy itself.

A Market the Buyer Cannot Leave

There is a loop inside the mechanism that the institutional language is built to keep out of view. The Fed buys the securities; the buying lifts their prices and lowers their yields; the lower yields invite more issuance (more Treasuries, more mortgage bonds, more corporate debt), which the market absorbs precisely because it believes the central bank stands ready to buy if absorption falters. The Fed then holds, on its own balance sheet, a great mass of the securities whose price its buying set, and carries them at that price. It is the largest single holder of the assets it is committed to supporting, the buyer of last resort for paper it had a hand in pricing, and the guarantor of a floor beneath its own position.

The collateral the entire financial system is built on (the ‘risk-free’ Treasury, the agency mortgage bond, and now the corporate bond) is valued at a level the institution holding most of it has promised to defend. A market in which the dominant buyer cannot sell without breaking the prices it has underwritten is not a market discovering a value. It is a market being told its value by a participant who is also the referee and at the same time owns the ball.

The Mechanism, Plainly

Public discussion of all this tends to run aground on the phrase ‘money printing’, which is technically wrong and rhetorically distracting. The mechanism is more precise than that, and less reassuring. The Fed creates bank reserves (liabilities of the central bank, held by commercial banks at the Fed itself), which do not circulate in the public’s hands. It then uses those bank reserves to buy securities from primary dealers, so that after the transaction the dealer holds reserves where it held bonds, and the Fed holds bonds where it held nothing.

The effect runs through several channels. The duration channel is the most direct: by removing long-duration assets from private balance sheets and substituting reserves, the Fed compresses the term premium and lowers long-term rates, which raises the present value of any asset whose payoff is distant. The portfolio-rebalancing channel reinforces it: dealers and other holders, left with cash where they wanted bonds, rotate into other assets and lift prices broadly. A signalling channel runs alongside, in which merely announcing a willingness to expand the balance sheet conveys the commitment to support markets and raises prices independently of any operation performed, which is why the corporate facilities of 2020 could thaw a frozen market while buying only a fraction of what they had authorised. The announced promise to buy is itself part of the policy.

The result is observable. From January 2020 to December 2021 the S&P 500 rose roughly 47%. The Case-Shiller US National Home Price Index rose roughly 31% over the same period. Median nominal weekly earnings for full-time wage and salary workers rose roughly 5%. The CPI for All Urban Consumers was up roughly 8% across the two years, most of it concentrated in 2021. Asset prices rose faster than consumer prices, which rose faster than wages. That ordering of asset prices over consumer prices over wages is the structural signature of the regime, and the order of the queue in which the subsidy is paid out.

Three Readings of One Condition

The three axes the opening essay of this series set out apply in turn to the Federal Reserve’s balance sheet as now practised. Each is a separate measurement, yet each turns out to be a different view of the same thing.

Efficiency

The first question is how much of the value moving through the structure is taken before it reaches the people the structure exists to serve. Most of the asset-price gain produced by central-bank operations is not new production. It is a revaluation: the same building, the same firm, the same cash-flow stream is worth more in nominal terms because the discount rate against which it is valued has fallen. The gain is real to the holder. No goods or services were created in the having of it.

The gains accrue, by construction, to those who already hold the assets. The Federal Reserve’s own Distributional Financial Accounts give the breakdown. In the fourth quarter of 2008 the top 1% of US households by wealth held approximately 27.7% of total household wealth; by the first quarter of 2022 that share had risen to approximately 31%, while the bottom 50% held under 3% throughout. The framework did not redistribute wealth evenly; it widened the gap.

There is no claim here that the Fed intended that outcome. The claim is that the framework, applied consistently, produced it, and goes on producing it, transfer by undeclared transfer, every cycle the balance sheet expands. The corporate-credit facilities of 2020 routed the same subsidy straight to the issuers whose paper the central bank agreed to hold.

Transparency

The second question is whether the participants understand what they are inside. The Federal Reserve publishes a great deal. The FOMC issues a statement after each meeting and minutes three weeks later; the Chair holds a press conference after each meeting; the Summary of Economic Projections appears quarterly; the H.4.1 statistical release reports the balance sheet weekly. On a procedural definition of the word, the institution is transparent.

What is missing is a different kind of transparency. The FOMC does not, in any routine communication, say the following: the policy framework lifts the prices of long-duration assets and lowers the cost of corporate borrowing, the resulting gain accrues to households and firms that already hold the assets and issue the debt, and currency holders, wage earners, and new entrants bear the cost. While the sentence is clear and accurate, such terms never appear anywhere the institution speaks.

The tools are described in euphemisms: ‘monetary accommodation’, ‘asset purchase programme’, ‘balance sheet normalisation’, ‘policy transmission’; and the act of buying corporations’ bonds is named the ‘Corporate Credit Facility’ rather than what it plainly is - the state lending its balance sheet to particular private companies of the central bank’s choosing.

The language is precise within its own idiom and illegible outside it. Procedural transparency is not structural transparency; both can be present at once, and here the first is and the second is not. The disclosure is complete and the structure remains opaque, which is functional opacity at its purest: the documents say everything, and the people are told nothing they could act on.

Longevity

The third question is whether the structure is built to survive the failure of its own growth assumption. The framework depends on three continuities: continued political tolerance for the wealth distribution it produces; continued willingness of foreign holders to hold dollar reserves, which lets the US issue debt at low real rates and gives the Fed scope to expand without immediate currency consequences; and the credibility of the implicit promise that asset prices will be defended at the next downturn.

None of these is unconditional. The first was tested by the inflation that arrived in 2021 with the expected twelve-to-eighteen-month lag from the 2020 expansion and ran through 2023. CPI inflation peaked at 9.1% year-on-year in June 2022, the highest reading since November 1981. To restore price stability the Fed raised the policy rate from a range of 0.00–0.25% in March 2022 to 5.25–5.50% by July 2023, the fastest tightening cycle in four decades, and the S&P 500 fell roughly 25% peak-to-trough in 2022.

The put, in that episode, was suspended: the institution chose price stability over asset-price support, which is the choice the mandate requires, and which was a departure from the operating mode of the preceding decade. The lesson is the one the longevity axis predicts. The subsidy is not a permanent feature of the regime but a contingent one (available precisely when prices are calm enough that it costs nothing visible to extend, and withdrawn at the moment a falling market would most call for it). A backstop that can be deployed only when it is not needed is, in the end, a bet that the next crisis will arrive politely.

The Authority Behind the Balance Sheet

Those three problems are variations of one underlying condition: a functional opacity that hides what the framework actually does, laced with an authority overlay that licenses the opacity to operate. In post-2008 monetary policy the condition has layers, and identifying them sharpens the diagnosis.

The authority overlay for the Federal Reserve is layered, and most of it has been added since 1913. The statutory authority is the foundation: the Federal Reserve Act and the codified dual mandate stand behind every operational choice. The independence doctrine is the second layer, shielding the institution from short-term pressure on the rate and the balance sheet. The technocratic credentials of the staff and the Board are the third, and the expertise is real. Procedural transparency (the statement, the minutes, the SEP, the H.4.1 release, the press conferences) is the fourth. The implicit put, the market’s settled prior that asset prices and now corporate credit will be defended at the next downturn, is the fifth, and it appears in no statute. Each layer signals to market participants and the political branches that someone responsible has already done the analytical work. Often no one has weighed who pays. The credibility is the product, and the analysis is the thing it is sold in place of.

Functional opacity supplies the material the credibility waves through. The idiom of monetary policy is precise within its own conventions and largely illegible to those outside them. The Fed publishes a Distributional Financial Accounts series and does not state that the outcomes it records are the predictable shape of the framework that produces them. The accumulation of purchases (QE1, QE2, Operation Twist, QE3, the 2020 expansion, the corporate facilities) was justified episodically, each programme presented as the answer to its own emergency. The cumulative shape is a balance sheet grown roughly tenfold in fourteen years and now holding the debt of private companies. This was never named for the regime change it was.

The mechanics alone would force a public reckoning, every cycle, with who gains and who pays. The authority overlay defers it by certifying that the institution acts within mandate, using validated tools, under transparent communication. The opacity hides how much of the post-2008 distribution is the framework’s predictable output rather than an unrelated fact of life. By the time the cost is visible it has already been collected, and exactly from the people least placed to refuse it and who never accepted the burden or risk in the first place.

Who Bears the Cost

The cost-bearing pattern across the post-2008 era is identifiable in the data. The beneficiaries are not hard to name: holders of long-duration risk assets at the moments of expansion, especially in 2009–2014 and 2020–2021; holders of leveraged portfolios, whose return on equity was amplified by a term-premium compression they did not have to finance; the corporate issuers whose cost of capital the central bank held down and, in 2020, whose bonds it bought; owners of unencumbered real estate through the post-2020 inflation.

The cost-bearers are equally identifiable. Currency holders saw approximately 12% cumulative loss of purchasing power on dollar balances across 2021 and 2022 combined. Wage earners whose nominal pay lagged price levels for the twenty-four months from early 2021 through late 2022 recorded negative real-wage growth in most months of that window. New entrants to housing met the repriced market, where required income-to-purchase ratios rose by approximately 50% from 2019 to 2022 for the median US home. Asset-poor households experienced a compound failure: their wages lost purchasing power, their savings earned negative real returns, and the assets they did not own became more difficult to acquire.

The externalities extend beyond direct participants. A low-rate environment that keeps zombie firms breathing and capital trapped in companies that cannot cover their own interest is capital not deployed in ones that could, which suppresses aggregate productivity growth (a cost paid, diffusely, by everyone who lives in a slower economy). The cohort that bought equities at the early-January 2022 peak, or houses at the 2022 peak, holds the position from which a return to historical valuation ranges would impose the largest losses, having entered at exactly the level the framework had lifted. The wider cost is borne by everyone who assumed the framework would always be available to lift them clear.

The post-2008 central bank balance sheet is the backstop the rest of the structure has learned to lean on: it absorbs the sovereign’s debt when auctions wobble, it stands behind the deposit base when a run outruns a weekend, it is the lender of last resort the derivative chain assumes will answer when any link fails. Every one of those rescues worked because the central bank could expand without the currency consequences arriving all at once. That capacity is not a law of nature but a forbearance (extended by everyone who holds the dollar, and free to be withdrawn), and the institution does not control the variable it depends on. The end of the arrangement is not a question of whether, only of when.

What the Subsidy Conceals and What It Does Not

The Federal Reserve is not a fraud. It is a public institution operating with explicit statutory authority and procedural transparency, performing necessary and important functions (lender of last resort, payments system, macroeconomic stabilisation, the prevention of a deflationary spiral). These are all real, and a regime that abandoned them would have to be replaced at an unknown cost of its own. The purpose and achievements of the Federal Reserve are real and should not be minimised in the course of describing what has been built on top of it. But the structure exhibits the pattern.

The Fed’s post-2008 transition into a continuous manager of asset prices and its post-2020 transition into a buyer of corporate debt were never concealed. They were simply never labelled as the standing subsidy they amount to. The framework is Ponzi-like in the analytical sense: earlier holders are paid out of an expansion that draws on the purchasing power of currency holders and wage earners, and the system produces no real goods, only the upward movement of claims on goods produced by others. On efficiency it fails: most of the value it generates is revaluation rather than production, the revaluation accrues to the top, and the corporate facilities carry the subsidy straight to the issuers. On transparency it fails structurally while passing procedurally: the distribution is the predictable output of the framework, and the framework’s own language never says so. On longevity it is increasingly stressed: 2022 showed that the subsidy is hostage to the price environment, real only while inflation stays low enough to ignore.

A backstop is only a backstop while it can be deployed, and the thing the rest of the structure leans on (the central bank’s willingness to expand into any crisis) turns on the one variable the institution does not control. That is whether prices are calm enough to permit the rescue. For thirteen years they were, and the put looked permanent. In 2022 they were not, and it was withdrawn in the middle of the cycle that called for it.

When the structure built to absorb the failure of the others fails in the conditions it was built for, the failure does not stay inside monetary policy. It reaches the savings, the wages, the pensions, the currency - the whole edifice that learned to lean on a rescue that is not guaranteed to come.

The trap is that both directions run the same way. While the subsidy continues, it works as this essay has described it: a quiet, ‘lawful’ transfer from the people who hold their lives in wages and cash to the people who already hold the assets, paid out every cycle to those least in need of it and drawn from those least able to spare it. That is the cost of the arrangement holding.

The cost of it breaking unequally hits the same people again, because when the backstop is finally called and cannot answer, the downturn it fails to cushion lands (as downturns always do) hardest on the ones with the least. There is no version of the story in which the bottom of the distribution is not the one that pays.

Continued, the structure is unjust by the slow arithmetic of inflation; collapsed, it is catastrophic by the fast arithmetic of a crash. Whether that combination of opacity and authority is removable (in this institution, or in any Ponzi-like structure of any kind) is the question this essay does not answer. It leaves it with the reader, who holds the currency, earns the wage, funds the subsidy without being asked, and will be standing inside the structure when it decides to go.

Conclusion · The PUNZI Papers Essay Five

This completes the present essay of The PUNZI Papers, a series of essays explaining the position behind our project, PUNZI WARS, and the potential we think it points to.

In the next essay: The Pension System Is a Ponzi

Visit us: https://punzi.xyz   Follow us on X: @PUNZIwars

Advisory: PUNZI WARS is a game and an on-chain research experiment. It is not an investment. Participate at your own risk.

Sources

1. Federal Reserve, Federal Open Market Committee statement (23 March 2020)

2. Federal Reserve Board, Primary Market and Secondary Market Corporate Credit Facilities (announced 23 March 2020; expanded to recent ‘fallen angels’ and high-yield ETFs, 9 April 2020; purchases ceased 31 December 2020)

3. Federal Reserve Board, Distributional Financial Accounts (quarterly series)

4. Federal Reserve Board, H.4.1 Factors Affecting Reserve Balances (weekly release)

5. Ben S. Bernanke, The Courage to Act: A Memoir of a Crisis and Its Aftermath (2015)

6. Alan Greenspan, The Age of Turbulence: Adventures in a New World (2007)

7. Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World (2018)

8. Edward Chancellor, The Price of Time: The Real Story of Interest (2022)

9. Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (1963)

10. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (2020–2023)

11. Bureau of Labor Statistics, Current Employment Statistics (2020)

12. Bank for International Settlements, The rise of zombie firms: causes and consequences (Banerjee and Hofmann, BIS Quarterly Review, September 2018)