In just three weeks, a staggering $500 billion has disappeared in the current economic turmoil. According to Tesla and SpaceX founder Elon Musk, this volatility is just a harbinger of a bigger crisis that could shake the very foundations of the American financial system, starting with the Federal Reserve of the United States (Fed).

Fear of Fed 'bankruptcy'

Elon Musk, always quick to share his controversial views on Twitter (or X, as he recently renamed it), has this time caught the public’s attention with an apocalyptic warning. He warned of a potential “failure” of the Fed, the central institution responsible for U.S. monetary policy. His remarks come as the Fed faces unprecedented challenges, including persistent inflation, rising interest rates, and diminishing demand for U.S. bonds.

Musk said the Fed faces a critical dilemma: raise rates further to curb inflation, which could stifle economic growth, or ease monetary policy, risking making U.S. debt unsustainable. He stressed that the current accumulation of federal debt, coupled with massive government spending, is putting the economy on a dangerous trajectory. The billionaire was adamant that if current conditions continue, the stability of the Federal Reserve itself could be compromised.

500 billion: Why this impressive sum?

The $500 billion figure that Musk mentioned represents a massive flight of capital or value from various financial assets in an extremely short period of time. While he did not provide specific details on the sectors most affected, there are indications that technology stocks, cryptocurrencies, and bonds are the main victims of this evaporation. Stock market volatility, exacerbated by global economic uncertainties and US politics, has caused massive capital losses. This situation could be the prelude to a deeper financial crisis.

Fed decisions in the spotlight

The Fed, led by Jerome Powell, has already raised interest rates several times since 2022 in an attempt to contain inflation, which has reached levels not seen in decades. Those hikes, while they have curbed inflation in the short term, have also made it harder for businesses and households to raise funds, weighing on economic growth.

In response to these policies, many observers, including Musk, believe that the Fed may be running itself into ruin. Indeed, a massive national debt combined with high interest rates makes financing that debt increasingly expensive. Musk, through his inflammatory statements, has also pointed out that the United States’ reliance on foreign investors to buy U.S. bonds poses a systemic risk. If demand for those bonds collapses, the repercussions could be catastrophic.

A warning or an exaggeration?

While Elon Musk is known for his often sensationalist statements, his warning about the Fed should not be taken lightly. Many economists agree that the Fed’s current policies could have long-term consequences, even if a complete failure of the institution seems unlikely at this point. Musk’s use of the term “failure” could be seen as an exaggeration, but it nonetheless draws attention to the potential fragilities of the American financial system.

The uncertain future of the global economy

The episode also serves as a reminder of the fragility of the global economy amid geopolitical tension, post-pandemic disruptions, and supply chain reorganizations. Economic actors, whether large investors or ordinary citizens, find themselves in a period of growing uncertainty. Musk’s warning, while extreme, reflects a broader reality: the need for monetary authorities to strike a balance between controlling inflation and preserving economic stability.

In the meantime, markets continue to fluctuate, and investors remain on edge. The question remains: Will the Fed be able to avoid the catastrophe Elon Musk predicted, or are we on the cusp of another major economic crisis? Either way, this debate highlights the risks and challenges facing the global financial system in an uncertain future.