Fed a Profit Center for Taxpayers?

Mike Shedlock
Posted: Aug 29, 2012 12:01 AM

Congratulations to CNBC for one of the silliest economic assertions in history. Please consider this sentence from Fed steps up release of results, says first-half income up.

Its release of first and second quarter results detailed a sharp rise to $46.447 billion in its payments to the Treasury, from $40.456 billion in the first six months of 2011, reminding U.S. taxpayers the Fed has been a significant source of income.

Fed a Significant Source of Income?

Say what? From Federal Reserve FAQs

The Federal Reserve does not receive funding through the congressional budgetary process. The Fed's income comes primarily from the interest on government securities that it has acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the Federal Reserve System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions. After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.

Got that? The Fed receives interest on government debt. The more it bloats its balance sheet, the more interest it receives (from the government, courtesy of US taxpayers of course). Whatever the Fed does not waste on salaries and other expenses, it returns to the US treasury.

Somehow the authors of that article managed to turn the Fed into a significant, $46 billion, profit center for the US taxpayers.

Furthermore, by suppressing interest rates, the Fed has crucified those on fixed income. Also recall that Fed fueled the housing bubble in the first place by holding interest rates too low, too long, in its open market operations.

Government Spending as Percentage of GDP

Here are a couple of charts from Doug Short at Advisor Perspectives regarding government spending.

Federal Government Spending as Percent of GDP

Total Government Spending as Percent of GDP

I asked Doug for those charts because Paul Krugman said he would be concerned if government spending hit 50% of GDP. The trend does not look good, but by Krugman's measure there is a ways to go.

Nonetheless, I think we should be concerned now. The numbers ignore exploding national debt and interest on national debt. Interest on national debt will skyrocket if rates go up or growth estimates penciled in do not occur. Both of those are likely, although Japan proves that amazingly low interest rates can last longer than anyone thinks.

For a discussion of interest, please see Trends in Interest Rates on National Debt Suggest Currency Crisis is Coming

The figures also ignore ever-escalating costs of Medicare, Social Security, and pension promises, all of which are guaranteed to soar in the not so distant future. Romney says Unfunded liabilities amount to $520,000 per household.

I will point out that those liabilities are not debt yet. So might Krugman. However, I am comfortable in reducing benefits and slashing spending while Krugman is not.

Clearly there are many ways to spin this data but please note that government spending in France exceeds 50% of GDP. Also note that French unemployment is 10.2% and Hollande is poised to hike the top marginal tax rate to 75%.

Do we really want to imitate France?

Mike "Mish" Shedlock