Tuesday, January 10, 2012

Federal Reserve Paid The U.S. $76.9 Billion In 2011


Read it at The Huffington Post
Federal Reserve Paid The U.S. $76.9 Billion In 2011, The Second-Highest Amount In U.S. History
by Martin Crutsinger

Gee, Ben should be the most highly compensated CEO on the logic of conventional wisdom.

That's almost $77,000,000,000 that non-government did not receive in net financial assets from government injection of interest, arguably affecting nominal aggregate demand adversely.

12 comments:

mike norman said...

Nearly $500 bln in interest income removed from the economy since 2008.

paul meli said...

My guess is that very little of that interest income ever gets spent.

Anonymous said...

But how much did the Fed pay for the assets? In addition to removing the interest income when they buy the assets, the spending on the assets inserts income. Was the asset swap just a wash? Or do you think the shift in the time schedule for the delivery of monetary assets toward the immediate term was a net loss? or a net benefit?

Anders said...

Dan - the Fed paying for the assets simply switched some private sector assets into lower interest bearing claims (ie Fed reserve balances). The new claims are presumably more liquid than Tsys, so it's fair to say the FDed injected liquidity - but it certainly didn't inject _income_ as such.

The income impact should be the interest income the private sector actually earned on the reserve balances, minus the interest income it would have earned on the Tsys (the counterfactual).

This is definitely a large negative number.

wh10 said...

Yeah but Anders, the Fed could have paid a price that was lower than what would have been traded by markets alone...

For example, if you buy a bond trading at $100 for $102.

Anonymous said...

Anders, if I sell something - like a treasury bond or some other asset - I receive income from the sale. Presumably I only make the sale because I prefer the immediate dollar income I receive from the sale to the more spread out schedule of payments I would have received had I held onto the asset.

So it seems to me the effect of all these asset purchases by the Fed is just to readjust schedules of dollar payments toward the immediate term. The interest payments that would have been made to private sector entities are withdrawn from the private sector on the schedule determined by the purchased financial instruments; but immediate term dollar payments from the government that wouldn't have occurred without the asset purchases are made instead.

I can agree that the net effect is an overall withdrawal of dollars from the private sector. But people often have reason to prefer $9 today to $10 next year, and are willing to sell the promise of $10 next year for $9 in the hand today. So I don't think we can measure the impact simply by looking at the net dollar effect in private sector balances. These sales of assets to the Fed were voluntary, so presumably the entities that sold these assets had what, by their own calculations, were good reasons to sell them.

mike norman said...

You receive a cash balance in your checking account that earns, at best, 15 basis points. Before you had coupon income far higher than that. You LOST income. Moreover, the Fed doesn't "spend." It takes one asset from you--a gov't security--and gives you another asset--a cash balance. Your net worth has not changed at all. The government "spends." The Fed just changes the duration of your financial assets.

Anonymous said...

Your net worth has not changed at all.

Mike, doesn't that depend on what price the Fed pays for the asset? There must be some reason the seller was willing to sell it.

Tom Hickey said...

Dan Kervick, as I understand it from JKH, Winterspeak, etc.,the only thing that alters non-govt NFA in Fed purchases of securities is if the financial asset the Fed acquires goes into default, and that is not going to happen with govt securities. Otherwise, it is just changing the compositions of assets held by govts. and non-govt when the Fed buys govts in exchange for bank reserves.

Anonymous said...

Dan - I'd suggest distinguising return OF capital, and return ON capital. I agree that a non-bank selling a Tsy for more than the non-bank thinks it's worth may provide some return ON capital, but most of the impact is a straight return OF capital - or rather a switch into a more liquid form.

In terms of the liquidity effects, I'm trying to quiz JKH on whether the removal of some repothecation, which I think ought to result from QE, would offset this immediate liquidity 'benefit'.

paul meli said...

It seems to me that this loss in NFA's doesn't matter because it seldom enters the spending channel.

Much of the money that has been created since 1980 has been accumulated as wealth by the very rich - from then on it may as well not exist.

The question is will this wealth ever matter to the rest of us?

mike norman said...

On the contrary, nearly all of it gets spent. The personal saving rate is only 3.5%, which means that 96.5% of ALL income gets spent. And interest is not an insignificant component of personal income.