Friday, January 11, 2013

Easy Money

Imagine a corporation that had 8.8 billion dollars worth of expenses and made a profit of 88.9 billion dollars in 2012. The previous year, it had made a profit of 79.3 billion dollars. If it were publicly traded, the market would price it at around 1-1.2 trillion dollars, making it the most valuable non-state owned entity in the world.

Well stop imagining. It's called the Federal Reserve. And last year, it made a profit of 89 billion dollars, all of which it sent to the US Treasury. The money it earned was primarily from its vast investment portfolio of 2.9 trillion dollars, made up of its Treasury holdings and mortgage backed securities that it bought from the banks during the financial crisis.

It represents approximately 2.1 trillion dollars of money conjured out of thin air to support the Fed's open market operations and quantitative easing and roughly tripled the country's monetary base.

These are all impressive figures. And in normal times, you would see inflation spiking as people realize that the money created doesn't have a commensurate increase in the size of the real economy. Various economists have predicted that a massive bout of inflation would occur, but it hasn't happened yet. People are a lot more fearful now, and a vast amount of money remains on the sidelines, not being used for anything.

The ball has been placed in the Federal government's court. Despite the Fed's stated reasons for its unlimited QE, it also has the secondary effect of making the cost of financing debt extremely cheap for the Federal government. The massive portfolio it has acquired in the intervening years has also boosted the Fed's profits, which by law must be handed over to the Treasury every year.

With one hand, we're enabling the Federal government's spending addiction. On the other hand, we're giving them more money to buy more stuff. I'm eager for the government to OD and we can finally sort through the aftermath. Because I'm tired of this permanent fiscal and monetary crisis that we find ourselves in. And it's time we finally unfroze the natural state of affairs and just deal with whatever we have to deal with. For the past 3 years, we've been stalling. And that's incredibly boring.


  1. This is mostly wrong. Low interest rates are a function of low NGDP growth, which as I've explained before is tight monetary policy. More expansionary policy (QE) which boosts NGDP should raises the real rate of interest which is why we see 10 year yields rise on easing announcements by the FED.

    And even if you don't accept my model I don't see how you can make the case that the fed is artificially depressing interest rates when:

    1) The federal reserve still owns the same 15% stock of treasuries it did before the crisis

    2) yields for safe assets are declining all over the world

    1. 1. Uh, no. Yield on 10 year notes are the lowest they've ever been (since the creation of the Fed) for the past 3 years or so.

      2. Your statement on the Fed only owning the same 15% of Treasurys is false. and

      The Federal Reserve owns 1.6 trillion dollars worth of Treasurys now whereas 4 months before the financial crisis began, it only owned 500 billion dollars.

  2. 1. Of course 10 year notes are the lowest they've ever been...NGDP growth is the lowest its ever been since the great depression. Monetary policy is extremely tight right now.

    2. Which is about 15% of total marketable treasuries...