The Fed’s Phony Benefits

IMG Auteur
Published : January 22nd, 2013
416 words - Reading time : 1 - 1 minutes
( 3 votes, 5/5 )
Print article
  Article Comments Comment this article Rating All Articles  
0
Send
0
comment
Our Newsletter...
Category : Crisis Watch

 

 

 

 

There is very significant news that has barely made the headlines : Last week, the Fed has paid $89 Billion in benefits to the U.S. Treasury. It is 18% more than last year’s payment and it wipes out the $79 Billion 2010 record (Fed announcement).

By the way, in passing, the most profit-making entity in the USA is not Apple, Exxon or another company; no, it’s the central bank, living proof that the economy is upside down !

Once again, this payment is quite normal. The Fed gives back to the State all of its benefits, less its Washington headquarters operating costs and dividends paid to the twelve regional federal banks.

What is less normal is the source of those benefits : interest paid by the State on the Treasury bonds owned by the Fed. The system goes around in circles : the Treasury issues bonds, the Fed buys most of them (through the printing press), then it pays interest on its bonds, the Fed cashes it and then pays back the Treasury ! To be more precise, part of the Fed’s revenue also comes from bonds issued by Fannie Mae and Freddy Mac, also bailed out by the State... so it’s still a closed-circuit operation.

In other words, this debt acquired through the Fed costs strictly nothing to the State. It’s like borrowing at 0% interest. The total weight of the debt (interest paid to all debtors) was $251 Billion in 2011; so, that $89 Billion represents more than a third of the economy.

This is a very perverse mechanism because, as more of the public debt is acquired by the central bank, the less it weighs on the federal budget. It encourages taking on even more debt and have it financed by the central bank or, in other words, the printing press. And there’s also another perverse effect : this massive buying by the Fed causes interest rates for all bonds to fall, not only those owned by the Fed but those owned by american and foreign investors as well. Finally, the debt of the State is costing it much less than it should.

This is nothing but a gigantic bubble that, barring a return to balanced budgets, can only lead to hyperinflation.
All discussions on budget deficit reduction have to be understood in light of this reality. In fact, it doesn’t cost that much to finance the debt and the deficit if you include the Fed’s payment... so why bother cutting expenses ?


 

 

<< Previous article
Rate : Average note :5 (3 votes)
>> Next article
Philippe Herlin is a researcher in finance and a junior lecturer at the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers of the Austrian School of Economics, he brings his own views on the actual crisis, the Eurozone, the public debts and the banking system. He is also contributor at www.Goldbroker.com
Comments closed
Latest comment posted for this article
Be the first to comment
Add your comment
Top articles
Latest Comments
A North Korean EMP Attack Can Create 90+ Fukushimas in the U.S.
12 DecThe Recusant1
Setting aside the sensationalist fearmongering of the article, the fact is that the NRC requires U.S. nuclear power plants to be able to shut down ...
Six Ways US Stocks Most Overvalued in History
12 DecThe Recusant
The problem with the current massive indebtedness of countries is that the central banks are now creating fantasy currency to accommodate the finan...
The Flat Earth Society Responded To A Tweet By Elon Musk: ‘Thanks F...
11 DecS W.-1
Thanks for letting me state my opinion! Your comment is insulting. Try as I might I am yet to find any scientific evidence of AGW or the e...
Peter Schiff Warns Of CRASH: ‘Everybody Is Going To Get Wiped Out!’
08 DecThe Recusant
"Schiff also said no one knows when this is going to happen for sure, only that it will happen." Peter has been warning of the next crash for years...
Meet The World’s Most Powerful Bitcoin Backers
07 Decsonora69
Why run a business or work for one when you can mine bitcoins for the price of the servers and electricity? The higher the price of bitcoin, the mo...
What Now?
04 DecDoom
Mathematically, doubling down is an amazingly powerful strategy...until it isn't. http://professorconfess.blogspot.com/2017/11/doubling-do...
The Flat Earth Society Responded To A Tweet By Elon Musk: ‘Thanks F...
03 DecS W.
I put the Flat Earthers in the same category as those who believe there is a God, a Heaven and a Hell.
Whipping-Post Politics
02 DecMr. Gnawbone1
I couldn't agree more, Keillor's dismissal was a bridge too far, but it is reflective of the fear, by Boards of Directors across the US, guiding ...
Most commented articlesFavoritesMore...
World PM Newsflow
ALL
GOLD
SILVER
PGM & DIAMONDS
OIL & GAS
OTHER METALS