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McClatchy: Fed Interest Earnings Approach $100 Billion

Fed’s interest earnings approach $100b

WASHINGTON — The Federal Reserve said Friday it transferred a record $96.9 billion to the U.S. treasury in 2014, profits on its unprecedented $4.4 trillion in holdings designed to support the U.S. economy in the aftermath of the Great Recession.

Returning to a topic I have raised a few times here at Angry Bear: what is the real cost of financing U.S. Public Debt. Also interesting from the perspective of the repeated desire from the Right to “Audit the Fed”. More from the McClatchy piece:

The Fed’s total assets were $4.5 trillion last year and its holdings generated $115.9 billion in interest income, the central bank said Friday, and that reflected an increase of $25.5 billion from 2013. The Fed also paid banks $6.9 billion in interest income for their balances held at Federal Reserve district banks last year.

The independent Fed, which does not rely on Congress for funding, had operating expenses of $6.1 billion in 2014. This number included $1.9 billion to run the Federal Reserve Board, currency costs and operation of the Consumer Financial Protection Bureau, created in the 2010 revamp of financial regulation.

Lots to unpack here and plenty of directions to take the discussion. So rather than noodle on by focusing on my own preoccupations let me turn this over to AB readers. As a Federal Reserve/Public Debt/Quantitative Easing/CFPB Open Thread.

Update: Link to Fed’s Audit Report (h/t McClatchy) Board of Governors of the Federal Reserve System; Financial Statements as of and for the Years Ended December 31, 2014 and 2013, and Independent Auditors’Report

Adding to Steve’s quest to define “money”. A couple short films.

Via Digby comes a couple short films talking about what is money.   They are part of an effort by a group/site called We The Economy that has 20 short films aimed:

 to drive awareness and establish a better understanding of the U.S. economy. Told through animation, comedy, musical, non-fiction, and scripted films, WE THE ECONOMY seeks to demystify a complicated topic while empowering the public to take control of their own economic futures.

I have to say I am a bit biased toward these two films as they promote the idea that I have presented here in various ways: trust.  It all comes down to trust.  All our wealth, power, security, prosperity and future.  Trust is the money.   And we have been doing our damnedest to destroy it in the quest for ever greater growth (financial or otherwise) via some concept referred to as freedom or more relatedly “free market”.

They are kind of humorous in parts too.

That Film about Money, part 1

The second part of That Film about Money

I’m going to go watch the rest of the films now.

Anyone got a number? For ‘Real Debt Service of Public Debt as % of GDP’

And this is an honest question, one that I have been poking around in but maybe don’t have the chops to answer.

Lets take three measures of Public Debt:
One nominal. Public Debt as of the 16th was $17.899 trillion. And rising.
Two as percentage of GDP. And BTW the preferred measure of deficit fetishists prior to the blowup in R-R, but still active enough. Well depending on whether you take Total Public Debt or its major component Debt Held by the Public this ratio is either close to 100 or 70 depending (top of head, please insert real number.
Three when measured as debt service as share of GDP.

Now I would argue that this last measure is the right one for measuring ‘sustainability’ of debt. For one thing it is generally the measure used my most households and corporations because it directly effects cash flow, and for most people Cash is King. Take the following thought experiment:

I have borrowed a billion dollars at zero percent interest on an interest only loan with no term. Is that borrowed money actually to be considered ‘debt’ if it costs nothing to hold it and never has to be paid back? Well lets just say that it is an odd kind of debt. Now obviously no one is going to loan me a billion on those terms but increasingly people are effectively offering something close to that to Uncle Sam. That is the real rate on the 10 year is at or even below the zero bound, in effect people are paying the U.S. to hold their money for them. On the other hand there are still older issues of the 10 year and longer notes and bonds that are carrying higher yields and so there is actual debt service. But how much of that is real? And what is the percentage of federal revenues and/or GDP going to that? Because this is a harder number to come up with than you might think for a couple reasons.

One, most debt service on the Intragovernmental Holdings component of Total Public Debt is not financed in real terms, instead it is just credited to various Trust Funds and shows up as an increase in Debt. But mostly not as an expenditure.
Two, a good deal of debt service on the Debt Held by the Public component of Total Public Debt is being paid/credited to the Federal Reserve. Which in turn returns any ‘profits’ to the Treasury. To me it is an open question as to whether debt service actually paid to the Fed should count as ‘Real Debt Service’ at all. Which is why I posed all this as a question.

Has anyone actually taken the ‘Interest on the Public Debt’ figure and related it to the actual budget line items for ‘Debt Service’ and then adjusted THAT for such debt service actually paid to governmental and quasi-governmental institutions? I have been meaning to make an attempt at doing this myself but have run into problems of time and expertise. But the question still remains: in real terms how close is the U.S. Treasury to being in the same position as my theoretical borrower with a no term billion dollar zero interest rate interest only loan? Not all that close maybe but the answer is far far away from most people’s assumption of what it means to carry $17.9 trillion in debt.

How the Fed Cornered the Long Bond

Fed Treasury Holdings 5-7-2014
The above link should take you to a PDF showing the Fed’s System Open Market Accounts holdings of Treasury Bonds and Notes which the second link will tell you comprise $2.224 trillion of the total $4.017 trillion of SOMA Holdings, with that total including $1.631 trillion of Fannie and Freddie Mac MBS’s. With the remainder in a variety of other Federal securities. In other words the ‘AFTER’ of three rounds of QE.

The PDF is extracted from a formatted Excel worksheet and shows all Fed SOMA holdings of Notes (1 to 10 years) and Bonds (20 & 30) by Maturity Date, Issue No, Coupon Rate, Par Value, and % (of Issue) Outstanding. As you scroll through the PDF a particular relationship jumps out at you: the higher the Coupon Rate the higer the % of Outstanding actually held by the Fed SOMA with a top limit apparently set at 70%. This isn’t entirely fixed, there is an additional layering of Long Term over Short Term with the Fed holding small percentages of all issues before jumping up to the 44.3% of the 9.25% Feb 15, 2016 and then taking progressively higher chunks of the Long Bonds maturing after that until holding peak as a percentage of issue with the 70% of the 8.13% 8/15/2019. Which percentage holds steady until the 8.00% 11/15/21 but then varies downward with holdings ranging mostly in the 55-70% range for issues between 2021 and 2042.

Feel free to prod at the numbers in this data table as you will. But the first order conclusion is that the higher the coupon rate in the out years of the Long Bond the larger the position of the Fed. With an apparent self-imposed limit of 70% of any given issue. I plan to comment on this at length in Comments but will allow readers the first crack. But would add one little fact nugget for your consideration: the Fed rebates all profits to Treasury. And to the extent that those profits are driven by those 8 and 9% interest payments on Bond issues where the Fed has holdings ranging up to 70% the end result is that a very large percentage of debt service on the Long Bond, a dollar amount that is recorded as an Outlay on the Federal Budget is effectively rebated back to Treasury.

U.S. Federal Intergenerational Debt: Rendered and Layered

It is a common trope among Austerians that the U.S. is passing on unsustainable debt to our children and grandchildren. And certainly there are some scary numbers out there, for example “$17.4 trillion!!” A very real number. But maybe it would be useful to render that number down so as to calculate real incidence of that debt and debt service within and between generations. With some real numbers and associated tools. With commentary mostly defered until (duh) Comments.

Total U.S. Public Debt (to the Penny)
Public Debt: $17,472,131,682,925.49 in turn the sum of:
Intragovernmental Holdings: $4,992,508,245,067.06 and
Debt Held by the Public: $12,479,623,437,858.43

Now for reasons that can be explained in Comments there is no need to actually pay down Intragovernmental Holdings and instead reasons why the various accounts that comprise it should increase in nominal terms over time, so I am just going to ignore it for the purposes of this post.

Debt Held by the Public: $12,479,623,437,858.43
Almost all of this is held in a combination of Treasury Bonds, Notes, Bills and TIPS with the major balances being in the first two categories. The respective holdings can be seen in the following graphic with specific numbers available by hovering your cursor:
Treasury Bonds (20 and 30 year Securities): $1.463 trillion
Treasury Notes (1-10 year Securities): $8.034 trillion

So right away we can see that ‘Long Term Debt’ as a percentage of ‘Total Public Debt’ is $1.463 tn/$17.472 trillion or 8.4% of total Public Debt. But of course somewhere between a half and a third of current 20 and 30 year Bonds have maturities in the next 10 years meaning that the actual amount of Public Debt due in years 11+ is commensurately less than that number. (Precise number left to the commenters). Now of course this calculation ignores two factors: 1) rollover of shorter term debt and 2) debt service. So maybe we can address the second factor first:

Average Interest on Public Debt
Total Marketable: 2.007%
Bonds (20 and 30 years): 5.011%
Notes (1-10 years): 1.808%

Okay those are the numbers. Implications, arguments and outright demagogery under the fold and in Comments.

Fed Treasury Holdings, ‘Real Debt’ and ‘Real Debt Service’

It is not difficult to determine a dollar figure for Total U.S. Public Debt. In fact you have to round UP from the Treasury’s Debt to the Penny and Who Holds it web application which tracks that number daily. As of end of business Thursday that total was $17,472,051,696,926.14. Which is a lot of money however you slice it but doesn’t really get to the issue of ‘sustainability’. First this number includes Intragovernmental Holdings amounting to $4,993,180,664,362.07 which while are certainly full obligations of the U.S. government and backed by Full Faith and Credit or in fact obligations that are under the control of that government and are largely in held as rolling reserves for various programs that ideally will never be redeemed in full. For example over half of that $4.9 trillion is the $2.8 trillion held by the Social Security Trust Funds which, if prudent and necessary steps were taken to shore up its ‘sustainability’, might never have to be redeemed on net and indeed would need to grow over time. So it would make some sense for calculations of ‘Real Debt’ to use the remainder, which Treasury tracks under the name ‘Debt Held by the Public’. Which to my mind is too close to ‘Public Debt’. But it is what it is.

And what is it? $12,478,871,032,564.07. But even this doesn’t get us to a good measure of ‘Real Debt’ because it doesn’t address the issues of Rate, Maturity and Term. To take this to an imaginary limit, what if every penny of that $12.5 trillion was in 30 year Bonds bearing a Maturity ranging from 2039 to 2044 and carrying a Rate of 0.025%. Well whip out your Financial Caclulator and do some PV calcs and that wouldn’t really be ‘Debt’ at all. And in particular it would incur no ‘Debt Service’ in the meantime. Now take it to a different imaginary limit. Assume every penny of that $12.5 trillion was held in 6 month or 1 year notes at a Rate of 6.0% but was all held by the Federal Reserve. Well that would imply a HUGE amount of Debt Service. On the other hand the Fed rebates all profits to Treasury so the net effect would be Treasury writing a ‘check’ to the Fed that would be ‘signed over’ back to Treasury. So that too means no ‘Real Debt Service’ in practical effect.

Now we don’t exist in a world near either of those limits. But that doesn’t mean we shouldn’t net out Public Debt that is held by either Government Trust Funds or the Fed from ‘Real Debt’. And equally important we need to understand what portion of total debt service is ‘Real Debt Service’ that is payable to non-Federal entities out of actual tax collections. That is we get exactly nowhere just stating: “The U.S. has $17 trillion in Public Debt”. Instead we need to have a grasp on the questions of “Debt to Whom? At what Maturity? At what Rate?” before we can put our fingers on ‘Real Debt’ and ‘Real Debt Service’. Answering those questions would require more than a single blog post and comment thread, but I suggest we start by looking at Fed Treasury Holdings under the fold.

Release of transcripts of 2007 Fed meetings

A note from Wonkblog

For anybody who cares about how the country ended up in this precarious economic state, a very big day is coming soon, as information that has been under lock and key for the past five years will be shared with the world. 

The FOMC had a big year in 2007! (Federal Reserve photo)

The Federal Reserve keeps transcripts of its meetings to set monetary policy, and releases them with a five year delay. It does not announce in advance when they will be released, but if the past is a guide, any day now we will be getting full transcripts of the 2007 meetings of the Federal Open Market Committee. Transcripts of all eight regularly scheduled meetings, plus three special emergency sessions to respond to the earliest ripples of the financial crisis, will be posted to the Federal Reserve’s Web site.  (The FOMC had a big year in 2007! (Federal Reserve photo)

One question for Ben Bernanke

by Mike Kimel

The other day Ben Bernanke gave a speech in which he asked and answered five questions about the Fed:

1. What are the Fed’s objectives, and how is it trying to meet them?
2. What’s the relationship between the Fed’s monetary policy and the
fiscal decisions of the Administration and the Congress?
3. What is the risk that the Fed’s accommodative monetary policy will
lead to inflation?
4. How does the Fed’s monetary policy affect savers and investors?
5. How is the Federal Reserve held accountable in our democratic

I’d have asked only one question, similar to his first, albeit with a bit of prefacing. This is what I’d love to ask Bernanke.

The Fed has a very close relationship with the financial sector. Simple examples of this include:

a. Of the three advisory committees that advise the Board of Governors of the Federal Reserve directly, even in theory only one, the Consumer Advisory Council, has a non-zero number of members who don’t directly work for the financial sector. Regional Federal Reserve Banks are also, ahem, advised by similar committees made up entirely or almost entirely by financial institutions and/or their representatives.
b. By design, every one of the Fed’s methods for raising and lowering the money supply require direct interactions between the Fed and financial institutions. None of these methods even allow for any direct interactions between the Fed and members of the public. (Note that raising and lowering the money supply does not in any way constitute “regulating the banks.”)
c. Federally chartered banks and some state chartered banks are designated “members” of the Federal Reserve system – no similar appellation or roles apply to the public at large.
d. Federal Reserve banks serve as repository institutions for member banks, but none of the services performed by the Fed for banks are
available to the public at large.
e. And of course, there is something of a revolving door between the Fed and the financial sector.

Given all of this, what would the Fed’s objectives be, and how would it be trying to meet those objectives, if the interests of the public were given equal weight to the interests of the financial sector?