Relevant and even prescient commentary on news, politics and the economy.

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

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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.

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Deficits, Debt, Debt Subject to the Limit, Off Budget, Trust Fund: Building your 2013 Toolkit

All of the terms in the post title have at least two usages, some of which map upon to common sense ideas from business or household budgeting, some not. Unfortunately the usages that don’t tend to be those used in federal budget reporting, and the result is untold confusion. Now one way out would be to listen to me. Then again the relevant line on my CV under ‘Budget Reporting’ reads ‘Some Guy’, ‘U of Intertoobz’. So really the only way out is to start to build your own Budget, Debt and Deficit Toolkit. And this post is intended to give you a start using sources provided by the official scorekeepers of such things: the U.S. Treasury, the Congressional Budget Office (CBO), the President’s Office of Management and Budget (OMB) and the Joint Committee on Taxation (JCT).

First stop is the U.S. Treasury Department’s Bureau of Public Debt and their web application Debt to the Penny. This handy application allows you to track Total Public Debt and its two components Debt Held by the Public and Intragovernmental Holdings to the literal penny as of the close of the daily books the last business day but one. That is if you check the site on Tuesday it will give you final numbers for Friday. And a search today gave me the results for Monday the 31st (since Tuesday was a Federal Holiday) with Total Public Debt of $16,432,730,050,569.12 . This number is almost exactly the same as Debt Subject to the Limit differing only in the last seven or eight digits, which change so fast that you wouldn’t be able to see the difference. Debt Subject to the Limit is set by Congress and under current law is $16.394 trillion. With the result shown in the following official graph Debt Subject to the Limit Graph which shows total Public Debt Subject to the Limit (dark blue) passing through the Limit (orange) on the 31st.

Without comment (we are just building a toolkit here) we can move from Debt to Deficit. Here things get more complicated but probably the simplest tool available to us from official sources is found in CBOs annual The Budget and Economic Outlook: Fiscal Years 2012 to 2022 and the literal top line numbers from that is Summary Table 1 (click to embiggen)

Note that in this Summary table the bolded words Deficit (-) or Surplus unmodified by any adjective are unequivocably the sum of ‘On-budget’ and ‘Off-budget’ surplus/deficit. This isn’t the only usage of ‘deficit’ in CBO reporting, and in a weird twist of terminology is NOT the same as what they call ‘primary deficit’, but it is a fair equivalent to what both CBO and the MSM term ‘THE deficit’. For example take a standard news story from just today FY2011 Federal Deficit = $1,299,000,000,000 or just a minor update of the figure from the Table.

I’ll flesh out some of the implications of this in Comments and in later posts but will leave with two points. One almost the entirety of the ‘Off budget’ surplus of $67 billion is the result of an increase in assets of the Social Security Trust Fund. It is NOT a measure of cash flow nor does cash flow measure into it. Two the claim that ‘Social Security doesn’t contribute to the deficit’ is not quite right. It can and does contribute to the bottom line. But in either positive (surplus) or negative (deficit) directions. And in 2011 a cash flow negative Social Security Trust Fund ran a surplus for the purposes of THE federal deficit as defined.

More tools and more discussion later.

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Social Security & the Debt Limit

{Crossposted from dKos Social Security Defenders Group}

Social Security has been off the radar this week for obvious reasons, progressives being more focused on efforts of Republicans to win the War on Women via the Continuing Resolution. Plus while Paul Ryan’s original Roadmap proposed privatization of Social Security his Budget proposal for next year left it mostly aside (except for an obscure ‘trigger’ mechanism for future cuts) in favor of a trillion dollar assault on Medicaid and a proposal to voucherize Medicare. Which only leaves one current assault vehicle, the pending bill to raise the Debt Limit which under current estimates needs to happen by mid May, and sure enough there are rumblings to this effect, no changes to Social Security, no votes to raise the Debt Limit from the Republicans.

So this seems an opportune time to explain the actual relation between Social Security and Public Debt and the paradoxical effects on debt from cuts to future benefits. Because all else held even all this does is increase real debt over the medium term (25 years) while reducing purely theoretical debt over the God help us Infinite Future Horizon. Conceptual unpacking in Extended.As usual a good starting point for the serious student is the Budget Concepts and Budge Process (pdf) section of the Analytical Perspectives of the Budget (html index) released each year by OMB to illustrate the President’s budget both conceptually and historically.

But even beofre citing definitions I would like to direct Kossacks (and any visitors-welcome!) to a very handy web tool maintained by Treasury called Debt to the Penny which true to its name will give you total federal debt to the penny at the end of any specified business day or over date ranges. For example as of close of business Thursday total ‘Public Debt’ was $14,264,245,526,311.58. This figure is the sum of ‘Debt Held by the Public’ at $9,652,195,544,012.12 and ‘Intragovernmental Holdings’ at $4,612,049,982,299.46 (‘debt to the penny’ meaning what it says).

Now ‘Intragovernmental Holdings’ is what OMB calls ‘Debt held by Government accounts’ which in turn “means the debt the Treasury Department owes to accounts within the Federal Government. Most of it results from the surpluses of the Social Security and other trust funds, which are required by law to be invested in Federal securities.” So the commonly expressed opinion that Social Security Trust Funds are not counted in that total $14 trillion of debt cited in the MSM is dead wrong, they constitute $2.6 tn of that $4.6 tn of ‘Intragovernmental Holdings’ or 18% of the total $14.3 tn in Public Debt. In fact Social Security is by far the biggest creditor the U.S. has, with Treasury holdings double those of the Fed and two and a half times that of our largest foreign lender the Chinese.

‘Public Debt’ is not precisely the same as ‘Debt Subject to the Limit’ but for all practical purposes it is the same $14 tn plus, for those interested Treasury supplies the following in their FAQ

What’s the difference between the Public Debt Outstanding and the Public Debt Subject to Limit?

The Public Debt Outstanding represents the face amount or principal amount of marketable and non-marketable securities currently outstanding. The Public Debt Subject to Limit is the maximum amount of money the Government is allowed to borrow without receiving additional authority from Congress. Furthermore, the Public Debt Subject to Limit is the Public Debt Outstanding adjusted for Unamortized Discount on Treasury Bills and Zero Coupon Treasury Bonds, Miscellaneous debt (very old debt), Debt held by the Federal Financing Bank and Guaranteed Debt

With the conceptual background set, lets see how Social Security Trust Fund Operations interact with the Debt Limit.

And the answer is simple, though a little counter-intuitive. If Trust Fund principal balances go up in any given year due to a surplus of income over cost adding new offsetting Special Treasuries then so does ‘Intragovernmental Holdings’ and so in turn ‘Public Debt’. On the other hand if in any year total cost exceeds total income including interest, the flow of offsetting Special Treasuries is reversed, then Trust Fund principal goes down and in turn so does Public Debt. In between those two outcomes is a series of years where income EXCLUDING interest trails cost, but the accruing interest covers the gap, in which case the rate of principal increase is slowed and so the rate of growth of total Public Debt due to increased amounts of Intragovernmental Holdings.

Put all of that together and what do you get? Short term cuts in Social Security benefits absent any changes in revenue INCREASE the rate of principal accumulations of Intragovernmental Holdings and so ADD TO DEBT SUBJECT TO THE LIMIT. And the same is true for any benefit change starting before the projected date the Trust Funds hit their maximum, which right now is about $4.2 tn in 2023.

Which is why holding Social Security hostage to this year’s Debt Limit is simple bullshit. one has nothing to do with the other, and any attempts to start phasing in benefit changes via changes in the index (as B-S would starting in 2012) makes total Debt Subject to the Limit HIGHER and not lower. In fact far from giving our children and grandchildren a break it would absent other changes just time shift debt repayment forward in time while making the principal balances and hence ultimate payment amounts larger. It is all more Bait and Switch, just sophistry using ideas about seeming fiscal rectitude to screw over worker-retirees starting ten years out.

(But such a move would reduce ‘Unfunded Liabilities’, which opponents of SS wrongly equate to ‘Debt’. They aren’t but that will be the subject of a later post.)

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Debt Limit Bill and Social Security Benefit Cuts

(cross posted at

Well the first line of attack is opening up. Lindsay Graham is threatening to hold up the Debt Limit Increase Bill, and so potentially throw this whole country and perhaps the world into default unless he gets cuts to Social Security.

This is insane on several levels, not least because the two things have nothing to do with each other to start with. To understand this we have to back off and examine four different categories of debt: Public Debt, Debt Held by the Public, Intragovernmental Holdings, and Debt Subject to the Limit. Total Public Debt and Debt Subject to the Limit are essentially the same dollar figures (an explanation of the difference here: Limit Difference), so when you compare the dollar total for the former from this link with the current limit as reported in the papers you can see how close we are: Debt to the Penny. So yes something needs to be done, but how does Social Security fit in?

It doesn’t. As you can see ‘Public Debt’ is the sum of ‘Debt Held by the Public’ and ‘Intragovernmental Holdings’ which latter includes the current $2.6 trillion Social Security Trust Funds. But cutting Social Security benefits in the short to medium term just makes Public Debt GO UP (or at under some formulations stay even).

If Social Security on a combined basis (OASDI) or for either component (OAS or DI) takes in more in taxes than it spends those surplus dollars plus interest on the existing Trust Fund get credited to the Funds in the forms of Special Treasuries. But those assets, though real as any other bond, also respesent obligations and so add to Debt Subject to the Limit. Meaning that any action that reduces the flow out in the form of benefit cuts/retirement age or increase the flow in via cap increases simply add to the bottom line and so make the country reach the Debt Limit FASTER. Now some big name economists say this isn’t really true, that instead the net effect is a wash. Well okay, I don’t buy it thinking they have confused an textbook accounting identity for a real world operation, but either way cutting Social Security benefit cuts DOES NOT HELP IN ANY WAY WITH THE DEBT LIMIT.

It is not clear whether Lindsay Graham understands that he is simply holding the world’s economy and the retirement benefits of millions of people in the future hostage to a simple hatred of the New Deal. But no one else should be fooled, cuts to Social Security and particularly phased in cuts in future decades have nothing to do with U.S. actual debt obligations in Spring 2010. It is pure blackmail.

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QEII: Who really owns US Treasury Debt

by Bruce Webb

Okay readers and Bears, give me a hand here, because some of our standard narrative on ‘unsustainable’ US debt seems to be turned on its head. The standard narrative is simple: we have $13 trillion in US Treasury debt, and most of it, or at least the new issuances are dependent on the Chinese Central Bank continuing to purchase that debt. Which in turn has led to such things as that new ad; How Great Nations Fall: “Now They Work for Us”. Well how does this actually stand up to numeric scrutiny?

Okay the first place to start is Treasury’s Debt to the Penny web application where we are dutifully told that total ‘Public Debt’ is $13.723 trillion as of close of business Tuesday Election Day. But as Bear readers know that total is broken into two sub-totals ‘Debt Held by the Public’ and ‘Intragovernmental Holdings’ with the respective totals being $9.133 trillion and $4.590 trillion. And of that latter we know that $2.6 trillion is held in the Social Security Trust Funds. Now some opponents of Social Security claim that the Trust Funds just hold ‘Phony IOUs’ which on their logic means that they, and so presumedly the rest of ‘Intragovernmental Holdings’ are not really debt at all and really should be using the $9 trillion as ‘Real’ debt. But even without assenting to this phony argument it is true that Special Treasuries are not marketable. Which doesn’t mean they don’t have value but does ensure that they will never flood the market which only has theoretical access to the $9 trillion in Regular treasuries in current circulation.

Of that $9 trillion how much is actually owned by foreigners and specifically the Chinese Central Bank? Well we need to turn to another Treasury tool: Foreign Holders of US Treasuries where we find out that total foreign holdings are estimated at $4.213 trillion of which $2.772 are considered ‘Foreign Official’ , that is presumedly foreign exchange reserves by various central banks, while total Chinese mainland holdings are $868.4 billion. Now we could argue whether we should add Hong Kong’s total of $137.8 billion to that or ask with Brad Setser how much of holdings in ‘Carib Banking Centers’, the Channel Islands offshore banks included under ‘Great Britain’ or the traditional havens for safe money of Luxembourg and Switzerland are really held on behalf of China but I think we would be hard pressed to come up with a total of more than $1.1-$1.2 trillion held by Chinese private and public entities. Which is less than 10% of total ‘Public Debt’ and perhaps 13% of ‘Debt Held by the Public’. This is hardly an ‘ownership’ position. Plus if we look at month to month totals we see that ‘Mainland China’ holdings are down significantly from their peaks last fall at $938.3 billion even as total foreign holdings are up $636 billion over that time. Meaning that contrary to popular belief not all of our financial eggs are actually in a Chinese basket, other countries are stepping up to the plate as needed.

But Chinese holdings are just the background for this post which was inspired by some really provocative numbers in this NYT story this morning: Fed Will Buy $600 Billion in Debt, Hoping to Spur Growth. When we put the numbers in this article in the context of the numbers, a new and startling narrative starts to emerge. But you will have to chase this post under the fold to see it.

The starting point are these three grafs:

The Fed said it would buy an additional $600 billion in long-term Treasury securities by the end of June 2011, somewhat more than the $300 billion to $500 billion that many in the markets had expected.

The central bank said it would also continue its program, announced in August, of reinvesting proceeds from its mortgage-related holdings to buy Treasury debt. The Fed now expects to reinvest $250 billion to $300 billion under that program by the end of June, making the total asset purchases in the range of $850 billion to $900 billion.

That would just about double the $800 billion or so in Treasury debt currently on the Fed’s balance sheet.

Time to break out that four-function calculator: After subtracting $4.590 trillion of mostly unmarketable ‘Intragovernmental Holdings’ we are left with the $9.133 trillion of ‘Debt Held by the Public’. Of that $2.772 are in ‘Foreign Official’ of which some (large?) percentage will be in essentially irreducable foreign currency reserves by the various Central Banks, leaving maybe as little as $7 trillion actually exposed to the market on any given day minus whatever is held by various private entities and sovereign wealth funds in the typical ‘flight to safety’ function of U.S. Treasuries. Now what the NYT is telling us is that the Fed ALREADY holds $800 billion of that and is prepared to purchase some $900 billion more over the next year putting it on track to holding around 25% of the total market for Treasuries. Which by my calculations will make it the second largest creditor of the Federal Government after Social Security. But where Social Security mostly contents itself it taking its interest payments in the form of Special Treasuries, i.e. the government’s own paper, the Fed turns over all its profits from operations over to the Treasury, which in this case includes all the interest on the near trillion dollars in debt they are buying.

In the face of all the screeching by the deficit hawks about unsustainable debt and debt service and $13 trillion and our children and grand-children what are the implications of between Intragovernmental Holdings and the Fed balance sheet that more than half of that debt is held by the Federal Government or its Agencies (of which I am going to count the fed as one). Are all of those folk who claim that ‘Governments can’t really owe themselves their own debt’ in relation to Social Security simply willing to discount ‘real’ debt by 50% and more? Because apparently the Fed is confident enough in its and the Treasury’s credit that it is willing to snap up a full eighth of current Debt Held by the Public in purchases on the open market.

I don’t know what all this means, as I have said before I am a number pointer and not a number cruncher, but these numbers seem pretty eye-opening to me. Crunch away me hearties!

(BTW this also raises questions about the so-far Invisible Bond Vigilantes. After you subtract out ‘Intragovernmental Holdings’, the Fed balance sheet and ‘Foreign Official’ you start to see a ‘tail wagging dog’ story emerging, who exactly do you make a run on the dollar when the Fed is offering to buy pretty much everything you are willing to sell?)

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"Run Government Like a Business" = Deficit Spending

We’re used to that line by now. Ross Perot—one of the more prominent people who got rich due to government contracts—used it, Carly Fiorina and Meg Whitman are using it (while desperately hoping you don’t pay attention to how they ran Lucent/HP or eBay), and Aaron Sorkin even had Charles Grodin say it in Dave, if only to establish his Sensible Centrist cred.

So how are businesses running their debt-laden firms? Ask the WSJ and ye shall receive:

U.S. corporations have taken full advantage of low interest rates, going on a bond-issuing binge that has left them with tons of cash, which they appear to be holding largely as insurance against a new bout of financial turmoil, rather than spending on new hires. Nonfinancial companies were sitting on about $8.4 trillion in cash as of the end of March, or about 7% of all company assets, the highest level since 1963. Even before its [$1.5 billion at the bargain-basement interest rate of only 1%] bond issue, IBM had $12.3 billion in cash and short-term investments, which accounted for about 12% of all its assets.

The WSJ is, of course, worried about The Savers:

Meanwhile, though, savers are seeing some of the worst nominal returns in decades. As of June, the weighted average interest rate on deposits, money-market funds and other highly liquid investments stood at only 0.29%. Returns on riskier investments aren’t great, either: The average yield on near-junk bonds with maturities close to 30 years stood at about 5.9% this week.

As Brad DeLong said recently, in a slightly different context, “I share [the] belief that these numbers ought to be higher. But I also think that I don’t have very good reasons to claim that I am right that they should be higher.”

Neither does the market.

And it’s not as if those companies were all saving during the Good Times. Indeed, they were arguably more poorly managed than the government. As Floyd Norris noted almost two years ago:

Over the last four years, since the buyback boom began, from the fourth quarter of 2004 through the third quarter of 2008, companies in the S&P500 showed:

Reported earnings: $2.42 trillion
Stock buybacks: $1.73 trillion
Dividends: $0.91 trillion

The net flows there is -$220B, give or take a billion. It’s spending roughly $1.10 for every dollar you earn. And, to make matters worse, nearly twice as much was spent to make people go away (buybacks) than to reward loyalty (dividends).

If the government really were to be run like a successful business—the way the S&P500 are run, the way IBM is run—they would be borrowing long-term right now at that 2.82% 10-year or even than 4.00% 30-year rate.

If it’s good enough for IBM, it should be good enough for the U.S. Government. The Mitt Romneys and Ross Perots have been telling us that for years; many we should listen?

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The answer is the domestic private sector

Jim Hamilton used the Federal Reserve Flow of Funds data to present a question: who will buy “the additional $8 trillion in net new debt that would be issued over the next decade under the CBO’s alternative fiscal scenario.”

I thought that the analysis was curious and too “partial”. If one believes the deleveraging story, then domestic private saving is going to rise. The answer to his question seems pretty obvious…

Let’s say that consumption goes back back to the 1960’s-style 62% of GDP, then get ready for household Treasury accumulation. Spanning the decade of 1960, households held on average 30% of the Treasury’s liabilities.

A simple example illustrates my point. If the Treasury’s book doubles to $16.5 trillion, and the household share of Treasury holdings rises to 30% – as of Q1 2010 the stock of Treasuries outstanding was just about $8.3 trillion (see L.209 here) – then households will accumulate over $4 trillion of those new Treasuries. That’s just households, and holding all else equal (like financial funds and businesses).

So the answer is: the domestic private sector.

Rebecca Wilder

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