Potatohead raises a good point that we’ve talked about before. That the Fed pays subsidies in the form of free interest income to holders of the free money that the Fed handed them during the course of QE. That includes Primary Dealers, banks, and money market funds. The Fed is approaching the point where it no longer earns enough income to cover the cost of these free income subsidies to the banks and other large asset holders.
As the spread between what the Fed earns in interest income and what it pays out in interest subsidies to banks, dealers, and money market funds, that means a reduction in Fed surplus income. That surplus is normally transferred to taxpayers. Every time the Fed increases the interest on excess reserves or RRP holdings, it increases those subsidies to the banks and money market fund holders. That costs the taxpayers money that they otherwise would have gotten back from the Fed, but it’s a pittance in terms of the overall budget. It doesn’t even amount to a rounding error, or a fraction of a rounding error. The whole idea that the Fed is losing money completely misses the point. And yet, the subject arises, so let’s look at it.
In the fiscal year ended September 30, the Fed had transferred $106 billion back to the Treasury, which was an average of slightly less than $9 billion per month. That was still up there with fiscal 2021, which was at $100 billion for the year. But the monthly comparisons have collapsed in the past few months. In November, the Fed sent back only $188 million, that’s million with an m, to the US Treasury. That compares with $7.9 billion in November 2021, and $7.4 billion in November. Back in pre pandemic days before the Fed had ballooned its balance sheet again by giving another couple trillion in free assets to the banks, it was still paying the US Treasury about $4.5 billion per month. So its clear that the Fed’s surplus has indeed collapsed and could go from surplus to deficate in the months ahead.
13 hours ago, potatohead said:Lee,
Thought you may like this..
They are now paying out more than they are taking in.
So, yes. It’s true.
This comes from the “QE is only good” school of Economism. True, Fed profits and losses are a moot point in terms of policy. True, losses have only a minimal impact on taxpayers. Furthermore, the Fed doesn’t mark its gold to market. It’s still carried on the books at $35 an ounce. There are hundreds of billions in unrealized gains in that 262 million ounce gold holding. That’s a giant profit cushion. The Fed could always use that gold hoard to tighten policy by selling some of it.
The whole argument about Fed profits and losses, misses the point. That is that while boosting Fed profits and returning a few shekels to taxpayers, ballooning the balance sheet, handing out trillions in free zero cost assets to the banks and their leveraged speculating customers, and on top of that laying free interest income to the holders, was a subsidy for those banks and speculators at the expense of workers, savers, and retirees.
Then with the pandemic, and fiscal helicopter money transferring income to the unwashed masses, inflation came hard as a tax on everyone but borrowers, who again get a subsidy because of it. Of course those late arriving borrowers get wiped out as their assets deflate under the pressure of QT. We’ll see how long that lasts. As long as stocks and bonds keep rallying every few months, it can last a long time.
Furthermore, the idea that QE had only good effects is delusional, therefore insane. It ignores the income and spending lost to savings beneficiaries, including retirees and insured people. Something that absolutely no one accounts for is how much did it cost the economy in terms of increased insurance premiums due to lost interest income. And how much did it cost the economy due to reduced income and spending to retirees, not to mention the moral cost to the fabric of society. These things are immeasurable, because we tried only abnormal policy. We have no normal policy to compare with because they didn’t try it. In fact, they’re normalizing now, and the economy is still doing ok.
So the Fed’s balance sheet losses aren’t even a pimple on the elephant’s ass in terms of policy. The argument is a diversion, both by the bears, who incorrectly believe that it will cause something bad to happen, and by the bulls who point out that it’s no big deal.
Both arguments miss the point. QE has been destructive in so many ways that few talk about, morally, politically, and economically. All of these negatives have fed into one another, directly or indirectly feeding the authoritarian populist movements that threaten democracies around the world. QE benefitted only the well connected criminal few who had the capacity and will to play the speculators’ game that the Fed enabled, promoted, and rewarded, while leaving the masses ever further behind. People saw those benefits only accruing to the wealthy, who had done nothing to earn them. People saw that the fruits of their labor either being outright stolen or at least diminishing in comparison to the financiers, and corporate robber barons, and speculators. They developed their own big lies in response.
Can we envision a way out of this that does not entail massive destruction? That’s the question, not whether the taxpayers lose a few billion more in the short run.
Meanwhile, we focus on the daily squiggles in this thread. In the past 4 weeks, the stock market, as shown by the ES, 24 hour S&P futures, has become Nowhere Man (credit Jimi). We show the Nowhere Man pattern on the hourly chart every day. It says now that the market has been going nowhere, but that if it drops below 3907, it could go Somewhere. That somewhere being a measured move target of 3737.
Otherwise, Nowhere. If they clear 3950, 4000 is probably nowhere from here.
For moron the markets, see:
- Federal Tax Revenues Are Slowing December 6, 2022
- Swing Trade Screen Picks – Picks are Balanced this Week December 5, 2022
- Bears Last Custard Stand December 4, 2022
- Bears Beware, Money Managers Are Finally Spending their RRP Slush Fund November 30,2022
- Swing Trade Screen Picks – Read My Lips, No New Longs (A Few More Shorts) November 28, 2022
- Major Inflection Point Here to Determine Whether Bull or Bear November 28, 2022
- Gold and Miners, Pullback Looks OK November 23, 2022
- Fed Policy Will Stay Bearish Until It’s Too Late November 20, 2022
- The Repeal of Rule Number One, Don’t Fight the Fed November 14, 2022
- Bond Market Rally is Technically Valid but Belies the Facts November 12, 2022
- Bad News for the Markets – Not Just Withholding Boomed in October November 3, 2022
- Surge in Withholding Tax Collections in October Indicates Faster Jobs Growth November 2, 2022
- Bear Market Isn’t the Mirror of a Bull October 31, 2022
If you’re serious about the underlying forces of supply and demand that drive the markets, join me!
If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.
