Given covid, the mutation, lockdowns, BLM protests and riots, the storming of the Capitol, impeachment and the first Biden stimulus bill on the horizon, it’s easy to miss headlines from the Federal Reserve. On Monday, the Fed released Reserve Bank income and expense data transfers to the Treasury for 2020. This is the central bank’s preliminary income statement and remittance figures for 2020, the headline number starting at:
$88.5 billion of their estimated 2020 net income to the U.S. Treasury.
Meaning, the Fed is to send $88.5 billion to “the people” via the US Treasury. However, more context and figures are required to reach a better understanding as to what this means.
Net income for 2020 was derived primarily from $100 billion in interest income on securities acquired through open market operations…
The Fed’s income primarily comes from owning US Treasurys and mortgage-backed securities (MBS), which makes sense because the Fed now owns $4.7 trillion and $2.0 trillion of these securities, respectively. This means $6.7 trillion was created and lent to the world. They can now receive over $100 billion a year in return (interest revenue) as compensation for their lending service.
Interest income on US Treasurys and MBS is hardly new. But this line item is:
The Federal Reserve Banks realized net income of $405 million from facilities established in response to the COVID-19 pandemic.
This might sound like a lot of money to most people, but is a relative drop in the bucket given the aforementioned $100 billion the Fed made off buying the nation’s debt.
As for the expenses, the largest cost to the Fed is the interest it pays to depository institutions (banks). This is interest paid to banks in order to compensate them for holding money at the Fed.
The Federal Reserve Banks had interest expense of $7.9 billion primarily associated with reserve balances held by depository institutions.
If this wasn’t confusing enough, it gets better:
We find operating expenses (mostly salaries and benefits) for $4.5 billion, plus $831 million for “producing, issuing, and retiring currency,” and $947 million for “Board expenditures.”
In what may come as surprise to most, the US Treasury is not the only entity the Fed is beholden to; this year the Fed paid:
$517 million to fund the operations of the Consumer Financial Protection Bureau.
And the payout to banks:
Statutory dividends totaled $386 million in 2020.
Numerous questions should come from this:
These numbers are preliminary. We won’t have the finalized figures until March. But so far, the $88.5 billion remitted to the Treasury seems to be “pretty good” given the low interest environment and when compared to the last decade of remittances.
Of course, something doesn’t seem quite right. In order for the Treasury to get a remittance from the Fed, the Fed must expand the balance sheet and money supply, therefore buying interest-bearing assets. The interest income earned by the Fed pays for expenses such as billions of dollars in salaries and interest payments to banks. This gets reduced even more after payouts to another government agency and dividends to banks. What’s left gets sent to the Treasury. Keep in mind the US Treasury does the actual “money printing.” In effect, a significant cost associated with the Fed is paying for their knowledge, allowing them to manage the money supply.
It’s a system implemented well over a century ago, a system in dire need of repair if not abolishment. An entity which can legally create money runs the risk of eventually owning the assets of an entire nation, being insensitive to prices and immune to bankruptcy. This, as well as other pernicious effects such as causing the boom-and-bust cycle, increasing malinvestment, price distortions, and asset bubbles all make it strange to think that society pays billions of dollars for this knowledge-based service. Central banking is a service so slanted toward the banks and government, and against society, that it’s no wonder the general public isn’t meant to understand its inner workings.
