Saturday, September 1, 2012

The Federal Reserve: Working for the Taxpayer

This article is filled with the usual fallacies promoted by those who advocate for monopoly money power; however I will focus on only the main issue raised in the article.  One of the many terribly destructive aspects of central banking monopoly power is that it allows for many subtle means of skimming money from the top.  One of these is portrayed (as a positive, of course) in this article – describing how the Fed makes a “profit” for the “taxpayer.”

Nestled in Ben Bernanke's Jackson Hole speech was a short quote that might get Republicans' attention: More Fed stimulus could turn a profit for taxpayers.

Now first consider this phrase: “turn a profit for taxpayers.”  Is this true?  Has the government run a surplus that I don’t know about?  Has the government or the Fed ever sent a dividend check to every taxpayer in proportion to…proportion to what?  Do you own shares?  Perhaps in proportion to taxes you have paid?  Where is the profit?

So how exactly is the Fed making taxpayers money?

First, here's an important distinction: When the Fed buys bonds, it's not spending the government's cash. Rather it creates the money itself, basically by electronically crediting the money to banks.

Yes, this is an important distinction, but likely not for the reason meant by the author.  Consider this process: the Fed, not through producing goods and services desired in the market, but simply by computer animation, creates digits – digits that are equal to the digits earned by others who have produced the goods and services that are desired by their fellow man.  These digits from nothing then compete with the digits from something, buying in the market on an equal footing.

I have previously described picturing this process as follows: consider money as chits.  Some people earn chits by producing goods desired in the market, and at prices discovered in a relatively free manner.  Call these the good chits. 

Others earn chits in a more monopolistic fashion, and without producing such desired goods – those who work for or contract with the government, those who work in professions protected by the government, and at the top of the field are those who can create the chits with nothing more than a push of the button.  Call these the bad chits.

Now, on one side you have all of these people with all of these chits – good and bad.  On the other side is a pile of all the goods and services produced by and desired in the free market – food, clothing, cars, houses, entertainment, etc.  These goods and services cannot distinguish between the good chits and the bad chits in the other pile.  All chits can claim the desired goods, even though only some of the chits are associated with producing the goods.  (As an aside, consider this when wondering why the standard of living has remained stagnant for decades.  Despite productive advances, the bad chits have increased in proportion to the good chits,)

The result is that those who have worked to create goods must use their chits to compete for goods not only with others who have produced goods, but with everyone who has chits.  Additionally, the Fed is buying government and other bonds with bad chits that must be repaid in the future (absent default) by those who will in the future earn good chits. 

Somehow, this process can create “profit” for the “taxpayer.”  Certainly for the “taxpayer” who benefits from this system – bankers and government employees are only two of hundreds of such categories of “taxpayers.”  But the article doesn’t make nor is intended to make this distinction.  By taxpayer, we are supposed to think…me!  The average Joe.

The Fed then earns interest on the Treasuries it holds, and while interest rates are very low, the sheer mass of bonds the Fed holds nevertheless makes for quite a windfall.

The Fed earned a $77.4 billion profit last year, and of that, most was from interest payments. The year before, it earned $81.7 billion, and in 2009, it earned $53.4 billion.

After paying some of its own administrative expenses, the Fed turns most of those profits over to Treasury, which can use them to pay government bills.

This is the profit.  The Fed earns interest on government bonds – interest the taxpayer paid in the first place!  Out of the left pocket, the average Joe pays taxes for government interest, and into the right pocket returns…well…nothing – again, the money goes to the Treasury and not your pocket.

But somehow this is a profit for the average Joe.

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