Last year the FED turned over $ 88.9 billion in profit to the U.S. Treasury, which was the “earned income” from the Fed’s QE program, for Bernanke’s Fed is the world’s largest coupon clipper. The Fed’s earnings are supposed to be turned over to the Treasury at regular intervals so why isn’t the Fed forwarding its gains to help the Treasury have more income to pay off the governments immediate expenses. If last year’s profits totaled $88.9 billion, this year’s gains should be larger as the balance sheet has grown by almost $850 BILLION. So where is the money, Ben?
Now, some may suggest that with the bond yield rising the FED will have diminished profits. That’s wrong for the Fed does not mark its portfolio to market and thus merely collects interest and bears no market losses because it hasn’t sold any bonds. Why this issue hasn’t been discussed is beyond me as this is not an insignificant amount. Hey Ben, stand and deliver. In a January 10 New York Times article, “Fed Profit of $88.9 Billion Sent to Treasury in 2012.” The writer, Binyamin Applebaum, quotes Bernanke as joking that the money the Fed receives “… is interest the Treasury doesn’t have to pay to the Chinese.” If the Fed doesn’t want to transfer its hard-earned gains to the Treasury then the FED can simply offer forbearance to the Treasury and not collect its interest due. If the fear is immediate default on the debt, the Fed needs to stop being a passive observer for it has HUGE SKIN IN THE GAME.
***The G-20 finance ministers and central bank governors convened over the weekend in Washington, D.C. in hopes of resolving the world’s problems. The final communique should be treated with “benign neglect.” This quote makes it a joke: “We will ensure that future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated.” Really. The world’s central banks are going to surrender individual nation-state responsibility for DUAL MANDATES to an unelected international organization. I can’t wait for Christine Lagarde to testify to Congress. Before the world had time to read the vacuous communique, the Chinese official news agency, Xinhua, had an op-ed piece calling for an end to the U.S. dollar’s exorbitant privilege as a reserve currency. The op-ed piece supports “… the introduction of a new international reserve currency that is to be created to replace the dominant U.S. dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.”
It seems that the G-20 meeting had more acrimony than the communique would acknowledge. There is no doubt some diversification away from dollars and it is an agenda that many in the emerging markets are pushing. It is of course bluster as the world’s financial system requires a credible medium of exchange and for the moment that is the DOLLAR. But if the Fed, Congress and the Treasury continue to lose credibility, alternatives will be found.
***An interesting rumor on Friday from the Canadian markets. Early Friday, the Canadian government released its unemployment report. The raw data was close to consensus on overall job creation but the unemployment rate dropped to 6.9% from 7.1%. The reason for the unexpected rate drop was that the youth sector showed a decline in participation, shrinking the labor pool. The weak data point was that manufacturing jobs fell by 26,000, which is not a healthy sign for Canada and maybe for the U.S. The U.S. auto sector has been booming so a Canadian manufacturing slowdown may simply be a one-off event but it is something to pay attention to going forward.
The CANADIAN DOLLAR had failed to rally for the first few hours as the manufacturing jobs loss weighed on market sentiment. At around 11:00 a.m. CST the LOONIE began to rally as a rumor circulated that investment funds were buying Canadian Treasury bills as an alternative to U.S. short-dated paper. The Canadian debt markets are not deep enough to meet the needs of the world repo market, but if firms like Fidelity and Blackrock avoid the U.S. short-term BILL MARKET–alternatives need to be found. Outside of the rally in the Canadian currency, the rumor has not been substantiated but it reflects the impact of the market’s search for high-grade collateral to support the short-term funding market.
***Something to pay attention to that does not show up in economic models. In France, the extreme right-wing National Front (FN), headed by Marine Le Pen, won a local election with almost 54% of the vote. This was a second round and just two candidates were involved: the National Front versus the center-right UMP candidate. President Hollande’s Socialists were knocked out last week and Socialist voters were directed by the Party to vote for the UMP candidate to prevent an extreme right-wing victory. The strategy failed and this should be a wake up call for all those who believe that in the “ALL IS WELL” in Europe story. From Greece to France, extremist parties are gaining ground in local elections. While not an economic data point, it should be on everyone’s radar screen.
***In another affront to the G-20 and the G-7, the Swiss National Bank’s (SNB) President Thomas Jordan stated that the EUR/CHF currency pair remains “a crucial tool of our monetary policy in order to avoid a tightening of monetary conditions in Switzerland.” This is a critical speech by the head of one of the world’s most respected central banks. It is a clarion call to all the countries concerned about the impact of a strong currency on their monetary policies. If Switzerland retains the right to intervene to weaken its currency for issues of domestic monetary policy, why doesn’t every other nation reserve the same right? Makes the G-20 communique null and void before the ink is dry. The SWISS are suffering the pains of being a safe haven in a “sea of madness”–very difficult waters to navigate. The EUR/CHF remains at the 1.23 level even as the media continues to rave about Europe having weathered its financial crisis. President Jordan, good luck on your voyage.