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.
Tags: Ben Bernanke, Canadian Dollar, Christine Lagarde, EUR/CHF, Fed, G-20, IMF, QE, Thomas Jordan
October 15, 2013 at 3:27 pm |
Yra,
What are your thoughts on the oil market? Thanks!
October 16, 2013 at 11:39 am |
Yra – Some observations on the French political situation.
The FN’s political base is in the south, vicinity Marseille. The location of Brignoles, site of the recent by-election, is about 30 minutes by car from Marseille. Hollande received 10% fewer votes there than in the country at large in the most recent national elections.
I thought the real shock came in the days following the by-election.
In May 2014, the French will hold a national election for their European Parliament representation. Although it is next spring– an eternity in politics– the results of a national Ifop poll conducted after the Brignoles by-election showed FN with 24%, UMP 22% and the Socialists 19% support. Almost one in four French voters have declared a preference for sending a member of FN to Strasbourg. Should such a thing come to pass, France would instantly be the most visible member of the anti-EU contingent at the European Parliament.
Marine Le Pen is not her father (Jean-Marie looks horrible in a black leather skirt). She appears to have much broader goals for FN than her father ever did. In the 2012 French parliamentary elections, she ran for a seat in the north of the country, far outside the FN’s traditional southern base. A coal mining area up near Belgium of longstanding Socialist preferences, she lost by around 100 votes. Her message of economic protectionism played well.
You are correct that none of this amounts to an economic data point. The matter bears watching, if for no other reason than to see if the UMP and Socialists adopt or move closer to FN positions in an attempt to brunt the advance of that group. One suspects they will, as the point differential in the Ifop poll is not insurmountable at this point. It is important to prevent the FN from having any type of electoral breakthrough next May.
All is definitely not well in Europe, and particularly in France.
Yra, thank you for the work you do here. A pleasure and an education. It is appreciated.
October 16, 2013 at 3:08 pm |
DaveB–a very good post indeed.You have enhanced the knowledge of the Blog and look forward to your continued views onFrance and its political and economic situation—and still no German coalition.Now the light comes off Washington and will return back to Europe.Regardless of the outcome for Marine Le Pen,she is making the eurocrat elites very nervous.But your point is well taken andit is why this blog analyzes Political Economy in an effort to seek profitable trades and investments.
October 16, 2013 at 7:17 pm |
Yra,
Rhetorical question, right?
Nate
October 16, 2013 at 8:32 pm |
nate–yes.but i believe it needs to be asked for it makes the FED a player in the fiscal realm as well as the key player in monetary policy
October 16, 2013 at 9:52 pm |
Yra,
I have been reading the debates on The Gold Reserve Act of 1934. Please see link:
http://fraser.stlouisfed.org/docs/meltzer/sengol34.pdf
I have LIMITED economic knowledge, and terrific finance education (University of Northern Colorado) with limited finance practical knowledge, by try to learn given my extreme handicap of having a monotonous job, military reserve duty, and a toddler and infant.It has been brutal…
All I see is fraud, smoke and mirrors, and scamming from EVERY political front, and EVERY economic know-it-all. The windows and doors have all been opened via prior legislation (pieces from 220 pg link above):
“It is interesting because it is the most ingenious instrument ever developed in the monetary systems. It is equally effective in attack and defense.. The reason for its establishment in this case is to defend the American dollar and our gold stocks against the invasion of similar funds operated by competitor nations. To understand its operation we must, realize that since the world depression nearly all nations have been forced off gold and swollen budgets along with disturbing internal conditions have depreciated their currencies; consequently, they could deal to better advantage with other low currency nations rather than with the high currency nations. Great Britain whose existence depends upon world trade found this trade dissipated because her currency had a high tendency and in order to check this tendency she set aside the equivalent of $175,000,000 with which to purchase American dollars and other gold-redemption currencies. She sold pounds and bought dollars. When you sell large quantities of a thing you cheapen it but when you buy large quantities the tendency is to enhance the value of the article purchased.
The equilization fund was so effective in driving our dollar up that we were forced off the gold standard. It is to prevent a repetition of this experience that we create the stabilization fund preparatory to the return to gold redemption. ”
Keep in mind, we have NEVER returned to Gold redemption…
Also,
“It is generally understood that the United States needs this equalization fund in order to compete with a similar fund which Great Britain has and is using. The British fund is not under the control of the chancellor of the exchequer. It is not under the control of one man. It is under the control of a board of three men, who operate with the utmost secrecy and caution. If the United States is to have such a fund, we concede as to the necessity of deviating from some of the principles of free and open government incident to democracy. We therefore recommend the utmost secrecy, care, and caution in the operation of such a fund. The amendment to section 10 permits this secrecy and caution. We concede to this secrecy with reluctancy on the ground of constitutional government but accept it on the grounds of necessity.”
THIS EXPLAINS WHY THE FED IS SO DISINGENUOUS, NO?
October 17, 2013 at 2:26 am |
Nate–now go and read the Tower of Basel by Adam Lebor to further understand the thinking of the likes of Montagu Norman and all the others who love the power of secrecy.Thank you for the wonderful post—Yra.
October 17, 2013 at 9:08 am |
Yra,
I must apologize. The first paragraph in quotes above is incorrect. I just caught it now while re-reading what I wrote (I copied and pasted it). GB’s Stabilization Fund was $1.75B, not $175M as stated above. It is AMAZING how inaccurate these OFFICIAL documents are. I have caught at least 50 typos in the document and about 10 were EXCEEDINGLY MAJOR! To the tune of adding or subtracting 3 ZEROES!
So, in 1934, our supreme leaders, decided we would start with $2B (talk about one-uppers!). Now it is claimed to be over $40B, but as stated below (1999 pamphlet from Cleveland Fed), it can make OFF BALANCE SHEET transactions that are hidden so I would guestimate well over $100B:
http://www.clevelandfed.org/research/commentary/1999/1201.pdf
I am NOT a conspiracy theorist, I am a realist and am starting to actually believe what I read, as there is no hiding this LEGALLY (not ETHICALLY) secret fund. It can give, steal, and do whatever to markets near and far. It affects markets that are numbered in the TRILLIONS of dollars.
BTW, I am trying to find good books that explain the Federal Reserve Act (former and current form), Brenton Woods, and the Basel Accords. I am WAY behind in my reading, but hope you could suggest some like you did the book Tower of Basel.
Thanks for taking your time to read my lengthy posts!
Nate