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Federal Reserve Made Record Profit in 2009: Report

Jan. 12 (Reuters) — The U.S. Federal Reserve made record profits in 2009 and will return $45 billion to the U.S. Treasury, after its efforts to prop up the economy created a windfall for the government, the Washington Post reported.


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61 Responses

    1. Dave,
      I pumped gas in high school in 1981 at $1.469, about a year ago I paid $1.479 at costco when oil went down to 33. I bought a PC for $2k in 1990 that had 2 orders of magnitude less performance than the $399 DELL laptop I bought over Christmas. ETC.

      I dont know where Ron Paul gets his inflation data or where his fear comes from.

      We are letting ourselves get ripped off by OPEC for petro periodically and property has increased due to unfettered re-leveraging. We can take focused/measured steps to address these two areas of price instability if we think its a problem. Rather than re-do the monetary system. Resp,

      1. Matt, my father used to be able to drive up to a gas station and not have to exit his car in the cold weather while an attendant pumped gas for him. How come I can’t find as many gas stations that will pump my gas for me as my father did? I am willing to pay more for this service, but it seems even while willing to pay more, I don’t have options my father had a generation ago. I don’t mind the cold weather so much, but hate touching the hose and exposing myself to flu and other germs. Many of my friends are willing to pay more, but it seems self serve gas stations have completely replaced full service in many areas.7

      2. Richard Benson that sounds like a business opportunity for you. The real question is how much more will people pay to have their gasoline pumped by an attendant?

      3. Maybe one cold test your hypothesis it by standing with a sign that says will pump your gasoline for $1.00. If you get 20 takers per hour you have a winner.

    2. Karl Marx’s critique of capitalist political economy argued that debt tends to expand at a faster rate than growth in the underlying real economy which is the source of the boom bust cycle.

      Marx claimed that rising levels of labor productivity attributable to applications of new technology had a tendency to undermine in real terms, the paper values of existing paper capital investments in older technology from previous production cycles. This reminds me of Charles Schumpeter’s notion of the creative destruction of capital.

      In the macro picture, Marx referred to this as the “tendency of the rate of profit to fall”. However, credit expansion provides a way to temporarily prop up the outstanding mass of un-depreciated fixed capital by re-circulating the difference to the overall economic output of goods and services which could be sold at inflated prices.

      This ongoing inflationary credit expansion results in an accumulation of potentially illiquid capital holdings, or what today would be called toxic assets sitting on bank balance sheets, which must eventually be purged in order for real economic growth to resume.

      The problem is that the government is not allowing the toxic assets to be purged and liquidated. The most interesting parallel between today’s economic collapse and Marx’s critique is the notion that greater and greater amounts of credit expansion are required to prop up older un-depreciated investment holdings and maintain full employment at the same time.

      Compare this to what Ron Paul and Jim DeMint wrote in a WSJ Op Ed ‘Americans Deserve a Transparent Fed’ on Nov 19. “The Fed has also for the past three decades, been required to engage in monetary policy with the goal of maintaining stable prices and full employment. Since the natural trend over time is for prices to decrease, a mandate to maintain stable prices is a mandate to pursue an expansionary monetary policy and inflate the money supply to counteract the lower prices we would expect from increased productivity.”

      Paradoxically, in this context Karl Marx and Ron Paul seem to be on very similar wave lengths.

      1. Ed,
        Thanks for this post. I need periodic reminders in order to keep my opinion of these folks in Congress at the appropriate low levels: “Since the natural trend over time is for prices to decrease…”. Where the h are they coming up with that one!? So according to Dr Paul, the “inflation” problem is even worse than we can see because all prices should ever really do is go down if not for the big bad Fed? Tell that to OPEC! The best you can say is naive. Resp,

      2. Matt – I had the same “Huh???” response at first too, but after a while it dawned on me that Paul and Marx are right on this issue. Applications of new technology to production makes output cheaper in real terms. This is not so obvious with prices in general, but in specific markets like computers for example it would be plain to see with a low power telescope from the planet Mars. Two other examples from the medical field would be laser eye surgery and cosmetic surgery where the cost for procedures are steadily dropping, probably because there are no government subsidies going out to those two areas to distort supply/demand price signals.

        Deflation from technological progress i.e. prodictivity, is a good thing because stable wages in nominal terms would translate into real wage increases and rising living standards. The problem in capitalism though as Marx identified is that rapid technological advances tends to bankrupt the investments in older technologies from previous business cycles. It would seem that there is a disconnect between what Marx called the tendency for the rate of profit to fall vs. standard accounting depreciation of physical capital investment in plant, machinery and equipment.

      3. Ed yes for some manufactured “commodity” items and services for sure, but for Ron Paul to make that generalization about all prices?…(see my boorish “chicken wings” example earlier in this thread, consumer prices have increased there not because of the Fed, but because of Hooters!), then you have cartels, organized labor, OSHA, environmental impact, NTSB, etc…as society, thru our representative govt, applies new mores over time and generations, often directing by law changes in how things are produced, you can see why some prices would often go up irrespective of what Ron Paul thinks the Fed does. Ron Paul may be well intentioned but he is ignorant. If you understand physical sciences: it’s like he has traveled to Jupiter and thinks he has gained 400 lbs along the way and is now a heart attack candidate.

        As for Marx’s obsolescence, that’s what wise management is (supposed to) plan for. You didn’t want to start construction on the new canal when the steam locomotive was already in service, or fund a railroad branch line when deisel trucks were starting to deploy. Likewise today, it is proving foolish to have funded retail big boxes that have to lease for $75.00 psf when you have e-commerce, USPS (if it fits it ships!) and a fullfilment center in WVa that leases for $7.50 psf. Ron Paul has to learn that the Fed and non-convertable currency has nothing to do with any of these age old issues. Resp,

  1. You guys are soo out of touch, have you priced food lately? I guarantee most of it has almost doubled or more, BTW you cannot eat electronic devices. I too pumped gas in the early 80’s it was around a $1.20 yesterday $2.99. Guess what, I never washed my hands!

    95% of Americans are having trouble paying for gas and you say you want to pay more so you don’t get germs?

    The banking system is corrupted to the CORE! Anybody can see the wars for profit, the intentional inflating of bubbles for profit, and so on. You guys need to see “The Obama Deception”

    Don’t worry though I am an uneducated disabled moron with no income, so I have many hours to research the web, most of the lower class are working there buts off to make interest payments, have no interest in reading and will accept there fate.

    Nobody ever listens to bukaka!

    Peace

    Also see “The Story of Stuff, this CANNOT LAST!

  2. Anyone who denies there is inflation is being willfully blind to the facts and has an agenda. Are there prices that have come down due to huge advances in productivity (in electronics and semi-conductors)? Absolutely.

    However, when I graduated college 30 years ago, I could rent a local apartment for about $400. That same apartment is now $1500. Same apartment, big difference in price. I could ride the subway for 50 cents… now $2.50. Same thing with a meal in a restaurant. Luckily salaries have also risen (again due to inflation)although perhaps not as much.

    This brings me to my big beef with MMT. Currency should be a medium of exchange and a store of value. Inflation over long periods of time has decimated the value.

    1. Why would you think there’d necessarily be more inflation using policies prescribed by MMT’ers than otherwise? Can’t think of any specific policies that are more inflationary, myself–Warren did call his seminal paper “full employment AND price stability,” after all.

    2. Jason,
      I think property is about the only area that has generally had consistent long term price increases. Most if not all other prices seem to perform cyclically with supply and demand. My theory is that it is because of a dramatic lowering of interest rates over the last 30 years coupled with increasing leverage on property and cumulative property taxes that have resulted in the increase in property values/expenses. This looks like some of this may reverse in the future.

      I think practically all wholesale/retail level price increases over the last 25-30 years lead back to property values in some way, not “debasing” whatever that is. I think it would be of value to also examine how fiscal policy has perhaps acted to drive up the prices of property over the same time period.

      I have come to not believe that “inflation is a monetary issue” to paraphrase M. Freidman (I think he said that before we went off the gold standard perhaps). Resp,

  3. A good deal of this discussion is missing the point.

    First, what do the Fed’s actions the past few years have to do with the price increases described in the comments above? I can’t think of anything. While you’re at it, health care costs increased as fast as most anything–I suppose the price of pharmaceuticals is somehow the Fed’s fault?

    Second, even if you have 1% inflation, which is below what even most inflation “hawks” think is an appropriate target, you get 99% of the value of the “currency” going away per century. Does it matter? Not if my income grows faster . . . and that’s the point–standard of living is far more important than the inflation rate in isolation, most of the time (aside from more extreme cases of inflation). Who cares if you can’t buy a Hershey bar for a nickel anymore if you can buy more Hershey bars?

    1. Scott,

      I think in your second paragraph you are the one missing the point.

      If, I can buy more Hershey bars today, compared to 1 Hershey bar for a nickel in the past, without inflation, I could buy even more Hershey bars today. So who cares? I think a lot of people do.

      Btw, how did you come up with loosing 99% of the value of currency at 1% annual inflation in a century? I’m coming up with a loss of about 63% of value (1 – 1 / 1.01^100).

      1. Regarding Hershey bars (and that was really a proxy for goods and services in general–I’m not really referring to Hershey bars or any 1 particular good, obviously), I would choose the same as you in that case, but you’re assuming you realistically can choose b/n more Hersheys at the higher price or even more Hersheys at the initial or even lower price (again, in the aggregate). Haven’t seen any real world economies that have actually pulled that off consistently–most that don’t get at lest a little bit of inflation end up with a lower standard of living (i.e., Japan). If you have ideas as to how to pull it off beyond what Warren’s already proposed, I’m all ears.

        Regarding the math, I was going at it much more simply . . . if prices rise 2%, the purchasing power of the currency in your wallet has fallen 2%. But yes, I can see where you were going, too.

        Best,
        Scott

      2. Scott,

        my idea is not at all in line with what you and Warren propose, but since you’re all ears…

        Why try to pull something off? Why try to control the economy? Why not let people make their own free decisions? Why interfere? Why not allow free banking (competing private currencies)?

    2. “that’s the point–standard of living is far more important than the inflation rate in isolation, most of the time (aside from more extreme cases of inflation). Who cares if you can’t buy a Hershey bar for a nickel anymore if you can buy more Hershey bars?”

      Scott, I cannot find the full service gas stations that my father could in many places. Standard of living therefore has went down, I must get out in the cold and pump my own gas and expose myself to germs on the gas hose handle. There are numerous examples like this where “citizens” are required to do thier own “work” and can no longer afford to have others do it for them.

      Also my local water utility just had a newspaper story writeup where fire extinguisher foam and anti-depressant and anxiety medicines were in the water. My father was able to get clean water from the river for free, but I cannot drink from that same river today and even the tap water I PAY for is polluted, certainly that is a decrease in standard of living?

      Another example, just 10 years ago I was able to go into many local libraries and have lots of space and access to computers and the internet. Today most libraries are overcrowded, and there is no hope of getting on a computer or the internet, too many other people, again standard of living has seriously decreased. 🙁

  4. the currency is a tool for further public purpose, which includes standard of living and a feeling of well being, fairness, and the rest of what we value

    1. Absolutely. The government as currency issuer is the sole provider of net financial assets to non-government, all commercial banking transactions netting to zero. Monopoly currency issuance is not only a prerogative of a sovereign government, but also a responsibility. This responsibility entails providing the necessary net financial assets to non-government to balance nominal aggregate demand with real output capacity. The currency issuer can always do by adding NFA through spending and subtracting through taxation in order to achieve a balance of aggregate supply and demand at full output potential with price stability.

      If the government balances nominal aggregate demand with real output capacity through appropriate policy, then no productivity is lost and prices remain stable at full employment. If the currency issuer overshoots, there is inflation, and if it undershoots, there is recession and rising unemployment. If the government undershoots substantially there is deflation and depression.

      The mistake that many people make lies in thinking that simply increasing monetary aggregates is “inflationary.” However, monetary inflation involves a relation between aggregate demand and supply, Inflation. meaning rising prices across the board due to a glut of money increasing demand in relation to goods and services, doesn’t occur unless nominal aggregate demand exceeds real output potential.

  5. I’d prefer my currency not be a “tool for further public purpose” thank you. I’d like to see it be a store of value not a tool for debasement. Warren’s thesis may call for price stability, but government (as does the Fed) will overdo it whenever given the chance. Government buys votes with money (programs, jobs etc (as money buys government). Take a look at the history of the New Deal. FDR & Co used govt spending as blatant vote buying. (Not saying Republicans are immune form this disease either).

      1. Too bad it hasn’t even come close to keeping pace with the CPI the past 30 years, unlike virtually every other asset class. Nice store of value . . . kind of like the $ during the gold standard–no inflation trend for a 50-year period, but lots of volatility and about 3 depressions. As long as you don’t have to liquidate when it’s down, you’re ok. I prefer my stores of value (as opposed to my investments) to have a bit less risk, but I digress, as that’s not the point.

        You want a currency for which there is no loss of purchasing power while the economy grows at its maximum potential with full employment. You’ve rejected Warren’s ideas for getting there because you don’t think they’re possible without “corruption.” How would you do it?

  6. First off, am not proposing that gold is the be all and end all investment. I’m simply saying that it has proven to be inversely related to the debasement of fiat money. If it hasn’t come close to keeping up with the CPI, what can you possibly say about a greenback!? At least gold is up 35x while the dollar inversely has depreciated 35x (i.e., is worth 3% of what it was 60 years ago via a vis gold.

    1. I never said the greenback had kept pace with inflation. YOU said gold was a store of value, though, and to keep its value, it doesn’t have to keep pace with the greenback, it has to keep pace with prices. It didn’t come close for a 30 year period.

      How do you define the store of value property that you think currency should have? Most argue it would ideally lose its value very slowly(2% inflation or a bit less, and stable) if at all (0%? and again stable). That doesn’t sound like gold (I certainly wouldn’t have wanted the purchasing power of $ to mimic the price of gold, year in and year out, in other words), but maybe your definition is different.

      Best,
      Scott

      1. Meant that last parenthetical statement in the past tense . . . “(I certainly wouldn’t have wanted the purchasing power of $ to mimic the ACTUAL PAST BEHAVIOR OF THE price of gold, year in and year out, in other words)”

      2. I don’t understand how someone can think they can trade a physical asset that will waste in value for something that will have perpetually the same value.

        Most assets get less valuable over time, and most assets become rapidly less valuable if they are not maintained.

        Somehow people believe that their money should retain all of its value in perpetuity. Didn’t Ed Seykota ask why nobody has even 1 penny, compounded at 3% interest since the time of Christ?

        Money is a short term store of value at best, but don’t hold it too long because it will waste away. You would think a few thousand years of history would be enough for people to understand this very basic idea, but apparently not.

    2. Scott gets it right. My previously published comment on Gold as a store of value at http://www.oftwominds.com/blognov08/store-value11-08.html

      “Timing is everything. If you had purchased gold in 1980 at the peak of $850, it would have to almost triple from present levels before T-bill investors will stop laughing all the way to the bank. (See CPI calculator courtesy of the Bureau of Labor Statistics.)”

      I would add that if you think the official CPI understates inflation then gold was an even worse store of value than the calculator would indicate.

      The problems caused by a desire to hoard a “store of value” is what drove Silvio Gesell to propose a demurrage currency. His book on the subject available online: http://www.appropriate-economics.org/ebooks/neo/neo.htm

  7. The supply of gold rises about 2-3% a year so that allows for some inflation. Otherwise I started this discussion replying to the poster who claimed there is no inflation. You entered the discussion admitting there is inflation but stating it doesn’t matter because hopefully one’s income will grow faster. However, what if it doesn’t (many claim real wages have not kept pace), what if you’re retired, or what if you’d just like to stop working and live off your savings? Inflation presents problems in all these scenarios. It also encourages debt which may be an even more serious systemic problem.

    It is possible that gold has not kept up with certain prices (although you haven’t stated which prices) but by definition it has increased 35x against the dollar. Give me a choice between holding a fistful of dollars or an oz of gold and I won’t think twice. It also illustrates how ridiculous the claims were above that there is no inflation.

    1. Jason,
      Ive posted this topic before: Chicken wings are going up in price again this month. Looks like they are headed towards $4.00 per lb. again. (Prime time for NCAA and NFL in January). Back in the 80s, farmers were probably lucky to get anything for them as pet food. So they have probably gone up more than gold on % basis. Is the Fed to blame? Resp,

    2. “… one’s income will grow faster. However, what if it doesn’t (many claim real wages have not kept pace)”

      Isn’t that why the Fed sets interest rates above the rate of inflation? It seems to me that everyone forgets that gold does not earn interest when making the comparison.

      This is probably the one thing on the site’s recommended readings that I haven’t quite understood, namely that the natural rate of interest is zero. To me it seems the natural rate of interest should compensate us for inflation. I don’t mind saving is a fiat currency as long as my real rate of return is positive.

    3. Jason Says: “The supply of gold rises about 2-3% a year so that allows for some inflation.”

      I wouldn’t call that inflation. Coincidentally, the annual increase in the supply of gold matches more closely that another other commodity, human population growth over the long haul. This probably explains why over the millennia gold evolved into the currency of choice as a more or less stable store of value.

  8. The folks in charge of managing the economy know that if there is absolute price stability and a stable source of return with little to no risk, this will cut into the incentive to invest at higher risk and stunt growth. So a bit of inflation is built in to create an incentive not to hoard money. Over a century, 1-2% inflation adds up. But as Scott says, look at the corresponding economic growth and rise in standard of living.

    BTW, inflation benefits debtors since debt is denominated nominally, so creditors oppose inflation. Creditors are the wealthy and they have a lot of clout, so the Fed manages chiefly using “inflationary expectations,” even though employment is also part of its mandate. The wealthy don’t mind a bit of inflation that stimulates investment and leads to growth, they are also the owners of most equity.

    The meaning of “inflation” for equity is chiefly ” wage inflation.” Obviously, asset holders don’t complain about asset “appreciation.” But they see inflation as essentially cost-push, with wages being the principle cost of business. The way to reduce this is by reducing the bargaining power of labor.

  9. Nice accounting skills, Mark Thoma:

    “The bonds that the Fed purchases earn money for the Fed in three ways. First, the Fed receives the scheduled interest payments on the bonds. Second, the Fed realizes capital gains and losses on the bonds it holds. Third, if bonds reach maturity while the Fed is holding them, it receives the repayment of the principal along with the interest that is due.”

    http://moneywatch.bnet.com/economic-news/blog/maximum-utility/what-caused-the-feds-record-45-billion-in-earnings-for-2009/385/

    1. JKH,
      He may have the accounting down but then he says at the end:

      “In any case, that the Fed is earning more than expected is good news. They will likely still end up with net losses once all is said and done since the bailouts of automakers, Fannie, and Freddie are likely to end up in the red, and it may be holding securities that have lost value, but those losses won’t be nearly as large as some expected.”

      I think he is mixing up the Fed with the Treasury Dept. here as I dont think the Fed had any involvement with the Autos, Fannie or Freddie, just AIG and Bernanke regrets it., Resp,

  10. JKH: Between that, and the goldbugs on this thread, there really is little hope.

    What’s interesting is how close the monetarists and gold bugs really are. They both have a “store of value” view of currency, where any increase is a “dilution”. They don’t see that prices come from supply and demad.

    Throw in a libertarian hatred of Govt, and they become blind of things that a Govt has to do well and manage well to produce good Governance. Maybe if they thought of currency as they do of National Defense. I don’t hear Tea Bag folks argue for an inept and small military in case an evil politician turns it on the populace.

    1. “They both have a “store of value” view of currency, where any increase is a “dilution”. They don’t see that prices come from supply and demad.”

      Isn’t any “dilution” an increase in supply?

      1. An increase in the supply of the medium of exchange, yes, but it is distinct from the number of actual exchanges, and what price those happen at.

        There must be a bid to impact a price.

      2. If the govt. gives you $1T cash, and you put it in an underground vault, what is the impact on prices?

      3. You have to go further than this, Jim, because Austrians believe banks lend out deposits.

        Curious would say in real life, the money saved goes into banks who will just have more to lend out etc. Unless you understand how banks work, you just cannot get there.

      4. I’m just pointing out, that “dilution” is another name for an increase in supply and vice versa.

        So to claim that 1 has impact on something, while the other doesn’t, doesn’t make sense.

        Winterspeak,

        you are not me, so how do you know what I would say in real life?

      5. Curious: Don’t be disingenuous.

        You aren’t the first person who has used “dilution” to mean an increase in the money supply. The word “dilution” is used to assert that an increase in the money supply makes the money less valuable. This is wrong because it misunderstands the nature of money.

        If your counter argument to “money saved has no impact” was not that say that banks lend out the deposits, it reflects poorly on you. But hey, maybe I gave you too much credit and that was not what you say in real life. Duly noted.

      6. Winterspeak said:

        1. “…prices come from supply and demad”

        2. “…an increase in the money supply makes the money less valuable. This is wrong…”

        So which one is it?

      7. Curious,
        Perhaps think of it this way: The supply of dollars cant be measured now that a Dollar is non-convertable (there is nothing to measure it against). Dollars have become a unit of measure like pounds if you step on a scale, no one wonders where ‘the pounds’ went if you go on Jenny Craig. If you are 200 pounds and travel to Jupiter and get on a scale you brought and the scale says 600 pounds, you dont have to call back to earth to send up the additional pounds (although if Dr Ron Paul was your Flight Surgeon he would immediately order you to loose 400 pounds!). They cant be supplied or removed or diluted. They are just used as units to indicate the current accounting amounts in bank accounts or prices of goods. Dollars have no intrinsic value on their own. Hope this helps., Resp

      8. Matt,

        money is credit and it is measured all the time.

        Yes, the unit of measurement ($) is not fixed to anything, but to claim that its value comes from supply and demand, and at the same time claim that an increase in supply doesn’t affect the value, doesn’t make sense.

        That’s all.

      9. It makes perfect sense, Curious, for reasons that people have tried to explain to you all over this site, and is detailed in the Required Readings.

  11. Jim Baird asks just above: “If the govt. gives you $1T cash, and you put it in an underground vault, what is the impact on prices?”

    David Hume answered this question in 1752 in his essay “Of Money”. He said in reference to a money supply increase “If the coin be locked up in chests, it is the same thing with regard to prices as if it were annihilated”.

    So what have we learned in last 250 plus years? Not much !

      1. Yes. He may be the best of the bunch here. He actually worked through some t-tables, and got it right.

        The thing is, that the Austrian approach makes sense in gold standard era. It just makes no sense now.

      2. I think Krugman is slightly better. He has an article called “The Hangover Theory” where he criticises the Austrians.

      3. The Austrians are the laughing stock and punching bag of the entire academic economics profession. They are viewed as being cranks and nutters.

        Criticizing them is as natural to them as breathing.

        The Austrians are actually RIGHT in a non-fiat/gold standard currency.

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