With Amazon minting currency, Fed at risk

MarketWatch ^ | Feb. 13, 2013 | Matthew Lynn

[PieterCasparzen]

The Fed does not charge the Treasury directly.

The largest cost to the Treasury is interest on its debt. That was $220 billion in a recent year.

The Fed is a mechanism put in place as the brainchild of the banking syndicate. The banking syndicate cares not if it makes a penny off the Fed’s operations directly; the syndicate has its own operations, that, as you saw above, have the ultimate enhancement as primary dealers in Federal debt.

The Treasury ceded its right to create dollars to the Fed.

The banking syndicate has a few other advantages: it is the sole provider of lending to the government (it has a monopoly on government borrowing). Government bonds represent a claim on taxes, the most powerful form of debt collection. As the sole lenders to government, the syndicate has considerable political influence. The syndicate extends beyond banking into foreign policy. It also extends into the foundation system. It has a monopoly on the capital markets that is enforced by the SEC. The list goes on...

The $77 billion is like cash back on your Discover Card.

[PieterCasparzen]

Ah, the Fed also sets government benchmark interest rates; rather nice tool for a banking syndicate.

[Toddsterpatriot]

The Fed does not charge the Treasury directly.

Neither does any other holder of government debt.

The largest cost to the Treasury is interest on its debt. That was $220 billion in a recent year.

How recent? Last year the interest was just under $360 billion.

The Treasury ceded its right to create dollars to the Fed.

Just under 100 years ago.

The banking syndicate has a few other advantages: it is the sole provider of lending to the government (it has a monopoly on government borrowing).

That's not true. You can go here, http://www.treasurydirect.gov/govt/apps/apps.htm and lend to the government anytime you'd like.

The $77 billion is like cash back on your Discover Card.

Yeah, free money.

[Toddsterpatriot]

Ah, the Fed also sets government benchmark interest rates

Only overnight rates.

rather nice tool for a banking syndicate.

Syndicate? What do you mean?

[PieterCasparzen]

The Fed does not charge the Treasury directly.

Neither does any other holder of government debt.

Treasuries pay interest to whoever owns them.

The largest cost to the Treasury is interest on its debt. That was $220 billion in a recent year.

How recent? Last year the interest was just under $360 billion.

That's even worse, right ? I believe that's more than the total of Federal Corporate Income Tax collected.

The Treasury ceded its right to create dollars to the Fed.

Just under 100 years ago.

I don't what what you're trying to convey by telling me what I already know, that this happened just under 100 years ago. It's not like a good wine, the idea does not get better with age.

re: monopoly vs. treasury direct

Sorry, I wasn't specific enough. The banking syndicate is made up of banks. In terms of which banks can participate as primary dealers, that is not open to every bank.

The $77 billion is like cash back on your Discover Card.

Yeah, free money.

Hardly, if you look at the whole picture, instead of looking at the Fed by itself, the government is in debt over $16,000,000,000,000. And that number is expanding by over $1,000,000,000,000 per year - and that's with the interest rate on that debt being kept ridiculously low.

I don't know where you're going with this discussion, seems like you are in favor of increases to Federal government debt.

[PieterCasparzen]

Ah, the Fed also sets government benchmark interest rates

Only overnight rates.

Fed interest rates are benchmark rates, I'm sure you understand the significance of benchmarks.

rather nice tool for a banking syndicate.

Syndicate? What do you mean?

I don't have time to explain that; I can recommend the book "Shadows of Power" by James Perloff.

[Toddsterpatriot]

The banking syndicate is made up of banks.

If you're talking about members of the Fed, there are hundreds. Not sure why you'd call them a syndicate.

Yeah, free money.

Hardly, if you look at the whole picture, instead of looking at the Fed by itself, the government is in debt over $16,000,000,000,000.

What does the whole picture have to do with the Fed. The Fed doesn't force the Treasury to borrow. The Fed did allow the Treasury to borrow $77 billion less last year than they would have otherwise. About $300 billion less since the crisis.

I don't know where you're going with this discussion, seems like you are in favor of increases to Federal government debt.

I don't know where you got that idea.

I'm in favor of cutting government spending, a lot.

Privatizing Social Security. Eliminating farm subsidies, sugar subsidies and ethanol mandates. Sealing the border and booting 10 million illegals, to start. Drilling in ANWR and off California and Florida. I can give you more, if you're still confused about where I'm coming from.

[Toddsterpatriot]

Fed interest rates are benchmark rates, I'm sure you understand the significance of benchmarks.

I can't think of a single case where the overnight rate is used as a benchmark. You have any examples?

[PieterCasparzen]

Don’t you think that folks who set the prime rate use the Fed funds rate as a benchmark to a large extent ?

[Toddsterpatriot]

Looks close.

[PieterCasparzen]

What does the whole picture have to do with the Fed.

It's meaningless to view the Fed all by itself. That is, taking it out of the context of the overall economy, banking system and government borrowing. The Fed is much more than a corporate entity that the government makes money off of, is it not ?

Here's the key: if the Fed is an essential part of the process of government borrowing, that enables government to borrow - even when the private sector does not want to buy the debt - then the Fed is an essential part of the government debt problem.

The Fed doesn't force the Treasury to borrow.

But let's be serious, that's like saying the dealer doesn't force the addict to shoot up. If you're part of the capital markets industry, you have to admit that you chuckle at that thought. Schmucks working and paying taxes and hundreds of billions of it goes to interest on debt - what a sweet deal, right ? I mean, that guy I mentioned above from J P Morgan - he's telling everyone in that annual report that Treasury Securities are a fantastic business for JPM - and they are a key ingredient in JPM's success in other businesses. If the Treasury created its own money instead of borrowing there would be no Treasuries market.

The Fed did allow the Treasury to borrow $77 billion less last year than they would have otherwise.

That does give the Fed a veneer of legitimacy.

About $300 billion less since the crisis.

Ahhh, the crisis. Unless we have a central bank with adequate control of credit resources, this country is going to undergo the most severe and far reaching money panic in its history, right ?

[Toddsterpatriot]

Here's the key: if the Fed is an essential part of the process of government borrowing, that enables government to borrow - even when the private sector does not want to buy the debt

Since Fed 2008, the debt held by the public jumped by $6.5 trillion. Over the same period, the Fed's Treasury holdings increased by $1 trillion. The 10 year yields 2.01%. None of that indicates the private sector doesn't want to buy government debt.

The Fed doesn't force the Treasury to borrow.

But let's be serious, that's like saying the dealer doesn't force the addict to shoot up.

No, it's like saying the Fed doesn't force the Treasury to borrow. The Fed doesn't force the Treasury to spend. The Fed actually causes them to borrow less, as I've said.

Schmucks working and paying taxes and hundreds of billions of it goes to interest on debt

About $300 billion less, since the crisis.

I mean, that guy I mentioned above from J P Morgan - he's telling everyone in that annual report that Treasury Securities are a fantastic business for JPM

Not every Primary Dealer does that well. Some firms have even stopped being Primary Dealers. It's not a guarantee of profit.

If the Treasury created its own money instead of borrowing there would be no Treasuries market.

Sure. What could go wrong?

Unless we have a central bank with adequate control of credit resources, this country is going to undergo the most severe and far reaching money panic in its history, right ?

You're right, there were no panics when we had no central bank.