Who is the Federal Reserve? | Who owns the Federal Reserve?
Who is the Federal Reserve | What does the Federal Reserve do
(1) Who owns the Federal Reserve System?
If it’s a private bank, presumably it’s privately owned. And, if its privately owned, its private owners presumably profit from their ownership. So, who owns the System, and how do they profit from it?
The System is owned, or can be owned by three sets of stockholders:
(1) Banks in the System must contribute 6% of their contributed capital and retained earnings on an ongoing basis in exchange for stock.
(2) The public can buy stock in $100 increments up to $25,000 per individual.
(3) The US Government can buy stock if the System is in need of additional capital.
Categories 2 and 3 are non-voting stock. The System isn’t in it for the profit.It was established in 1913 and operates under the authority of the Federal Reserve Act, as amended. It’s four responsibilities include;
(1) establishing the System
(2) to afford a means of re discounting commercial paper
(3) establish the supervision of banks in the US
(4) Other duties
Think of it as a trading company in the Japanese tradition. It provides banks with the liquidity they need to stay open daily. The System buys up the commercial paper (90 day maturity) banks issue that tie up their liquidity. The System provides new cash for old, lends money to banks in a liquidity bind and requires banks to charge off bad debts and holds them accountable to strict accounting standards. It also insures deposits, operates as a bond trader for the Treasury and a myriad of other duties such as buying up commercial debts and replacing cash in the market via its open market committee and setting rates on short term debt transactions between banks.
(2) Is the Federal Reserve System owned by other private banks who are system members?
Yes
Do private banks, for example, purchase equity interests in the Federal Reserve System?
Yes
If so, does the System pay them dividends or interest or what on their equities in the System?
The System pays a dividend of 6% established by law. After paying its expenses, the System turns the rest of its earnings over to the U.S. Treasury.
(3) From whence does the Federal Reserve System get its capital?
Capital is obtained from the three categories of stockholders discussed above.
Does its capital stem exclusively from member private banks purchasing the System’s equity issues?
It does but it doesn’t have to. It can go to the public or the US Government.
Or, as I suspect, does the System get much or most of its capital from the U.S. Mint’s printing presses?
No it does not. It serves as a conduit to introduce fresh cash into the system in exchange for cash retired by its members.
(4) When the System ”pumps billions of dollars into the financial system”, whose dollars is it “pumping”?
It is exchanging debt for cash.
Presumably, these “pumped” dollars aren’t the dollars of the System’s private member banks, because its private member banks are the recipients into whose capital the “billions of dollars” are required to be ”pumped”.
The money is not being given away it is exchanged for debt which is then repaid. I seriously doubt the first real dollar is used, it is all done electronically.
So, whose “billions of dollars” are being “pumped”?
If push came to shove it would be the capital of the members.
Is it “billions of dollars” from the U.S. Mint’s printing presses?
No.
And, if so, what’s the functional relationship between the U.S. Mint devaluing the dollars in my pocket and the dollars which wind up either in the Federal Reserve System’s pockets or the pockets of its private member banks?
The US Mint does not devalue the dollars in your pocket. The market price of goods and services simply goes up and your dollar buys less. The System turns over its profits to the Government, the private member banks make 6% on their investment.
In other words, who really profits from whatever Holy Money Machine is increasing the Nation’s money supply (either because it’s grown too small to conduct the society’s business or because private banks have screwed up and need the Government to “pump” their liquidity)?
Profit is not the intent from open market transactions, stimulating the economy without triggering inflation is the intent. Inflation, by the way is not so bad. If you are in investments, such as real estate you can do real well. The value of your home will go up and conversely the amount you owe will decrease. Rich liquid investors don’t worry about inflation, they simply change their strategy to constantly reinvest at the higher interest rates. People on fixed incomes or those who cannot raise their own prices (or wages) to keep up are the ones that lose big time. If we had a bout of 15% inflation your house would go up 15%, your debt would drop 15% and your inflation adjusted income would go up 15%. Not bad. Also the national debt would go from $6 trillion to $5.1 trillion without paying a dime.
Correspondingly, who really picks up the tab?
There is no tab and quite possibly a benefit.
The devalued dollars in my pocket?
Cash investments, like money in your pockets is a bad investment in inflationary times.
The lending community in general (which, functionally, is to say the borrowing community in general)?
The Government (which, functionally, is to say the taxpayers)?
(5) Who pays the System’s expenses and by what market mechanism is its officers’ remuneration determined?
The System pays its own expenses and reports annually to Congress and to independent auditors concerning its salary structure.
Presumably the System has no competition, so what determines its operators’ rewards?
See above.
(6) Why is a central private bank, rather than the U.S. Treasury, the prime abiter of the Nation’s financial destiny?
It isn’t, it reports twice yearly to Congress on its strategy.
Who elected the members of the System’s Board of Governors, and why are they in control of the Nation’s financial destiny?
The seven members of the Board of Governors of the Federal Reserve System are nominated by the President and confirmed by the Senate. A full term is fourteen years. One term begins every two years, on February 1 of even-numbered years. A member who serves a full term may not be reappointed. A member who completes an unexpired portion of a term may be reappointed. All terms end on their statutory date regardless of the date on which the member is sworn into office.
The Chairman and the Vice Chairman of the Board are named by the President from among the members and are confirmed by the Senate. They serve a term of four years. A member’s term on the Board is not affected by his or her status as Chairman or Vice Chairman.
They do not control the Nation’s financial destiny. The Nation’s financial destiny is controlled by Congress.
© 2007, Choice Real Estate, Inc. & Choice Real Estate of VA, Inc., & Choice Finance®
The Fed is expected to cut rates again when it meets on the 21st. This will immediately reduce the prime interest rate on Home Equity lines of credit, however, fixed mortgage rates may actually stay the same or go up slightly. If you are thinking of refinancing, lock in a low current rate before they start going up again.
Tags: Board of Governors of the Federal Reserve, federal reserve, private member banks, who owns the federal reserve
September 10th, 2009 at 5:26 pm
More on the FED (click here)
March 13th, 2009 at 2:40 pm
Who owns the Mint?
March 9th, 2009 at 3:58 pm
Choice,
Nice answer and great suggestions. So this recession looks like a very…. long one?
March 8th, 2009 at 4:44 pm
First, the stimulus bill is a done deal.. Obama couldn’t stop it at this point if he wanted to. It simply exchanges Government payments, virtually all to those who don’t pay taxes, in exchange for Government debt. Will it help? It won’t hurt if someone (the Chinese for example) buys our debt. I’m sure they will, this go around. The debt can be repaid by our kids and their kids. We sure wonʼt pay it back. The only question is the interest rate the Chinese charge.
It might help short term if the Government payments get out in a hurry. Unfortunately the jobs it creates will probably be federal, state and local government jobs. The federal jobs won’t go away and will continue to be paid on a permanent basis with federal payments. The states and local Governments will have to pay for their employees after year one and they don’t have the money. Private side jobs will be temporary and last till the money runs out assuming The Government can get the money paid. It seems that all the shovel ready jobs and not ready and no one in the states knows which project to fund first. Infrastructure payment will take years. The long term effect might produce some jobs but only temporarily. This demonstrates the Federal Government cannot create long term jobs in the private sector..
The budget could have a long term and useful effect on the economy if Obama handles it right. A dead and gone famous economist, Milton Friedman made an observation (paraphrasing); He characterized the Federal Government as the payer of taxpayer funds and the collector and borrower of funds. Basically that is all it does. How it does this is critical to the US economy.
If the Government increases payments it must get the money by raising taxes on those who pay taxes or borrowing the money or printing money. Therefore increased payments on one side and increased taxes on the other side set off and have no real effect on the economy. This gives to those that donʼt pay taxes and takes from those that pay taxes. The economy remains in balance, it has just been redistributed from the tax payers to the non-tax payers. The Government has created NO NEW JOBS, just NEW PAYMENTS.
Who can create new jobs that are permanent? The people who pay taxes. The people that reduced the jobs because sales and income were off in the recession. What incentive will get these people to create jobs? A LOWER TAX RATE; until sales improve. The people who donʼt pay taxes create no jobs, they just get more payments. The Government canʼt create new jobs by making more payments. In fact the Government should be reducing payments. Jobs are the critical factor in the economy now. Increased jobs mean less Government payments.
So thatʼs Obamaʼs solution. He should veto the budget bill if it comes to him. He has the authority to re-propose a budget bill that slashes Government spending and cuts taxes. Payments are cuts easily made, cut out the pork, freeze spending at last yearʼs level, cut Government salaries by 20 percent across the board. Trust me, nobody will quit. This will let him cut taxes and spur investment in new jobs, which will further reduce spending. This will be the most popular budget in history.
Obamaʼs second dilemma. The mortgage bail out. There are three major players in this. The private Investment market, Fannie Mae and Freddie Mac are one set of players, the second player is the Government, who changed the credit underwriting rules and pressured player one to do the deals. And the third is the borrowers.
We want the first two sets of player to take the responsibility for their actions and to be fair not generous to the borrower who was bilked by swollen Market values and large loans. Here is how Obama does it. He proposes that a comparison be made between the size of the mortgage and the new market value of the house.
To the extent that the mortgage amount exceeds the new fair value of the home, each of the first two players (who have the money) should pay down 50 % of the difference. Player one takes a small loss matched by player two. Player one now owns a mortgage that is equal to the market value of the house, so it can carry it as at full value on his balance sheet. Player two makes a one-time payment and is no longer involved. Player 3 can either walk away with no liability or attempt to refinance the mortgage through player one at a lower payment, rent the house from player one or occupy the house while player one attempts to sell the house at the lower value..
February 13th, 2009 at 9:33 am
Here’s Julio:
http://www.youtube.com/watch?v=01MNZBTt4K4
And here’s Henrietta:
http://www.youtube.com/watch?v=-88Il-4nby0
So there you have Obama in Fort Myers yesterday, straightforwardly telling Julio and Henrietta that’s exactly what the Democrat National Party will do for them–just as quickly as it can and as much as it can.
Obama’s telling Julio and Henrietta he’s going to “offset” their social security “tax” (which, because neither Julio nor Henrietta pay any Federal income tax, is the only wage-based Federal “tax” each pays) while transferring to them much more income from the minority of voters who pay virtually 100% of all Federal income taxes.
Let alone the fact that Julio and Henrietta’s social security “tax” isn’t a “tax” at all but, instead, merely their income-based installment payments on the annuities Julio and Henrietta are purchasing from the Federal Government to support themselves when they are too old to work (or would be, if the Federal Government hadn’t been embezzling Julio and Henrietta’s annuity installment payments for at least a generation now).
So what the Chief tells this Julio and this Henrietta is what all the Julios and all the Henriettas of the world want to hear.
Their Karl Marx has arrived–their Vladamir Lenin, Mao Ze Dong, Che Guevara, Fidel Castro, Hugo Chavez, and Jesus Christ all rolled up into a second coming of the heavenly socialist savior who will redeem the capitalist world by destroying all the evil white-male vestiges of Northern Europe’s unjust Enlightenment.
The message of Thomas Jefferson this isn’t.
It is, instead, the message of the Reverend Jeremiah Wright after a good long political scrubbing and a nice new suit of socialist duds–all dressed up, looking cool, smelling good, and headed for a blowout party.
Julio has a vote.
Henrietta has a vote.
February 13th, 2009 at 2:36 am
Choice,
As a homeowner and successful professional with little downtime for a gueling 30+ years employed in corporate America, for the first time I’m facing a seemingly insurmountable climb up a sheer wall in obtaining employment. In late 2008 the company where I was employed for almost five years was abuptly put on hold after the banks froze their AAA credit due to the financial crisis. In a panic all but a few (myself included) were asked to leave without warning.
My bad was buying in to the euphoric market climb since the dot-com bust, and over-leveraging myself. The cash assets I saved for a rainy day at Washington Mutual are going to be paid by a strapped FDIC, oh, hopefully in the next two years? Of course the reason I saved cash in an insured bank was to provide a “fail-safe” mechanism to avoid foreclosure in the event the unthinkable and seemingly impossible scenario occurred.
The FDIC is so back-logged that I may not get the cash for two years, far after the banks have foreclosed and my credit is ruined. My only hope is to get a job, a task that for 30+ years has occurred within 2-3 months. In my fourth month of unemployment, with bills requiring a six-figure income that could have been service for two years by a Washington Mutual bank account the FDIC should pay out in about two years, I must get a job or sink like a rock.
Compounding the situation is that the bank holding my 401K funds, a last resort, will not give me a distribution because they are in financial trouble. One bank is holding my emergency savings intended for the rainy day that I prayed would never come (figuring I would end up transferring these funds to my retirement account one of these days). The other bank is holding my massive 401K cash funds. Adding insult to injury, I was so cautious that in 2007 when the mortgage crisis began, I sold all my mutual funds at the top of the market in my 401K plan, and transferred them to the Wells Fargo guaranteed reserve! In a worse-case scenario, I could take a distribution from my 401K and pay the 10% penalty. Who would have guessed the largest bank in the world would delay paying my distribution indefinitely because I’m in a long line of people demanding distributions from 401K plans?
So here I am, like a paying passenger thrown off a cruise ship in the middle of the Pacific. A thousand miles from the nearest land mass, adrift, there’s a hole in the raft (the hissing sound keeps me awake nights) and shark fins are everywhere. I’m in this kind of dream-like fog mentally because I’m shocked beyond belief that someone whom everyone might agree did everything “right” is in no better shape than someone who did everything “wrong”!
In light of this situation, an issue regarding the mortgage meltdown and government stimulus package remains unresolved. Perhaps your understanding of the Federal Reserve and financial system controlled by the government will help me understand this issue?
On the CNN web site as a comment to one of their news articles on the bailout of homeowners, I posted the following comment:
“Cancel all mortgage debt to-date. If Obama is dead serious about stimulating the economy, he will work with Congress on a bill to cancel all mortgage debt nationwide, incurred up to the date of the bill’s passage, and basically start the housing economy at zero. From that point forward, the free markets can determine the new price of real estate. It will not cost Obama or the United States economy anything to forgive all mortgage debt and restart the housing market. A new day will dawn.”
My request to you is to explain to me what is wrong with my comment?
Although I’ve prided myself in understanding the system, what has gone terribly wrong in the economy has shattered my assumption that I know how the system works.
I don’t understand why part of the stimulas cannot include cancelling all mortgage and credit card debt. A friend exclaimed to my suggestion, “Are you out of your f*ng mind?” Why am I out of my f*ng mind? Money is a construct. Please indulge me, and perhaps other curious readers with a morbid curiosity about how my suggested scenario would play out, and explain the mechanics and logistics behind Obama’s taking my suggestion. Let’s assume for the sake of argument (and I know most might think it’s an insane stretch) that Congress went along with including this suggestion in the stimulus bill, and banks cancelled all mortgage and credit card debt (up to the date of the bill’s passage). People receiving unemployment now have only to pay their utility, gas, food and a few miscellaneous expenses. Forgiven credit cards are cancelled and they must reapply for new credit based on stricter criteria. Mortgage debt is cancelled so aside from property taxes (likely reassessed) they remain in their homes. Real estate across the board plunges in terms of dollar value to prices not seen since the early 20th century.
Please continue this scenario based on your understanding of how the economy, Federal Reserve system, government and tax system, etcetera, actually works…
Thanks in advance for your time! I know you’re busy and this would really mean a lot to me if you could answer this message to the best of your knowledge and belief. I know it might sound strange but as a successful professional who has earned in the six figures for over fifteen years (until late 2008) I’m really serious in not knowing the “answer” to these questions.
February 10th, 2009 at 8:41 pm
Matt,
Glad to see you are interested in this topic and I see Choice has not chimed in as of yet… and yes…we are being robbed right now as I write this…by the very same people that caused the problems in the first place.
I think its probably best for us all just to say… when its your turn in the Whitehouse…steal whatever and whenever possible… and then call it “Government Whatever” which is then protected by the very same laws it writes, creates and invents… for themselves and their buddies to profit and prosper by!
http://news.yahoo.com/s/bloomberg/20090209/pl_bloomberg/agq2b3xegkok
Not a bad gig…once you think about it…it is your money…not their own!
January 9th, 2009 at 8:26 pm
Something else –
http://www.federalreserve.gov/newsevents/press/monetary/20081006a.htm
The Fed is now paying interest on reserves to it’s member banks. Where does the Fed get it’s money? Correct me if I’m wrong, but I believe it is the taxpayers.
Conclusively, American taxpayers are paying interest to banks on their own reserves that are required through the Fed’s fractional reserve banking policy. This is in addition to the 6% these banks earn just for being a member bank.
But this is just a new “tool” for the Fed’s to stabilize our markets and get credit flowing again I suppose. I am no economist, maybe someone can explain to me how this will help? It just seems like we are moving money from the poor and middle-class taxpayers to the bankers and upper-class.
January 9th, 2009 at 7:58 pm
Lew wrote, “..rape the citizens for more taxation to create more government income to pay for what…interest on more debt and runaway spending?”
I think I will venture a guess on this one, good sir. This increased government income is being used for increased defense spending (I prefer to call it Offense Spending).
Another interesting note, and this is old news, but what a deal JPMorgan Chase got when they were able to buy Bear Stearns at 2$ a share and with the help of a loan from the Federal Reserve itself.
http://edition.cnn.com/2008/BUSINESS/03/16/stearns.morgan/
It is also interesting to note that the CEO of JPMorgan Chase is one of the Board of Directors for the Federal Reserve Bank of NY.
http://www.newyorkfed.org/aboutthefed/org_nydirectors.html
With the purchase of WaMu as well and strong backing from the Fed, I think JPMorgan Chase will remain quite a powerful corporation for years to come! Also, since people will naturally call me some kind of “conspiracy theorist” or “nut-case”, I would like to point out that everything I have “said” is based on observations and facts except for my hazardous guess to Lews proposed question.
December 11th, 2008 at 10:19 am
THANKS LEW, I appreciate it.
December 10th, 2008 at 10:46 pm
Choice,
Thank you for your response and time spent on my question.
For some reason you appear to have an attitude and for that I am sorry if I offended you. Clearly neither of us really know what is actually going on inside the government and or where all this money is going and or to whom and or what interest rate our true debt is at.
I do not believe I ever stated I knew or know everything and I believe this is why I solicited your input. I do understand just how busy you are and we all are and just how valuable all our time is… especially when we are all attempting to survive in this world of mounting debt. This debt just does not seem to go away for most of us peasants…or at least for those that are the producers and or income earners that acquire property through loans. Even the property that our homes sit on is just leased to us…property tax….never goes away and seems to only go up year after year.
If we were to go to the new Amero and the North American Union the government would
have to consolidate all these banking institutions…like they are doing now. Here is a video to check out…not sure if it is all true…but you might like it.
check out this video
If you ever find out the real percent please let me know…and I wish you the best.
To know the truth is to know power of the lie… often disguising it.
December 10th, 2008 at 7:48 pm
not sure why you asked me, or why you thought I could answer. i did not ask for your solicitation. ANY response I give should be appreciated and thanked.
I do not pretend to be an expert on anything. My answers are my answers, take them or leave them, I don’t care. You are insignificant to me.
In the future, when someone takes time out of their day to give you a well thought out answer (whether you think so or not)…. Make sure the first thing you do is thank them. No one owes you anything. Besides, you know it all anyways.
December 10th, 2008 at 7:43 pm
Choice,
Not a teacher and only a realist…looking for the truth….not an impression of the truth or someone’s opinion of the truth. I own several homes and have made every payment on any debt I have ever had… on time… for the past 40 years. It does not appear that it is me that has to grow up.
I asked you what I thought was a question that you could answer…It appears that you can not give me the total percent or percentage of debt interest to be payed back for every dollar generated as debt and or borrowed to finance the countries “federal government operations and debt” and or current projected borrowing practices. It is said we have 59 trillion in future not financed obligations already coming. So this is not a game or an interpretation of some kind of a game that I am playing…I am looking for the truth. If we owe 60 trillion what is the true interest to be repaid…6%+ or what?
I understand that some people think money grows on trees…and based on what I have seen this government and federal reserve do recently…they surely do. So these actions will affect every future generation for many years to come…if not… then the system needs to be dismantled because it is funny money that they are printing for those in power control positions only…while we the actual holders of the debt….get nothing. Get the point Sherlock!
December 10th, 2008 at 9:53 am
I still have not answered your question? Do i OWE you an answer? Taking the time out of my day the first couple of times was enough. Show some appreciation for any answers you get. You sound like a conspiracy theorist. You probably work for a University? not a shock and totally a shame if you are teaching tomorrow’s future.
“her citizens kicked to the curb unable to pay their mortgages..”
Who’s fault is that? Don’t take out a mortgage you can’t afford.
Pay your obligations. this is not the governments responsibility. Be a man. Grow up.
December 10th, 2008 at 9:49 am
Lew, sounds like you already know it all. No need to ask for our opinions.
December 10th, 2008 at 6:26 am
Choice,
Well now I think you stated that we will never be able to pay off this debt…..as far as the 6% here is a clip from Wik.
The 12 Federal Reserve banks provide the financial means to operate the Federal Reserve. Each reserve bank is organized much like a private corporation so that it can provide the necessary revenue to cover operational expenses and implement the demands of the board. Member banks are privately owned banks that must buy a certain amount of stock in the Reserve Bank within its region to be a member of the Federal Reserve System. This stock “may not be sold, traded, or pledged as security for a loan” and all member banks receive a 6% annual dividend.[27] These member banks must maintain fractional reserves either as vault cash or on account at its Reserve Bank; member banks earn no interest on either of these. The dividends paid by the Federal Reserve Banks to member banks are considered partial compensation for the lack of interest paid on the required reserves. All profit after expenses is returned to the U.S. Treasury or contributed to the surplus capital of the Federal Reserve Banks (and since shares in ownership of the Federal Reserve Banks are redeemable only at par, the nominal “owners” do not benefit from this surplus capital); the Federal Reserve system contributed over $29 billion to the Treasury in 2006.[29]
http://en.wikipedia.org/wiki/Federal_reserve
You still have not answered my question and that is OK…since the Government can never get out of debt…the citizen will never be able to get out of debt and is actually… a legal slave through the taxation programs set up by the government to pay back a debt that can never be repaid. This makes the entire system a scam and one based on similar Ponzi Schemes set up just like… say social security.
Since this Federal Reserve system appears to be severely broken at best it needs to just go away and the citizen needs to stop paying any taxes on a debt that not only can not actually be repaid… but is based on fraudulent behavior of a government that does not represent them.
You can not base any government system on future growth and expect that system to be sound from a controllers aspect… when the system itself has no product or way of funding it self or its operations. The enslavement of its citizens and the destruction of the planet is the by-product of these types of mental mind games and control mechanisms played directly on the populations of the world at large.
We appear now to be reaping the benefits of a poorly played game designed purely for the elite population to control… and tied directly to the government…which by the way will have no foreclosures on its government owned lands or buildings… while her citizens are kicked to the curb unable to pay their mortgage loans. Here the whole time the government has had no intention of ever repaying its own debts….and now only looks to rape the citizens for more taxation to create more government income to pay for what…interest on more debt and runaway spending? Clearly the entire Federal Reserve System is and was corrupt from its initial conception.
November 9th, 2008 at 1:25 pm
HI LEW
We see a little confusion here. Lets revisit the basics . The authority to propose and authorize federal government expenditures is held by the Congress. Although the President proposes a budget, the true authority requires the Congress to propose and approve a budget bill and send it to the President. The Congress not only authorizes the budget, it also authorizes the total amount of Government debt. Just as an historical aside, the proposal made by the President has never contained pork. Pork is added by Congress when it proposes its budget. The President’s budget is prepared by Federal Departments following Presidential guidelines and is refined before completion by the Office of Management and Budget. It follows a multi year strategic plan determining Government needs and plans, contains recommendations for cutting Government expenses such as eliminating Government programs that are obsolete or redundent. The President’s budget has for years warned of the sub-prime market in general and Fannie Mae and Freddie Mac in particular. These warnings in addition to warnings from the Comptroller of Currency and the GAO have been ignored by Congress.
In any event, the Budget comes from Congress. It is up to the Departments of the Government to stay within these parameters and carry out the directions of Congress. Spending, such as the “Bridge to Nowhere” is specifically required by Congress and the Departments, by law, must carry out the mandate. The Department of the Treasury is responsible for handling the cash flow of the Government. It consolidates Government revenues such as taxes, payment of Government direct loans, fee income and sale of assets into a General Fund which is used to pay the cost of Government. Revenues flucuate during the year. If revenues exceed costs, the Treasury retires debt. If revenues fall short of needs, the Treasury borrows money to make up the short fall. When the Treasury borrows it enters the private market for Government bonds. The private market for Government debt bids competively for the right to buy the Government’s debt. Many entities make up the market for Government debt. These include, but are not limited to foreign governments, bond traders, bank trust departments and even private individuals. All of these entities are interested in investing in something that carries no risk of default and therefore are willing to accept a lower rate of interest
There is no magical 6% that anyone earns. Treasury interest rates for debt are determined by auction. They could be 3% or they could be 10%, it depends on the market’s willingness to hold debt that has no risk of defaulting.
No one makes 6% by printing money. Money is printed to (1) replace old or damaged bills and (2) to maintain a level of liqudity in the economy.
If we understand the meaning of your term “true debt in interest” you are asking for the percentage rate that tax payers will be required to repay for Government debt. The tax payer will be required to pay the exact interest rate, determined by competitive auction, on the debt instrument issued by the Government.
Will the debt ever be repaid? Doubtful. Could it be? Sure. Should it be? No. For example, say the Government takes in 2 trillion in tax and other revenues and expends $2 trillion to run the Government and maintain debt service on its borrowings. We will call this a balanced budget. There is very little in the budget considered “discetionary”, most goes to debt service, the military and to fund other Government promises to pay such as Social Security. Then we have a war or a natural disaster. We could keep the budget in balance by slashing expenses in funding for some part of Government to pay the cost of the war or natural disaster. For example, we could cut off medicare. We doubt that would be a popular choice. Therefore we borrow to handle the short fall. If the economy continues to grow, increased tax revenues will pay off this debt over time.. At least that is the way it is supposed to work. Unfortunately, Government expenditures have continued to grow at a faster pace than tax revenues have increased.
How much debt can we afford? This is usually calculated by comparing the debt to the Gross Domestic Product, roughly the value of what our economy can produce. WE are in better shape than most countries, but in worse shape than our economic competitors.
November 7th, 2008 at 5:06 pm
Choice are you going to answer the Question? What is the true “debt in interest” to be paid back by the public trust of taxpayer for debt instrument printed and then sold to those buying our debt?
Thanks
October 26th, 2008 at 8:47 pm
I guess stock would not be the correct word then…when we talk any debt sold to anyone to pay the bills to run the government…this debt then turns a 6% profit for the people printing the money and handling the total debt irrelevant of the instrument sold to acquire the debt?
So who is making 6% profit for printing money for the USA ….and will the country ever get out of debt? If 6% is raked off the top immediately to print the money…what is the rate of interest or profit on the debt instrument then sold to the lender of the money ie. bonds, treasuries etc. for every dollar borrowed…what is the true “debt in interest” to be paid back for every dollar borrowed…that inturn creates the debt? Thanks
October 15th, 2008 at 3:25 pm
C. Brown
Apparently you read only one half of my discussion. I said inflation was a push for those rich and liquid enough that they could match inflation by swiching deposits.
As to the other half, I agree with you completly. Inflation is a killer for fixed income families or for income that lags inflation.
No the banks don’t profit from inflation. Typically, for a loan of average risk the bank lends at a rate that averages 3 percent over their marginal cost of money (MCC).
MCC includes the weighted average of their checking, savings and cd deposits plus the cost of their own borrowings. The 3 percent is divided into 1 percent profit, 1 percent for losses and 1 percent for managing the debt. This has been true for the last 100 years.
Banks charge a little more for car financings and a lot more for credit cards. This is because these loans are riskier than say second mortgages. When inflation hits the banks costs of money goes up, in other words they must pay more interest to attract deposits. Their loan values go down unless they are tied to inflation. Even these loans decrease in value because they lag inflation and become more risky at higher interest rates.
October 15th, 2008 at 3:24 pm
Lew Orben
No Lew, no one including the Government makes a market in Federal Reserve stock. Think about the bank’s stock as an equity contribution. Initially the contribution was made in gold, Eventally this changed. The amount of stock the banks own is a function of their capital or the equity in each bank. As their capital goes up, their contribution grows. No one buys or sells this stock unless there is a merger or takeover, even then it is simply transferred to the surviving bank.
I wish that this Country’s debt were confined to the Fed stock. It is not. For example, the Chinese own about a half trillion in Treasury bonds. One half of our national debt is owned by foreign countries. Most of this debt is conveyed electronically, there is very little actual cash in the system.. Hopefully most of this debt will stay over seas. If it is cashed in we will see a lot of dollars being printed.
October 15th, 2008 at 12:11 pm
In your answer regarding inflation and the 15% hypothetical, you suggest that inflation is not a bad thing because income, prices and interest rates all go up together and balance each other out. If that were true, no one would sweat it. Isn’t it the truth that prices go up, and interest rates charged go up, but income and interest earned or paid lags behind these other inflationary realities and NEVER catches up?
Isn’t it obvious that the minimum wage, for example, (which in many cases is actually the “maximum” wage companies will pay) does not keep up with inflation?
Isn’t it also true that the banks, which don’t produce anything are the real winners in any inflation environment? They loan other people’s money at interest rates or fees far above the the originator’s rates, no matter what they are.
Isn’t the “intentional” and universal minimum 5% unemployment rate the hedge against inflation ever being a negative sum gain?
September 22nd, 2008 at 1:06 pm
So as you explained that every time the government needs money it purchases stock from the Federal Reserve… the government is borrowing money from private banks all over America in exchange for debt…these lending banks in turn make 6% on the money that they have supplied the government as a rate of return for their loan to the government and assuming the governments debt. This 6 % profit is then realized by the private banks until stock is bought back by the government. That means that we are paying 6% to private banks on the 10 trillion of national debt we have at this time. Is this correct?