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Home Publications Blogs Beat the Press The Fed Hands $47.4 Billion to the Treasury: If Only the Deficit Hawks Knew

The Fed Hands $47.4 Billion to the Treasury: If Only the Deficit Hawks Knew

Thursday, 22 April 2010 04:04

The NYT reports on the Fed handing $47.4 billion in profits to the Treasury. This event should have gotten more attention. The $47.4 billion in profits from the Fed affects the budget in the same way that raising $47.4 billion from taxes or saving $47.4 billion with spending cuts would affect the budget. However, the Fed neither raised taxes nor cut spending. It printed money.

The reason why this is important is that the Fed is now printing large amounts of money and can print more to support the government's deficit during this downturn. The government does not need to raise taxes or cut spending to pay for programs like unemployment benefits or aid to state to and local education. It can simply print money.

While in principle there is a limit to its ability to print money, that would only come after the economy was back near full employment and further increases in demand threatened to cause inflation. However, the economy is nowhere near this point today. Vincent Reinhart, an economist at the American Enterprise Institute, is quoted in the article as saying: "If it [the Fed] tried to increase its balance sheet tenfold, say, the public would be unwilling to hold those reserves. You’d get dollar depreciation and inflation."

A tenfold increase in the Fed's balance sheet would raise it by more than $20 trillion. As Reinhart's quote implies, there is no reason to fear moderate increases in the Fed's balance sheet -- say by another $1-2 trillion over the next few years. It is important to note that the portion of the debt financed by the Fed printing money imposes no burden on future generations. The interest paid on this debt goes to the Fed, which in turn is refunded to taxpayers, just like the $47.4 billion noted in this article.

The Peter Peterson/Robert Rubin deficit hawk gang is deceiving the public on this issue by implying that the deficits run up to support the economy through this downturn will burden our children. In fact, insofar as the spending provides their parents with jobs and income, it directly helps our children. Insofar as it goes to support education or maintain and improve the infrastructure, it will also help our children.

The idea that today's deficits are hurting our children is simply not true. Anyone who says otherwise should read this article as many times as necessary until they understand why.

Comments (9)Add Comment
Some of the deficit is hurting our children, even though some of it is good
written by Aditya Savara, April 22, 2010 6:22
"In fact, insofar as the spending provides their parents with jobs and income, it directly helps our children."

Yes, the current spending is probably doing good overall. But it is still being done rather inefficiently -- in terms of which sectors it is being spent in and how -- so some of it is just hurting our children.

If the NYT simply said "The current spending creates jobs", wouldn't you feel compelled to say that the news source should discuss how badly the spending is being allocated?

I believe you have discussed this issue before, but I think you need to mention it here too.
Education cuts
written by AndyfromTucson, April 22, 2010 8:46
The New York Times just ran another article about how tens of thousands of teachers are slated to be laid off because of poor state and local government finances and the end of the first Federal stimulus package. Another Federal stimulus package could prevent these teacher layoffs, but all the media hysteria about the danger of the deficit to our children has made this politically impossible. So, now we are inflicting a definite harm on our children today in order to avoid a speculative risk to them from deficits in the future. That makes sense.
Andy, why do you blame the feds?
written by Aditya Savara, April 22, 2010 8:59
Andy, why do you blame the federal government?

Why can't the state and local governments just cut other programs?

Also, shouldn't you support the idea of federal legislation to mandate that states keep better budgets to begin with so they don't get into a mess again? Basically, if the states were responsible, they could borrow money or dip into savings to cover their deficits now. They should be required to become responsible starting now.
Still feeling the burden of 40's inflation?
written by skeptonomist, April 22, 2010 9:22
What exactly were the long-term consequences of the severe inflation of the 40's and early 50's? The 50's and 60's were prosperous; the GDP growth - and especially wage growth - of that period is a distant dream, so there were no major short-term damages. Those who feel the burden now and blame your parents and grandparents raise your hands.
Okay Dean,
written by Queen of Sheba, April 22, 2010 3:16
I've read the NYT article seven times now in an effort to understand enough to allay the fears of my deficit-hawk neighbors, but I still don't get it. I didn't know the Fed paid some or all of their profits to the Treasury. I think I need to study a primer on the Fed's relationship to the Treasury. Got any suggestions on where I should start?
written by izzatzo, April 22, 2010 4:05
Hey Bubba, come 'ere and read this. He's saying it agin. The gubmint can just print more money to pay for the debt. What'd you do with that counterfeit printer we lived on when Carter was president? Let's modify it to do holograms and get rich again.

They won't notice with the quantitative flooding
and all. I already checked and as long as P and V are constant, increasing M just increases Q for MV=PQ, so we don't have to worry about causing inflation and drawing any attention from the Fed.
written by scott, April 22, 2010 11:18
Dr Baker, could you please explain how stagflation can possibly exist? As I read your model we have just two market conditions inflation and contraction. That sure as hell seems to miss a bunch. Don't know if you noticed but inflation IS running up.

Oh yeah, not in any measurable way, food and fuel are exempted from consideration. But this is another way that your metrics are not based in reality. While in reality inflation consumes our commodities dollars the gov't fails to increase our checks as it just doesn't show up.

Further, as the stimulus from the Fed pumps money into the economy at less than 1/2% that money is again driving speculation in oil and commodities. This enriches the speculators at the expense of the masses--NONE of this shows up in Dr. Baker's metrics. Ignore the fact that we have the largest oil glut we've had since October '07.

Never mind that the percentage of our national budget that goes to debt service increases every year, displacing money that used to fund budgets and services. No, these monies will be going to enrich the wealthy. We used to tax them, only today we pay them to loan us money. Never mind that money depreciates as it trickles down to us common folk.

The effects of inflation are here even if 10yr T notes are under 4%, they won't be for long. When economies emerge from this downturn, ours will be the hot potato. Or, more likely there won't be a recovery, but STAGFLATION that will keep the world's economy waiting for recovery for a decade as if waiting for Godot.

Finally, Dr. Baker doesn't mention the horrible inefficiency of gov't spending. I'm not a critic of gov't per se, but our dog and pony show gov't. We have dog and pony show medicare--a fully socialized system would be far more efficient. Our compromised system is horribly inefficient.

Lastly, (sorry) Dr Baker would dismiss a bit of inflation. After all inflation would make our $12 trillion in foreign debt cheaper. Only there's a hitch here he ignores. For every dollar obligation inflation might ease, we owe 4 ($48tr.) times in obligations that will rise FASTER than inflation!

But, other than that I think you've laid the issue to rest Dr. Baker.
written by SteveBreeze, April 26, 2010 5:55
OK so we print money so that mom and dad keep their job. Teachers work and give us a better educated populous in the future 9AND SO FASTER GROWTH). The down side. is, lets say inflation goes up by 2% into the 4-5% range. People will start becoming less "underwater" in their homes. Banks will howl like wounded hyenas because their profits will sag a little.
My vision
written by custom essay, July 29, 2010 8:44
It can simply print money. this is a very big problem, 'cause no one knows how much money in the hands of the population. This may lead to an economic explosion. The problem I described in more detail - custom essay. Maybe someone would be interested.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.