Former Fed economist on the QE tax

The fallacy of Fed ‘profits’ (and ‘losses’)

But for Bob Eisenbeis, a former Atlanta Fed economist now at Cumberland Advisors, any discussion about Fed “profits” is inherently deceptive. He explains in a research note:

That Fed remittances are considered profits is a total misrepresentation and a fiction. The Fed is part of the government and is not a private-sector, profit-making entity. (The Federal Reserve Banks are quasi-public, but the Board of Governors is a government agency, and the system’s debts are guaranteed by the government.)

The Fed purchases Treasury debt from the public, paying for that debt with deposits it creates by a stroke of the pen. Looking at the Fed’s portfolio of securities from the perspective of the nation’s consolidated balance sheet, we see that one form of government debt (Treasury debt) is taken out of circulation and replaced with another form of government debt (Federal Reserve liabilities).

In effect, Treasury debt is taken out of circulation and is now owned by the government. It just happens to be the debt is on the books of the Fed and not the Treasury, but that is simply an accounting artifact and effectively the debt has been retired. The Treasury pays the Fed interest, which is an intra-governmental transfer of funds. From the funds received from Treasury, the Fed extracts both its operating expenses and contributions to capital, makes the required 6% dividend payment to member banks, and remits the remainder back to the Treasury.