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The Most Profitable Organization In History

Apple and Exxon Mobile are the two most profitable US corporations. Apple earned $39.5 billion last year. Exxon Mobile earned $32.5 billion. The Federal Reserve, however, earned more than both of them put together: $101.5 billion.

As I have said before, it’s amazing how much money you can make when you make the money!

And what did the Fed do with all that money? It gave it to the American taxpayers. Well, more precisely, it gave it to the US Treasury Department. The Fed handed over $99 billion to the Treasury. That payment alone reduced the government’s budget deficit by 16%. The actual deficit was $506 billion. It would have been $605 billion without the Fed’s contribution.

Nor was this a one-off event. Any way you look at it, the Fed is a money-making machine (pun intended). The US central bank has given the government $500 billion since 2008, as you can see in the chart below.

Where do all these profits come from? They come from the Fed’s huge bond portfolio. The Fed owns $2.5 trillion worth of US government bonds and another $1.7 trillion bonds backed by the Government Sponsored Enterprises (a.k.a. Fannie Mae and Freddie Mac). The central bank earned $116 billion of interest income on those bonds last year.

OK. So those bonds represent $4.2 trillion of assets on the Fed’s balance sheet. But, balance sheets must balance. So what’s on the liabilities side of the Fed’s books? The main items are $1.3 trillion of Federal Reserve Notes (i.e. dollar bills, also known as currency in circulation) and $2.6 trillion of deposits placed at the Fed by banks. The Fed does not pay any interest on the Federal Reserve Notes and it only pays 0.25% (or 25 basis points) on the banks’ deposits. Consequently, it paid only $6.9 billion in interest expenses. Therefore, even after deducting various miscellaneous expenses, the Fed still ended up with a profit of more than $100 billion last year. That just might make it the most profitable organization in history!

What’s more, there’s no end in sight for this earnings bonanza. As long as the Fed continues to own those bonds, it will continue to reap fabulous returns – and, it will continue to hand them over to the government, thereby reducing the government’s budget deficit year after year.

The Fed is not alone. Other central banks are getting in on this game. The Bank of England owns 26% of all UK government debt. The Bank of Japan owns Japanese government bonds equivalent to 22% of Japan’s GDP. Next the European Central Bank will begin buying the debt of the Eurozone governments, and by September 2016, it will own nearly 10% of the total.

How can this be? Surely this is too good to be true. How can the central banks print money, buy government bonds and earn enormous profits without causing high rates of inflation or even hyperinflation? It’s possible because Globalization is extremely deflationary. By pushing down wages in the developed economies, the deflationary pressures from Globalization are offsetting, even more than offsetting, all of the inflationary forces that should have resulted from the vast creation fiat money by the central banks.

Fiat money creation and Globalization have never before occurred at the same time. Consequently, this is a unique moment in history that presents both great dangers and extraordinary opportunities. Yesterday, I uploaded a new Macro Watch video that explains the massive profits of the world’s major central banks and discusses their implications for economic policy in the US, the UK, Japan and the Eurozone. The video is called “QE Is Debt Cancellation”.

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