Pension Relief, Reforms and the Federal Reserve (Part 1)

Last night I received a call from a commenter.  He was able to tell me where my theory needed more explanation.  Any commenters are welcome to call anytime.  This caller was convinced that anything he did not know was immaterial, a dangerous yet common belief.

We are facing some hard and complex problems, not the least of which is a tremendous amount of false information.  Let’s start with clearing up wrong information.

The Federal Reserve (Fed) does not print money.  Money is printed by the Department of the Treasury.  This flies in the face of public perception and we will never solve problems with bad information.

The St. Louis Federal Reserve Fred is an economic data repository.  The quantity of money in circulation is called M1 (odd name).  Many wrongly believe the “Government” randomly prints money.  This is not true.  Here are some numbers for consideration in the decade between 1999 and 2009.  I choose this range as it is a decade back from our depression.

In January, 2009, there was $1.58 trillion of currency in circulation, up 46% from the January, 1999 amount of $1.1 trillion.  Over the same range our Gross Domestic Product (GDP) grew by about 49%.  We can say the hard currency money supply, while grown by about half a trillion dollars, had growth even with the economy.

Over the same date range we had massive domestic growth in home loans.  Banks file monthly standard financial statements known as “Call Reports”.  Total bank real estate loans grew by about $2.3 trillion, or 192%, during the same time.  Total loans originated were much more but I just cite the amount of loans banks held.  In January, 1999 dividing the M1 by GDP shows America had about 11.4% of the annual economy in hard currency. By January, 2009 the ratio of currency to GNP was about the same at 11.0%.

From 2011 through 2015 the hard currency money supply grew very rapidly thanks to the Treasury and not the Fed.  I would guess this is because in about 2010 banks stopped lending money, cancelled credit cards, etc.  The increase in hard currency could have been an offset to the national loss of credit.  Between 1999 and 2016 the hard currency supply had grown by about $2 trillion, or 280%, and more than half of that growth was between 2011 and 2015.  The GDP grew about $9 trillion, or 193%.  We therefore conclude the money supply grew by much more than the GDP. Economically there is some sense to an increasing money supply. It is not random as many believe.

Others believe banks can borrow money freely from the government (or the Fed).  This is equally untrue.  The Fed has something called a discount window and banks may opt for one of three types of loans, generally very short term (often overnight) and collateralized.  The interest rate is more than banks pay on savings accounts so borrowing from the Fed can be expensive.  Banks may be paying about a half of a percent for a regular savings account whereas a one year CD looks to be about twice that, or one tenth of a percent.  But look at the Fed discount window rates; primary credit interest rates to banks 1.75%, secondary credit loans to banks at 2.25%.  Why would a bank borrow from the Fed when deposits are a third the price?

How does the Federal Reserve impact pensions?  The Fed is about to start selling $4.5 trillion in assets.  This money goes to Congress and has no allocation yet. There is an enormous pot of gold up for grabs.  If we do not claim the money now it will be wasted.

One commenter asks if the Fed can make mistakes?  Yes, the Fed is staffed with intelligent, hard working men and women, and we all are fallible.  The problem is that our economy is evolving but not our economic theory.

Another commenter asks about the Fed making cheap loans to pensions?  Consider the 2016 audited NJ State Pension report.  After paying $17.3 billion in benefits the total net position is $79.2 billion, down more than six billion dollars from 2015.  The net investment income was a loss of $649 million.

Suppose this pension is thought to be $50 billion underfunded and received a $50 billion, one percent loan.  The simple interest would be $500 million per year.  Pensions nationwide are failing.  MA machinists, Teamsters, IL peace officer, CA teacher or public employees; none can afford to repay; loans will fail-they do not work. What is needed is new capital, and reforms.

Stay tuned for part two where I will explain how I propose to use these funds for pension relief and reform.

Tim Alexander

PS: if you mistakenly think this is a taxpayer bailout, be ready for a pleasant surprise.

26 responses to this post.

  1. Posted by NJ2AZ on December 11, 2017 at 12:49 pm

    As i understand it, the Fed “purchased” all those assets by simply crediting the reserve accounts of the member banks. Bank reserves are not really money, hence QE did not cause runaway inflation like some expected.

    When those assets are finally sold by the fed, the reserve accounts will be debited and the ‘money’, which never really existed anywhere but as a credit on a reserve account at the fed, will return to the nothingness it came from.

    It is not a fed “windfall”, treating it as such by putting all of that made-up money into circulation would be inflationary.

    Then again i have said, perhaps not here, the only way the full face value of pensions are paid is if the currency is devalued. if thats the end game, i guess this is a good enough mechanism as any.


    • NJ2AZ, thank you for your comments.
      Bank reserves are real money. These are funds that must be held and are a backbone of Monetary Policy. This is one tool used to maintain an elastic currency.
      Please stay tunes for part two. I think it will answer many questions.
      Tim Alexander


  2. Posted by George on December 11, 2017 at 1:47 pm

    “If we do not claim the money now it will be wasted.” The process of removing dollars from circulation by selling Treasury securities will support the value of the US dollar.

    Who is we*. This is a message board addressing pensions so there is substantial interest in that subject, but there are a lot of people who could use the federal help. For example the fed could buy college loans and cancel them. Or something else. If you can convince the congress critters or the Prez to do it, good job. But I suspect like the fish in The Old Man and the Sea, it will be consumed before you get back to port.

    * Tonto to the Lone Ranger: What do you mean, ‘we’? Old Lone Ranger joke.

    Another quibble is there is an assumption that central banks are government bureaucracies and can be ordered to do things. My understanding is the Fed is owned by the member banks, will they object? I think the Japanese central bank actually trades on a stock exchange.


    • Thank you for your comments. Please wait for part two-it is on the way.
      The Fed is independent and not owned by bank, but part of the duties are Regulatory.
      Tim Alexander


  3. Posted by Mike on December 11, 2017 at 2:19 pm

    Whoa, Tim. No the $4.5 trillion proceeds from a sale of all Fed assets would not go anywhere, and specifically not to Congress. This amount, greater than the entire USA budget for FY18, is not available for paying for budget stuff and is not up for grabs.

    I guess Congress could change the rules about Fed and Treasury finance, but until it does, this huge Fed asset won’t buy bridges or bombs, or bail out pension plans.

    I still look forward to your Part 2, which probably does not rely on the current specific working of the Fed.


    • Posted by NJ2AZ on December 12, 2017 at 10:59 am

      right? Either i’m crazy or Mr Alexander’s position suggests a serious misunderstanding of QE and fed operations.

      The notion that the Fed will sell $4.5T worth of assets and send all those proceeds to congress is axiomatically false.

      The ‘money’ used to cover the principle value of those assets was created from nothing, and when the assets are allowed to mature (they will not be sold) , the asset will be removed from the Feds balance sheet, the liability will be removed by debiting the reserve account of the member bank, and the whole accounting gimmick is over.


  4. Thank you for your comments. You are incorrect in the Fed sends each year the surplus to the Treasury.
    More in part two.
    You are correct, the US Government budget last year was about $3.9 trillion. But remember, the July 2017 GNP was about $17 trillion. The Fed and their balance sheet is primarily concerned with the economy, which is larger than the US Government budget. You are comparing apple and oranges.
    Stay tuned for part 2, and thank you for commenting.
    Tim Alexander


    • Posted by Mike on December 11, 2017 at 4:38 pm

      Yes, Fed Reserve remits to Treasury profits that arise from interest income on Fed Reserve assets, net of expenses like interest paid by Fed Rsrv on deposits.

      BUT…..the proceeds from selling $4.5 trillion of Fed Rsrv assets would not equate to profits of $4.5 trillion. The true profit net of purchase price would be far, far less.

      Actually, I doubt that Fed Rsrv will remit to Treasury any such trading profits (aka capital gains) because it would not similarly charge Treasury were it to lose money trading (ie incur capital losses).

      I hope Part 2 does not depend on using $4.5 trillion of “profits.” They are not there.


      • Posted by PS Drone on December 11, 2017 at 5:04 pm

        I think this guy is a nitwit who is probably posting these idiotic statements from his prison cell. Surprised John keeps allowing him to take center stage on his blog.


        • Posted by Anonymous on December 11, 2017 at 5:37 pm

          Oh boy another TL like comment, typical for the current state of the GOP a la T Rump – suppression of free speech. Where have I heard this before on John’s blog before and the response was this is John’s blog font like it leave it.


          • Posted by Tough Love on December 11, 2017 at 9:03 pm


            I too have been wondering how long Mr. Bury will put up with this fruitcake.

            I don’t think he is commenting from a prison cell, just that he has a VERY marginal business, is a wanna-be “economist” with knowledgeable no greater than the thousands of others with a bachelors degree in economics, and somehow thinks commentary on Blogs such as this will raise his profile.

            I think it’s doing more harm (for him) than good.

      • Posted by Anonymous on December 11, 2017 at 5:40 pm

        Mike it seems you’re constantly back peddling when Tim cites contradictions in your statements.


  5. Posted by stanley on December 13, 2017 at 10:04 am

    Mr. Alexander, I don’t want to critique your whole can of worms. I just want to make a few points. First, the Fed can’t unload much of $4.5T, it can only sell into the market a few billion. Otherwise, the interest rate would go sky high to attract the necessary funds. That would blow up the federal budget which is already a total mess with the current falsified interest rates. Second, this fed asset sale will only go on a short time (I don’t know, maybe a year or two) until the next recession causes a new round of so-called quantitative easing. Third, some major factors that have hidden the foolishness of recent monetary policy are oil and gas fracking which have treated the American people to a huge reduction in energy costs and the falsification of interest rates have ripped off savers including pension plans which you want to bail out and have reduced costs to various parts of business and industry. This has given the false impression that foolish monetary expansion can be done without unpleasant results.
    Late life health and pension benefits have been severely over promised and no scheme is going to find a pot of gold to fund the promises. People need to organize themselves to deal with this reality to avoid serious inconvenience.


    • Thank you for your comments. Intelligent discussion is always welcome.
      I disagree with the thought of selling assets will lead to escalating interest rates. The exact compositions of assets are unknown, but likely low yield treasuries, bonds, etc.
      I do not see a link between flooding the market and rates. Perhaps you refer to yields and not rates, suggesting the securities are sold for a tremendous discount?
      I would anticipate a discount.
      Between Nov 2015 and Nov 2017 we have seen almost a 10 fold increase in the Fed Funds rate, compared to the prior administration average fed funds rate increase of about 225% increase. The point here is the cost of borrowing has already gone up.
      I would disagree about a fear of a next round of quantitative easing. Easing experienced during the last depression was unique. While we will always have economic tide changes of growth and slowdown, most downturns would not require such intervention.
      May I refer you to
      Federal Reserve Bank of New York Staff Reports;
      “Large-Scale Asset Purchases by the Federal Reserve: Did They Work?” By, Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack.

      I disagree with your statement that energy missteps are linked to monetary policy. A primary monetary policy tool is the “Taylor Rule”. This uses inflation as a primary input and benchmark. Core inflation does not include energy. I would agree there is a suspicious coincidence with low energy prices, but not certain of the link back to monetary policy.
      I would disagree with the statement of “falsification of interest rates”. Classic theory would suggest low funds valid in exceptional circumstances. It is my opinion the Fed was worried about creating a “fire break” defense against further economic collapse. remember that three large banks failed, and were merged with other banks. You can argue the effectiveness, but hindsight is always 2020.
      It is my opinion the failure was classic theory, which, then led to interest rate abuses. For example, classic theory states the economy may be sped up or slowed, by changing reserve rates, interest rates, etc. But these tools are relevant to banks. Consider information from the Thompson Reuters Loan Pricing Conference. This documents the massive increase in hedge fund lending, banking conducted by non-banks and beyond monetary control.
      Now I ask you a question. From Nov 2004 through Aug 2006, we had the single largest, consecutive rate increase, in our history, more than 400%, why? Our depression started about late 2008, or a delay of two years, why? Rates next held at this stratospheric level for another year, August 2007. By May 2008, rates went sub two percent.
      My point here is if high rates are to slow the economy and low rates to stimulate, why did this fail? Because we have a tremendous and growing amount of financial activity beyond monetary control. Freddie Fannie were still buying, as were pensions, while rates were increasing. This is the failure of classic theory.
      Falsification of interest rates is a feeling and not a specific term. I am well aware of the pain and losses to pensions and individuals, but in order to correct, we need specific terms, not feelings, and new theory.
      Please feel free to call or write.
      Tim Alexander


      • Posted by Tough Love on December 13, 2017 at 10:59 am

        The one thing we certainly DON’T need, because it flies in the face of fairness to Private Sector Taxpayers, is a bailout of the ALWAYS grossly excessive (vs those granted Private Sector workers) Public Sector pensions & benefits.


  6. It is a shame you are illiterate and incapable of reading, my dear troll. If you were, you would see that I am for public and private pensions reform and capital equally. But again, reading seems beyond you, my dear troll.
    I wonder what life has done to make you so angry and miserable.
    A difference between one seeking legitimate change and a coward is the ability to communicate off-line.
    Intellectual or Coward????
    Tim Alexander


    • Posted by Tough Love on December 13, 2017 at 11:42 am

      Well, as for “illiterate” I have degrees and credentials in my field (profession) that you don’t appear to have in your field.

      Your are a one-person business, with marginal income (per Google search), and refer to yourself as “Managing Director”. Is that to impress potential clients, perhaps trying to make them believe there are multiple other employees and your near the top of the heap.

      It’s obvious you have a passion for this stuff (all the off-topic preaching), but “wanna-be economist” is all the I see.

      Enjoy your 15 minutes of fame.


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