Over at Mises Canada today, I write about the real wolves lurking in the economy. By now many of you have probably seen the “Wolf of Wall Street”, the story of a fraudster who managed to swindle millions from his clients. Leonardo DiCaprio has been lambasted for romanticizing the life of the real-life “wolf” he recently won best actor for at the Golden Globes. Jordan Belfort, the founder and president of New York investment banking firm Stratton Oakmont, conned small-time investors out of millions of dollars between 1989 and 1997. While the movie based on his life – The Wolf of Wall Street – glamorizes the protagonist’s crimes, there are few laughs to be had for his victims.
For his unsavory troubles, in 20003 a federal judge ordered Mr. Belfort to repay $110 million as part of his sentence for fraud and money laundering. Besides the $11.6 million raised by selling his assets, he has been able to pay just $243,000 over the last four years, despite receiving $1.7 million for his two books based on his life and the sale of the movie rights.
Once upon a time, a fraud of $110 million might have seemed like a lot. Since 2008, however, it’s just chump change.
Consider the Federal Reserve’s remittances back to the U.S. Treasury every year. The Fed buys assets and pays for them by issuing money. As the assets it buys earn interest while the money it issues doesn’t (or in the case of reserves earns only a little), it turns a profit. Even though the Fed is supposed to be “independent” of Congress, it still remits its profits back every year. For 2007, the grand total is estimated to be a hair under $78 billion.
$78 billion is almost $250 for every man, woman and child in the country. Not bad really, and the best part is almost no one knows about it. Congress probably would have faced a little public backlash if it announced an annual tax of $1,000 for every family of four, but these remittances from the Fed are like manna from heaven.
You see, in its bid to keep doing anything it can to not cut spending, Congress has incurred debts at a feverish pitch. Even with its sequester limiting spending somewhat, fiscal year 2013 still saw the government spend $680 billion more than it owed. Fed remittances will reduce this amount by over 10%. Actually, not quite. The assets that the Fed earns money on and that it remits back to the Treasury are issued by the Treasury. Thus the Treasury didn’t earn any money on this convoluted deal, it just didn’t have to pay out the interest it would have had to if anyone other than the Fed had bought its bonds.
Here’s how it works. The Treasury sells bonds at interest. Some of these bonds are bought by private citizens, governments, or other central banks, and some are bought by the Federal Reserve. The Treasury pays interest on all these bonds, but the Fed sends the payment right back at year end. It’s like a free lunch.
But one of the certainties in economics is that “there ain’t no such thing as a free lunch.” Loosely stated, there is always a cost to an action. So who pays in the case of the Fed’s remittances?
If Congress is making money, you better believe it is coming from the pockets of Americans. The Fed earned the money it remitted back to Congress by buying bonds. The offsetting transaction is issuing money. Since 2008, a period during which the Fed remitted $400 billion back to the Treasury (probably more than it has remitted over its whole 100-year existence), the Fed increased its holdings of U.S. Treasuries from $800 billion to over $2.2 trillion. It paid for these bonds by, effectively, issuing money.
One of the other cold, hard rules of economics is that if you print money too quickly, prices will follow suit. While many consumer goods prices seem to not notice the effects of the Fed’s Quantitative Easing adventures, other more flexible prices sure do. Broad stock indexes, such as the Dow Industrial Average, have more than doubled over the same time period, reflecting the large degrees of money which have been directed towards equities. It’s only a matter of time before it trickles down to the little people – and that means more money to spend on the more mundane items of life. It won’t matter much though – by that time prices will have risen to not only ameliorate the effects of the increased amount of money available to make purchases, and inflation will have wiped out your savings.
As the old saying goes, the best way to make money is in the money business. Actually, this is only half true. The best way to make money is to be the institution that grants (and gets the kickback from) the monopoly powers over the nation’s money supply. Over the past ten years the U.S. Treasury has received over a half trillion dollars in distributions remitted back to it from the Federal Reserve.
Jordan Belfort may have been a wolf of Wall Street, but he only stole chump change compared to what the wolves of Congress and Constitution Ave. have over the past six years.
(Originally posted at Mises Canada.)