Seigniorage: Simple, Short and $1.7 Trillion Sweet

The new Macro Watch video describes the enormous windfall profits the US Government and, therefore, US taxpayers earn as the result of Seigniorage every year.

Seigniorage is the profit a government makes by issuing currency.  In the United States, the Fed issues the currency in the form of Federal Reserve Notes.  As it does, it is required to hold US Government Securities as collateral to back the Federal Reserve Notes it issues.  That means the more Currency the Fed issues the more government debt it has to buy.  

At the end of 2018, US Currency In Circulation totaled $1.67 trillion. That means the Fed is required to own $1.67 trillion of government debt to back those Federal Reserve Notes.  When the Fed buys government bonds, it does so by creating money, which costs the Fed nothing. On the other hand, the Fed earns interest income on the bonds it acquires.  

Therefore, the difference between the interest income the Fed earns on the government bonds it acquires to back the currency it issues and the cost of issuing that currency is all profit to the Fed.  

The Fed, however, is not permitted to keep its profits.  After deducting its relatively small operating expenses, it must turn over all its profits to the US Treasury Department. Since the Fed was established, it has given the Treasury Department $1.5 trillion.  Not all of that was profit earned from issuing the currency, but much of it was.

Since 1968, when the Fed was no longer required to own gold to back the currency it issues, Currency in Circulation has increased at an annual average rate of 7.4% a year.  If it continues increasing at that rate, it will reach $3.7 trillion in 2029.  As it expands, so will the windfall profits the government will receive from Seigniorage.  That income will reduce the government’s budget deficits every year.

For the mechanics of how all this works, Macro Watch subscribers can log in and watch this video now.  The video is 11-minutes long and offers 21 downloadable charts.

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