SHI 11/22/17: The FED is Santa Claus!

SHI 11/15/17: Steaks on Plastic
November 15, 2017
SHI 11/29/17: Here’s The Problem
November 29, 2017

Imagine receiving a gift of $100 billion a year!


Nice, right?   Well that’s about the amount the FED “gifts” the US Treasury each year.   But that may soon change.   The FED may be taking back their gift!   Bad Santa!  🙁

You’ve heard the FED is shrinking their balance sheet.  I think this is a bad idea.  Why?  Because the FED is earning a ton of money each year from the assets on their balance sheet … and then the FED “gifts” those earnings to the US Treasury!   Check out these “net earnings” numbers:

  • 2013:  $89.3 billion … $79.6 billion was then paid to the Treasury
  • 2014:  $113 billion … $96.9 billion gifted to the Treasury
  • 2015:  $112 billion… $117 billion presented to the Treasury
  • 2016:  $109.9 billion … $91.5 billion to the Treasury…you’re welcome!
  • YTD (3 quarters) 2017 $84.2 billion … $61.7 billion to the UST

In the past (just about) 5 years, the FEDs assets have earned $508.4 billion in net interest income … and has given the US Treasury $446.7 billion!

Let me repeat:  In the past 5 years, the FED has paid the US Treasury ALMOST A HALF A TRILLION DOLLARS!

I think the FEDs balance sheet is the real Santa Claus.   I say we keep the balance sheet ‘plump’ — our Treasury can sure use the money!


Welcome to this week’s Steak House Index update.


If you are new to my blog, or you need a refresher on the SHI, or its objective and methodology, I suggest you open and read the original BLOG:

Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   This has been the case for decades … and will continue to be true for years to come.

Is the US economy expanding or contracting?

According to the IMF, the world’s annual GDP is almost $80 trillion today.

At last count, US ‘current dollar’ GDP is almost $19.5 trillion — about 25% of  the global total.    Other than China — a distant second at around $11 trillion — no other country is close.

The objective of the SHI is simple: To help us predict US GDP movement ahead of official economic releases — important since BEA data is outdated the day they release it.

‘Personal consumption expenditures,’ or PCE, is the single largest component of US GDP — is typically about 2/3 of the total.  In fact, the majority of all US GDP increases (or declines) usually result from (increases or decreases in) consumer spending.  Thus, this is clearly an important metric to track.   The Steak House Index focuses right here … on the “consumer spending” metric.

I intend the SHI is to be predictive, anticipating where the economy is going – not where it’s been. Thereby giving us the ability to take action early.

Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI, but we’ll explore related items of economic importance.

If the SHI index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.


4 times a year, since 2012, the FED delivers to Congress a report called, “Quarterly Report on Federal Reserve Balance Sheet Developments,”  which is the source for my numbers above.   ‘Federal Reserve’ asset holdings are held in their “SOMA,” or System Open Market Account.  Back in 2008 — pre-crisis — their SOMA account held only $496 billion in securities and $80 billion in REPO agreements, according to the NY Fed.

Before beefing up SOMAs holdings up to the current balance of almost $4.5 trillion, the FED returned very little money annually to the Treasury.   Today, with $4.5 trillion in assets, the FED pays the US Treasury about $100 billion a year.   Why is this important?

For two reasons.

First, the US Treasury is spending more each year than it takes in.  Which means our national debt continues to grow … and grow … and grow.   While we can “kick the national debt can” down the road for now, we cannot indefinitely.   How much more is America spending — each year — than we’re collecting?   Here are the approximate numbers, sourced from the White House and the “Office of Management and Budget” (

  • 2009: $1.4 trillion
  • 2010: $1.3 trillion
  • 2011: $1.3 trillion
  • 2012: $1.1 trillion
  • 2013:  $679 billion
  • 2014:  $485 billion
  • 2015:  $438 billion
  • 2016:  $584 billion

(A quick comment.  The link above is pretty cool if you like numbers.  Table 1.1 shows US spending, deficits and surplusses going back to 1789.)

With each passing year, the deficit becomes part of our growing national debt.  Many would argue — and I would agree — the ‘deficit spending’ in 2009 thru 2012 was fully justified.   I’m in the camp that believes the FED, along with their compatriots at the BIS, saved the world from financial Armageddon.  And expanding the FEDs balance sheet, known as “quantitative easing,” was an effective tool.   I know some very bright and capable people disagree with the FEDs choices during this time; I just don’t happen to be one of those people.  I believe the fed did what they must.

Fast forward to today:   The FED now has a huge pile of assets that throws off about $100 billion a year to the US Treasury!   You have to admit:  That’s a pretty nice annual gift for our beloved Uncle Sam.   Those extra dollars come in handy!

Frankly, here’s the question I would ask the FED:  Why not increase the balance sheet even more?   If $4.5 trillion can net the US about $100 billion a year, wouldn’t $9 trillion net the Treasury about $200 billion a year?   Hmmm….that sounds pretty good to me!  What do you think, Uncle Sam?  🙂

Because without this annual gift, our annual deficit is likely to grow by more than $100 billion.   If the FED balance sheet reductions have the effect of increasing long term interest rates, the Treasury will be paying quite a bit more for our debt.  The difference could be quite a bit larger than just a $100 billion!

Second, the current administration claim to the contrary, lower tax rates don’t correlate with GDP growth increases.   Look at this chart, courtesy of The Economist from an article entitled “The grow-nothings:”

Like The Economist, I’m skeptical of claims tax rate cuts will spur greater GDP growth…which, in turn, would theoretically generate more tax revenue to the Treasury.   While the chart above suggests the opposite is true, I would argue there is simply no correlation or causation relationship.   The tax cuts, as proposed, are likely to increase our annual deficit.

So a spare $100 billion from the FED — over each of the next 10 years — would go along way to keep our “red ink” at bay.   Like the thick, juicy filet Mignon served up piping hot at Ruths’ Chris, I would argue the FEDs balance sheet should remain equally corpulent!  Or even more portly! 

Use SOMA assets as a deficit reduction tool, I say!

Sorry, I’ll step down from soapbox.   And into the Steak House.   How are the expensive eateries doing this week?  Let’s take a look:

It looks like giant T-bones and lobster mac & cheese aren’t overly popular the Saturday following Thanksgiving.   This year or last.   Not a big surprise … after all, we have TURKEY LEFTOVERS TO ENJOY!!!

Mastros is bucking the trend this year; but, last year you could enjoy a thick, juicy Mastros steak 2 days after enjoying your turkey at any of 5 of the 14 time-slots.   This year, only 9 pm is open for reservations at Mastros.  Here’s our longer term trend report:


The gap between last year and this has shrunk to only 6 this week — the smallest gap since about a month ago.   And while this metric suggests consumer spending remains subdued, and by extension therefore that GDP growth is also moderated, permit me to share the latest NY Fed ‘nowcast’ from November 17th:   Their latest reading is 3.8% for Q4 GDP growth.   Which would be a HUGE reading (if it becomes true) on top of Q2 and Q3 GDP growth results.

In their report, they focus on significant strength in ‘Capacity Utilization’ and the ‘Industrial Production Index.’  Both of which are impacted by the level of manufacturing activity and corporate investment.   Which we all know are fairly robust right now here in the US and around the globe.

If consumer spending (the foundation of the SHI) retains it traditional role in GDP growth — meaning it contributes about 70% of the total — then the industrial numbers, even as strong as they are, may not contribute what the NY Fed is forecasting.   But consumer spending can be eclipsed by industrial activity — as it was in Q3 — if corporate profits continue to lift and investment in plant/equipment continues to grow.   We’ll keep our focus on these developing trends.   Stay tuned.

  • Terry Liebman

Comments are closed.