Federal Reserve Bonds and Feudalism

The Federal Reserve balance sheet has about $4.5 trillion of assets, of which about $2.5 trillion is invested in U.S. treasury bonds, $1.7 trillion in mortgage backed securities, and $300 billion other factors.  On the liability side, there is about $1.5 trillion in currency, $2.4 trillion in "Reserve Balances with Federal Reserve Banks" (also called "Excess Reserves"), and about $600 billion other factors.

The Excess Reserves are held by banks, mostly the big 6  - Bank of America, Chase, Citibank, Wells Fargo, Goldman Sachs and Morgan Stanley.  (For the simplified example here, assume that they hold all the excess reserves).  They receive interest on the excess reserves (IOER), which is currently set at 0.5%.

These $2.4 trillion in reserves are effectively bonds.  The Fed uses the capital from the bonds to buy treasury debt.  For simplicity sake assume these are all 10-year treasury bonds, which currently yields about 1.75%.  The profit from the spread mostly goes back to the U.S. Treasury.

So what can we observe from this?  The marginal rate that the U.S. government pays on debt is really 0.5% not 1.75%, because it gets a refund of the difference.  So there is an incentive to incur more debt because the rate is so low.  The banks are eager to lend because the 0.5% is risk-free - they are guaranteed to get it.  It is guaranteed first by the Fed itself, second by the general credit of the U.S. treasury and by mortgages (Fannie Mae), and third by the taxpayers and mortgage holders of the U.S. The interest on $2.4 trillion at the rate of 0.5% is $12 billion per year.  It doesn't sound like a lot, but consider that the $2.4 trillion was basically conjured up through thin air, while the $12 billion was earned through the blood, sweat and tears of millions of taxpayers.

I consider that someone who has an ultimate claim on every asset in a country, even though the percentage amount is very small, to be the sovereign.  Especially since they can set the rate.

So what we have is feudalism - to a very minor degree.  The queen is the chairwoman of the Federal Reserve, Janet Yellen.  The dukes and lords are the presidents of the big banks and the directors of the Fed.  The judges on the Supreme Court also are nobility, maybe call them "Law Lords".  The President, really the Prince,  owes fealty to the Queen of the Federal Reserve.  In turn, every taxpayer in the US owes a good portion of their labor to the agents of the Prince (the IRS).

Interesting thought experiment.

Update - see this: