what pays the interest the federal reserve puts on all the money it loans?

Question

I hear the fed puts interest on all the money it loans. Which is basically all the money in the entire country, therefore a perpetual debt that is impossible to pay off.
I hear ALL of our income tax goes straight to paying off the interest (debt) generated by the fed. I also hear our income tax gets divied up amongst certain programs. Can it be possible both are true at the same time?
If the government has to pay for programs, uses our income taxes for it....what pays back the interest levied on the money loaned out by the fed to begin with? They could just SAY it goes to certain programs, which it might, but the end result is that it ends up being the same amount that is going back to the fed to pay off the interest. Such as if in reality you owe Johnny (the fed) 1$, but you pay Uncle Sammy (IRS) 1$ so he can pay it to Johnny's interest for borrowing 2.85$ on something (all programs claimed to be paid directly by income tax) that's already been paid for through other taxes.

Answer 1

Here's the scoop, t

- Re "I hear the fed puts interest on all the money it loans."

Yes, the fed charges interest on it loans.


- Re " Which is basically all the money in the entire country, therefore a perpetual debt that is impossible to pay off."

Sort of true but not a big deal. I'll explain

By law, all currency must be collateralized (i.e. backed by something of value). When the Fed wants to add money to the economy, they create it out of thin-air and buy T-Bills.

Yes, this $800B+ in T-bills could be considered perpetual debt. When a T-bill matures, the Fed will buy another.

Why is it not a big deal? Because the Fed returns about 95% of the interest earned on those T-Bills to the Treasury. Not a bad deal for the tax payer.


- re: " I hear ALL of our income tax goes straight to paying off the interest (debt) generated by the fed.

That's just "tax law denier" nonsense. Prove it for yourself

Revenue from income taxes: $809B
(ref: http://www.publicagenda.org/issues/factfiles_detail.cfm?issue_type=federal_budget&list=7)

Interest on the national debt: About $350B

Budget of the Federal Reserve: $2.9B
(Ref: http://www.federalreserve.gov/generalinfo/foia/frbbankbudgets/2007ReserveBankBudgets.pdf)

Big difference.


There's a lot of misinformation out there on this topic. be sure to check things out for yourself.

Answer 2

The debt is generated by Congress when they pass a budget that exceeds expected revenues. Bonds must be sold by the Treasury to cover the shortfall. That's where the debt comes from, not the Fed.

The only money that the Fed generally lends is for overnight interbank transfers and other loans to member banks. Your car loan or mortgage didn't come from the Fed, directly or indirectly.

The reality is that the Income Tax just about covers the total interest due on the Federal debt. It's up to Congress to sort that mess out. Clinton left office with the first budegetary surplus since the LBJ administration. We all know what happened since then... (Even if you factor out the unknowns, Iraq and Katrina, there's still $7 trillion missing. Where's the money??)