The Fed's Exploding Balance Sheet! (SAFEHAVEN)

[Geaux4it]

I agree- Nothing goes up for ever.

-Geaux

By: David Chapman | Thu, Nov 28, 2013

What is one to make of a balance sheet that has exploded from roughly $870 billion in 2007 to almost $4 trillion today. That is the balance sheet of the US Federal Reserve Board as the financial crisis of 2008 saw one of the largest bailouts in financial history followed by three rounds of quantitative easing (QE) plus Operation Twist whereby the Fed exchanged short dated Treasury maturities for longer dated Treasury maturities. It was with QE3 that the Fed began to purchase $40 billion a month of agency mortgage backed securities (MBS) every month greatly adding to its holdings of MBS.
Below is a timeline of QE since 2008 imposed on a chart of the Dow Jones Industrials (DJI). It makes for an interesting read.

The Fed's Exploding Balance Sheet! | David Chapman | Safehaven.com

 

[Toro]

[MENTION=41066]Kimura[/MENTION]

Yet, the price of gold has fallen from $1921 too $1250 and silver fell from just under $50 to $18 and change.

Imagine that.

 

[Kimura]

Meh. All these QE articles are really misleading. I hate when people refer to QE as “injecting liquidity”.

Operationally, QE is effectively a process where the FED buy assets (mostly US government securities) to increase reserve levels in the banking system and, when the FED so desires, they can target a lower interest rate anywhere along the yield curve. Their game plan was the 5yr and 10yr Treasuries.

When the FED buys these Treasuries, it’s done in the secondary market where the FED purchases them from the public. The FED doesn’t purchase directly from the Treasury.
When the FED buys said Treasuries, it credits the seller’s bank with reserves. Any bond purchases result in additional reserves within the banking system so to speak. Bond prices will then increase and yields will decrease since they are inversely correlated to bond prices.

There isn’t any type of liquidity being injected. QE is nothing more than as asset swap – a bond swap for a reserve balance. They’re both the same since they’re dollar denominated liabilities of Uncle Sam. The only difference is the term and interest rate which a paid. US Treasuries have a term – two year, five year, ten year, etc while reserves are zero maturity. They both pay interest; however, they pay interest at different rates.

The FED conducts QE and it removes one type of asset from the public – a US Treasury – and swaps it out with another – the actual reserve balance. There isn’t any new money created in this process. It doesn’t create any new money (net financial assets) as government spending normally would. All it does is alter the yield curve, i.e. the amount of time these financial assets are being held by the public.

Lastly, if and when QE ends, I predict NOTHING will happen. Operationally, the Federal Reserve will stop purchasing bonds and crediting the banking system with reserves. Interest rates may increase, but to the extent that market forces perceive any type of stimulus being removed, yields may actually decrease. QE doesn’t increase aggregate demand in any capacity, so it doesn’t really remove any net economic benefits from a macro standpoint.

In the event investors perceive that the discontinuation of QE will cause decreased inflation pressure from the FED, I strongly suspect gold, oil and other commodities may decrease and the dollar may actually increase. This will simply change the overall composition of market leaders.

My two cents….

 

[Kimura]

[MENTION=41066]Kimura[/MENTION]

Yet, the price of gold has fallen from $1921 too $1250 and silver fell from just under $50 to $18 and change.

Imagine that.

[MENTION=2926]Toro[/MENTION]

It's all based on perception. There was/is a perception that QE is tantamount to the FED increasing the money supply or "printing money". The majority of traders and investors are still locked in convertible currency paradigm, so they acted on this and ran up the prices of various commodities and sold the dollar.

Here's how I reacted during this entire fiasco when douches like Kyle Bass and Peter Schiff were given all this media attention:

 

[itfitzme]

Some things can "go up forever". CPI, M1 and M2, GDP, Population, tax revenue, spending, debt, deficit. All these things can "go up forever", at least as long as they go up, they go up together. And as they go up together, they can go up forever.

 

[HelenaHandbag]

[MENTION=41066]Kimura[/MENTION]

Yet, the price of gold has fallen from $1921 too $1250 and silver fell from just under $50 to $18 and change.

Imagine that.

[MENTION=2926]Toro[/MENTION]

It's all based on perception. There was/is a perception that QE is tantamount to the FED increasing the money supply or "printing money". The majority of traders and investors are still locked in convertible currency paradigm, so they acted on this and ran up the prices of various commodities and sold the dollar.

Here's how I reacted during this entire fiasco when douches like Kyle Bass and Peter Schiff were given all this media attention:

Now they're just running up the prices of securities instead.

When this bubble pops, like all of them do, there are a lot of people who have run guys like Schiff into the ground who are going to own them a big apology.

 

[Kimura]

[MENTION=41066]Kimura[/MENTION]

Yet, the price of gold has fallen from $1921 too $1250 and silver fell from just under $50 to $18 and change.

Imagine that.

[MENTION=2926]Toro[/MENTION]

It's all based on perception. There was/is a perception that QE is tantamount to the FED increasing the money supply or "printing money". The majority of traders and investors are still locked in convertible currency paradigm, so they acted on this and ran up the prices of various commodities and sold the dollar.

Here's how I reacted during this entire fiasco when douches like Kyle Bass and Peter Schiff were given all this media attention:

Now they're just running up the prices of securities instead.

When this bubble pops, like all of them do, there are a lot of people who have run guys like Schiff into the ground who are going to own them a big apology.

I doubt it. Peter doesn't even basic understand monetary operations under a fiat system and he bases investment strategies on gold standard/convertible currency. He's out of paradigm.

However, I do agree that QE generates asset price inflation, but it simply cannot generate CPI inflation.

 

[itfitzme]

There are a host of misperceptions of economic. And they are held by the same folks that post "it's simple econ 101", "you don't understand Econ 101", etc.

Often, they are so oblivious as to ascribe free market effects to anything but the free market.

General principles that apply to single markets (ceterus paribus) are incorrectly applied to the macro economy.

And, as is once again pointed out above by Kimura, there is a total failure in even beginning to understand the functioning of the money supply. I get it, it took me some time to find and understand what inside amd outside money are; and what this means in terms of the macro economy that is completely different than what many seem to believe.

Some basics that demonstrate the lack of understanding of "simple econ 101" include;

Basic micro economic models require that companies on a competitive market earn zero profit. Profit means an inefficient market. As soon as inefficiency is accepted as real, the entire body of conclusions, drawn from "It's simple econ 101", no longer apply.

The government doesn't "print money". It doesn't create it in any manner. Private banks create money.

Debt is required in the macro economy.

There are more, generally the result of; extending micro principles to macro economics; not understanding the significances of "at the margin" and "all other things being equal; and failing to recognize that all economic effects are relative to some average measure like CPI, money supply, population, etc.

 

[itfitzme]

I am thankful, this year, for terms like "convertible currency paradigm".

 

[itfitzme]

The real value of M1 has increased substantially where it has historically been rather flat.

CPI is eliminated as an effect. I wasn't aware that RGDP went up substantially.

 

[Toro]

Meh. All these QE articles are really misleading. I hate when people refer to QE as “injecting liquidity”.

Operationally, QE is effectively a process where the FED buy assets (mostly US government securities) to increase reserve levels in the banking system and, when the FED so desires, they can target a lower interest rate anywhere along the yield curve. Their game plan was the 5yr and 10yr Treasuries.

When the FED buys these Treasuries, it’s done in the secondary market where the FED purchases them from the public. The FED doesn’t purchase directly from the Treasury.
When the FED buys said Treasuries, it credits the seller’s bank with reserves. Any bond purchases result in additional reserves within the banking system so to speak. Bond prices will then increase and yields will decrease since they are inversely correlated to bond prices.

There isn’t any type of liquidity being injected. QE is nothing more than as asset swap – a bond swap for a reserve balance. They’re both the same since they’re dollar denominated liabilities of Uncle Sam. The only difference is the term and interest rate which a paid. US Treasuries have a term – two year, five year, ten year, etc while reserves are zero maturity. They both pay interest; however, they pay interest at different rates.

The FED conducts QE and it removes one type of asset from the public – a US Treasury – and swaps it out with another – the actual reserve balance. There isn’t any new money created in this process. It doesn’t create any new money (net financial assets) as government spending normally would. All it does is alter the yield curve, i.e. the amount of time these financial assets are being held by the public.

Lastly, if and when QE ends, I predict NOTHING will happen. Operationally, the Federal Reserve will stop purchasing bonds and crediting the banking system with reserves. Interest rates may increase, but to the extent that market forces perceive any type of stimulus being removed, yields may actually decrease. QE doesn’t increase aggregate demand in any capacity, so the it doesn’t really remove any net economic benefits from a macro standpoint.

In the event investors perceive that the discontinuation of QE will cause decreased inflation pressure from the FED, I strongly suspect gold, oil and other commodities may decrease and the dollar may actually increase. This will simply change the overall composition of market leaders.

My two cents….

I'm betting asset prices will begin to fall when QE ends, or the when it is perceived as ending. The long end of the curve is sniffing this out.

Yields are being suppressed by all this Fed bond buying. The median PE of the Russell 3000 is now 18 (probably going to 20+).

 

[HelenaHandbag]

[MENTION=2926]Toro[/MENTION]

It's all based on perception. There was/is a perception that QE is tantamount to the FED increasing the money supply or "printing money". The majority of traders and investors are still locked in convertible currency paradigm, so they acted on this and ran up the prices of various commodities and sold the dollar.

Here's how I reacted during this entire fiasco when douches like Kyle Bass and Peter Schiff were given all this media attention:

Now they're just running up the prices of securities instead.

When this bubble pops, like all of them do, there are a lot of people who have run guys like Schiff into the ground who are going to own them a big apology.

I doubt it. Peter doesn't even basic understand monetary operations under a fiat system and he bases investment strategies on gold standard/convertible currency. He's out of paradigm.

However, I do agree that QE generates asset price inflation, but it simply cannot generate CPI inflation.

Oh really? Checked the prices at the gas pump and grocery stores lately? How about the shoe stores? Bought any home improvement supplies lately and compared the prices to just a few years ago? Consumer prices are up all over the place, that is a fact.

Then, when in history has all this monetizing of debt and trying to inflate your way out of your debts ever worked? Ever?

And supposing that the witch doctors at the Fed stop pumping up the Dow bubble, how do they intend upon clawing back all that excess inflated value without ruining people's savings and investments?

 

[Kimura]

Oh really? Checked the prices at the gas pump and grocery stores lately? How about the shoe stores? Bought any home improvement supplies lately and compared the prices to just a few years ago? Consumer prices are up all over the place, that is a fact.

Inflation is defined as a rise in the general price level of goods and services in the economy over a certain time period. Inflation includes ALL prices, not asset classes or sectors of the economy. You have to discern between inflation and the cost of living. The use of the word inflation is profoundly erroneous when we see price increases in certain expenditure categories. Inflation, as its defined by economists, isn't occurring since an increase in individual prices doesn't equal inflation.

Then, when in history has all this monetizing of debt and trying to inflate your way out of your debts ever worked? Ever?

Again, that's gold standard/convertible currency paradigm. Operationally, under a fiat monetary system (non-convertible/floating exchange), we don't "monetize debt". That's terminology that's no longer applicable.

And supposing that the witch doctors at the Fed stop pumping up the Dow bubble, how do they intend upon clawing back all that excess inflated value without ruining people's savings and investments?

There's nothing magical about QE. I explained to how it worked. It's a shitty policy which has done nothing to stimulate aggregate demand.

 

[HelenaHandbag]

Yes, I know what the tweed jacketed, pipe-smoking, academic faculty lounge definition of inflation is. Prices are going up with no economic growth to speak of, that is inflationary enough for the peasants on Main Street.

Saying that there is no monetizing of the debt is just a plain old Wall Street fiat bankster lie. The Fed is buying up US Treasuries and just printing up the money, or adding zeroes to balance sheets. IOW, monetizing the debt.

When the current Dow bubble craps out, as is all too inevitable, the flight to safety may well be historic. Hope you have enough Treasuries to keep your house warm.

 

[Geaux4it]

[MENTION=2926]Toro[/MENTION]

It's all based on perception. There was/is a perception that QE is tantamount to the FED increasing the money supply or "printing money". The majority of traders and investors are still locked in convertible currency paradigm, so they acted on this and ran up the prices of various commodities and sold the dollar.

Here's how I reacted during this entire fiasco when douches like Kyle Bass and Peter Schiff were given all this media attention:

Now they're just running up the prices of securities instead.

When this bubble pops, like all of them do, there are a lot of people who have run guys like Schiff into the ground who are going to own them a big apology.

I doubt it. Peter doesn't even basic understand monetary operations under a fiat system and he bases investment strategies on gold standard/convertible currency. He's out of paradigm.

However, I do agree that QE generates asset price inflation, but it simply cannot generate CPI inflation.

Peter is one of the few that called the 2008 collapse. I think he is spot on about what's coming

-Geaux

 

[Kimura]

Now they're just running up the prices of securities instead.

When this bubble pops, like all of them do, there are a lot of people who have run guys like Schiff into the ground who are going to own them a big apology.

I doubt it. Peter doesn't even basic understand monetary operations under a fiat system and he bases investment strategies on gold standard/convertible currency. He's out of paradigm.

However, I do agree that QE generates asset price inflation, but it simply cannot generate CPI inflation.

Peter is one of the few that called the 2008 collapse. I think he is spot on about what's coming

-Geaux

And so did I and about twenty of my colleagues. There's also a plethora of actual economists that saw problems. Peter Schiff has been wrong about QE, hyperinflation, China, commodities, persistent trade deficits, etc. The guy is beyond clueless and considered a joke by anyone with a cursory background in finance and economics. He lost his clients a boatload of money with his retarded investment strategies. But hey, he's got a book to sell!

 

[Kimura]

Yes, I know what the tweed jacketed, pipe-smoking, academic faculty lounge definition of inflation is. Prices are going up with no economic growth to speak of, that is inflationary enough for the peasants on Main Street.

Saying that there is no monetizing of the debt is just a plain old Wall Street fiat bankster lie. The Fed is buying up US Treasuries and just printing up the money, or adding zeroes to balance sheets. IOW, monetizing the debt.

When the current Dow bubble craps out, as is all too inevitable, the flight to safety may well be historic. Hope you have enough Treasuries to keep your house warm.

There's no such thing as monetizing the debt under our current monetary system. When we were on the gold standard, the nation's money supply was limited to the amount of gold it had on hand. The government obtained gold by issuing certificates - government IOUs. These certificates were passed around just like physical cash. This where the term monetization comes from because the certificates were basically just like money.

Again, for a second time, QE isn't "printing money". It doesn't change the overall amount of net financial assets of the private sector. QE is nothing more than a glorified asset swap. Bonds are LITERALLY swapped out for reserves. Additional reserves are of no consequence, nor do these removed bonds have any major impact on the economy. As the FED purchases some of these long-term assets within the private sector, it increases demand, which then lowers rates at the longer end of the yield curve. We should view these rates as investment rates because the cost of investment funds will also then decrease. This lowers interest rates and raises aggregate demand.

The only consequence is decreased interest rates for savers which can decrease aggregate demand. How this can fix our macroeconomic problems is anybody's guess. This definitely demonstrates some of the problems with using monetary policy to tweak the economy, especially without a jobs program or a full employment policy. QE is useless, but ultimately harmless.

Lastly, yes, money creation is nothing more than a balance sheet operation. It's basically the FED crediting private bank accounts at the end of the day.

EDIT TO ADD:

My biggest PROBLEM with Quantitative Easing/low interest rates is that it enables some of the more parasitical institutions, such as hedge funds and institutional traders, firms involved with heavy CDOs, etc. to obtain ridiculous levels of leverage. These institutional firms create speculative bubbles and the control fraud that's inevitably follows.

 

[Toro]

Well, and the need of large institutions to find yield.

When the Fed pushes rates too low, institutions such as insurance companies and pension funds start taking greater risks to generate necessary returns.

Wall Street is partly to blame for the GFC, but the truth is, institutions were stretching for an extra 20-30 bps because knee-scraping yields fundamentally threatened their business models. So Wall Street complied.