Fed Balance Sheet Weekly Update

Here is the update of the Fed’s Balance Sheet (proportions) chart.

Fed's Balance Sheet (proportions) as of 3/3/11 release.

Click to enlarge


The chart shows the assets owned by the Federal Reserve as a % of its total assets. It is evident that 2008 brought a significant change to the composition of the dollar, and after a period of relative stability from mid-2009 to mid-2010, we’re on the move again (QE2). As I explain here, here and here; a dollar is a liability of the Federal Reserve. So, as the Federal Reserve changes the structure of its balance sheet, the dollar becomes ‘good for’ different and fewer assets.


The way in which the Federal Reserve has changed its balance sheet over the past years has accommodated the most levered and ‘socially systemic’ institutions. As can be seen, the Federal Reserve acquired significant quantities of mortgage-backed securities in 2008. In doing so, they eased the problems of all those institutions that owned mortgage-backed securities and owed dollars. Furthermore, as the MBS market was the worst of the bunch, they ended up easing the problems of all those institutions that owned any financial assets and owed dollars (i.e. the entire financial sector).


So what’s happening now? Well, as QE2 progresses, the degree to which the dollar is ‘good for’ mortgage-backed securities is declining, and the degree to which the dollar is ‘good for’ government bonds is increasing. Perhaps not so incidentally, this trend coincided with the housing double dip.


So my contrarian point of view is this: when the world is screaming about ultra-loose monetary policy by the Fed, could this be a clean-up operation that – in fact – tightens the noose?


Revealing what the Fed doesn't want you to know.


See here for our collection of rare historical economic data.

Posted Mar 4, 2011