Fed Balance Sheet Weekly Update: 10/3/11 – My Contrarian Gene says that QE2 Tightened the Noose.

Here is the update of the Fed’s Balance Sheet (proportions) chart. I continue to be spurred on by my contrarian gene; it’s telling me that QE2 was a big clean-up operation.

Fed Balance Sheet Proportions

Click to enlarge.


Looking at the chart above we see that – on a % basis – government notes & bonds continue to take over the (previously significant) mortgage-backed securities part of the Fed’s balance sheet. Meaning, each dollar (a liability of the Fed) is becoming increasingly ‘good for’ government notes and bonds. Whereas previously it was – to a large degree – ‘good for’ mortgage-backed securities.


Huh? Is this tightening or easing?


Over the past few years, the Fed (and other central banks) have been engaged in the peculiar task of making insolvent ‘socially systemic’ institutions solvent again (i.e. making zombies). They have ordained upon themselves the responsibility of deciding who wins and who loses. This, it is said, is ‘good for all’. Their means have been to alter the composition of the dollar via balance sheet expansions. Meaning, they have changed what the dollar is ‘good  for’ in order to accommodate the assets and liabilities of said institutions. Previously, they owned too many mortgage-backed securities, and owed too many dollars. To bring them back from the grave, Bernanke made dollars ‘good for’ mortgage-backed securities. In doing so, said institutions miraculously owned and owed the same things (they owned MBSs and owed dollars (now ‘good for’ MBSs)). Everyone else owned stuff ‘better than’ MBSs, so they loved it even more (they owned stuff better than MBSs and owed dollars that were ‘good for’ MBSs).


So what happens now that the dollar is becoming increasingly ‘good for’ government bonds and notes? My take is that this will – once more – reveal the insolvency of certain institutions. The zombies had put on some human make-up for a while, but we’ll see that they’re still zombies… They should have called it QE-1.


For a more intellectually rigorous take on this, see here.


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


See here for our collection of rare historical economic data.

Posted Mar 10, 2011