Fed Balance Sheet Chart – Weekly Update: 31/3/11
An update of the weekly Fed Balance Sheet (proportions) chart. Apologies for the delay in posting this. The chart of the Fed’s assets (% total assets) follows:
As I have emphasised in previous updates; post-2008 monetary policy is about changing the dollar both ‘quantitatively’ and qualitatively. What do I mean by this? Well, one of my central assertions at greshams-law.com is that in order for a currency to be a sound and functioning currency, it must trade in the market to allow for a profit-motive. In spite of being continually thwarted in its endeavours by the central planners of money (central banks), the market is always engaged in finding that profit-motive (and usually succeeds). For fiat currencies, this implies that they must trade at ‘discounts from par‘ – the entire stock of the Fed’s liabilities should not purchase the entirety of its assets at market prices.
Any expansion in the Fed’s balance sheet thus – due to the nature of fiat currencies – dilutes the dollar. This is the quantitative aspect of Fed balance sheet expansions. However, due to the homogeneous nature of dollars (i.e. you can’t tell them apart), when the Fed expands its balance sheet to change its composition, dollars become ‘good for’ qualitatively different things.
Implications for now:
As can be seen from the chart above, the Fed drastically changed the structure of its balance sheet during 2008/2009. In essence, they made dollars ‘good for’ MBSs as well as conventional central banking assets (gold, government bonds, etc.). QE2 seems to be reversing that change; the dollar is - once again – becoming ‘good for’ (mostly) conventional central banking assets again.
I say that this is bearish for asset prices. Pre-2009, supposedly important institutions owned too many MBSs and owed too many dollars. To alleviate this, the Fed changed the quality of the dollar – they made dollars ‘good for’ MBSs. Thus, insitutions that were previously close to insolvency found that the burden of their dollar liabilities had lightened considerably. Similarly, everyone else – who owned stuff better than MBSs – found that they were safe again. Now, it would seem, the dollar is changing back to something similar to its former self. If imbalances still remain in the system, then can we really expect those insitutions to thrive or – even – survive?
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012