Federal Reserve Balance Sheet Charts – Weekly Updates: 28/4/11

An update of the Fed balance sheet charts for 28/4/11. From this week onwards, I will be posting a plain (dollar-denominated) chart of the Federal Reserve’s assets (in addition to the usual ‘proportions’ chart).


Federal Reserve Balance Sheet Chart

Click to enlarge. Source: Federal Reserve


Federal Reserve Balance Sheet Chart (Proportions)

Click to enlarge. Source: Federal Reserve


The first chart shows the Federal Reserve’s assets as recorded on the ‘factors affecting reserve balances’ statistical release. The second chart shows those assets on a proportional basis. That is, the latter chart shows the Fed’s various assets as a percentage of its total assets. Both charts clearly show that the structure and size of the Fed’s balance sheet was (by and large) stable pre-2008. As the ‘credit crunch’ hit, households and institutions found themselves owing more than they owned. For whatever reasons, this situation was deemed to be unpalatable and so the dollar itself was debauched to ease the burden of dollar debts. Hence, we saw an explosion in the Federal Reserve’s balance sheet (see first chart), and an altered structure of the dollar (see second chart).


I consider the second chart to be of utmost importance, as it helps us understand what each federal reserve note (and reserve balance) is ‘good for’. As this changes, the burden of dollar debts and dollar redemption claims (demand deposits) changes with it. Hence, as dollars became ‘good for’ mortgage-backed securities post-2008, the stresses upon those who owned MBSs and owed dollars were alleviated. Given that everyone else owned better things, they were particularly happy with this situation (as they suddenly became comfortably solvent and profitable).


Although the recent quantitative easing program (QE2) has increased the size of the Fed’s balance sheet (which is dilutive for the dollar), it has also shifted the proportional holdings of the Federal Reserve back to US government securities (a more ‘traditional’ central banking asset). It is conceivable to me that this will – once again – tighten the screw on the margin. That is, those institutions that were truly ‘saved’ by the alterations to the dollar previously, might find themselves hurting once more (after all, this QE2 exercise has got people pointing towards inflation, inflation, inflation – which means being short dollars and long stuff).


I encourage you to look at the ‘Fiat Currencies’ section on this page if you’re interested in more detailed explanations of the concepts described above.


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Posted Apr 29, 2011