Three Weeks Until the End of ‘QE2′
An update of the weekly Federal Reserve balance sheet charts for 9/6/11. There are only three weeks to go until the end of QE2, and the market is getting rather jittery…
[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.]
With only three weeks to go until the end of the notorious ‘QE2′, the so-called ‘risk assets’ seem to be having a tough time. Given that the private sector is experiencing a long-term ‘short squeeze in dollars‘, this should be unsurprising. The rudimentary problem is that a great number of very large institutions have amassed large short positions in dollars via the medium of debt. Now, they are compelled – all at once – to ‘sell things in order to buy dollars’.
Due to the supposedly ‘systemic’ nature of these institutions (they belong to housing, banking etc.), this short squeeze in dollars has been deemed to be unacceptable. Hence, in 2008/2009, the Federal Reserve made dollars ‘good for’ Mortgage-backed securities. In this way, the institutions that owned MBSs and owed dollars found that they subsequently owned MBSs and owed new, debased ‘dollars’ (conduits for mortgage-backed securities). Thus, those institutions managed to survive and others got an automatic boost (as they then found that they owned things way better than ‘dollars’!).
QE2 has had the effect of reducing the Fed’s relative holdings of mortgage-backed securities (and all the other junk). As Jim Rogers said yesterday, we should not be surprised if QE2 comes back, even if they call it – say – ‘cupcakes’!
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012