Stagnation in the Total Size of the Fed’s Balance Sheet Continues…
The total size of the Federal Reserve’s balance sheet increased by around $1.5 billion over the week ending August 24, 2011. Moreover, further evidence of a dire desperation for dollar funding emerged as the Fed increased its lending to foreign central banks and shuffled around its liabilities. See below for the usual Federal Reserve balance sheet charts and an outline of the funny business that went on over the past week.
As mentioned above, the Fed’s balance sheet was roughly flat on the week, expanding by only $1.46 billion (which is something like a 0.05% increase). The assets side of the balance sheet was fairly dormant on the week. The most notable changes were;
- An increase in the Fed’s holdings of US government notes and bonds of $800 million.
- An increase in the Fed’s ‘Other Assets’ of $1.558 billion.
- An additional $300 million extended to foreign central banks.
- Across the board tiny increases in the Fed’s holdings of junk (Net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, Maiden Lane III LLC & TALF LLC). This contrasts to the decreases in these holdings seen over recent weeks and months.
As can be seen on the proportional chart above, the backing to the dollar has reverted to a more ‘traditional’ stance over recent months: most notably, holdings of notes and bonds have increase relative to holdings of Mortgage-backed securities. Sure, recent expansions in the Fed’s balance sheet have been quantitatively dilutive to the Federal Reserve note, but — as we have consistently maintained over recent months — the shift away from MBSs and towards government securities has tightened the screw on the credit creation process. So behold the truth of the words of the Elder Mr Dawes of the Dawes Tomes Mousley Grubbs Fidelity Fiduciary Bank (in Mary Poppins!):
While stand the banks of England, England stands. When fall the banks of England, England falls!
There were more significant changes to the liabilities side of the balance sheet. Of course the overall size was roughly flat (inline with the assets), but there was a $37 billion decrease in ‘other deposits held at depository institutions’ and a $33 billion increase in ‘other deposits’. ‘Other deposits held at depository institutions’ are basically the reserve balances held by commercial banks at the Federal Reserve banks, whereas ‘other deposits’ consist of:
… balances of international and multilateral organizations with accounts at FRBNY, such as the International Monetary Fund, United Nations, International Bank for Reconstruction and Development (World Bank); the special checking account of the ESF (where deposits from monetizing SDRs would be placed); and balances of a few U.S. government agencies, such as the Fannie Mae and Freddie Mac.
The definition above (found on federalreserve.gov) is fairly vague and so it’s quite difficult to figure out what this particular reshuffling meant. However, it should be clear that something fishy is going on! This could be symptomatic of a round of buying up junk from the carcasses of US government agencies (after all, on the assets side there were minor increases in the holdings of junk across the board). Or it could be a symptom of an under-the-table bailout of European banks. It really isn’t clear from the information here, but we think it’s safe to assume that this is symptomatic of ongoing troubles rather than the opposite!
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012