Fed Balance Sheet Ballooning
Followers of our blog and work have been forewarned about this. The Federal Reserve’s balance sheet in the past 6 months has increased from about 3.8 Trillion to over 4.1 Trillion Dollars.
During the Great Financial Crisis and its recovery, the Fed increased its balance sheet up to 4.5 Trillion with multiple rounds of Quantitative Easing (QE). This time, we are at 4.1 Trillion during a “booming” economy. This warrants your attention.
Interestingly enough, the Fed’s balance sheet began in September of 2019, around the time the repo market incident occurred with interest rates in the US spiking up to 10%. It seems like something, or some bank, is broken, but we will never know who is receiving this money.
Many have been calling this the “not QE” QE. Even Fed Chair Powell saying this is not QE. In their defense, this money is not being used for stimulus, rather it is being used to provide liquidity and to prevent interest rates from RISING. However, there is now new information about repo which is stating the Fed is opening lines to hedge funds now…which will likely go into stocks and other assets. Remember everyone, there really is nowhere to go for yield in this macro environment except stocks. There are a lot of large funds and the retail crowd chasing yield, and are finding it difficult to do so without taking more risk.
What does this mean? It means the debt will continue to increase, interest rates will be cut, and currencies will be killed (inflation). I have given my thoughts on why the US is cutting rates, and two reasons are allowing citizens and government to service their debt and take more debt, as well as to weaken the dollar. More debt needs to be issued just to sustain where we are. We are already at record levels of worldwide debt at 253 TRILLION Dollars.
When will the market begin to take notice of this? Wall street will ride this until the party is over. They know the Central Banks will keep this party going until it ends. I have given my thoughts on why digital money will be required to keep this keynesian/ soft money cycle going, but for this to happen there will have to be a credit freeze for people to accept a digital system from the government…repo could be the signs of this coming.
Here at UnchartedFX we always talk about the confidence crisis. That is what it really is about. When people start losing confidence in governments, central banks and the fiat money system, we see a run into Gold as things begin to turn. In terms of the Fed’s balance sheet, it is all about confidence. Will the number be 5 Trillion? 6 Trillion? Before people begin to realize we are in QE forever and central banks will become the BUYERS of last resort. Will people realize the Fed is already at 4.1 Trillion when we are not in a recession, meaning they will have less ammunition to handle the next recession? This is all about confidence, and the Fed has to maintain confidence assuring everyone that they know what they are doing, and that what they are doing is working.
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