The Only Constant Growth is Seen in the Fed’s Balance Sheet

by on December 17, 2013 5:04 pm BST

Prior to starting the quantitative easing program in order to stop the financial hemorrhaging in 2009, the Federal Reserve’s balance sheet was roughly $800 billion. In September 2012, the balance sheet increased to $2.82 trillion. Now, in the wake of asset-bubbles, the Federal Reserve’s balance sheet expanded to $3.99 trillion on a full-out Keynesian blitzkrieg that makes Paul Krugman smile from ear-to-ear (he actually wants the Fed to do more).

Former Vice Chairman Donald Kohn said “there’s discomfort in the sense that the portfolio could grow almost without limit,” and it has come to that. It only rivals the Bank of Japan’s quantitative easing that includes large, continuous debt purchases no matter longer the mid- to long-term costs. As several key Reserve Bank president voice their discomfort and want for at least the tapering process to simply start, Kohn added “there’s discomfort in the sense that the portfolio could grow almost without limit.”

Ben Bernanke, the current Fed Chairman, has quadrupled the balance sheet since 2008 in an attempt to lower long-term borrowing costs and unemployment. Granted, the unemployment rate hit seven percent from the 26-year high of 10 percent, yet the participation rate is at 40-year lows. Studies show that if the participation rate was that of when President Barrack Obama took office the unemployment rate would hover 11 percent.

What is particularly concerning, the Federal Chairwomen nominee Janet Yellen not only believes in massive balance sheet expansion, but she believes and “does not see” asset-bubbles currently across markets. Then, what exactly is she looking at? And it stands to reason the balance sheet expansion has only masked the difficulties within the economy opposed to fix them. “The balance sheet is growing because that’s how the Federal Reserve thinks it’s going to accomplish the mandates that Congress gave to it,” said Kohn.

According to a survey by Bloomberg, economists see the Federal Reserve’s balance sheet to grow to $4.36 trillion after the current round of quantitative easing ends adding  $1.54 trillion. “This is a stimulus of the first order. It’s just unprecedented,” said Alabama Republican Senator Richard Shelby. Some, particularly fiscal conservatives, in Congress are worried, too.

Those worried of the Fed’s operations believe that inflation will rear its ugly head. Consumer prices tell a different story as inflation is below the Fed’s target of two percent, currently at one percent. Some academics have pointed out that a period of deflation is flowed by high levels of inflation.

When the economy was bleeding 800K jobs a month during the heart of the financial crisis, quantitative easing made since. Five years latter is became the lazy thing to do, and the Fed’s balance sheet has been the only thing consistently growing in real terms. “QE turned out to be a safety net, a floor, a way to catch the economy to keep it from crashing,” said Steve Blitz, chief economist at ITG Investment Research Inc. Blitz also shed light on the real problem with the monetary policy, ‘“a safety net to catch a falling economy is not the same thing that can springboard the economy to a higher rate of growth.”

The following graph showed the great impact of QE1, but it also shows the near-zero effect additional QE has done to the US economy:

The lack of growth following QE1

The lack of growth following QE1

What the lack of fiscal policy and the lax monetary policy around the global has done:

Equity prices diverge and become inverse to global growth.

Equity prices diverge and became inverse to global growth.