"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

Trader Dan's Work is NOW AVAILABLE AT WWW.TRADERDAN.NET



Thursday, September 11, 2014

Charting the Rate of Growth/Decline in the Fed's overall Balance Sheet

I find it rather fascinating to see the depths of denial that some will sink to when it comes to taking the Federal Reserve's clearly announced intentions to wind down its final Quantitative Easing program. You might recall that this last of their QE's was originally in the amount of purchases of both Treasuries and MBS (Mortgage Backed Securities) debt to the tune of $85 billion/month.

The chart I put together should hopefully dispel the rather foolish talk from some as referenced above and help objective and open-minded observers understand where the Fed is in its intent to bring this program to an end.

The chart details the Rate of Growth/Decline in the "Securities Held Outright" portion of the Federal Reserve Balance Sheet. For all practical purposes, this might as well be considered the total Balance Sheet ( the other items that are involved are dwarfed by comparison ) but that is another matter. Suffice it to say, one can easily tell the start up and the decline or winding down of the various QE episodes that have been in place since the Credit Crisis of 2008 and the Fed's response to that.

The data is constructed by creating a look-back period of 52 weeks and noting the percent change of the current week to the same exact week exactly one year previous. By looking at the data in this manner, we can get a very good view of how the Fed was responding to the lock up of the Credit markets and its determination to be a buyer of last resort of both MBS's ( mortgage backed securities) and Treasuries.



One can see the amazing surge in the 2009 as QEI was undertaken. Then we would see the end of a QE program, and the implementation of the next. The RATE OF INCREASE in the Fed's Balance sheet can easily be noted.

Fast forward to the beginning of this year and the Fed's announced intentions of a "TAPERING" of its final bond buying program with the intent to end it sometime this year.

Note well that the Fed did not say it was going to stop buying both Treasuries and MBS debt when it first began making the markets aware of its timetable to end QE4. It announced that, depending on the economic data, it would begin to scale back those purchases ( roughly $10 billion each month) until it ended them altogether.

Thus while its balance sheet continues to grow, the RATE OF GROWTH, year over year, is definitely declining. Indeed the Fed is tapering just as it said it would.

Just for comparison sake, here is a chart of the overall Fed Balance Sheet ( Securities ) so that the reader can see the growth. It is rather remarkable is it not? Even in this view, one can see the leveling off of the line over at the far right hand side. Their purchases are slowing down.



The reason for this short set of comments and charts is simple - there are those in the gold permabull camp who continue to deny that the Federal Reserve is tapering and preparing to end its QE programs. We will let the reader decide from the data whether their claim has any merit. I for one reject their specious assertions.

Now, it is going to be an entirely different matter if the Fed chooses to actually REDUCE the size of their balance sheet. That is going to be an interesting education we will all receive when once that happens, if at all. For all that one knows, they could simply choose to hold the securities (Treasuries and MBS debt) until they mature and return any interest earned to the Treasury.







18 comments:

  1. > return any interest earned to the Treasury

    It sounds like the Fed invented "monetary perpetuum mobile" (by providing effectively "free money" to the Treasury)

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  2. The period of QE will be written about and studied for years. Even Ben didn't know how it would all play out in the end and we won't know for years I expect.
    Just clicked over on Jesse's site.......nice video tribute to 9/11.

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    1. Jesse apoears to have gone more than slightly "special" and appears to have lost the plot:

      " remember me in your prayers, as I will remember you.  The need is great and will be greater.  This is our currency, and it has no other counterparty but the Lord."

      http://jessescrossroadscafe.blogspot.co.uk/2014/09/gold-daily-and-silver-weekly-charts-do.html

      Speaking in my personal capacity as a heathen Commie, I find that kind of remark more than slightly mawkish and, quite frankly, a bit daft

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  3. So Dan, what you are getting at is that the camp that is believing what Janet and co. are telegraphing is to be believed and that the qe to infinity guys are grasping at straws, no?

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    1. Steve Brassey;

      Yes, what I am saying is that the Fed is doing what they have told the markets that they would do, and that is to slow down the rate of purchases or "taper" their bond buys.

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  4. Those graphs are 'painted', Dan - far from tapering, the Fed has been secretly printing trillions of paper promises and then buying them back from itself via Belgium, because they fear deflation and inflation and interest rates and shadow banking. Ponzi.

    I know these things because the guy who sold me the Golden Unicorn Farts had written an article about it on the internet, and he seemed to know what he was talking about

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  5. The way gold is going tonight it might be 1200 by morning. Of course don't assume anything and watch the charts.

    And if they're painted who cares that's what they are.

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  6. Where is Bo Polny? David P??

    I want my money back!!!

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  8. We are in the late innings of a recovery and just now tapering to zero. What happens if we have an external shock with the balance sheet being stretched this far? I understand there was no other option to keep the wheels turning. My question is is the current situation sustainable.

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  9. Dan,
    Thank you for all your posts as I do appreciate your points of view. Looking back the Fed has terminated all the other QEs programs, so too will this one end. What the "QE to infinity" people are saying, IMO, is that the Fed upon seeing an economy still weak will introduce another QE or whatever they will call it. Time will tell. Your observation as I read it, that falling commodity prices does not indicate a recovering economy. The stock market may be rising but it has many variables to why this is occurring.
    I would like to end this post by say on this 13th anniversary of 9/11 let us pray that We the People will get the truth of who was responsible for this act. An interesting youtube video on Architects & Engineers- solving the mystery of WTC 7 is a must watch.

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  10. In 1998 - 2000 the commodity index collapsed to multi-decade lows.

    And stocks soared, interest rates soared economic growth soared.

    This time is no different, except interest rates haven't even started rising yet.

    And gold and silver are already pricing that in. All this huge debt load will be paid back by futures taxes from the coming economic boom.

    The market has spoken. Pay attention to it.

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  11. Thanks Dan. Yes the experiment in QE is far from over. Will be interesting to see if markets will "allow" a complete end to the asset purchases including the interest reinvestment program, raising of interest rates and eventually reducing the balance sheet. The markets have not been kind in the past attempts at hawkish actions. With the deflationary forces in play for the last several months, will be interesting to see if the data will allow the Fed to be more hawkish and still achieve their mandates for inflation and employment.

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  12. Excellent analysis and charts.

    If the trolls will look and read and THINK it should be convincing.

    I fear they and the painted data camp will just react and deny. So sad.

    Keep up the good work.

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