Friday, January 21, 2011

Checking the Fed's Balance Sheet

Here is the latest update to information on what is on the Fed's balance sheet. There are some words at the beginning of the release about the unwinding of the relationship between AIG and the New York Fed, and that shows up in several places on the balance sheet. On the asset side, the QE2 asset purchases continue, with an increase in long-maturity Treasuries of about $27 billion during the past week. Mortgage-backed securities (MBS) are now running off at a slower rate than previously, presumably because of the increases in mortgage interest rates. The reduction in MBS was about $3 billion, so the net increase in securities held outright is $23 billion from the previous week - a rate higher than the monthly target of $75 billion in net purchases. In spite of that, with all the AIG action, total assets actually went down in the week by $16 billion.

Then, on the liabilities side, the balance in the Treasury's general account (which I have discussed here and in other posts) fell by $30 billion, which would increase the stock of outside money in private hands. However, on net, particularly given the transactions with AIG, the result is that the net increase in outside money is small: $280 million in currency and $5 billion in reserves.

As has been the case since the beginning of the QE2 program, the effects of the program have only been to lower the average duration of the consolidated government liabilities held by the private sector. Other factors - movements of reserves to Treasury accounts, and the unwinding of Fed credit programs - have acted to hold down the growth in outside money. When Bernanke said in his 60 Minutes interview that QE2 was not about printing money, that sounded out of context, or misleading, but apparently he was (perhaps unintentionally) correct (so far).


  1. This is an excellent comment! This kind of hard data analysis is what is missing in the general mass publications which leads to confusion that the Fed is printing money when nothing could be further from the truth. Therein lies the problem for it is very important to distinguish who controls monetary policy in the US - and that is the Fed, which is a private institution. As such, and independent, it may (it does) have different incentives from that of the government which is (at least should be) aligned with the interest of the general public. So it is conceivable that the motivations of the two may differ. So, in our present environment, the least painful option ( for the populace) would have been inflating our debt. This, one can argue, even if it leads to a hyperinflation, may be less painful than the widespread bankruptcy of the populace in the face of deflation. However, from the point of view of the Fed, hyperinflation will lead to a complete breakdown of the monetary system, which, will be catastrophic as it is the source of profits for the private institutions. Note in a deflationary scenario private institutions will suffer of course but less so if there is a complete breakdown of the money system - in a deflationary scenario there will simply be a transfer of assets from the populace to a selected few who control the money...By the way, does anyone wonder why Mr. Bernanke never again mentions helicopter money drop since he has crossed the line from working in academia to being the Chairman of the Fed?

  2. One message here is that the Fed and the Treasury are not so independent. If the Fed swaps reserves for long-maturity Treasury securities, that is essentially identical to a swap of T-bills for T-bonds - what we would normally consider a Treasury action, i.e. managing the maturity structure of the debt. If the Treasury issues debt and deposits the proceeds in its reserve account, that looks like a traditional open market sale by the Fed.