Fed's Assets Broken Down



1) Since the start of 2009, the Fed has bought 1,178 billion securities (including 899 billion of long term mortgage backed secuties). Despite the size of these purchases, the Fed's balance sheet has remained essentially unchanged since the beginning of the year (increasing only 75 billion).

2) Without these enormous purchases of US debt, interest rates would be higher.

3) Securities held outright (toxic and treasury securities) now total 1,673 billion, filling 75% of the Fed's balance sheet. This leaves little room for the Fed to keep buying US debt without expanding its balance sheet (printing money). For example, the Fed bought 71 billion mortgage backed securities in the last week, and expanded its balance sheet by 54 billion.

Fed's Liabilities Broken Down

Reserve balances with Federal Reserve Banks (purple) stood at 1,049 billion last week, the highest ever. Banks who own these reserve balances can withdraw them at any time, in which case the Fed must print and deliver the cash.



The dollar index

The dollar collapse is already underway. The gentle downward slide will turn into a freefall when food shortages become apparent and prices spike.



My reaction: The Fed is running out of room on its balance sheet, which leaves it caught between a rock and a hard place:

1) The only way it can keep continue purchasing US debt over the next year is by significantly increasing the size of its balance sheet (printing a lot of money). If the Fed starts rapidly expanding its balance sheet now, it will undermine what little faith is left in the dollar, sending it plummeting.

2) If the Fed stops buying 120 billion worth of US debt each month, interest rates are going to quickly head up, killing the economy and enormously increasing the government’s interest expense.

Conclusion: This is another example of how everything is reaching the breaking point as we approach the end of 2009.