I discussed the size of the Fed’s balance sheet in The Fed, Gold, and MMT and during my interview on Supply Side Podcast with Jonathan Doyle. I also talked about gold manipulation on the podcast. I’ll expand a little on both of these topics.
The Fed’s problem arises not only from the continued, unprecedented growth of its balance sheet since the onset of the 2008 financial crisis but more alarmingly from the rapid expansion–even relative to QE–due to the COVID lockdowns over the past year. The Fed’s dilemma isn’t the current “effective” size of its balance sheet. I explained in The Fed, Gold, and MMT why its “effective” size is $2.5 trillion. The Fed’s balance sheet was $0.8 trillion at the start of the 2008 financial crisis. In “effective” terms, the Fed’s balance sheet has tripled over the last 12 years. That’s not the monetary crisis the Fed’s current $7.3 trillion balance sheet seems to signify.
Gold was $700 before QE began in March 2009, and it has also nearly tripled. That’s the gold signal that signals monetary error and other economic dislocations associated with the error. The gold signal is the purest economic indicator because the earth combined with gold’s unique monetary properties determine its value. Gold’s properties and its preciousness in the earth are beyond human control, and its thousands of years of use as a monetary reference define its stability of value. Its value can’t be distorted or manipulated, unlike all other economic indicators. To manipulate the POG, its annual supply, relative to the total stock of all the gold ever mined and still held, would have to be changed drastically over a period of time. It would take decades, or even centuries, for this change to happen to the extent that it could change the previous thousands of years of stability. Basically, it would require either no new gold to be found or the sudden discovery of easily accessible large new deposits that significantly change the historical stock to flow ratio. This is completely different than the conventional interpretation of gold manipulation where gold futures contracts temporarily distort gold’s price but have no effect on gold’s history of thousands of years of stable value.
The Fed’s problem is that it can’t unwind its real balance sheet of $7.3 trillion without disastrous consequences. What was the result of the Fed creating a $7.3 trillion balance sheet? It enabled the Fed to control the price of credit–interest rates–by OMO purchases of treasuries and MBS with its magic checkbook. The Fed creates money out of thin air, buys bonds, and substitutes cash and reserves for the interest-bearing bonds. Depository institutions then hold a substantial portion of those reserves as excess reserves in Fed accounts that remove them from the normal reserves system. The Fed’s bond purchases lower the price of credit. The price of credit is the most important market signal. When the Fed distorts this signal, it distorts capital allocation. Capital misallocation distorts all economic indicators. This distortion defines the global financial system since the onset of QE began manipulation of the price of credit in 2009.
To unwind or normalize its balance sheet, the Fed would have to sell $3.2 trillion of bonds held as ER and mop up through bond sells another $1.6 trillion in the Treasury General Account. The Fed attempted to normalize in 2018-2019. It reduced its balance sheet from $4.5 trillion to $3.8 trillion and excess reserves from $2.7 trillion to $1.3 trillion. Markets started blowing up in December of 2018, and the Fed quickly threw in the towel on normalization. The new Fed normal is perpetual no normal. The Fed, or the BIS if you want to go deeper, has exported interest rate manipulation policy to global central banks. That’s why negative interest rates exist. The whole world is in the same boat.
Since the Fed’s reason for expanding its balance sheet is to control the price of credit, then the Fed will lose control of interest rates if it normalizes. It’s not hard to imagine what happens with the Federal budget and deficits if interest rates return to historical norms. The only way the Fed can normalize is with growth, a sustained period of expansive growth like during the Bretton Woods era of gold-linked stable money. Between COVID and Democrat control, there are few growth possibilities on the horizon. More likely, anti-growth, tax hike fiscal policies are in the Biden pipeline. If only Biden knew.
The Fed went from $4.0 trillion to $7.3 trillion in one year. Now it is stuck with that. What happens in the next year and the year after that with the continued irrational, authoritarian, criminal, and economic destructive policies being rolled out under COVID?
It’s hard to see where this goes and where it ends. Continued dollar devaluation is the only certainty. In the cards, at some point, is an attempted move to a digital cashless society. That’s a key component for the increasing trend toward totalitarian control being rolled out on the back of COVID. You can read about it at the World Economic Forum. The WEF lays out the entire agenda in books, articles, videos, conferences, and their close association with supranational, private, and governmental organizations. Not surprisingly, the increasingly authoritarian control instituted in the U.S. and the world is in lockstep with the WEF agenda.