How a Yellen departure could spark a fire under the Fed to cut its $4.5 trillion balance sheet


CNBC: It’s often said that good things come to those who wait — but a bloated $4.5 trillion balance sheet might be a notable exception to that rule.

With the Federal Reserve facing a Herculean conundrum in unwinding its crisis-era monetary policy — and a likely leadership transition on the horizon — Goldman Sachs suggested on Saturday the central bank could move early to reduce the vast sums of government and mortgage-backed securities (MBS) it holds on its books.

A potential fire sale of Treasurys and mortgage-backed securities by the Fed could have significantly more adverse effects on financial conditions than gradual runoff, and the mere risk of such an outcome might set up another ‘taper tantrum.’ more

Opinion: It began in 2009 as an experiment for an economy that refused to grow. Since there was a Democrat in office, you didn’t  hear how QE hurts the poor and middle class and makes the rich uber-wealthy.

Simplified QE Formula: Create money – give it to banks – banks buy stocks and bonds, and wham-o, Batman, the stock market has nowhere to go but up.

The problem is that the newly created money is like counterfeit, it is literally borrowed from ourselves and has to be paid back. In began in 2008-9 and didn’t slow down until the Fed began to taper (reduce) bond purchases in December 2013.

The newly created money, however is now a whopping $4.5 trillion in debt on the Fed’s balance sheet. The data show the Fed owns about 35 percent of Treasury securities  which exceeds 80 percent of marketable Treasuries outstanding.

If the Fed sells off the assets at too fast a pace, bond prices could fall too quickly which like a see-saw would drive interest rates higher, causing what little economic growth we have to stall.

Globally, QE debt is over 12 trillion, which, of course, does not factor in the national debts of each nation, making the world awash in debt.

What to do?

It is significantly above my pay grade to even begin to understand how $12 trillion of debt can be unwound without causing an economic shock.

When the big one comes, however, economists will wonder why no one saw it coming. They will opine that the Fed had it wrong. That printing money was only delaying a bigger problem while making the rich much, much richer.

Which is what makes it so interesting that the Apostle John saw something like this coming 2000 years ago “do not hurt the oil and wine“; the rich represented by the oil and wine will be just fine in the first 3 years of the tribulation. (Rev 6:5-6)