Today I’m focusing more on the Federal Reserve Balance Sheet as that is part of the reason as to why S&P put the United States debt to “outlook negative” (see previous blogs on this).
One can use various sources to see what the balance sheet of where the Federal Reserve has gone and where it is going.
Using this Wikipedia source:
http://en.wikipedia.org/wiki/Federal_Reserve_System
We know that as of November 7, 2010, the Federal Reserve’s “Total assets” stood at $2340.44 billion (=$2.34 trillion) U.S. dollars.
From the Federal Reserves own website, as of April 21, 2011, we know that the Federal Reserve’s “Total assets” is now at $2,730 billion U.S. Dollars.
http://www.federalreserve.gov/releases/h41/current/
This is an increase of $400 billion dollars in 6 months! The increase is a mix in purchase of Treasuries, etc.
It’s the continuous and unabated purchasing of Treasuries which have many concerned that the Fed is basically devaluing its currency and this is part of the reason why S&P has put U.S. debt in “negative watch”.
While this is supposedly supposed to help the economy (click on the link by the Bank of England as to how this works), it also causes many problems as well.
http://www.bankofengland.co.uk/education/inflation/qe/video.htm
1) It causes “malinvestments” as the “cheap money” has to go somewhere to find a better return-which is usually the stock market, commodities market, etc. (again, click on the video as to why the money issued by the Federal Reserve needs to “go somewhere”).
2) It causes debasement of the underlying currency (in this case, the U.S. dollar). There is a reason as to why the U.S. dollar has performed so poorly against other currencies such as the Japanese Yen or Eurodollar. This is in spite of the fact Japan has its own set of unfortunate problems and also in spite of the fact many European countries such as Greece, Portugal, Spain and Ireland have their own fiscal problems.
3) It can cause a rapid (and many times uncontrollable) increase in inflation.
Supposedly the Federal Reserve is going to be ending its “QE2″ (“Quantitative Easing”) policy in June. What we don’t know however is what will happen (i.e.-”outcome”) when that does happen. Will stocks go down? Will commodities go down? Will the U.S. dollar start to appreciate in value against other currencies?
What we do know however is that the current U.S.economy is fragile and that there is a chance that if the U.S. economy goes back into a recession, the Federal Reserve will have to once again “turn the money spigot” on once again. This is what one of the fears and concerns of S&P in downgrading their outlook is (along with the fact they fear that the U.S. Govt. can’t get its “house in order”).
As I’ve mentioned in my previous blog, many countries are concerned about their U.S. dollar holdings (fearing it will depreciate even more-i.e.lose more value) and have at least started to either look, or have started to do business in other currencies.
Tags: commodities, debt, Federal Reserve balance sheet, S&P downgrade, U.S. Dollar
