Fed Balance Sheet Set to Grow

By Tim on 12/17/2012 in Uncategorized

The Federal Reserve’s announcement of QE4 last week has spawned a cottage industry in forecasting the growth in the central bank’s balance sheet, a good example being the graphic below from this item over at U.S. Global Investors in which total money printing is expected to reach $7 trillion in a few years.

A more extreme view was offered up by David Rosenberg of Gluskin Sheff who noted the following:

Six more years of financial repression. Get used to it… If our assumptions are anywhere in the ballpark, the Fed’s balance sheet expands … to nearly $9 trillion or practically 50 percent of GDP by the time the unemployment rate gets to the 6.5 percent Holy Grail. At that point, Holy Grail is likely to turn into ‘Holy Cow’ as the Fed embarks on the inevitable process of unwinding all of this monetary largesse.

Holy Cow is right. It’s no wonder Fed Inflation, Employment Thresholds Worry Two Fed Presidents

4 Responses to Fed Balance Sheet Set to Grow

  1. But What Do I Know? December 17, 2012 at 7:26 AM #

    The Fed will never unwind “all of this monetary largesse.” Why in the world would Rosenberg think it is “inevitable”?

    There is no going back to the Fed’s old way of operating; to believe so is simply nostalgia and wishful thinking.

    Reply
    • Steve White December 17, 2012 at 8:18 AM #

      BWDIK

      Agreed. Exactly. The use of the word “embark” in the sentence in question implies that Rosenberg thinks the Fed will begin a carefully-considered, long-term plan of unwinding its balance sheet. This snippet also implies that Rosenberg thinks the unemployment rate will actually get to 6.5%. Good luck with BOTH of those ideas…

      FWIW, the chart in question simply plots a straight line with a 45 degree slope of 1 because the assumption is the Fed will add $80 Billion per month or almost $1 Trillion every year ($80 B x 12 = $960 B). Now, at the end of 2012, the Fed balance sheet is about $2.9T. If we add $1T per year, it will look as follows:

      2013 - $3.9
      2014 - $4.9
      2015 - $5.9
      2016 - $6.9

      The formula is simply: 2.9 + x where ‘x’ is the number of years out you want to look. You don’t really need a chart for that.

      I can’t find the original story where Rosenberg is quoted so I can’t tell how he concludes that unemployment will eventually get to 6.5%. From the quote, he seems to think it will happen when the Fed balance sheet is $9T, which implies it will happen in late 2018 (by simply adding $2T to 2016′s nearly $7T figure).

      I wonder how he figures that? It might be something as lame as just plotting some constant rate of decrease in the current unemployment rate.

      I have no idea what the employment rate will be 6 years from now and I suspect he doesn’t either… It will be reported as whatever The Man wants it to be.

      Reply
  2. Tim December 17, 2012 at 9:18 AM #

    A Fed Exit Plan? Hah!

    That’s the working title of a post in my draft folder. Hopefully I’ll get around to finishing it someday.

    I think debt cancellation (aka, debt “jubilee”) is far more likely than selling any substantive amount of this stuff back into the market. Alternatively, they could just let it all mature - then it would be gone in less than 30 years.

    Reply

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  1. How to Get to 6.5 Percent Unemployment | Iacono Research - December 18, 2012

    [...] addition to the sharp increase in new graphics as noted here yesterday that project the growth in the Federal Reserve’s balance sheet, that is, since they [...]

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