EDITOR NOTE: It was just a little over a year ago when many a financial pundit was talking about the Federal Reserve’s balance sheet; that it needed to be trimmed if the Fed was expected to have enough ammo to boost the economy should another recession take place. Well, that conversation has long passed. As the article below points out, the US economy was supposedly, “the greatest economy the world has ever seen,” according to President Trump. But still, prior to the pandemic, the Fed’s balance sheet was at $4 Trillion, and interest rates were already near zero. Fast forward to the present, and interest rates are even closer to zero, and the Fed balance sheet is headed not toward $5 T $10 T, or $20 T but more like $50 Trillion. What will such a high balance mean when it comes to your dollars, your assets, your wealth and (for those of you approaching retirement), your golden years?
President Trump has said often that he had “created the greatest economy the world has ever seen, until the China virus came.” Maybe some people believe that, but if the economy was so great why did the Fed keep interest rates at zero and its balance sheet at $4 trillion?
The president is bragging about the third quarter GDP bump; however, as David Rosenberg tweeted, “Even with the Q3 GDP snapback, a snapback that is now stalling, 2020 likely goes down with a –4% print, by far the worst year for the economy in the post-WWII era.”
Maybe the economy wasn’t so hot. Danielle DiMartino Booth, who once worked for Richard Fisher at the Dallas Fed, told Raoul Pal on Real Vision,
September the 16th , when they launched Not QE. Because the inversion of the 2s 10s had passed the 30-day mark, and they're like, oh my god, history says that we're in recession.
Well, no kidding, we're in recession. World trade was contracting for the entire year of 2019. Lacy Hunt will tell you, you have to go back to the double-dip recession of the 1980s or 2007- 2009, that era, before you had global contraction in global trade. Of course, we were headed into recession. But it was very slow.
There were the good old days when the Federal Reserve’s balance sheet footed to all of $800 billion in assets. In November 2008, the depth of the great recession, the Fed’s assets exploded to over $2 trillion. By 2015, Fed total assets had reached $4.4 trillion. Of course, when coronavirus hit, Fed assets popped to over $7 trillion.
Some people predict $10 trillion by year-end 2020. Who knows? Jerome Powell is pushing for fiscal stimulus and claims his operation has more ammunition if forced to use it. DiMartino Booth told Pal,
The Hippocratic Oath is nowhere in the Eccles building. They don't understand Do No Harm. They don't understand Do Nothing. They can't.
And the market and market participants, they need to know that the Fed is doing something, because if they don't, they're just staring at a pile of insolvent crap. So they have to know that there is something being done on behalf of them. And the reason that every Fed official has been begging for stimulus spending is they want $3 or $4 trillion of new product out there to buy and continue to aggressively grow the balance sheet.
To put it simply, the Fed needs more bond issuance to buy.
As it is now, the Treasury issues, primary dealers buy, and then the Fed buys what the rest of the market doesn’t. There is talk to take the primary dealers out of the equation, as DiMartino Booth said,
Even if they don't reopen the Federal Reserve Act of 1913 to allow the Fed to buy Treasuries at auction, which would require the law to change, what difference does it make if—and you see, you see the ticks flow. You see foreign investors stepping back from our Treasury market, meaning the Fed had to step in. So if the Fed is effectively absorbing Treasury issuance, why wouldn't you call it monetization by any other name, if it's de facto?
Felix Zulauf, owner and president of Zulauf Asset Management, told Grant Williams and Peter Fleckenstein on The End Game podcast that the government can’t absorb higher rates. He said the world’s central banks must take whatever paper governments issue. The result by the end of the decade will be a Federal Reserve balance sheet totaling $40 to $50 trillion. Williams and Fleckenstein audibly gasped upon hearing Zulauf say this.
Once the world’s central banks reach their limit, Zuluaf believes sovereign interest rates will be capped and pension plans and individual retirement accounts will be forced to buy the paper.
Negative rates will continue in Europe, leading to a nationalization of the banks. The same will happen in the US, with real interest rates being negative for years to come. Negative rates punish banks, Zulauf said.
Today’s social unrest doesn’t surprise Zulauf given the central bank policies which have led to the huge divide between the haves and have-nots. He sees the US as the worst in this regard along with Brazil. The result is “the zeitgeist is turning left.”
Trump is a populist/socialist who speaks to the right wing, according to Zulauf. He believes Joe Biden would work better with the European socialists.
This splintering will lead to more nations being formed in the next twenty years, and even California, with the fifth-largest economy in the world, may break away.
This is an investment scenario like we’ve never seen. Good luck and be careful.
Originally posted on Mises Institute