With the Fed lying about unwinding balance sheet, the central bank appears to have no intention of letting stocks tank
Since the end of summer, Janet Yellen stated during one of the Fed’s FOMC meetings that the central bank would begin unwinding its $4.8 trillion balance sheet in October since the economy ‘appeared’ to be able to stand on its own.¬† But according to analyst Dave Kranzler over at Investment Research Dynamics, not only has the Fed not begun to unwind, but their balance sheet has actually increased between October and the middle of November.
Elijah Johnson:¬†Now, I’d first like to discuss the Fed’s Balance Sheet because you recently wrote an article about how what is really happening with the Fed’s balance sheet is that it is increasing.¬† Now the Fed claimed that it was supposed to be normalizing it’s balance sheet a couple of months ago, but since then, the balance sheet has actually increased by $7 billion.
Dave Kranzler:¬†¬†It all depends on where you mark when you measure the Fed’s balance sheet, but essentially net-net from the end of September to the last Fed balance sheet report which was last Wednesday (Nov. 15), the Fed balance sheet actually increased.
If you recall they announced in September that they were going to start shrinking their balance sheet, which means they were theoretically going to start withdrawing some of the liquidity from the system that they put into the system with their massive QE program (money printing).¬† But the fact of the matter is they were allegedly supposed to take down their balance sheet by $10 billion per month, and $10 billion is nothing, I mean it is infintesimal compared to the $4.8 trillion the Fed has printed not to mention the multiples of this they have enabled through credit expansion.
At its core, the 2008 Financial Crisis occurred because of the credit expansion introduced by former Fed Chairman Alan Greenspan when he took interest rates down to 1% following the bursting of the Dot Com bubble, and the need for credit by the Federal government following the events of 9/11.¬† And subsequently the banks used this credit irresponsibly to create a housing bubble that would eventually itself burst, and which nearly took down the entire financial system because of the lack of liquidity.
So with this in mind the Fed believed that the only answer to a liquidity problem was of course to create even more liquidity.¬† And to remove it from the system as they intimated in September would be the catalyst for the same type of stock market crash we saw between 2008 and 2009, followed by the destruction of the already unsound bond markets which have been the result of eight years of near zero interest rates.
Kenneth Schortgen Jr¬†is¬†a writer for¬†The Daily Economist,¬†Secretsofthefed.com,¬†Roguemoney.net, and¬†Viral Liberty, and hosts¬†the popular¬†youtube podcast¬†on Mondays, Wednesdays and Fridays.¬†Ken can also¬†be heard Wednesday afternoons giving an weekly economic report on the¬†Angel Clark radio show.