Tuesday, June 17, 2014 – 11:00 a.m.
Last Modified: Wednesday, June 18, 2014 – 12:30 a.m.
One has to wonder what’s coming down the road for the economy. There’s no debate that the Federal Reserve was responsible for the Internet and real estate bubbles, of the past.
The big question here is how big is the new Federal Reserve-driven stock and real estate bubble?
I pulled up the latest Federal Reserve balance sheet and couldn’t believe what I was actually seeing. I never ever thought they would go this far.
Prior to the 2008 collapse, the Fed kept its balance sheet below $1 trillion. Please remember, when the Fed buys asets to place on its balance sheet, it isn’t using money from the U.S. Treasury, or money generated from government-issued debt. It’s printing, or making the money appear out of thin air, by pushing some numbers on a computer screen.
The balance isn’t reflected in the actual national debt numbers, but is only listed as a footnote on the U.S. Treasury balance sheet.
For years now, the Fed has been using fake money to buy up government and mortgage-backed securities (MBS), in order to push interest rates down, thus providing liquidity (easy money) to foster economic growth. This slush-fund of money has been used by investors, banks and others, to buy up real estate and stocks.
The result? A continuing weak economy, which contracted 1% in the 1st Quarter of 2014, higher commodity inflation, a record stock market, and real estate prices that have skyrocketed back from a devastating collapse.
As of June 12, 2014, the Fed had assets on its balance sheet totaling $4.38 trillion. Combined with the official U.S. balance sheet deficit of $17.4 trillion.
A figure that is just under 130% of the annual Gross Domestic Product (GDP) of the U.S., which is currently at $16.8 trillion.
Of that amount, $2.27 trillion was used to purchase government securities in the open market. Another $1.65 trillion was used to buy MBS instruments.
Until recently, the Fed was buying at a pace of $85 billion in securities per month. That amount has been reduced at a rate of $10 billion per month to the current $45 billion. The purchases should end by October.
The next issue becomes the trillions of dollars of securities on the books, that need to slowly flow off at a snails pace. If the Fed holds the debt to maturity, it’s going to be interesting. More than half of the balance sheet matures in 10 years, or longer.
So the big question remains. If all this stimulus didn’t send the economy into orbit, how will taking it away impact the economy, real estate and stocks?
The mom and pop investor has finally started plowing back into the market once again. While at the same time, the wealthy have been slowly pulling their money out, or hedging.
Then there’s the next question: How big will the next crash be?
Because they always happen, and we haven’t had one yet.