In case you were wondering . . . Part 7 - More on $4.5 trillion, 2% and a Theory of Relativity
- Published 7/25/2017
- Aug 18, 2017
- 3 min read
Governor Janet Yellen has indicated interest in shrinking the Balance Sheet to its pre-crisis balances. The markets have responded with a yawn. Below, is an extract from the Fed Balance Sheet.
(dollars in trillions) 12/31/2016 12/31/2007 $ Change
Total Assets $ 4.45 $ 0.92 $ 3.53
U.S. Treasuries $ 2.75 $ 0.75 $ 1.82
U.S. Backed Mortgages $ 1.80 $ - $ 1.80
Total Liabilities $ 4.41 $ 0.88 $ 3.53
$’s in Circulation $ 1.46 $ 0.79 $ 0.67
Member Bank Deposits $ 2.22 $ 0.03 $ 2.19
The discussions I have read associate the Balance Sheet reduction with Assets – specifically U. S. Treasuries. Those Assets financed the expansion of Currency resulting from quantitative easing and the Federal budget. This can be seen in $’s in Circulation and the Member Bank Deposits. In the Deposit account are reserves and un-invested dollars held by the Fed for its Member Banks.
Indications are, the Fed will allow U. S. Treasuries to mature. As I understand the process, by not replacing them, un-invested and out of circulation dollars held in Member Bank Deposits will be eliminated. Recently created currency has contracted, but, it is not circulating in the open market, so risks of deflation may appear low. Hence the yawn.
WSJ 7/10/2017 Weak Inflation Vexes Central Banks - “The decline in inflation is a mystery since the global economy appears to be growing at a faster pace than during recent years, while unemployment rates continue to edge lower.”
I do not understand how anyone could be mystified by the intractability of low inflation.
The Unemployment Rate does not include the involuntarily part-time and those no longer seeking work.As of 12/31/2016, that exclusion halved the count of Americans classifiable as inadequately employed.
The stifled economy of the last eight years put downward pressure on household incomes.Meanwhile, medical costs soared; food prices increased; and consumer credit interest rates were unchanged.
More people may be employed, but there’s a price tag to years of inadequate employment.Americans are using less gasoline, content with the car they own, and avoiding discretionary expenditures.The money saved is re-building depleted savings and retirement accounts.
In the United States, the simple average of growth in GDP from 2009 to 2016 was 1.76% and from 2014 to 2016, 2%.For 2017, 2% seems to be the forecast.I’m not seeing “a faster pace” in these numbers – actually, somewhere between static and anemic.
In the absence of economic growth there is nothing to inspire Inflation.Also, the Fed is using the Interbank Rate to manage Inflation to a target of 2% - the natural rate absent inspiration.
Our primary trading partners are not enjoying robust economic health.
WSJ 7/8/2017 Investors Brace for ECB’s Unwind – “ECB President Mario Draghi kicked off the bond selloff last week with bullish comments about the eurozone economy that investors saw as heralding tighter monetary policy.”
WSJ 7/8/2017 – BOJ Props Up Domestic Bonds - “Japan’s central bank stepped in to tame a rise in government-bond yields on Friday, signaling its determination to stick to its current policy mix, even as the recent selloff in global bond markets intensifies.”
So, stimulus continues in Japan and the EU and both have negative interbank rates. The lender pays interest to the borrower. The “time value” of money is the foundation of financial analysis. A negative interest rate indicates absence of demand for the money. The ECB and BOJ are funneling billions of euro and yen into their domestic economies and an institutionalized premium is necessary to entice borrowers? This is dangerous territory.
WSJ 7/11/2017 – OECD Sees Signs of U.S., U.K. Slowdown - “In the early months of the year, the leading indicators pointed to a pickup in U.S. growth. Economists, and businesses then expected to see some increases in investment spending and cuts in taxes under the then newly installed administration of President Donald Trump. But those hopes have faded . . .”
WSJ 6/30/2017 - Revised GDP Signals 1.4% Growth Rate - “Chief Executive James Keane (Steelcase Inc.) told analysts that uncertainty about government policy may be causing some companies to delay projects.”
The Central Banks, the global Business Community, and the American People await the implementation of the economic platform for which Mr. Trump was elected. They understand the United States is a catalyst and the only economy capable of spurring enough demand for goods and services to reverse this ridiculous situation. Meanwhile, Capitol Hill sits inanimate. Democrats pursue impeachment; Republicans impersonate Fredo Corleone; and both protect their perquisites. Mind boggling.
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