The news of legislation to increase oversight on Federal reserve got me curious about their current state of affairs.
More on proposed legislation >
I wanted to investigate how much Fed's credit has expanded in the past year see if there are signs on trouble as we emerge from the recession. Its the first time I'm looking at Fed's balance sheet and am not even sure I can understand it. However, whatever little I did understand makes me very nervous.
Reserve bank credit has almost double the past year from $1.1 trillion to $2.1 Trillion. About $900 Billion of it coming in increased Treasury Securities. But I also noticed that fed has about $690 Billion in Mortgage backed securities. I wondered if this was marked to market which I doubted and the footnote provided more details.
"Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Current face value of the securities, which is the remaining principal balance of the underlying mortgages"
It appears that they are not marked to market but at face value of remaining principal balance which is cause for concern as these were trading at 10 cents to the dollar when they were bought. Most market participants thought that they would collect the fraction of the face value due to defaults. Fed is holding off selling these MBS for now but when the eventually do sell them they might incur a huge loss. I wonder what it means for a central bank but a $300 - $400 B loss on $2.1 T balance sheet can't be good.
Coming bank to increased credit and corresponding increase in treasury securities, it has to be inflationary. When the economy shows any sign of recovery inflation might be a big problem leading to a weak dollar. Further, holders might look to offload their US treasuries leading to Dollar plummeting. We might be in for serious currency crisis with lot of volatility world over.
Again, I am not a economist and most of what I have said is speculative. However, whatever I do understand is concerning. I did search for other who might be looking at fed's growing balance sheet. While most did say inflation is on cards I found this one particularly interesting saying that its not necessary and not inevitable. This one's explains it via basic marco-economic principles.
All said and done I am still wary of another impending shock and I think its best to be prepared.
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