Sunday, March 08, 2009

Reserve Balances held by the Federal Reserve Bank are going off the chart

The chart below from the St Louis Fed is disturbing. The chart depicts the Balance Sheet of the Federal Reserve Bank. As you can see the balance sheet has soared since mid-September 2008. This rise is unprecedented and was caused by the financial situation beginning with Bear Stears, Lehman, and AIG.

The Fed now owns $27.0 Billion of poor quality assets from the troubles at Bear Stearns. It owns another $46.7 Billion from AIG. In addition, The FRB now owns $316.2 Billion in a Commercial Paper Funding Facility; and, $465 Billion in Central bank liquidity swaps. Prior to this crisis both of the last two number were zero. Next, the Fed is being instructed to start buying mortgage backed securities from distressed banks. This will balloon the monetary base once again.

The the U.S. monetary base has increased from approximately $890 billion to $1,740 billion--doubling in a little more than 3 months. This is unprecedented and is represented by the blue line climbing straight up the right side of the chart.

Right now, there is little concern about inflation. However, there should be concern because if markets do not become normalized soon, the Fed will not be able to sell these distressed assets without taking enormous losses. If the Fed is unable to unwind these assets in an orderly fashion then inflation will almost certainly come back with a vengeance.

Gold, oil, and commodity prices should be watched very closely by investors. Even a slight pick up in demand is likely to send commodity price up sharply. Weather factors could also be a factor in the major growing regions of the United States this year--right now it is very dry, not a good condition.

Rises in the monetary base often lead to rises in inflation. The current increase in the monetary base started in the later part of 2007; and then took off with a vengeance in September 2008. There is usually a 12-18 month lag before inflation hits. We are coming into the window right now.
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Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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