On April 5, 2017, the Federal Reserve (Fed) announced that is going to unload its balance sheet.
What does this mean?
Prior to the 2008 financial meltdown, the Feds balance sheet was under $1 trillion. Now, it is around $4.5 trillion.
These figures represent the U.S. debt that the Fed is holding.
The Fed has increased the debt that it is holding attempting to re-inflate the housing bubble. It has done this by:
- Buying all the toxic debt (Mortgage backed securities) from the banks.
- Driving the interest rates to record lows by buying all of the Bonds from the Quantitative easing (Qe1, Qe2 etc.). Results are artificially low interest rates making the public’s ability to obtain higher mortgages easier in an attempt to re-inflate the housing bubble (which it has).
- Now that the Fed has successfully re-created the housing bubble, it is time to sell the securities
The Fed has done this and, in the process, affected nearly every asset class including gold, silver, real estate etc.
What does liquidating its balance sheet mean? It means selling its mortgage-backed securities and its treasury Bonds.
Why did the fed buy mortgage-backed securities and treasury securities in the first place?
It bought mortgage-backed securities in 2008 when all of the banks were in trouble because of all the nonperforming loans.
Essentially, the Fed bailed out the banks.
It has been buying U.S. treasury securities (Bonds) because nobody wants to buy the United States debt anymore.
The biggest buyers, in the past, of the U.S. Bonds that have been China, Russia, Japan and Germany. They ALL are now selling off their U.S. Bonds because they realize that the U.S. is printing dollars out of control causing their Bonds to be paid back with dollars that don’t have the same purchasing power as they did when the Bonds were purchased.
How will they shrink their balance sheet?
Historically, as the Bonds and Mortgage back securities matured, themFed would reinvest the proceeds into more Bonds and Mortgage backed securities. Now, as the Bonds and Mortgage-backed security’s mature, they will not reinvest the money. Thus, slowly remove them from their balance sheet.
The bottom line is that, with ALL of the big players (i.e. China, Russia, Japan etc.) selling their US debts and now the Fed (Who is currently the #1 buyer of US debt) shrinking its balance sheet, it is likely this will send the US economy into a tailspin.
With the last buyer of U.S. government issued debt jumping ship, what’s next…..