In the USA many commentators are having a panic reaction to the spectacular spike in the federal Reserve's balance sheet e.g. Dr Martin Weiss's newsletter essay titled Bernanke gone Beserk! from which the above and following chart come from. Anyone could say the exact same about the UK's Bank of England (HM Treasury & DMO) balance sheet growth that is more imposing relative to GDP even before the massive £585bn ($936bn) awaiting approval to grow the Bank of England balance sheet dramatically (with the innovation that the assets will be swapped for Bank of England unencashable cheques that the banks cannot remove from the premises - a dangerous innovation only if banks start writing unencashable cheques to each other and treating them as balance sheet items!)
There is no comparison with earlier Fed balance sheet hikes; none were of this magnitude or persistence. What is different this time is that the Fed (like the the Bank of England & HM treasury) is substituting for private funding sources to supply funding of banks' 'funding gaps' (previously filled by Medium Term Note & securitization programs). The liabilities that balance the central bank assets growth are heavily discounted securitised loanbooks (discounted below their mark-to-market and/or actual gross defaults impairment), subject to large fees, and with substantial interest margin in favor of the Fed (or Bank of England/ HM Treasury in the UK, or the ECB in the Euro Area). Terms & conditions are renewable every time the Treasury Bills (government securities with less than 1 year maturity) that the assets are swapped for are rolled over. In essence these are major repo swaps but with unusual informal as well as formal conditions attached. Informally, if no less imposing, the banks must treat the T-bills as reserves they cannot encash except to buy back their pledged assets but must continue to roll-over until the private sector wholesale funding sources are again available at a near to normal price i.e. whatever banks consider safely affordable, though this is a high threshold given the profitable charges & rates asserted by Fed & FDIC. The Fed can sell the assets on as and when it chooses to, whether via the awkward subsidised TARF scheme or any other better one it can come up with.
We need not worry this is 'printing money' as if new money injections into the economy and thereby boosting banks' lending capacity and the money supply. It is replacing private funding sources (of 'funding gaps' between deposits and assets much of whose private funding capacity has evaporated. It is a liquidity injection into a falling money supply. This too is very much the conscious awareness of the Bank of England's 'liquidity measures' (including APS, often mistakenly terms asset insurance, when that is the least of it).
But net increase in money supply is hard to judge. When banks are shrinking their balance sheets(and hedge funds also) it does not appear in aggregate to be a "printing money frenzy" as Dr Weiss states (& many others) - all else in the monetary context has not remained stable but receded/ fallen. The Fed is filling a gap that has appeared as private wholesale funding capacity has receded, not adding on top to what was there in order to maintain monetary growth stability.
It is only by looking only at the surface data of the central banks' balance sheets one can imagine there must be a money supply explosion - not so, and especially not in very low or begative general price inflation. The superficial impression is that the Fed (Bank of England especially too & others) are behaving totally without precedent, somehow thoughtlessly or carelessly - but is that a realistic presumption? Do they not know what it is they are doing?
It is easy in a 'Federal Tax Dollar' obsessed USA to create panic over this as if the whole amount of Fed balance sheet explosion is tax dollars at risk - much as there is enormous misunderstanding already about the size and affordability to taxpayers (and to the exchange rate of the dollar) of Federal Debt looked at gross. In fact it is not hard to also calculate looking forward that the net returns to the Fed as all this unwinds medium term will generate profit to the central budget or via the Fed debt balances sufficient to pay for more than half of federal budget deficits in the coming years!
