Saturday, 13 July 2013

Net Assets to Total Asset Ratio of the Federal Reserve Hits a New Record Low: 1.569%

According to data published yesterday by the Federal Reserve, Total Assets of the Federal Reserve was USD 3.411 trillion, the highest ever reported.

Total Liabilities also hit a new high at USD 3.356 trillion...

...thus leaving the Federal Reserve with Net Assets of just USD 54.970 billion. Net Assets therefore made up only 1.569% of Total Assets for the week ending 12 July 2013 and was the lowest ever reported Net Asset to Total Asset ratio by the Fed based on data going back to December 2002 (the Fed does not publish data prior to this).

Of course, the Fed can never go bust as it can always print money to pay its bills. As such, the Fed can operate with a thin net asset percentage and it would not make much of a difference even if it was negative. But there are limits to how much it can print as price inflation pressures could ultimately build up (when the money leaves the banking system and becomes part of the broader measures of money supply).

Also, if net assets become negative, the Fed would at that stage be technically insolvent from an accounting view point. That is a problem in itself as Robert P. Murphy points out. Finally, one should not forget that a weak Fed balance sheet does not exactly increase confidence of the holders of U.S. dollars. A reduced confidence in the Fed and the dollar could therefore exert downward pressure on the dollar, which by itself can put upward pressure on price inflation (as the U.S. is a net importer of goods and services).

As Thorsten Polleit points out in his article The Fiasco of Fiat Money,
To keep the fiat-money regime going, therefore, people must keep their confidence in the value of fiat money.
Dr Frank Shostak, in an article discussing Mises' writings (The Prophet of the Great Depression), explains how a monetary system can fall apart,
Whenever monetary authorities allow the rate of monetary pumping to proceed at an accelerating pace, the purchasing power of money tends to fall by a much larger percentage than the rate of increase in money supply. Mises attributed this to increases in inflationary expectations. Peoples' expectation that the future PPM is likely to fall causes them to lower the present demand for money. This sets in motion a mechanism that, if allowed to continue unabated, can ultimately break the monetary system.
Inflationary expectations lead the suppliers of goods to ask for prices that are above what the holders of money can pay. Potential buyers don't have the money to purchase the goods. The emerging shortage of money, according to Mises, is an indication that the inflationary process has gained pace and cannot be "fixed" by raising the supply of money. On the contrary, policies that accommodate this shortage can only make things much worse. Ultimately, the sellers demand astronomical prices, transactions with inflated money become impossible, and the monetary system falls apart.
The Fed is therefore playing a very dangerous game indeed. Not only with the U.S. dollar and price inflation, but with the whole U.S. monetary system as well. This is no breaking news, but we are now much later in the game than when the Fed first floored the money printing pedal back in September/October 2008.

Also view: Chart: Federal Reserve Total Assets and S&P 500 Index (as of 12 July 2013)

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