With Thursday’s release of the Federal Reserve’s balance sheet data, we finally see how much they were able to reduce assets in the month of June. The current plan is to reduce US Treasuries (UST) holdings by up to $30 billion a month and Mortgage-Backed Securities (MBS) by $17.5 billion a month, for June, July and August. After which, the balances are to decrease by up to $60 and $35 billion, respectively.
Trust the Fed to ensure their plans are well thought out, as these figures are only “caps,” meaning they are not guaranteed amounts. The Fed has promised to reduce its balance sheet in June by $47.5 billion at most. They could be accused of not being very aggressive, but they could rationalize this by explaining how they applied just the right amount of tightening in June, when the time comes.
So far, the balance sheet has been decreasing:
- On June 1 the UST balance was $5,770,779,000,000. As of Thursday’s release, the balance on July 6 was $5,744,344,000,000, for a reduction of roughly $26.4 billion.
- On June 1 the MBS balance was $2,707,446,000,000. The balance on July 6 was $2,709,336,000,000 for an increase of roughly $1.9 billion.
The Fed did not decrease the balance sheet as much as they could’ve, reducing by half the maximum limit. But did this substantially change the outcome of the boom-bust cycle?
In America’s Great Depression, which is one of the best, if not the best, books on the great depression, Rothbard gives an in-depth discussion of the Austrian Business Cycle Theory (ABCT). What remains highly relevant is when he says:
The boom will end when bank credit expansion finally stops.
Make no mistake: The boom is what causes the bust. Our future was fixed the moment the Fed decided to shower the world with trillions of newly created US Dollars. The boom may have been exciting for those long in the stock market, those who received forgivable loans from the Paycheck Protection Program, and the many million recipients of government stimulus checks. But when the money flow stops, so too does the boom.
The mere cessation of credit is enough to bring about the bust. It is not because the Fed is tightening too much or too little, too early or too late. The crash is set in motion simply by the Fed stopping, as it has, their credit expansion process. Therefore, even if the Fed does nothing except hold the balance sheet steady for the foreseeable future, the crash remains inevitable.
Rothbard briefly explains the cycle:
Thus, bank credit expansion sets into motion the business cycle in all its phases: the inflationary boom, marked by expansion of the money supply and by malinvestment; the crisis, which arrives when credit expansion ceases and malinvestments become evident; and the depression recovery, the necessary adjustment process by which the economy returns to the most efficient ways of satisfying consumer desires.
Unfortunately, another certainty lies ahead: No matter how self-evident, failure is assured, since it’s only a matter of time until the Fed and Congress use all their efforts to bring us out of the downturn (or depression). There will come a point when things become “so bad” that they will claim they are forced to intervene using more monetary and fiscal schemes than FDR himself could ever imagine!
We’ll get more stimulus, lower rates, higher prices, bailouts for some, and stimulus for all. This boom will set in motion the next bust, perpetuating the cycle, until everyone becomes aware of this nefarious process. In the future, we may look back at 2022 and remark just how low prices were back then…
