The mechanism propping up (or holding down, depending on perspective) this apparatus known as the US economy can be visualized in a few charts, allowing us to see how fragile “the system” really is. In the last week of the year we see:
Total Assets
The Fed’s balance sheet now stands at an all-time high of $7.4 trillion. Meaning over 3 trillion digital dollars were created this year for the purpose of buying and lending to specific persons or organizations. “Liquidity” or “stimulus” are normally cited as the reasons behind this expansion.
Securities Held Outright: US Treasury Securities
To provide more context for what the Fed bought with $3 trillion this year, look no further than US Treasurys and mortgage-backed securities (MBS). The Fed currently owns $4.7 trillion of US Treasurys, making the Fed a significant holder of the US government’s current $27.5 trillion debt.
Securities Held Outright: Mortgage-Backed Securities:
As for MBS, the balance currently sits at $2.1 trillion, meaning the Fed created roughly $600 billion in order to subsidize the housing market this year.
A true elephant in the room, it seems, MBS purchases are seldom, if ever, discussed, scrutinized, or even written about. With the housing crisis apparently having been resolved over a decade ago, it seems odd for the Fed to continually make monthly purchases to support this market. But as long as the housing market stays strong and rates remain low, it’s safe to bet that few people will ask questions.
M2 Money Stock
Given the exceptional rise of the Fed’s balance sheet this year, some may be left wondering: What happens after the Fed expands the balance sheet?
It’s tough to trace several trillions of dollars; however, looking at the supply of money allows us to conceptualize its path from the Fed into the system. Here we see the M2 money supply, now sitting at $19.2 trillion.
Looking at the data shows the money supply increased by nearly $5 trillion for the year. Considering the newly created $3 trillion from the Fed eventually entering the banking system, coupled with money creation by commercial banks, $5 trillion seems as good a number as any. Also keep in mind that, since March 26 of this year, reserve requirements at depository institutions have been set to zero. So the money creation by the banks could have been a lot worse!
While this financial system may work well for many, like anything else which favors the rich and well connected, it works for them just a little bit more than for everyone else. The advantage is given to those who get access to newly created money first.
Currency in Circulation
When the currency in circulation is compared to the M2, the fragility can be seen with a deeper perspective. At year end 2020, there exists $2.1 trillion of coins/bills, of which approximately 10 percent was created in this year alone.
Note the similar parabolic rise in all the above charts and understand that “parabolic moves” don’t normally end well. But when “the end” will come remains anyone’s guess. Nonetheless, when people say our money is not really there, it’s very much true. That only 10 percent of our money exists in a physical form while 90 percent is digital means this entire system could collapse should a sizable amount of people simply ask for their money back. Of course, a bank run could never exist in a cashless society…
Perhaps that’s why it’s so important the population remain calm and trust the system, its central planners, academic influencers, and the mainstream media. Especially in 2020, during this time of crisis, when the public looks for leadership, the role of the state is of paramount importance!
