With one week left in the year, it’s time to take a look at America’s financial system as visualized through various Federal Reserve charts. This is the follow up from 2020: A Visual of the System, published this time last year.
Total Assets - $8.790 trillion
America’s central bank now owns nearly $9 trillion worth of assets, an increase of almost $1.4 trillion for the year. The Fed’s balance sheet might sound official, but it’s more of a euphemism to describe the money creation process more than anything else. Ultimately, the Federal Reserve System created over a trillion dollars and unleashed it into the world, with most going to the purchase of various debt instruments.
Securities Held Outright: U.S. Treasury Securities - $5.650 trillion
An increase of just under $1 trillion in the year, and the Fed remains one of America’s largest debt holders. At year end, US debt stands at $29.4 trillion ($27.5 trillion last year). This leads to an interesting comparison: The national debt increased by approximately $2 trillion versus the Fed’s holding of US debt which increased by approximately $1 trillion.
Securities Held Outright: Mortgage-Backed Securities (MBS) - $2.650 trillion
Mortgage debt owned by the Fed increased by only half a trillion. While not the largest increase on the balance sheet, $500,000,000,000 is still a lot of money! It’s fair to say that few people understand MBS, fewer know where this money is going, and even fewer can name the prime beneficiaries of this government intervention. Over a decade since the housing crash, this may be another of those indefinite temporary measures.
The MBS balance combined with the US Treasury Security balance means that $8.3 trillion is owed to the Fed. It’s an unfathomable sum of money, and likely the reason an asset reduction strategy by the Fed is seldom discussed. Should a time come when the Fed starts selling securities or letting the balance sheet run-off, i.e., letting securities mature and not buying new ones, drastic changes to interest rates will more than likely occur.
M2 - $21.187 trillion
The money supply increased by nearly $2 trillion from a year ago. The Fed plays a significant role in the money creation process, but commercial banks also have an important role to play. Perhaps an empowering thought for the individual, because each time you make a deposit or withdrawal, or anytime you use a loan to buy anything, from a house, to bitcoin or stocks, you too are contributing to fluctuations in the money supply.
Currency in Circulation - $2.212 trillion
For all the trillion dollar increases to money supply and asset purchases, currency in circulation only increased by $100 billion from this time last year. When compared to the M2 money supply, the actual notes and coins in circulation only amount to 10%. The dollar went digital a very long time ago, existing mostly on computer mainframes and general ledgers.
If enough people went to the bank and demanded their money, it would become quickly apparent that their money is not available.
As 2021 winds down, not much more can be said. There have been no substantial changes to the debt-based money creation mechanism which ensures all goods, services and assets perpetually increase in price. The inevitable boom and bust cycle this monetary expansion causes is still in effect, so it’s only a matter of time, being the when, not the if, the bust happens. Until then, one can try to think of ways to prepare or profit off of making accurate predictions.
Good luck in 2022.
