Sometimes a good graphic really helps to put things in perspective. Courtesy of the WSJ's Real Time Economics blog is this interactive Federal Reserve assets chart.
The chart headline refers to the Fed's "balance sheet". But in small print you read that it is actually charting just the Fed's assets. The full Fed balance sheet would also include liabilities, which are not shown. (If you're curious about what the Fed's liabilities are comprised of take a look at the green paper in your wallet or purse, and you can learn more here and here.)
Why are the Federal Reserve's assets important? Simply put, the Fed's assets equal the money printed by the Fed. In other words, for an asset like a U.S. Treasury bill to wind up on the Fed's balance sheet it must be purchased by the Fed. And the money to purchase that Treasury bill is created (printed) by the Fed.
Looking at the chart two things jump out:
- The parabolic 'hockey stick' curve. Fed assets shot upwards from roughly $800 billion pre-financial crisis in 2007 to today's $2.3 trillion.
- The increase in the different types of assets held on the balance sheet
Prior to the crisis the Fed's balance sheet was pretty simple: basically $800 billion in U.S. treasury securities. Now it contains everything from former AIG and Bear Stearns junk assets, to loans to other government's central banks, to who knows what until the one-time Fed audit is completed.
Looking at the value of the U.S. Dollar and U.S. government debt, so far the market's reaction to the the tripling in size of the Fed's balance sheet has been relatively benign. But can present values be sustained through another round of Fed "quantitative easing"?
Disclosure: Long Gold and Silver