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Little to Show for the $3 Trillion Federal Reserve Balance Sheet

The U.S. central bank’s bond-buying spree has merely kept the economy running in place

The Federal Reserve’s aggressive bond buying has caused the central bank’s balance sheet to balloon.

Fed’s Balance Sheet Tops $3 Trillion for First Time

Wall Street Journal, Jan. 24

And the Fed recently stated it will continue its $85-billion-per-month bond buying spree.

But the Fed’s easy-money policy has failed to produce healthy growth in the economy. In fact, the economy actually contracted (0.1%) in Q4 for the first time since 2009. That’s what the Fed has to show for all of its quantitative easing initiatives.

With that in mind, consider the sobering views of three economic professionals which have been published in CNBC in recent days.

First, the head of the nation’s largest bond firm says that the credit bubble “is running out of time and energy.” He adds (Feb. 4):

Our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic. … Unless central banks and credit extending private banks can generate real or at second best, nominal growth with their trillions of dollars, euros, and yen, then the risk of credit market entropy will increase.

Second, the outlook of a well-known University of Maryland business professor is also grim (Feb. 4):

Record low interest rates are propping up weak consumer demand but sowing the seeds of another financial crisis. …

Cheap borrowing rates help banks push student debt over $1 trillion, even though one in six loans is in default, and permit California, Illinois and other states to avoid reforming pension systems and issue debt they never will repay. …

The federal and state governments will be forced into draconian spending cuts in the manner of an Italy or Spain, corporations and state governments will default on many of their lower grade securities. …

Financial markets will collapse, again!

This calamity will be worse than the last, because much of the middle class’s residual wealth—retirement and savings accounts and other assets—will be dissipated and federal spending will be contracting not expanding.

And the chief economist at Deutsche Bank comments on the Fed’s near-zero interest rates (Feb. 1):

They have the pedal pressed so far down, I just think it’s going to end so badly.

Bob Prechter saw the economic writing on the wall when he wrote the second edition of Conquer the Crash (p. 133):

The lack of solutions to the deflation problem is due to the fact that the problem results from prior excesses. Like the discomfort of drug addiction withdrawal, the discomfort of credit addiction withdrawal cannot be avoided. The time to have thought about avoiding a system-wide deflation was years ago. Now it’s too late.

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