It’s all to do with the FED talking about shrinking their balance sheet.
The new fake fear that is starting to be ginned up right now is that the Fed is going to be moving ahead soon with plans to reduce the size of its balance sheet. The doomsayers are saying this could result in catastrophe. Apparently balance sheet reduction was mentioned in the minutes from the March meeting. That didn’t stop the fanatical Fed watchers from getting their campaign of worry going.
The BELIEF that this is bad will be the main thing you are going to hear from now on. And, furthermore, when it starts happening or, even if the Fed moves up its intentions, investors will reflexively sell stocks out of blind fear.
In reality any time the Fed adjusts its balance sheet, either up or down, the only thing that is going on is an asset swap with the economy. In the case of Quantitative Easing and the asset purchases that that entailed, the Fed was buying Treasuries and other securities like mortgage backed securities and replacing them with reserve balances in the banking system. That’s it.
At the time it was happening, however, everyone went crazy. They said it was “money printing” and it would cause skyrocketing inflation; even hyperinflation. People bought gold and sold the dollar. Even many savvy people, not just kooks.
Of course this was the wrong thing to do. It was based on complete ignorance of monetary operations and what really was going on. By buying relatively high yielding assets like Treasuries and MBS and replacing them with reserves in the banking system, the Fed was removing income from the economy. That was income that investors could have earned.
You can see it very clearly in the numbers. Personal interest income dropped from $1.36 trillion in 2008 to $1.18 trillion by mid-2010, after both QE1 and QE2. That’s a loss of nearly $200 billion. It’s income that would have been earned by people and firms yet instead, it was taken by the Fed. That’s the reason why there was never any inflation. That’s why the dollar never collapsed. It was not money printing at all, it was money “un-printing.”
No one understood this. You had all the nut-jobs telling people to buy gold and sell the dollar and we know how those trades worked out — poorly. Similarly, there was blind belief that it was bullish for stocks and while stocks did rally, they rallied on an “expanding multiple” theme, not on what would have been a more solid, expanding economic growth theme.
Now we’re about to have the opposite, but it will be similarly misconstrued. People will be told to be scared when the Fed starts reducing its balance sheet when in actuality, it’s really not a bad thing at all. From a purely definitional point of view, it’s once again just an asset swap. More importantly, however, this time, instead of buying relatively high yielding assets and replacing them with low yielding reserves, the Fed will be putting back those high yielding assets and taking away the reserves. There’s nothing bad about that.
In the same way they said back then that They said it was “money printing” and it would cause skyrocketing inflation; even hyperinflation and it didn’t happen. Is the same wrong thinking in that there will be a $ shortage.