The Federal Reserve’s balance sheet continues to rise, although at a slower pace than it had the previous three weeks. This isn’t saying much.
From April 1, 2020 to April 8, 2020, it went from $5.81 trillion to $6.08 trillion. It is sad that I am rounding off to the nearest $10 billion.
So in the period of one week, it went up a little under $300 billion. This is after it went up $1.5 trillion in the matter of three weeks.
The Fed’s balance sheet was around $900 billion in 2008 when the financial crisis hit. The Fed quickly expanded its balance sheet to over $2 trillion in the matter of a couple of months. From 2009 to 2014, it eventually doubled again.
The balance sheet sat around $4.4 to $4.5 trillion for several years until 2018, when the Fed gradually reduced it. It went a little below $4 trillion in 2019.
The Fed had already started expanding it again in late 2019, before there was any fear of a virus. It is important to remember that the yield curve had somewhat inverted in 2019. The 10-year yield fell below the 3-month yield, which is a marker of a coming recession. Also remember that the repo rate had spiked up in September 2019.
The economy was not on a sound footing before the virus hit. The Fed had already started expanding, and it had lowered its target federal funds rate.
The reactions to the virus would have been serious regardless of where the economy stood at that time. When the government shuts down millions of businesses, this obviously has a major impact on productivity.
The bigger problem though is that we were already on shaky ground. There is not going to be any V shaped recovery. There will not be a U shaped recovery either.
The Federal Reserve and the federal government are making things dramatically worse. They are both massively misallocating resources.
Wages are going to decline significantly. The Fed has moved to a policy of massive monetary inflation. It is unclear how this will play out, but it isn’t going to be good.
There is no question that Americans are going to experience a major decline in living standards. Things will not be fixed when governments allow businesses to reopen. Many businesses will stay closed. The ones that do reopen will be very conservative. They may only hire back a portion of the previous workers.
The big unknown is how the reduction in living standards will take place. Will consumer prices decline or rise? It will obviously depend on the product or service in question, but there will be a general trend one way or the other.
The thing I do know is that real wages will go down. Nominal wages will likely go down for the rest of 2020. When a lot people are looking for work, wages go down. It is a supply and demand issue.
But if the Fed’s massive monetary inflation starts to translate into massive price inflation, then maybe nominal wages will eventually go higher. The problem is that the increased wages will not buy as much.
It is possible that, in a few years, a $100,000 salary may not qualify as a middle class salary, even in a lower cost-of-living area. This will be the case if a loaf of bread costs $10. We will see if dollar stores can remain dollar stores.
Everything has changed over the last month. When the lockdowns end, the economy is not going back to the way it was. The federal government is making things worse with its massive spending. The Fed is making things worse with its massive monetary inflation. It is inescapable that living standards will decline well beyond this year.