The Federal Reserve (the Fed) has done the unthinkable.  It has increased its balance sheet to over $8 trillion.

The balance sheet stood around $900 billion in 2008.  When the financial crisis hit, it quickly doubled in the matter of a couple of months.  It proceeded higher for many years, reaching $4.5 trillion in late 2014.

This was all referred to as quantitative easing (QE).  From 2008 to 2014, we went through QE1, QE2, and QE3.

Ben Bernanke had talked about balance sheet normalization.  In 2018 and early 2019, there was mild monetary deflation coming from the Fed.  But it was very mild, and we, of course, never went back to anywhere close to what the balance sheet looked like in early 2008.  In August 2019, the balance sheet got down to about $3.76 trillion.

Here is something that people forget (if they ever knew).  The balance sheet started increasing again in September 2019 when interest rates in the repo market spiked higher.  These are rates on short-term loans that the Fed had to control by starting up monetary inflation again.

It is also easy to forget that the yield curve went negative in 2019.  There were many problems on the horizon.  But the Fed was able to cover it all up because of virus hysteria and lockdowns that came about in March 2020.

By the time March 2020 came, the balance sheet had already gone back up to about $4.2 trillion.  Balance sheet normalization (using pre September 2008 as a basis) was never going to happen with or without a virus.  It wasn’t ever going to be close.

Now here we are in June 2020, and the balance sheet is over $8 trillion.  It is up about nine times what it was prior to the fall of 2008.

It’s not that this is unprecedented in history.  We know about Weimar Germany, Zimbabwe, Venezuela, and many other countries that have experienced hyperinflation.  What is unprecedented is that this is happening in the richest country in the world with a currency that is still considered to be the world’s reserve currency.

I am not saying that we are in hyperinflation or that we will go into hyperinflation.  But when the central bank increases its balance sheet 9-fold over a period of 13 years, it should open your eyes.

From 2008 to 2014, the Fed mostly got away with its massive monetary inflation.  Much of the newly created money went into bank reserves.  The fractional reserve lending process of banks did not multiply this new money like it could have.  In addition, there was still some hesitancy on the part of consumers due to the shock of the financial crisis.  While assets went up in price – particularly stocks – consumer prices did not rise significantly according to the government’s CPI numbers.

It is a different story in 2021.  The Fed’s inflation has come fast and furious, and the government has helped inject some of this new money directly to people in the form of unemployment checks and stimulus checks.

We are in a major boom right now.  The problem is that it is mostly an artificial boom.  It is also unsustainable.

The Fed is continuing to add about $120 billion per month to its balance sheet.  This could end quickly if Fed officials see that they are losing control of the dollar.

They say they want higher inflation (meaning price inflation).  They say that the current pickup in price inflation is just transitory.  But you better believe that they are a bit concerned right now.  They really don’t want to return to the 1970s or something far worse.

These are dangerous economic times.  We could see much higher price inflation still to come.  We could see a major pop in the “everything bubble”.  We could see one and then the other.  We could see both at the same time.

This is why it is important to diversify.  I still recommend something resembling the permanent portfolio.  It is important to not get sucked into the mania.  The mania is unsustainable.