When the U.S. economy was on the verge of collapse after the financial crisis of 2008, the Federal Reserve came to the rescue. The central bank provided the financial system with quantitative easing—it printed money and bought bad debt from the big banks . Today, the Federal Reserve will meet and discuss the further purchase of bad debt from the big banks or some other form of monetary stimulus. To me, it won’t be a surprise to see it “add” to its balance sheet with more money creation. The Federal Reserve already announced three rounds of quantitative easing; I highly doubt it will be shy to announce more. What is troublesome to me is the speed at which the Federal Reserve is building its balance sheet. In January of 2008, the Federal Reserve had total assets of $927 billion—before quantitative easing and other stimulus poured into the markets. (Source: Federal Reserve, January 3, 2008.) Now, the same balance sheet stands at $2.9 trillion. (Source: Federal Reserve, December 6, 2012.) The Federal Reserve’s balance sheet has grown by almost $2.0 trillion—200% in less than five years all from money created out of thin air! One goal of the Federal Reserve was to buy mortgage-backed securities to stimulate the economy, and then to start selling the mortgage-backed securities back into the market in mid-2015. (Source: Bloomberg, December 7, 2012.) This way the central bank is not stuck with these securities while it gets back to its “pre-crisis balance sheet.” I wonder if we will ever really see this happen. My concern? Quantitative easing has caused the U.S. dollar to decline steadily. Like everything else in economics, the more of an item there is in supply, the less the item is worth. It was with the help of printing money out of thin air that the Federal Reserve was able to get its balance sheet to these levels. The Federal Reserve is stuck at a crossroad. If it does nothing, the risk of the economy falling back into a recession in 2013 increases; if it goes out and buys more mortgage-backed securities or provides other monetary stimulus (anything that results in creating more money), then the U.S. dollar will decline further. Since many countries are on a race to devalue their currencies to stimulate exports, the latter could be welcome. Most definitely, rising interest rates are not a concern now, as the Federal Reserve has practically guaranteed they will stay artificially low for the next few years. Of course, that’s unless inflation gets out of hand. My belief: the Federal Reserve will continue to create new money, buy more mortgage-backed securities or more U.S. Treasuries, and keep interest rates ... Read More