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FED's balance sheet


jawn619
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I was discussing this with a couple of friends and i was thinking about something that almost everyone believes but might not necessarily be true. One was the concept that the U.S. treasury bonds/bills are RISK FREE

I have a questions about the nations balance sheet.

 

So basically with all of this quantitative easing, The US balance sheet is loaded with huge liabilities. So the US is basically like someone who is living way above their means and has a huge amount of debt compared to it's assets? Does anyone have any links or data showing what the governments balance sheet looks like? Or any ways of thinking that can enlighten me?

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You seem to be blurring the distinction between QE and national debt.  In QE the Fed is buying assets (mortgages and bonds) and "borrowing" to do so.  There is huge liabilities but also correspondingly huge assets.  It is largely a wash except that the purchases are assumed to eventually result in a modest loss. Secondly, correct if me if I am wrong here, but the Fed is creating money at zero cost such that the liability side has a zero cost of funds and the asset side is earning something.  Thus theoretically the Fed is generating a profit for the US at the same time it is stimulating the economy.

 

The national debt is obviously different - the cumulative effect of borrowing to support current spending.  While a serious problem, it is not growing as rapidly in the last few years.

 

I would be careful in using the analogy of a person living beyond their means.  There are important differences, for example a person cannot raise their income while the US can by raising taxes. 

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You seem to be blurring the distinction between QE and national debt.  In QE the Fed is buying assets (mortgages and bonds) and "borrowing" to do so.  There is huge liabilities but also correspondingly huge assets.  It is largely a wash except that the purchases are assumed to eventually result in a modest loss. Secondly, correct if me if I am wrong here, but the Fed is creating money at zero cost such that the liability side has a zero cost of funds and the asset side is earning something.  Thus theoretically the Fed is generating a profit for the US at the same time it is stimulating the economy.

 

The national debt is obviously different - the cumulative effect of borrowing to support current spending.  While a serious problem, it is not growing as rapidly in the last few years.

 

I would be careful in using the analogy of a person living beyond their means.  There are important differences, for example a person cannot raise their income while the US can by raising taxes.

 

Thanks for the clarification. Can someone else explain to me the national deficit? preferably with some concrete numbers?

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You seem to be blurring the distinction between QE and national debt.  In QE the Fed is buying assets (mortgages and bonds) and "borrowing" to do so.  There is huge liabilities but also correspondingly huge assets.  It is largely a wash except that the purchases are assumed to eventually result in a modest loss. Secondly, correct if me if I am wrong here, but the Fed is creating money at zero cost such that the liability side has a zero cost of funds and the asset side is earning something.  Thus theoretically the Fed is generating a profit for the US at the same time it is stimulating the economy.

 

The national debt is obviously different - the cumulative effect of borrowing to support current spending.  While a serious problem, it is not growing as rapidly in the last few years.

 

I would be careful in using the analogy of a person living beyond their means.  There are important differences, for example a person cannot raise their income while the US can by raising taxes.

 

Thanks for the clarification. Can someone else explain to me the national deficit? preferably with some concrete numbers?

 

The answer to your question is another question:

What do you want to include in your calculation?

  • Federal debt?
  • Federal entities deb
  • Federal pension plan liability
  • Federal Mecidaid and Medicare liability
  • States debts
  • States entities debts
  • States entities pension plans deficit
  • Cities debt
  • Cities pension plans deficit
  • Other liabilities (promised guarantees, etc...)

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You seem to be blurring the distinction between QE and national debt.  In QE the Fed is buying assets (mortgages and bonds) and "borrowing" to do so.  There is huge liabilities but also correspondingly huge assets.  It is largely a wash except that the purchases are assumed to eventually result in a modest loss. Secondly, correct if me if I am wrong here, but the Fed is creating money at zero cost such that the liability side has a zero cost of funds and the asset side is earning something.  Thus theoretically the Fed is generating a profit for the US at the same time it is stimulating the economy.

 

The national debt is obviously different - the cumulative effect of borrowing to support current spending.  While a serious problem, it is not growing as rapidly in the last few years.

 

I would be careful in using the analogy of a person living beyond their means.  There are important differences, for example a person cannot raise their income while the US can by raising taxes.

 

Thanks for the clarification. Can someone else explain to me the national deficit? preferably with some concrete numbers?

 

The answer to your question is another question:

What do you want to include in your calculation?

  • Federal debt?
  • Federal entities deb
  • Federal pension plan liability
  • Federal Mecidaid and Medicare liability
  • States debts
  • States entities debts
  • States entities pension plans deficit
  • Cities debt
  • Cities pension plans deficit
  • Other liabilities (promised guarantees, etc...)

 

Federal. I just want a rough idea of what the Fed's balance sheet looks like.

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Im not sure if a hidden liability like pensions is a really big problem.

 

US tax revenue is about 6 trillion $. And the deficit is about 500 billion$ I think. Which is really not too bad, since it is shrinking. So basicly 6.5 trillion is spent, while 6 trillion comes in. But in the past years, tax revenue has been lower then the historical average. And gov spending has been higher. So it is not really a huge problem compared to some other first world countries.

 

As for debt, the figures differ. Some say 18 trillion$, which ofcourse isn't that bad, very managable, and nothing too worrying, just 3x income. But this does not take into account hidden liabilities:

 

http://www.forbes.com/sites/realspin/2014/01/17/you-think-the-deficit-is-bad-federal-unfunded-liabilities-exceed-127-trillion/

 

And:

http://www.wsj.com/articles/SB10001424127887323353204578127374039087636

 

Aaah 127 trillion. Now suddenly the debt load looks a lot more crazy. If average age rises a bigger and bigger % of tax income has to be spent on pensions. So fewer and fewer money available for servicing debt and other things.

 

To paint a picture what is happening in Japan and how much worse it could be in the US.

 

http://www.mof.go.jp/english/budget/budget/fy2014/02.pdf

 

Tax income is 45 trillion yen, and they spend 90 trillion yen. So their deficit is huge compared to the US. And their debt is freaking 780 trillion yen.  I dont think this includes offbalance sheet debt. Those are actual bonds outstanding. So with the US debt is 3x tax revenue, but for Japan it is 20x!!

But if it doesn't then ofcourse it is more insane even.

 

 

 

The problem here is that when the population ages in the US, which will happen, pensions will eat up most of the spending. In Japan they basicly eat up 26 trillion yen, vs 45 trillion yen of income. Politicians are not happy to cut into that, so what will happen is, they borrow more and more and more. So what you see now in Japan (and what is extremely likely to end badly) will also happen in the US, unless something drastic happens.

 

So where does the central bank come in? They can inject money in the system by buying up this debt. Basicly reducing the debt load for free. The problem is, you gotta insert money in the system to do that. And if you do that then you get inflation. And if you get inflation (because putting more of something in the system bidding on the same amount of stuff decreases its value) investors demand higher interest rates. So after a certain point when the debt load is huge, and a large % of tax income has to be spent on paying interest, if you want to print yourself out of your debt load, hyper inflation is the only outcome...

 

For example 22 trillion of the 45 trillion of income in Japan is spent on debt servicing. So if there is inflation, this figure will go up, because interest payments go up. And with too much leverage, if it goes up even a little bit the debt problem spins out of control. Because tax revenue doesn't really go up by much because the country ends up being poorer because of this. So now maybe interest payment is 40 trillion instead of 22 trillion. Also take into account that higher interest rates will also partially reflect future expected inflation. So Increased interest cost far outpaces increased tax revenue in this case. This means they gotta borrow even more to fill up that spending/income hole! And if they borrow even more, this means even more interest, and if they dont print they will have to default if they run out of lenders. Or they print more, causing more inflation, causing higher interest even, causing a even bigger hole in the budget. etc etc.

 

The only way is higher tax revenue, but if you increase taxes, it often hurts GDP. And with large debt loads, you often have a bad economy, so not much chance people will just earn more by them selves and pay more taxes that way.

 

So you can say that at a certain point you reach a tipping point where basicly you get default (argentina) or hyperinflation (zimbabwe). The US has not reached that point of no return yet. But if they are not carefull in the next decade or so, it will happen.

 

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As for FED balance sheet, I think it is like 4 trillion$? Total money supply is like 18 trillion $ now I think.

 

I think the reason you barely see any inflation in the regular inflation basket (besides housing education and healthcare) is because it takes a while to trickle down from wall street to the real economy. First it basicly cleans up the balance sheets of the financial industry. But ofcourse they dont just hand out the money to the regular people, so it does not really add to the pile of money bidding on goods and services in the inflation basket.

 

Only if lending standards are loosened up because of the increased pile of money banks have will you see inflation in things like housing. I think you see it first in things like stocks? If anyone knows more on how this money trickles in the economy, that would be great.

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Sorry for tripple post, but to add, I think the 60 trillion in medicare and social security can be viewed as an erosion of what the US government can spend on other things in the next few decades. As the US population ages, as happens with all first world countries, fewer and fewer can be spend on roads, education, defence etc. So with 6 trillion in income (and only slowly growing), only increasingly small parts of that 60 trillion have to be paid each year to become a problem. This leaves out the 18 trillion ofcourse.

 

And the problem here is, it basicly becomes a ponzi scheme at some point. So the government will need a certain level of complacancy. If Japan would collapse, that would be huge, and Im not sure what will happen then. A lot of investors sure dont want to borrow money so easily to the US if they see Japan go down like that. That would essentially end the ponzi scheme, so this could become a problem sooner then you think (eg in 5 years already instead of 15).

 

http://www.aoa.acl.gov/Aging_Statistics/index.aspx

 

 

 

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Btw the government balance sheet and FED balance sheet are two very different things. Fed owns 4 trillion in securities (MBS securities and bonds mostly). But this basicly means that they injected 4 trillion$ in the US economy and institutions. This was bought with 'printed' money. Buying from other countries and from US institutions/citizens.  They can destroy these securities for all they care. If they sell them they can reduce the money supply. But if they abuse this power, then ofcourse they can ruin a country and potentially severly damage an economy by hampering exchange of goods and services.

 

Part of the reason you did not see inflation because of this was because a lot of value was destroyed. So basicly moneysupply would have went down rapidly, but this was filled up by the FED.

 

But when you talk about what the government owes, that is very different, they cannot simply wipe out their debt without huge consequences for the country. The FED's balance sheet isn't really a traditional balancesheet. They dont really owe anybody anything. I wouldn't even call it a balance sheet, more a money lever injection device or something.

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Im not sure if a hidden liability like pensions is a really big problem.

 

US tax revenue is about 6 trillion $. And the deficit is about 500 billion$ I think. Which is really not too bad, since it is shrinking. So basicly 6.5 trillion is spent, while 6 trillion comes in. But in the past years, tax revenue has been lower then the historical average. And gov spending has been higher. So it is not really a huge problem compared to some other first world countries.

 

As for debt, the figures differ. Some say 18 trillion$, which of course isn't that bad, very managable, and nothing too worrying, just 3x income. But this does not take into account hidden liabilities:

 

 

Unless you look at different numbers than I do, revenue (receipts) are approx. $3 trillion, and outlays are about $3.6 trillion, creating a 600 billion annual deficit.  So the $18 trillion debt is not 3x income but 6x. 

 

http://www.whitehouse.gov/omb/budget/Historicals

 

 

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Im not sure if a hidden liability like pensions is a really big problem.

 

US tax revenue is about 6 trillion $. And the deficit is about 500 billion$ I think. Which is really not too bad, since it is shrinking. So basicly 6.5 trillion is spent, while 6 trillion comes in. But in the past years, tax revenue has been lower then the historical average. And gov spending has been higher. So it is not really a huge problem compared to some other first world countries.

 

As for debt, the figures differ. Some say 18 trillion$, which of course isn't that bad, very managable, and nothing too worrying, just 3x income. But this does not take into account hidden liabilities:

 

 

Unless you look at different numbers than I do, revenue (receipts) are approx. $3 trillion, and outlays are about $3.6 trillion, creating a 600 billion annual deficit.  So the $18 trillion debt is not 3x income but 6x. 

 

http://www.whitehouse.gov/omb/budget/Historicals

 

 

http://www.usgovernmentrevenue.com

 

I also count state and local revenue, not correct?

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