The Federal Reserve has ostensibly embraced the mantra of "records are made to be broken." For the first time in its century-old history, the United States central bank's balance sheet exceeded $8 trillion after more than a year of unprecedented and ultra-aggressive emergency measures to cushion the blow of the coronavirus-induced financial crisis.
How Much is $8 Trillion Anyway?
According to weekly data published by the Eccles Building, the Fed began selling roughly $160 million worth of holdings in 16 bond exchange-traded funds (ETFs). This is still a drop in the bucket as the institution possesses close to $14 billion in its corporate credit portfolio alone.
Despite money supply growth looking like it has moderated, the balance sheet continues to explode. But this has been the case since the Great Recession, with the organization increasing its balance sheet to more than $4 trillion to rescue the U.S. economy from the ashes of despair in 2009.
So, what is next? The talk on The Street is that the Fed will soon engage in a good old-fashioned taper tantrum. Now that the economic recovery is in full swing, the world’s most powerful entity could begin to curtail the fourth edition of QE. Will this involve raising interest rates? Perhaps it will be a blend of unwinding its astronomical amount of assets and keeping rates near zero.
At this point, anything is possible as the Fed could perform the Powell pivot at a moment's notice. With the White House planning to spend trillions of dollars more, the central bank will have no other alternative but to monetize the debt and deficits, an endeavor of kicking the fiscal can down the road.
Uncle Sam is Bleeding
When will Uncle Sam's hemorrhaging cease? As the months go by, the bleeding only seems to get worse. But the blood on Capitol Hill is ostensibly critical to expanding the economy in the aftermath of the once-in-a-century pandemic.
The Treasury Department recently reported that the U.S. budget deficit topped $2 trillion in May. Last month, the federal gap was around $132 billion: tax receipts totaled $463.7 billion, and spending came in just below $596 billion. This brought the fiscal year 2021 deficit total to $2.063 trillion. With four months to go in the current fiscal year, the federal government is poised to eclipse last year's record of $3.13 trillion, especially if President Joe Biden gets his massive spending proposals approved by the House and Senate.
The national debt continues to intensify, surpassing $28 trillion. Although near-zero rates have made it easier to borrow money, U.S. taxpayers have been on the hook for about $320 billion in interest payments. In comparison, Americans shelled out nearly $523 billion in interest last year. Keynesians typically dismiss the deficit, arguing that it is inconsequential for the broader economy. This is poppycock, however. Deficits are nothing more than tax hikes on future generations, requiring them to shoulder the burden. This takes money out of the private sector and is put into the hands of the fiscally irresponsible government.
A fiscal crisis is looming. But the Washington leadership believes more spending and more taxation will be the panacea to the pecuniary plight the nation faces during these uncertain times.
Burning Dollars with a Cuban Cigar
Is Cuba participating in the de-dollarization campaign? Havana might be late to the party, but it is better late than never for America's adversaries.
Cuba announced on Jun. 10 that it would no longer accept cash bank deposits in dollars, citing tighter U.S. sanctions that are preventing the country from using its dollars in foreign markets. Cuban bank account holders will have until Jun. 21 to deposit their dollars before the suspension goes into effect.
The central bank confirmed in a statement to state-run media that the island nation is finding it difficult to locate "international banking or financial institutions willing to receive, convert or process U.S. currency in cash." After former President Donald Trump enhanced sanctions on Cuba, close to two dozen banks halted processing dollar-denominated transactions from the communist country. President Biden promised to reverse his predecessor's measures, but the administration has yet to take any action on this file.
For a long time, Cuba had maintained a 10% levy on dollars because of the difficulty the government had in utilizing them amid the U.S. embargo. However, in 2020, the government removed the tax after permitting stores to sell in hard cash instead of the local currency. Still, the dollar hegemony has frustrated America's foes, including Russia, China, Iran, and others. Will Cuba join the international push to dethrone the dollar and remove the currency's stranglehold on geopolitical affairs?
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Read more from Andrew Moran.
