Sunday, June 10, 2012

An Interesting Statistic

As in, holy shit, that's quite a statistic.

Pop Quiz! Without recourse to your text, your notes or a Google search, what line item is the largest asset on Uncle Sam's balance sheet?

A) U.S. Official Reserve Assets
B) Total Mortgages
C) Taxes Receivable
D) Student Loans

The correct answer, as of the latest Flow of Funds report for Q1 2012, is ... Student Loans.

(continued at link)

A chart from the linked article:

The timing suggests millions of the suddenly unemployed grabbed up student loans and headed to school. I'm sure there will be plenty of high-paying jobs waiting for them so they can pay off all that debt. It's not like US companies can just ship the work overseas or import more labor or anything.

The Fed's assets:

So in essence, the "recovery" amounts to trillions of dollars in toilet paper, ahem, assets (student loans, Treasury instruments, mortgage derivatives) "purchased" by the Fed with money it literally gins up out of nothing. (The Fed doesn't have a couple of trillion in cash just sitting around). These assets are worth nowhere near what Fannie Mae, Freddie Mac, Sallie Mae, Wall Street, Bank of America, and many other institutions and funds paid for them. That was the crisis in 2008: everybody realised the several trillion in credit and speculative paper that had been advanced was not worth nearly its book value. In very simple terms, it's as if you loaned $100,000 to a professional athlete, leveraged the asset or simply sold it on a secondary market, and then a week later you learn the athlete has been horribly injured in a car crash. In this case, the central bank just bought the assets at or near book value instead of the substantially less market value. Again, this was done with what economists call "liquidity" or "Quantitative Easing" and others would call whole cloth.

The only reason even larger numbers of us weren't suddenly out of work was the giant hole of vanished nominal wealth was quickly filled by the Fed. But no new wealth has been created. Producers will eventually realize that the interest rates and pricing structure in the economy do not reflect actual supply and demand. Prices will rise and creditors will start demanding higher interest. The Fed will have no choice but to continue to suppress interest rates and monetize bad assets to keep economic reality at bay.

Does the fact that the Fed has all these actually near-worthless assets holed up in its vault, so to speak, mean that all of it doesn't matter? I don't think so, because if it did we'd just print up money whenever we needed it.

1 comment:

elvisd said...

Academia is the mighty economic engine of our land.