New Normal: Awash in Cash, Fed Record Balance Sheet

Fed Prepares to Maintain Record Balance Sheet for Years - Bloomberg: "... Maintaining a large balance sheet in a tightening period would mark a strategic shift for the Fed and reverse much of central banking doctrine from the 1990s and early 2000s, which favored minimal interference in the economy. Under then-Chairman Alan Greenspan, the Fed targeted the fed funds rate, the cost of overnight loans among banks, and left most other interest rates to markets. Officials avoided subsidizing credit to specific industries, such as housing, to avoid opening a Pandora’s Box of requests to aid other sectors. That changed after the collapse of Lehman Brothers Holdings Inc. in 2008, when the central bank cut the fed funds rate almost to zero. Seeking more ways to stimulate growth, the Fed then began an effort to influence longer-term rates on home loans and other debt with purchases of longer-term Treasuries, mortgage-backed securities and housing-agency debt...."

Easy money: Even without the Fed, we are awash in cash.: "....Yes, the U.S. Federal Reserve has been an active supplier of easy money, with its various forms of quantitative easing since 2009 amounting to more than $4 trillion. But it is hardly the only source of liquidity. The Japanese government of Shinzo Abe has been actively pumping money into Japan’s economy in attempt to jump-start what has been a rather moribund system. Now Europe and China are adding to the mix. The mandate of Narendra Modi to reform the Indian economy could well mean that India will soon add to the global liquidity cornucopia. And then there are pools of money sitting in cash or less than fully invested, from the $5 trillion on U.S. corporate balance sheets alone (nearly $2 trillion of which is held by nonfinancial companies, i.e., not banks), to the more than $6 trillion controlled by sovereign wealth funds such as those of Norway, Saudi Arabia, Singapore, and Abu Dhabi. On top of that are the vast cash reserves of global savers, who have been wary of financial markets and prefer instead to keep cash savings in banks and money market funds ($2.6 trillion in the U.S. alone)...."

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