The chart below gives a pretty clear picture of the challenges that lie ahead for the US and the rest of this systemically interconnected financial world, as we all try to struggle through the hangover left by the near collapse of the global economy in late in 2008.
The green and the red stuff in the graph is the extra money the US Federal Reserve has added to its balance sheet to support the US and global economies. (US banks, currency swaps, new lending funds, US commercial paper). There’s an awful, awful lot lot, more than any one can comprehend. Simply trillions of dollars which has been was used to stabilise the global and various economies from the threat of implosion after Lehman Brothers fell over and a number of other banks creaked and tumbled.
The Fed beefed up its balance sheet and that’s what is holding up the world economy at the moment, with modest assistance from the Bank of England, the Bank of Japan and the European Central Bank. The ship has steadied, but rocky shoals lay ahead, or jagged mountain peaks.
The next step is to dismantle this monster mountain of money before it ends up causing its own set of dislocations: say a surge of inflation after the deflationary effects have run their course; or another recession if the play dough is pulled away too quickly.
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To say the Fed and the rest of the financial world are in uncharted waters ranks, quaintly, as something of an understatement. As any climber will tell you, the worst falls usually take place on the descent.
Our thanks to Crikey fiscal vigilante Julian Gillespie for this lovely Fed graph: