The Fed’s Balance Sheet: The Other Exponential Curve
As the threat of COVID-19 keeps millions of Americans locked down at home, businesses and financial markets are suffering.
For example, a survey of small-business owners found that 51% did not believe they could survive the pandemic for longer than three months. At the same time, the S&P 500 posted its worst first-quarter on record.
In response to this havoc, the U.S. Federal Reserve (the Fed) is taking unprecedented steps to try and stabilize the economy. This includes a return to quantitative easing (QE), a controversial policy which involves adding more money into the banking system. To help us understand the implications of these actions, today’s chart illustrates the swelling balance sheet of the Fed.
How Does Quantitative Easing Work?
Expansionary monetary policies are used by central banks to foster economic growth by increasing the money supply and lowering interest rates. These mechanisms will, in theory, stimulate business investment as well as consumer spending.
However, in the current low interest-rate environment, the effectiveness of such policies is diminished. When short-term rates are already so close to zero, reducing them further will have little impact. To overcome this dilemma in 2008, central banks began experimenting with the unconventional monetary policy of QE to inject new money into the system by purchasing massive quantities of longer-term assets such as Treasury bonds.
These purchases are intended to increase the money supply while decreasing the supply of the longer-term assets. In theory, this should put upward pressure on these assets’ prices (due to less supply) and decrease their yield (interest rates have an inverse relationship with bond prices).
Navigating Uncharted Waters
QE falls under intense scrutiny due to a lack of empirical evidence so far.
Japan, known for its willingness to try unconventional monetary policies, was the first to try QE. Used to combat deflation in the early 2000s, Japan’s QE program was relatively small in scale, and saw mediocre results.
Fast forward to today, and QE is quickly becoming a cornerstone of the Fed’s policy toolkit. Over a span of just 12 years, QE programs have led to a Fed balance sheet of over $6 trillion, leaving some people with more questions than answers.
This is a big experiment. It’s something that’s never been done before.
Kevin Logan, Chief Economist at HSBC
Critics of QE cite several dangers associated with “printing” trillions of dollars. Increasing the money supply can drive high inflation (though this has yet to be seen), while exceedingly low interest rates can encourage abnormal levels of consumer and business debt.
On the other hand, proponents will maintain that QE1 was successful in mitigating the fallout of the 2008 financial crisis. Some studies have also concluded that QE programs have reduced the 10-year yield in the U.S. by roughly 1.2 percentage points, thus serving their intended purpose.
Central banks … have little doubt that QE does operate in many ways like conventional monetary policy.
Joseph E. Gagnon, Senior Fellow at the Peterson Institute for International Economics
Regardless of which side one takes, it’s clear there’s much more to learn about QE, especially in times of economic stress.
The Other Exponential Curve
When conducting QE, the securities the Fed buys make their way onto its balance sheet. Below we’ll look at how the Fed’s balance sheet has grown cumulatively with each iteration of QE:
- QE1: $2.3 Trillion in Assets
The Fed’s first QE program ran from January 2009 to August 2010. The cornerstone of this program was the purchase of $1.25 trillion in mortgage-backed securities (MBS).
- QE2: $2.9 Trillion in Assets
The second QE program ran from November 2010 to June 2011, and included purchases of $600B in longer-term Treasury securities.
- Operation Twist (Maturity Extension Program)
To further decrease long-term rates, the Fed used the proceeds from its maturing short-term Treasury bills to purchase longer-term assets. These purchases, known as Operation Twist, did not expand the Fed’s balance sheet, and were concluded in December 2012.
- QE3: $4.5 Trillion in Assets
Beginning in September 2012, the Fed began purchasing MBS at a rate of $40B/month. In January 2013, this was supplemented with the purchase of long-term Treasury securities at a rate of $45B/month. Both programs were concluded in October 2014.
- Balance Sheet Normalization Program: $3.7 Trillion in Assets
The Fed began to wind-down its balance sheet in October 2017. Starting at an initial rate of $10B/month, the program called for a $10B/month increase every quarter, until a final reduction rate of $50B/month was reached.
- QE4: $6 Trillion and Counting
In October 2019, the Fed began purchasing Treasury bills at a rate of $60B/month to ease liquidity issues in overnight lending markets. While not officially a QE program, these purchases still affect the Fed’s balance sheet.
After the COVID-19 pandemic hit U.S. shores, however, the Fed pulled out all the stops. It cut its target interest rate to zero for the first time ever, injected $1.5 trillion into the economy (with more stimulus to come), and reduced the overnight reserve requirement to zero.
Despite receiving little attention in the media, this third measure may be the most significant. For protection against bank runs, U.S. banks have historically been required to hold 10% of their liabilities in cash reserves. Under QE4, this requirement no longer stands.
No End in Sight
Now that the Fed is undertaking its most aggressive QE program yet, it’s a tough guess as to when equilibrium will return, if ever.
After nearly two years of draw-downs, Fed assets fell by just $0.7 trillion—in a matter of weeks, however, this progress was completely retraced.
QE4 is showing that what goes up, may not necessarily come down.
Mapped: The World’s Biggest Private Tax Havens
What countries or territories do the ultra-wealthy use as tax havens?
The World’s Biggest Private Tax Havens
When the world’s ultra-wealthy look for tax havens to shield income and wealth from their domestic governments, where do they turn?
If you’re putting money in offshore bank accounts in order to save on taxes, there are two main criteria you’re looking for: secrecy and accessibility. Based on pop culture and media reports, you might imagine a secretive bank in Switzerland or a tiny island nation in the Caribbean.
And though there is some truth to that logic, the reality is that the world’s biggest tax havens are spread all over the world. Some of them are small nations as expected, but others are major economic powers that might be surprising.
Here are the world’s top 20 tax havens, as ranked by the 2020 Financial Secrecy Index (FSI) by the English NGO Tax Justice Network.
Which Countries are the Biggest Tax Havens?
The FSI ranks countries and territories from all over the world on two criteria: secrecy and scale.
- Secrecy Score: How well the jurisdiction’s banking system can hide money. This includes analysis of ownership registration, legal entity transparency, tax and financial regulations, and cooperation with international standards.
- Global Scale Weight: What is the jurisdiction’s share of the world’s total cross-border financial services? This metric is based primarily on the IMF’s Balance of Payments statistics.
By weighing a country’s ability to hide money by its relative share of offshore financial services, we see the tax havens with the biggest impact on the global economy.
|1||🇰🇾 Cayman Islands||Caribbean|
|2||🇺🇸 United States||North America|
|4||🇭🇰 Hong Kong||East Asia|
|5||🇸🇬 Singapore||Southeast Asia|
|7||🇯🇵 Japan||East Asia|
|9||🇻🇬 British Virgin Islands||Caribbean|
|10||🇦🇪 United Arab Emirates||Middle East|
|12||🇬🇧 United Kingdom||Europe|
|13||🇹🇼 Taiwan||East Asia|
|17||🇹🇭 Thailand||Southeast Asia|
|19||🇨🇦 Canada||North America|
|20||🇶🇦 Qatar||Middle East|
At a glance, the top 20 tax havens are spread out across regions. Just under half of the list is located in Europe, but the rest are spread out across the Americas and Asia.
And the jurisdictions are opposites in many ways. They include financial powerhouses like the U.S., Japan, and the UK as well as smaller nations and territories like the Cayman Islands, Hong Kong, and Luxembourg.
But one surprising thing many of them have in common is a link to England. In addition to the UK, four of the top 20 tax havens—Cayman Islands, British Virgin Islands, Guernsey, and Jersey—are British Overseas Territories or Crown Dependencies.
Also worth noting is the importance of scale in the rankings. The highest ranking jurisdictions by secrecy score were actually the Maldives, Angola and Algeria, but they represent less than 0.1% of total offshore financial services.
Best Place To Hide Private Vs. Corporate Tax
Some of the listed tax havens might be confusing to nationals of those countries, but that’s where relativity is important. The U.S. and Canada might not be tax havens for American or Canadian nationals, but the ultra-wealthy from East Asia and the Middle East are reported to utilize them due to holes in foreign tax laws. Likewise, the UAE has reportedly become a tax haven for Africa’s ultra-wealthy.
In addition, many of the countries used as tax havens for individual wealth are also utilized by corporations.
The Tax Justice Network’s 2021 assessment of corporate tax havens listed the British Virgin Islands, Cayman Islands, and Bermuda as the top three tax corporate tax havens.
While individuals might create shell companies in tax havens to hide their wealth, corporations are usually directly incorporated in the tax haven in order to defer taxes.
But the tax haven landscape might soon shift. The G7 struck a deal in June 2021 to start taxing multinational corporations based on the revenue generated in each country (instead of where the company is based), as well as setting a global minimum tax of 15%. In total, a group of 130 countries have agreed to the deal, including India, China, the UK, and the Cayman Islands.
As the campaign to bring back deferred taxes ramps up, the question becomes one of response. Will the ultra-wealthy individuals and corporations start to work in tandem with the new rules, or discover new workarounds and tax havens?
Comparing Recent U.S. Presidents: New Debt Added vs. Precious Metals Production
While gold and silver coin production during U.S. presidencies has declined, public debt continues to climb to historically high levels.
Recent U.S. Presidents: Debt vs. Coins Added
While precious metals can’t be produced out of thin air, U.S. debt can be financed through central bank money creation. In fact, U.S. debt has skyrocketed in recent years under both Democrat and Republican administrations.
This infographic from Texas Precious Metals compares the increase in public debt to the value of gold and silver coin production during U.S. presidencies.
Total Production by Presidential Term
We used U.S. public debt in our calculations, a measure of debt owed to third parties such as foreign governments, corporations, and individuals, while excluding intragovernmental holdings. To derive the value of U.S. minted gold and silver coins, we multiplied new ounces produced by the average closing price of gold or silver in each respective year.
Here’s how debt growth stacks up against gold and silver coin production during recent U.S. presidencies:
|Obama's 1st term (2009-2012)||Obama's Second Term (2013-2016)||Trump's term (2017-Oct 26 2020)|
|U.S. Silver Coins Minted||$3.7B||$3.3B||$1.4B|
|U.S. Gold Coins Minted||$6.7B||$5.1B||$2.9B|
|U.S. Public Debt Added||$5.2T||$2.9T||$6.6T|
Over each consecutive term, gold and silver coin production decreased. In Trump’s term so far, the value of public debt added to the system is almost 1,600 times higher than minted gold and silver coins combined.
During Obama’s first term and Trump’s term, debt saw a marked increase as the administrations provided fiscal stimulus in response to the global financial crisis and the COVID-19 pandemic. As we begin to recover from COVID-19, what might debt growth look like going forward?
U.S. Public Debt Projections
As of September 30, 2020, the end of the federal government’s fiscal year, debt had reached $21 trillion. According to estimates from the Congressional Budget Office, it’s projected to rise steadily in the future.
|U.S. Public Debt||21.9T||23.3T||24.5T||25.7T||26.8T||27.9T||29.0T||30.4T||31.8T||33.5T|
By 2030, debt will have risen by over $12 trillion from 2020 levels and the debt-to-GDP ratio will be almost 109%.
It’s worth noting that debt will likely grow substantially regardless of who is elected in the 2020 U.S. election. Central estimates by the Committee for a Responsible Federal Budget show debt rising by $5 trillion under Trump and $5.6 trillion under Biden through 2030. These estimates exclude any COVID-19 relief policies.
What Could This Mean for Investors?
As the U.S. Federal Reserve creates more money to finance rising government debt, inflation could eventually be pushed higher. This could affect the value of the U.S. dollar.
On the flip side, gold and silver have a limited supply and coin production has decreased over the last three presidential terms. Both can act as an inflation hedge, while playing a role in wealth preservation.
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