Perspective matters.
Something you see up close can appear very different if you step back and look at it from a distance.
In this episode of the Money Metals' Midweek Memo, host Mike Maharrey steps back and examines Federal Reserve monetary policy over three decades, providing a different perspective on the trajectory of inflation and the economy than you probably get from mainstream financial media.
In this episode, Mike also dives deep into the most recent central bank gold buying data and what's driving it.
Mike opens the show talking about a massive painting by Salvador Dali. The canvas is over 14 feet high and 9 feet wide.
"The thing about this painting is that it is completely different depending on your perspective. If you’re moderately close, you will see incredible detail. If you get really close, you’ll basically see dots and color blobs. You can’t really grasp the full concept of the painting unless you get pretty far away, because it’s so big.
"This painting really drives home the importance of perspective. Without considering all the perspectives, you really can’t grasp the scope and breadth of Dali’s work. If you only consider it from one perspective, you’ll only get part of the story. Your knowledge will be incomplete. And if you try to make a judgment, you’re going to end up way off base."
Mike points out that perspective is also important when looking at financial conditions and the economy.
"I want to talk about the historical perspective, which is kind of an extension of the time perspective that I focused on last week. To do this, I’m going to look at the Federal Reserve balance sheet and what it tells us about price inflation and the central bank's efforts to get it under control – and by get it under control, I mean create it."
Before diving into the main topic, Mike digs into the most recent central bank gold buying data.
"You might remember back in May, for the first time in over a year, the People’s Bank of China didn’t report any increase in its gold reserves and everybody freaked. Central bank gold buying has been a significant source of demand over the past few years, and it was one of the factors underpinning the spring bull run. So, when China stopped buying, a lot of people wondered if that was a signal that central banks more broadly might be stepping back from the yellow metal.
"The short answer is no."
Mike points out that central bank gold buying in July doubled June's numbers and was at the highest level since January. He goes over the numbers and highlights some of the biggest buyers.
Mike then turns to the Federal Reserve balance sheet, pointing out a post on X by a financial planner who noted that the Fed has reduced the balance sheet by 20 percent - the most in history.
"This struck me as a very odd flex, given the context of that drawdown."
Mike explains why understanding the balance sheet matters.
"It’s an extremely important monetary policy tool. And if you care about inflation, and dollar depreciation, and the price of trajectory gold and silver, and the direction of the economy, you have to pay attention to the balance sheet. The mainstream tends to focus on interest rate policy, but I would argue that the balance sheet probably has an even bigger impact on the money supply and inflation than interest rate manipulation."
Mike gives a short overview of how Fed monetary policy works, calling quantitative easing and balance sheet expansion "the nuclear missile of monetary policy." He notes that the central bank didn't even use the balance sheet as a significant policy tool until the 2008 financial crisis, but when it did, it was with gusto.
So, yes, the Fed decreased the balance sheet by about 20 percent over the last 18 months or so. And this sounds impressive -- until you put it in the context of balance sheet expansion.
"When you frame the recent balance sheet drawdown (quantitative tightening or QT) in percentage terms as Bilello did in his chart, it creates the impression that the central bank took an aggressive policy stance against inflation. The implication seems to be that it was a bold move by the Fed that could have far-reaching effects.
"But when you put balance sheet reduction in the context of balance sheet expansion, it looks more like Powell & Company just spit in the ocean."
Mike proves the point by running through the numbers during both the Great Recession and the pandemic.
To sum it up:
"In the period between the onset of 2008 the financial crisis and the end of the pandemic, the Fed expanded the balance sheet by 889 percent."
So, when you put the recent 20 percent reduction in the balance sheet, it doesn't sound very impressive at all.
"By the way, in May, the Fed quietly announced that it would begin to taper balance sheet reduction. In other words, they’re about finished with the drawdown."
Mike closes the show by explaining why this matters to the average person and a call to action.
"What does this mean for you? I think the takeaway is the same as last week – the Fed can talk a good game about fighting inflation, but it isn’t. Inflation is the policy. It’s the goal. They just hope you don’t notice. That means if you want to preserve your wealth, you always have to assume massive levels of inflation and currency devaluation. That means you need real money.
"So, now is a great time to call 800-800-1865 and talk to a Money Metals' precious metals specialist."
Articles Mentioned in the Show
What Is Quantitative Easing and How Does It Work?
What Is Fractional Reserve Banking?
The Chart from the Post Mike References
Fed Balance Sheet Over Time
About the Author
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
