What Happened The Last Time The Fed's Balance Sheet Hit 25% Of GDP

Tyler Durden's picture

Ever since the Fed launched its unprecedented, unsterilized debt monetization rampage known as quantitative easing, coupled with seven years zero interest rates, there has been much confusion about how the Fed will achieve two gargantuan tasks: i) hike rates, and ii) reduce the amount of holdings on its balance sheet. The quandary, according to conventional wisdom, is magnified because something like this "has never been done before."

Conventional wisdom is wrong: something like this has been done before; the reason why nobody wants to talk about it is because it ended in epic disaster.

The chart below shows the Fed's balance sheet expressed as a % of GDP: it has grown from its long-term "normal" 5% to just over 25%.

 

Never before has this happened, right? Wrong.

As the following chart below shows, the Fed's response to the first (not to be confused with the current) great depression was, drumroll, identical.

Whereas the Fed's balance sheet expressed as a % of GDP was humming along nicely largely at just over 5% in the period ever since the Fed was created in 1913, things got promptly out of control when the Great Depression hit in 1929. At that point the Fed's balance sheet grew from 5% to just shy of 25% at its peak. Maybe there is a reason why some call the current period the second great depression...

More to the point, last night we showed that the first Great Depression period is comparable to the current time period not only in being a mirror image of the Fed's balance sheet, but also of interest rates, which by necessity had to be virtually zero in a time when the Fed was monetizing assets to stimulate aggregate demand. And so they were... until 1937, when the Fed hiked rates.

As we showed yesterday, what happened next was that a little over a year after the Fed hiked rates for the first time, the Dow Jones tumbled, plunged by 50% in March 1938 (the S&P500 in its current form would not appear for another 20 years).

But that was the topic of last night's post. What we want to emphasize here is what happened after. Because as the market crashed and the economy collapsed yet again in the last such acute episode of the Great Depression, something far more historic than a simple market collapse took place.

 

In other words, from the first rate hike by a Fed whose balance sheet as a % of GDP was nearly identical to the current one, to the start of World War II: less than three years.

We truly hope this time its different, although judging by today's dramatic return of the nuclear arms race and the countless war zones across the middle east and Africa, slowly all the increasingly militarized geopolitical events are falling into place.

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City_Of_Champyinz's picture

Idiot politicians never learn a damn thing from history, and we are the ones condemned to repeat it...

cossack55's picture

Great! Fightin' the krauts and nips again.

Ham-bone's picture

this time it's (totally fucking) different...

for the first time in US history the largest segment of our working population is 55+ while all younger groupings are declining...

this is the last act of a very bad play...we should all be asking for a refund.

http://econimica.blogspot.com/2015/06/random-thoughts-as-we-circle-drain.html

http://econimica.blogspot.com/2015/05/2008-was-tremorwhy-main-event-is-still.html

Creepy A. Cracker's picture

Yep... The "Germans bombed Pearl Harbor" then all hell broke lose.

(Animal House)

TeamDepends's picture

That is interesting because guess what boys and girls? Jade Helm started yesterday (yes, they bumped it up a month)!

Miffed Microbiologist's picture

Yes we had a party. I hope they don't go running through my property in the dead of night without night goggles. I take my designation "Pocket Insurgency" seriously.

Miffed

kaiserhoff's picture

Hmmmm.

 What happened the last time we had 30 million illegals collecting welfare,and camping out wherever they damn well please?

alphamentalist's picture

what this article fails to highlight is that the Fed's b/s hit 25% AFTER ww2 was over, and only went parabolic after the war started (implying monetary financing of war materials). we went to 25% twice as fast this time and without a global war. i've typed this before--until i was blue in the fingers--but this time is different: this monetization is the death rattle of the western nanny states. what comes after this may well be another global war, but with our national accounts in such a sorry state, it will be a war we fight from the back foot. but, it could just as easily be a war amongst ourselves--instead of the classical euro nonsense--as the ideologies which ahve brought us to this precipice are entrenched and unwilling to concede an inch of their privledges.

new game's picture

what is scarey is the back foot is quit the arsenal of high tech killing devices being commandered by zioneocons. hmmm, not so good of a warm fuzzy fucking sinking shit thought...

THX 1178's picture

Nowadays, since everything is moving faster... i would say 3 weeks at most. Maybe 3 days. Noth three years.

weburke's picture

yellen interest rate announcement tomorrow.

Richard Chesler's picture

The fed will only raise rates once all goyim serfs are deep in debt.

It's called history, bitchez!

 

MontgomeryScott's picture

'yellen interest rate announcement tomorrow.'

Those interested in having sex (casual only) with Mr. Yellen are encouraged to attend this 'meet-up' seminar. She will be taking a vote on the 'Yellen Interest Rate', in hopes of future encounters. An instruction sheet will be provided that details the finer arts of preparation for being 'pegged' by her/him. Don't be worried, though, as no nudity or activity will take place this time (you are encouraged to research the graphics of this practice on your locally-provided internet porn site, in preparation for the September 2015 'kickoff' event'. YOU just MIGHT be 'a chosen one', and we encourage you to prepare soon!).

Sincerely,

Benjamin ('I DID IT TOO, AND ENJOYED EVERY SECOND') Shalom Bernanke

(Special appearance by L'il Timmah 'Turbo-tax' Geithner... HURRY, SEATS are gonna go FAST... including YOURS!)

P.S.

Alan (the maestro) Greenspan MIGHT make a 'special appearance' as well, to help out Mr Yellen with her speech.

Oldwood's picture

Everything is well in place for one hell of a civil war right here in America. The only caveat is we now have the ability to change our identity, our sex, race or just about anything else. It will make it much easier to be on the winning side now.

Obama LaForge's picture

Yes, you are correct. Cyberattack by the Chinese, and suddenly EBT cards stop working. 80% of Washington DC is black. We'll have to withdraw troops from somewhere just to put down that rebellion. World calls us racist for self-defense. The next president tries self-deportation of illegals. California and New Mexico are majority latino. They secede. Not to mention all the Muslims lying in wait, dormant until activated. Nevermind the throngs of people brainwashed into thinking they're own country is evil, and that every outside attack is deserved. Not to mention the 1% leeching everything away. And the Chinese and Saudi 1% moving in. Think they're going to start waving the American flag? We have about 10 different 5th columns in this country right now, and when the shit hits the fan, I absolutely predict a civil war.

MontgomeryScott's picture

@ alphametalist,

If I'm looking at this 'chart 4' correctly, I am getting a totally different take on this.

It appears that the FED used the planned deflation to stock up on 'assets' during the period from 1931 through about February 1940. Naturally, FED assets were 'gold' and 'silver' back then (or promises to pay back lent currency in the same). 1933 is a critical juncture when the so-called 'parabolic rise' began, actually, and is (coincidentally?) when that Fabian Socialist Roosevelt outlawed private ownership of GOLD (thus allowing the FED to start printing fiat currency in order to stock up on metals; using the deflationary spirals (continuous periods of 'credit-tightening' by the FED-allied 'member banks' that were left AFTER the closure of most of the smaller and independent ones that 'suffered' the 'bank run' cycles from 1929-1932).

The FED had to nominally back this fiat currency DURING the war years (hence the drop in assets versus the continuance of the rise of the 'balance-sheet' of fiat paper currency (THE BLUE LINE, for those who haven't seen through the official B.S.).

This 'parabolic rise' seems to have almost FLAT-LINED right about AUGUST 1945, and the FED was seemingly forced into a corner, selling OFF the assets in order to try to back the sheer volume of currency that had been printed (hence the declining FED ASSETS versus the 'balance sheet' up through 1959 (where the chart ends).

I'd say that the FED had decided that a 23% amount of 'assets' was sufficient to kick-start the buildup to the entrance of the United States into WWII; with an 18-month lead time. The 'Lend-Lease' Act took place right when the FIRST DROP in ASSETS happened to occur.

Those who do not study history are doomed to repeat it.

The WAR was pre-planned at least 10 years in advance BY THE GLOBALIST BANKERS (including the foriegn-owned members of the Federal Reserve System), and this chart is only ONE OF MANY that tends to prove it.

ALL WARS are BANKERS' WARS.

FUCK the inflation; FULL SPEED AHEAD!

 

Shawnee's picture

why did Hitler hate the jews you ask? Cause he was a waiter.

 

cherry picker's picture

Not a big deal as before.

Don't think grunts will be in trenches they have to dig by hand.

With drones, missiles, robots, chemical and biological weapons and for the nations, nukes, most will be fought behind some kind of a monitor with a joystick. An 80 year old can do that.

That way people don't have to 'work' in killing, murdering and pillaging although raping is still done the old fashioned way.

There is a huge sickness descending on this planet.  We either are guiding ourselves to fit a prophecy or the prophecy is going to happen anyway regardless of what is done.

All I know there are no peace makers in NATO and the closest one I can see to being a "peace maker' is Putin, regardless what the general population wants to believe.

angryBuddhist's picture

You are right, Putin has been the one practising restraint despite the rest of the world's efforts to goad him into a brawl.

Reminds me of this video . . .

https://www.youtube.com/watch?v=djTbzxQQzKQ

talisman's picture

[most will be fought behind some kind of a monitor with a joystick.
An 80 year old can do that.]
Just so everyone realizes that Chinese kids are a lot  handier
with a videogame joystick than 80 year old Americans

Ham-bone's picture

There was a world war and then the debt was dealt with...

The last time the US was in excess of 100% debt to GDP...here's what happened...balanced budget and GDP more than doubled.  That will not happen again.

 

’46-’59 (14yrs) 


  • Debt grew 1.06x’s ($269 B to $285 B)

  • GDP more than doubled, 2.2x’s ($228 B to $525 B)
  • Income (Wages/Salary) grew 2.3x’s ($115 B to $264 B)

http://econimica.blogspot.com/2015/02/fundamentally-flawed-chapter-32-how-we.html

Squid-puppets a-go-go's picture

oh, they learn alright - at least the oligarchs do. This is the wash rinse repeat that occurs overthe span of  decades.

gold and silver are the only real lifeboats in these times

Ham-bone's picture

I hope you are right re: gold and silver, but it's time we recognize this ship may go down with all hands on board.

SUNKNIGHT2010's picture

You're quite correct about & gold not being the guaranteed sanctuary that so many think . Many Jews were very wealthy and yet ended up in concentration camps . The former wealth they had ,going to the Nazi party .
No one knows exactly how this coming apocalypse will play out exactly. So at best ,we are making educated guesses & praying it works out in our favor !

MontgomeryScott's picture

Um, 6 million, wasn't it?

6 million.

Yeah.

NYT, 6 million Jews, circa 1929.

On and on, and on and on, and ON and ON, AND ON AND ON... the lies and obfsucations continue.

HOW MANY GENTILES did STALIN 'purge' from 1929 to 1940 AND ONWARDS?

Yeah... THIS one isn't even MENTIONED. Estimates range from 15,000,000 to 45,000,000, but since birth records aren't readily available (because they weren't 'WEALTHY') no one REALLY knows.

But the GERMANS... they got 'many' Jews (in the case that 'many' means more than ONE). Hitler was a really ruthless M.F. when it came to eradicating the Rothschild Family (and their minions), but the '6 million' thing is SO MUCH BULLSHIT! I suppose they 'pulled babies from the incubators, and left them to die', as well...

In memory of the Americanized Kike Khazarim and Ashkenazim ("Yids' kids") that sacrificed their lives (or, NOT!) so that the bankers can continue their wars and lies (and those who spread this disinformation)

https://www.youtube.com/watch?v=riwxbh_n_WM

The former wealth... the NAZI party... Switzerland... the FED... HISTORICAL TRANSFERS... BOY! The NAZIS did a number on FRANCE, didn't they? LOTS and LOTS of Jews were there in 1940... an 'equal-opportunity' war raider, I see... did you know that there were 'many' Jews (about SIX MILLIONS; or, maybe, MORE THAN ONE) in FRANCE ALONE?

 

 

Fedaykinx's picture

yeah there are a couple hundred examples of this "six million" number getting bandied about, going clear back into the 19th century if i'm not mistaken.

i'm sure it's just a coincidence.  a really, really... really... big coincidence.

GeorgeHayduke's picture

Many Japanese folks in the US of A were wealthy before they were put in concentration camps right here in the US during WW II. Much of their wealth was confiscated or disappeared into black holes too while they were in the camps.  No ovens, just wealth stolen and years of their lives taken.

The game of confiscating wealth from hapless minorities to the wealthy hands of the majority is played everywhere it's just not so well publicized in some places, especially those who boast so much about their freedom. To the oligarchs we all are viewed as Japanese on their property during WWII.

conscious being's picture

SquidPuppets - re. Your 1st two sentences. That's why I gave the first comment "Oh those politicians just won't learn.", the dreaded down-vote. That's not what's going on.

The politicians are not paid to learn in a Bankster driven oligarchy. They are payed (or threatened) to do as they are told by their Bankster owners. The Banksters, having played this scenario out, over and over again, over the centuries, certainly know how the story goes, plot twists and all.

MontgomeryScott's picture

 

 

The Sparks Of The Tempest rage a hundred years on... (or in the case of the FED, 102 years; approaching their demise):

https://www.youtube.com/watch?v=cnijc9wNpV4

FUCK YEAH! 'KANSAS' is fracking PRESCIENT!

10,000 years, NOTHING was learned!

(I suggest you turn the volume up for this one)

Hitlery_4_Dictator's picture

The Grexit - part 1: The never ending story

The Grexit part 2: It's Happening This Weekend.... For Reals This Time

The Grexit - part 3: The epic saga continues

The Grexit part 4: Germany Strikes Back

The Grexit - part 5: Greece pivots

The Grexit - part 6: Enter the IMF Dragon

The Gexit - part 7: Loan sharknado

The Grexit - part 8: the bankers dozen

The Grexit - part 9: the bailout begins

The Grexit - part 10: atms the new frontier 

The Grexit - part 11: Drachma fever

The Grexit - part 12: fiat wallpaper blues

The Grexit - part 13: drackma park

The Grexit - part 14: terminator euro II

Livermore Legend's picture

Indeed.....

You and Banzai should Collaborate.....

MontgomeryScott's picture

The Grexit - part 15: 'FLIP THIS NATION!' (boadcasted worldwide on PMSNBCSN. See your local listings for showtimes.)

reader2010's picture

 

"We learn from history that we do not learn from history."

- Hegel

Oldwood's picture

History is seldom pretty or kind. Why would we want to learn from or remember that?

who's serving the kool aid???????

Money Counterfeiter's picture
Money Counterfeiter (not verified) Oldwood Jun 16, 2015 10:06 PM

1935, 1940, and 1946.  Bailing out the 0.01% is  old trick.

jughead's picture

Actually they are the ones who repeat it...we just get to suffer the consequences of their repeat. 

Chuck Walla's picture

There isn't any payday in learning anything. Only selling something.

 

FORWARD SOVIET!

JRobby's picture

Bernanke was supposedly "chosen" as he was a "scholar" of the events and central bank policies of the "first" great depression era.

Is doing the same thing that was done in the past and expecting a different or better outcome =  "scholar"? Monkeys train very quickly on "repetitive tasks"

orangegeek's picture

Macros don't count anyMOAR.  What ever that fat cunt yellen wants, the market does.

 

MOAR ATFHs tomorrow!!!!!  Yellen talks nothing and the markets ramp.

Larry Dallas's picture

This has got to stop. I don't think the US will come out victorious this time. Not an ounce of passion in our millenials to fight for a cause.

cossack55's picture

Please to name a relevant cause. Thank you.

nuubee's picture

Technology to enable homesteads on ungoverned Mars is worth fighting for.

MontgomeryScott's picture

Well, those damned Martians are dead anyways, so what the hell! I think we should use their ancient homes and cities for target practice. It'll keep our troops on their toes, you know. OUR TECHNOLOGY rules the day! A REWARD for EVERYONE who takes part, and 'shiny medals' for ALL, as well! There are no 'losers'. There are only WINNERS!

Ray Bradbury was pretty good.

https://www.youtube.com/watch?v=XCOV-ht0Ifc

It's as real as the Apollo moon landings, you know.