Forum Post: Living In A QE World /// All Central Bank Balance Sheets Are Exploding Higher, Or Engaged In QE /// Largest Central Banks Now Hold Over 15 Trillion in Fictitious Capital
Posted 10 years ago on Jan. 28, 2012, 5:20 p.m. EST by MonetizingDiscontent
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Living In A QE World
-January 27th, 2012-
All Central Bank Balance Sheets Are Exploding Higher, Or Engaged In QE
The degree to which central banks around the world are printing money is unprecedented.
The first eight charts below show the balance sheets of the largest central banks in the world. They are the European Central Bank (ECB), the Federal Reserve (Fed), the Bank of Japan (BoJ), the Bank of England (BoE), the Bundesbank (Germany), the Banque de France, the People’s Bank of China (PBoC) and the Swiss National Bank (SNB). Noted on the charts are significant events or growth rates.
Shown is the size of each respective balance sheet in its local currency. Note that all are exploding higher as every chart goes from the lower left to the upper right. Most are still making new all-time highs. If the basic definition of quantitative easing (QE) is a significant increase in a central bank’s balance sheet via increasing banking reserves, then all eight of these central banks are engaged in QE.
ECB Balance Sheet
The Federal Reserve's Balance Sheet
Bank Of Japan's Balance Sheet
Bank of England's Balnce Sheet
Bundesbank (Germany's Central Bank) Balance Sheet
Bank de France (French Central Bank) Balance Sheet
Swiss National Bank (Switzerland's Central Bank) Balance Sheet
Comparing Central Bank Balance Sheets
For comparison’s sake, we converted the eight balance sheets above into dollar terms. The four largest, the PBoC, the Fed, the BoJ and the ECB are shown in the first chart below. The second four, the Bundesbank, Banque de France, the BoE and SNB are shown in the second chart below. We split them up because of their vastly different scales.
In the first chart, note that the balance sheets of the PBoC and the ECB are larger than the Federal Reserve when converted to dollars. The BoJ used to be the largest balance sheet in dollar terms until 2006.
Central Banks Balance Sheet (China, ECB, US & Japan)
When shown in dollar terms below, the Bundesbank is the largest of the “second four” central banks. Further, its growth rate over the last five years has been among the highest. This is surprising since the Bundesbank is considered the “hard money” central bank.
Central Banks Balance Sheets (Germany France UK & Switzerland)
Combining Central Bank Balance Sheets
The next chart below adds up the eight largest central bank balance sheets in dollar terms. It is only current through October as that is the latest number from the PBoC.
The combined size of these eight central banks’ balance sheets has almost tripled in the last six years from $5.42 trillion to more than $15 trillion and is still on the rise!
The Eight Central Bank Balance Sheet (US UK ECB Japan Germany France China & Switzerland)
Central Banks Equal To One-Third Of World Equity Values
As noted above, QE is an expanding of balance sheets via increasing bank reserves. The purpose of QE, as explained by this Bank of England video... http://www.bankofengland.co.uk/education/inflation/qe/video.htm ...is to increase bank reserves through purchases of fixed income securities in order to lower interest rates. This makes fixed income securities relatively unattractive/overvalued and pushes investors out the risk curve. This should increase buying for riskier assets such as stocks, pushing them higher in price. Theoretically these higher prices should lead to a wealth effect and increased economic activity.
Given this definition and purpose, it is fair to compare the size of these balance sheets (now $15 trillion) to the capitalization of the world’s stock markets (now $48 trillion). This is shown in the chart below.
Prior to the 2008 financial crisis, the eight central bank balance sheets were less than 15% the size of world stock markets and falling. In the immediate aftermath of Lehman Brothers’ failure, these eight central bank balance sheets swelled to 37% the capitalization of the world stock market. But keep in mind that the late 2008/early 2009 peak was due to collapsing stock market values combined with balance sheet expansion via “lender of last resort” loans.
Recently, the eight central bank balance sheets have spiked back to 33% of world stock market capitalization. This has come about not by lender of last resort loans, but rather by QE expansion (buying bonds with “printed money“)... http://www.arborresearch.com/bianco/?page_id=46908 ...even faster than world stock markets are rising.
Size Of The Eight Central Banks Balance Sheets As A Percent Of World Market Capitalization
What Does It All Mean?
In our conference call... http://www.arborresearch.com/bianco/?page_id=46898&ref=http%3A%2F%2Fwww.arborresearch.com%2Fbianco%2FSubscriberArea%2Fspecialreports%2Fpdffiles%2Fsr-13v1.pdf ...earlier this month we said (page 12):
2011 was so difficult because all stocks seemingly moved together. It was as if every S&P 500 company had the same chairman of the board that knew only one strategy, resulting in a high degree of correlation between seemingly unrelated companies.
Massive central bank involvement in the markets risks returning us to a de facto centrally planned economy. Those S&P 500 companies all have the same chairman; it is Ben Bernanke because his policies are affecting everybody. That is what makes money management so difficult. Correlations will ebb and flow; they always do. But what makes them go away? This will only happen when governments and central banks go away.
But if they go away, then does that not mean things get ugly? Maybe they do get ugly, but it also means that we sort out the excesses in the market. We reward the people that do the right thing and we punish the people that do the wrong thing. And we have an adjustment process that may be ugly, but then we have a period of long expansion.
Central banks are ruling markets to a degree this generation has not seen. Collectively they are printing money to a degree never seen in human history.
So how does this process get reversed? How do central banks pull back trillions of dollars of money printing without throwing markets into a tailspin? Frankly, no one knows, least of all central banks as they continue to make new money printing records.
Until a worldwide exit strategy can be articulated and understood, risk markets will rise and fall based on the perceptions and realities of central bank balance sheets. As long as this is perceived to be a good thing, like perpetually rising home prices were perceived to be a good thing, risk markets will rise.
When/If these central banks go too far, as was eventually the case with home prices, expanding balance sheets will no longer be looked upon in a positive light. Instead they will be viewed in the same light as CDOs backed by sub-prime mortgages were when home prices were falling. The heads of these central banks will no longer be put on a pedestal but looked upon as eight Alan Greenspans that caused a financial crisis.
The tipping point between balance sheet expansion being bullish for risk assets versus bearish is impossible to know. Given the growth rate of central bank balance sheets around the world over the past few years, we might not have to wait too long to find out. Enjoy it while it is still bullish.
European Bailout Infographic: Presenting The Truckloads Of Cash Needed To Rescue The Insolvent PIIGS
...No, literally truckloads. Our friends at demonocracy.info have been kind enough to put together an infographic that explains the European bailout in simple, visual terms, that even the most innocent of FTL truckers can grasp without much exertion, for the simple reason that it shows all the bailouts amounts in terms of trucks of cash. And here is the kicker: one would need a 13 lane highway, filled with trucks bumper to bumper, stretching for about 3 kilometers to represent the €2.91 trillion in total amounts owed by the PIIGS and their citizens (whether voluntarily or not... actually make that involuntarily) to Europe's largest banks.
What is most frightening is what is not shown: just how it is that the world's central banks are keeping all of these banks propped up. Because sooner or later all this money will be discovered to have been fatally misallocated. Then the real bailout cost will become all too evident, and just like in the US, it will be in the double digit trillions. Which means the metaphorical highway of trucks full of cash will stretch on for kilometers and kilometers and so on (or miles, for the naive US-based truckers). But since that day is in the future, there is no reason to worry about it.