With the Federal Reserve looking to “normalize” its monetary policies by unwinding its massive asset base, a look at the balance sheets of the key central banks around the world shows that the global economy is far from normal and is unlikely to normalize without at least some economic stresses. The global expansion of central bank balance sheets (i.e. the use of quantitative easing) since the Great Recession is unprecedented and will have obvious impacts on the economy as central bankers look to unwind their positions and return to a neutral monetary stance if one does exist in the post-Great Recession world.
Let’s start by looking at the definition of a central bank balance sheet as shown on this graphic:
Since quantitative easing became the central banker’s monetary tool of choice, let’s now look at what has happened to the balance sheets of the world’s most influential central banks since the Great Recession. Here is a graphic showing the Federal Reserve’s assets:
In October 2017, the Fed held $4.46 trillion worth of assets, up 405 percent from its level prior to the Great Recession.
Here is a graphic showing the European Central Bank’s assets:
In August 2017, the ECB held $5.049 trillion worth of assets (€4,278,881 million), up 184 percent from its level prior to the Great Recession.
Here is a graphic showing the Bank of Japan’s assets:
In September 2017, the Bank of Japan held $4.569 trillion worth of assets (¥5,133,985 hundred million), up by 349 percent from its level prior to the Great Recession.
Here is a graphic showing the Bank of England’s assets:
In June 2017, the Bank of England held $0.568 trillion worth of assets (£430,159 million), up over 300 percent from its level prior to the Great Recession.
Here is a graphic showing the People’s Bank of China assets:
In total, the world’s five most influential central banks currently have balance sheets totalling $19.917 trillion, however, we must not forget that the less influential central banks around the world have also increased the size of their balance sheets. According to Pimco, global central bank balance sheets have now exceeded $22.5 trillion in total.
Now, let’s look at the total global economy. If we take Statista’s estimate of a global GDP of $75.278 trillion for 2016, this means that central bank balance sheets now comprise 29.1 percent of the global economy. This suggests that the unwinding of the assets acquired during the unprecedented experiment with quantitative easing and other unconventional monetary policies are bound to have a significant impact on the global economy.
Let’s close with this quote from Christian Noyer at the Bank for International Settlements:
“Unconventional monetary policies are necessary but complex. They create more interference with markets than policies conducted in ordinary times. As a consequence, it becomes more difficult to avoid unintended spillovers of stabilization policies on the allocation and distribution of resources. This reality should not prevent Central Banks from acting decisively when there are risks for price stability. But such actions demand rigor and precision in their implementation. For Central Banks, their balance sheet has become the main tool of monetary policy for the foreseeable future.” (my bold)
Only time will tell whether the risks that central banks took by grossly inflating their balance sheets was worth the risks to the global economy, risks that will likely become apparent as central bankers look to unwind their positions and find that there are unintended consequences to every action that they took to “rescue” the world from an economic collapse. We really are living in a new global economic reality.
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