Sunday, January 29, 2012

Central banks continue to explode balance sheets

The big central banks of the G10 have exploded their balance sheets and this will continue in 2012. They will continue because there are no other options. The liquidity will continue until it works.

Their timing has been different but the action has been the same, increase the assets. Balance sheets increased in 2008 in response to the crisis,  but the liquidity added to financial markets has continued everytime there is a hint that more liquidity may be needed through poor economic numbers. The Bank of Japan has been the exception in terms of size but even here the balance sheet is significantly larger than 2008.

The Bank of England has tried to reduce its assets after the crisis but turned to two large jumps in assets in 209 and again in 2011. The US has followed two rounds of QE and is on the verge of undertaking a third round. The Fed will be hard pressed to not take action now that it has a 2% inflation target and prices have started to move lower. The most interesting case is the ECB which has adhered to their inflation target goals in discussions but have actually show to be the largest quantitative easer based on its loan portfolio. You don't have to buy government bonds to increase the balance sheet. It can come in the form of loans to the tune of $650 billion in three year paper. The ECB is forbidden from financing governments but no one said anything about the banks. They have also negotiated dollar swap lines which also provide liquidity. The ECB is every much the easer like the Fed and Bank of England. In fact, we should see the ECB become the ultimate quantitative easer before the year is over. 

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