The size of quantitative easing as measured relative to GDP is staggering. The table shows the money supply as measured by the central bank balance sheet relative to GDP in 2008 before the crisis and now. The higher numbers mean that the money multiplier has decreased. Money is not being used by the economy.
Central 2008 2012
FED 6% 19%
ECB 17% 32%
BOJ 22% 31%
BOE 7% 22%
The biggest gains were with the Fed and BOE which have increased money relative to GDP by a factor of three. The BOJ has been a laggard; however, it has announced a new program in February. The increase in money was necessary. Whether this size was necessary is unclear, but there is still the issue of how these numbers will be reversed. With the Fed stating that QE3 is on hold and the economy doing better, the ratio will start to decline, but the Fed will have to take action and this is a growing concern of fixed income markets.
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