January 31st, 2012
Econintersect: The balance sheet of a central bank represents the assets held, purchased by creating money (in the U.S. Federal reserve notes, currency or the electronic equivalent) for purchase from the banking system. The expansion of a balance sheet is known by the technical name of quantitative easing (QE). It is called quantitative because it refers to an increase in the quantity of money supplied to the banks. In the U.S. Fed Chairman Bernanke has referred to the process as one of increasing liquidity, but that has not been the major effect because the banks have chosen to sit on much of the money, doing such things as piling up reserve deposits with the Fed. Some have suggested that the behavior represents the actions of a financial system which still fears the threat of bank insolvencies.
Russ Winter (The Wall Street Examiner) refers to the $15 trillion as "fictitious capital." He cites Japan as a poster child for problems that all eight of the major central banks may face. Winter points to the shrinking exports of the land of the rising sun and the fact that, exacerbated by the march 2011 earthquake damage, Japan may borrow as much as 2/3 of its current year expenditures.
James Bianco (The Big Picture) has individual charts for the eight large central bank balance sheets. The total for the eight is reproduced here:
Bianco points out that the size of the eight central banks total balance sheet is more than 30% of world stock market capitalization compared to 10-12% before the financial crisis. Here is an excerpt from what he wrote:
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.
There are those who maintain that the solution is to stop using debt and use fiat money as they maintain it should be used. The proper use, according to the proponents of MMT (Modern Monetary Theory), is for governments to use their sovereign rights to issue money directly and not to create money by borrowing it from a banking system.
- Largest Central Banks Now Hold Over $15 Trillion in Fictitious Capital (by Russ Winter, The Wall Street Examiner)
- Living in a QE World (by James Bianco, The Big Picture)
- Fed Statements Make More Treasury Purchases Less Likely (GEI News, 16 January 2012)
- Federal Reserve May Be Ready with Additional Accomodation (QE) (GEI News, 30 November 2011)
- ECB Balance Sheet Explodes (GEI News, 11 November 2012)
- U.S. Facing Insolvency by Ignorant Choice (by Derryl Hermanutz, GEI Analysis, 26 December 2011)
- Casting Sunlight on the National Debt Fraud (by Roger Erickson, GEI Opinion, 8 August 2011)