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.

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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.

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.

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!

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,  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“) even faster than world stock markets are rising.

What Does It All Mean?

In our conference call 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.

Source: Bianco Research

Category: Bailouts, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

42 Responses to “Living In A QE World”

  1. TraderMark says:

    The last stat is quite stunning – equivalent of 1/3rd of all market cap now on central bank’s balance sheets.

  2. Tutti says:

    I’ve been working under the assumption that some sort of QE event was taking place and that there was a ‘QE Put’ in place. The move off the lows seemed borg like enough to suggest it.

    Jims piece though, is an eye scary opener. At some point the music is going to stop and someone is going to be left without a chair – though in this scenario its more likely that there will be several without chairs.

    The only question I keep coming back to is what happens to the junkie when he can’t get his fix anymore. In this case I don’t believe a hershey bar or 12 steps is going to do the trick. Know any Central Banking Methadone Clinics?

  3. Nuggz says:

    “This will only happen when governments and central banks go away.”

    Be careful for what you ask.

    De-regulation is what got us here.

    People are their own worst enemy and the housing/credit crisis was an exquisite example.

  4. constantnormal says:

    It certainly seems that a lot of the central banksters are desperate to inflate away their debt problems.

    However, doesn’t inflation induced by monetary expansion require a relative difference between currencies to be effective? Isn’t there the possibility that, for all this effort, nothing will be accomplished?

    … perhaps this is the 21st century version of the protectionist trade wars in the 1930s … accomplishing nothing so much as strengthening the debt-driven deflation.

    Maybe, whichever nations are smart enough to wise up and erase their debt overhang, via bankruptcies and defaults, will be the ones that money flows into from the inflaters, strengthening the debt-light economies and empowering the deflation in the inflaters?

    Whatever this means, it seems likely that we are still building momentum for The Main Event … we ain’t seen nuttin’ yet …

  5. Breezy says:

    While the Fed and ECB graphs look much the same, there are fundamental differences between them that should be recognized.

    The ECB’s recent big increase is a result of its LTRO. Those are repo transactions with risk controls that require collateral to back the loans. The collateral is subject to margin calls. Realize the chaos and downward spiral that could result from margin calls. Recall the shadow banking system’s margin-call debacle of 2008.

    In contrast, the dodgy assets the Fed took onto its balance sheet require no margin calls. They can remain indefinitely on the Fed’s balance sheet supplying interest income to the US Treasury while offering no threat whatsoever to economic stability.

    The ECB’s LTRO expansion of the balance sheet has a different purpose too. Unlike the Fed’s efforts that were aimed at bank solvency problems by replacing dodgy assets with unimpaired dollars, the ECB’s LTRO is aimed at maintaining credit in the periphery of Europe. It’s an interim action on the liability side of bank balance sheets, not the asset side. Bank deposits in the periphery have been fleeing to the core – Germany, France, Netherlands. The LTRO is designed to relieve that funding squeeze.

    These major differences lead to completely different sets of risks and consequences.

  6. CountryMouse says:

    Would these charts be more truthful with a log scale?

    ~~~

    BR: I cannot tell from your question if you are being sincere or are a jackass.

    On the possibility that you are asking sincerely about log charts over a 10 year period, the answer is No, Dawg, a 10 year that does not use logs is not “more truthful”

  7. dougc says:

    The Eurozone needs another 5 to 10 Trillion Euros of QE to solve the banking solvency and soverign debt problems. By solve I mean kick the can down the road for another 5 to 10 years. The solution for too much debt and leverage isn’t more debt and leverage but we can all hope that the financial geniuses that got us into this problem will prevent a collapse of our monetary system. Don”t worry …Be happy.

  8. RC says:

    Well, if central banks the world over are increasing money supply effectively debasing paper currency, why Gold is not at a new high?

  9. [...] We found this thought provoking article by James Bianco of Bianco Research by way of Barry Ritholz’ The Big Picture website. He takes a deeper dive into Central Bank balance sheet expansion. The big question remains surrounding a tipping point. How much is too much? What happens if they stop expanding their balance sheets and begin to ratchet them lower? Here is the link to the research. http://www.ritholtz.com/blog/2012/01/living-in-a-qe-world/#more-75249 [...]

  10. russwinter says:

    These portfolios are also more and more toxic. The ECB has 81 billion euros in capital and reserves against the 2.7 trillion “assets” . They will need to send the bill for their losses to the ECB sponsors. Italy is a 18.4% contributor to the ECB, and Spain 12.2%, just one more contingent liability.

    http://www.wallstreetexaminer.com/blogs/winter/?p=4385

  11. beaufou says:

    In old times, Jubilee years were used to rid the economy of debt and the sinners would repent by giving back their ill gotten gains.
    In modern times, they simply print to death no matter what, it’s a liquidity trap but who cares as long as they can still make a few more millions out of it.
    The financial world and the markets; whatever formal liberty you want to give them; have grown too big compared to the real economy and are simply parasitic…end of story

    Organize a global default or face disorganized defaulting societies the world over.

  12. rootless says:

    Are central banks really “printing money”? Or are they swapping assets?

    Also, one has to take into account that currency in circulation, the money issued by governments is only a small fraction of all the money in the system. Governments aren’t the only ones that create money. Money created by banks amounts to a multiple of government money. When a bank creates a loan it creates money. The total amount of debt in the system is a multiple of the central banks’ balance sheets.

    And how will this go away,

    when governments and central banks go away.

    ?

    This pointing at the government and central banks is rather like pointing at someone who is pumping off sewage from a big spill into a tank for being responsible for filling up the tank with stinky sewage, and then proposing to solve the sewage problem by getting rid of the one who is pumping off the sewage.

    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.

    That the capitalist economy would go into some sort of harmonic equilibrium where everyone will achieve optimal happiness (maybe after some “ugly period” of adjustment), if one just got rid of those dreadful governments and central banks, is certainly central to the anarcho-capitalist belief system. There is just one little problem. There is no evidence whatsoever that this isn’t just a delusion, a fantasy world that has nothing to do with how this economic system really works.

  13. NoKidding says:

    The ECB has printed 2.8 TRILLION Euros, but the US Fed has only printed 2,800 billion. We’re winning!

  14. b_thunder says:

    “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…” – No one knows, because the process will never be reversed. They neither can pull back “the liquidity” without crashing the stock and bond markets nor can they raise rates without cratering the real estate market. The end game is simple: asset prices will rise in nominal term, but the real value will drop 3X as much.

    “When/If these central banks go too far, … 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” – not like Greenspan but like Rudolf E. A. Havenstein

  15. [...] James Bianco Charts: Living in a QE World (Ritholtz) [...]

  16. chavan says:

    What are we looking at here? How do you plot ‘balance sheet’? Are we looking at assets, liabilities, equity? Something else?

  17. Ian Sanchez says:

    Can any body help a neophyte with understanding the money flows? How do the central banks actually capitalize their BS expansions? Is it just via the printing press? I get that for the US fed but what about a central bank like France that can’t print Euros?

    Also, where does the money go? When the US Fed buys T-bills and gov’t bonds from the treasury, how does that cash actually get into the hands of equity investors or others that actually introduce liquidity into the real economy. Or is the suppression of interest rates and the wealth effect really the end game. Thanks.

  18. ZedLoch says:

    Where’s the inflation? What’s the velocity of this money?

    Maybe if we don’t throw it out of a helicopter, but shoot it out of tanks we’ll get out of this recession quicker…

  19. Prinicipal Programmer says:

    ZedLoch says ” but shoot it out of tanks we’ll get out of this recession quicker…”

    Not sure to what extend you were joking, but it seems to me that the more times people ‘try to get out of something quicker’ it does the exact opposite. The ZenMaster thing to do would be nothing. (Of course no ZenMasters are in politics – why would they want that job?)

  20. Bernie X says:

    And yet USD M3 is at the exact same level as it was in Feb 2009.

    Meaning that, in actuality, the Fed hasn’t printed a penny in 3 YEARS.

  21. Concerned Neighbour says:

    The central banks, and the Fed in particular, are the equity market now. They are the largest player, and everyone and their dog front-runs and/or mimics what they do. Fundamentals are completely irrelevant.

    It’s frustrating for traditional savers such as my family. My parents are nearing retirement and can earn next to nothing in “risk-free” fixed income. To obtain yield, they can choose between junk bonds and equities that have been blatantly manipulated higher by the Fed. The latter in the hopes that the circus will continue indefinitely.

    What a sorry state of affairs. I’m surprised retirees and/or soon to be retirees aren’t in the streets. No doubt the Fed continues to jack the already overinflated stock markets to try and prevent this from happening.

  22. Francois says:

    “The last stat is quite stunning – equivalent of 1/3rd of all market cap now on central bank’s balance sheets.”

    Fed has no choice, since politicians refuse to clean up the excesses and banditry of the financiers. The alternative is a total crash.

  23. [...] Living In A QE World | The Big Picture [...]

  24. JasonPappas says:

    Truly frightening! Thanks, Barry, for reprinting Bianco’s article.
    I asked about the elephant in the room … it’s a herd!

  25. [...] you’re not concerned about inflation, a set of graphs at The Big Picture may change your mind. They show the balance sheets of the world’s eight largest central [...]

  26. Jackpile says:

    RC: Gold hasn’t risen as fast because of (a) metals manipulation in futures market to hide counterfeiting activity and prop up the dollar, (b) the mass of humanity still hasn’t woken up to the massive money printing, and (c) a lot of this QE is tied up in bank reserves, not hitting the market (yet) I presume. Mike Maloney made a compelling presentation last fall where he projected gold against money supply and notes that gold is severely undervalued. If you properly monetize gold (and silver) to account for the diet money on the planet, I think he calculated gold should be well over $20,000/oz TODAY. It’s cyclical and metals have a huge, huge, huge spring back coming soon.

  27. [...] 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.” James Bianco perfectly describes the current situation. [...]

  28. startupcv says:

    These do not appear to be balance sheets – simply the amount of cash issued.

    A balance sheet would show the offset in assets owned by governments (e.g. ~$2 trillion of mortgages purchased by the US government to offload banks – the US owns those houses so that $2T isn’t “vaporware”. Or the nationalized banks acquired by many European countries that own large numbers of homes. TARP is largely paid off so the US owns few banking assets at this point.)

  29. [...] The Big Picture: Living in a QE World by James Bianco   “The degree to which central banks around the world are printing money is unprecedented. [...] The purpose of QE 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’) even faster than world stock markets are rising.”   As a side note, the eight central banks 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).     [...]

  30. [...] Click to enlarge: Source: James Bianco; “Living in a QE World”; January 27, 2012; posted at The Big Picture [...]

  31. [...] Very interesting article on The Big Picture, talking about the skyrocketing balance sheets of central banks around the globe. By focusing on the eight largest central banks, the article talks about the resulting influence of central banks. [...]

  32. [...] referee in a free market, they are dominating the markets.  Consider the following chart from the Big Picture Blog.  Not only did the balance sheets of the largest central banks in the world explode higher in [...]

  33. [...] who caught the Jim Bianco piece ‘Living in a QE world’ should have been horrified to see the total monetization commitment at over $15 trillion equivalent [...]

  34. [...] reason why Buffett’s views of gold should be ignored can be seen in the following charts, all courtesy of James Bianco at Bianco [...]

  35. [...] with charts that show desperate inflationism for the central bank of your choice, can be found here. The combined size of the Big 8 central banks’ balance sheets has almost tripled over the [...]

  36. [...] Hat tip: The Big Picture. [...]

  37. [...] Chart Courtesy of Barry Ritzholtz’ The Big Picture and Bianco Research http://www.ritholtz.com/blog/2012/01/living-in-a-qe-world/  [...]

  38. [...] Ritholtz recently pulled together some extraordinary charts illustrating the exploding balance sheets not only at the ECB and the Fed, but the Bank of England [...]

  39. [...] Bankers Believe In Their Balance Sheets – Truth is their balance sheets aren’t real [...]