Global Investing

Central banks and the next bubble (2)

In the previous bubble blog earlier in the week I wrote that G4 central bank balance sheets are expanding to a whopping 26% of GDP.

In what Nomura’s Bob Janjuah called “Monetary Anarchy”, some analysts worry that central bank liquidity expansion is a timebomb which if/when it explodes would have very negative consequences.

Swiss private bank Lombard Odier, weighing in on the debate, warns that not only has the quality of central bank balance sheets deteriorated, there has been no visible impact on the real economy.

Stephanie Kretz, member of the investment strategy team for private banking at Lombard Odier, points out that a sharp fall in the money multiplier, defined as the ratio of broad money (M3) to the monetary base, means the impact on the real economy has been almost non-existent.

What about the real economy? Ballooning and riskier central bank balance sheets will not generate sustainable growth or reduce unemployment and debt levels, but could well induce at a later stage unintended consequences that include bouts of hyper-inflation, loss of trust in fiat money and loss of central banks’ credibility as to their capacity to maintain strong currencies and stable prices.

Central banks and the next bubble

Central bank balance sheets are expanding at what some say is an alarming pace. Can this cause the next bubble to form and burst?

JP Morgan estimates G4 (U.S., Japan, euro zone and Britain) balance sheets are now around 24% of GDP combined, with around 11% of GDP comprising bonds held for monetary purposes.

“The recent pace of balance sheet expansion is the fastest since the immediate aftermath of Lehman, largely down to the ECB. The increased BOJ purchases, more QE in the UK, and 200 bln euros upwards of increased ECB lending from this month’s LTRO together point to a further $600bln+ rise in G4 central bank balance sheets this year, to around 26% of GDP.”