Where has all the magic money gone?

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The Bank of England’s policy of quantitative easing will soon have introduced £325 billion of electronically-created money into the system, keeping interest rates low. According to the Bank’s own booklet on QE, the effects should have been to “boost growth…reduce the cost of borrowing for businesses and households…boost (bank) lending to consumers and businesses.” It concludes that the result is that “the extra money has worked its way through the economy, resulting in higher spending and therefore growth.” Cue hollow laughter from all directions.

The real result is that the banks have sat on the money, rebuilding their balance sheets. With QE reducing the cost of banks’ inputs, their profits have risen, enabling bankers to continue to pay themselves enormous bonuses, even if their incompetence led to their banks being bailed out by the taxpayer.

Courtesy of James Bianco at Bianco Research, it is instructive to see just how the Bank of England’s balance sheet has exploded in recent years. Even before QE, the Bank not only cut interest rates to the bare bone but, in 2008, heavily bought short-term gilts. As a result, the bank’s assets as a proportion of UK Gross Domestic Product have climbed from 7% at the end of 2007 to 21%, alarmingly similar to what happened in the highly inflation decade of the 1970s.

Of itself – so the economists tell us – QE will not produce inflation. Due in large part to the banks’ desire to rebuild their balance sheets, the money created by QE does not appear to be flowing around the economy. But if we do see growth and the banks increase their lending, the money created by QE will suddenly have an effect and the Bank would have to be extraordinarily fleet of foot to mop up the cash.

Andrew Sentance supported the initial bout of QE when a member of the MPC. Now, however, he thinks that what was, after all, an emergency measure, should be unwound: “It is far from clear that an economy which has been suffering from persistent high inflation needs a policy which is designed to push up inflation further. Yet that is precisely what the MPC expects QE to achieve.”

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The explosion in Central Bank balance sheets

It is not only the Bank of England who has engaged in Quantitative Easing, however. Whether they use the term or not, the major eight central banks have all seen an explosion in the size of their balance sheets, including the Chinese and the European Central Bank, all trying to counter the effects of massive deleveraging. The ECB’s balance sheet is now a record €3.02 trillion, having grown by 54% in the past 12 months alone; that’s the equivalent of a third of the Eurozone’s Gross Domestic Product. And although the ECB hopes that the banks which have borrowed from it will channel the money to small and medium-sized businesses, instead the banks are playing safe and redepositing it with the ECB.

Click on graph to see an enlarged version

The Swiss National Bank and the Banque de France have behaved in a similar manner as, indeed, has the bank often considered to be the soundest of all, the Bundesbank.

Click on graph to see an enlarged version

The combined size of the big eight central banks’ balance sheets has almost tripled in just six years to over $15 trillion. And it is still rising. Given that the total capitalisation of the world’s stock markets is $48 trillion, that means that the eight major central banks’ assets are now the rough equivalent of a third of the world’s stock markets by market capitalisation.

Where will all this lead? Given the unprecedented nature of what is happening, does anybody even know? Business Secretary Vince Cable confessed that it was “imperfectly understood”, an “experiment”, and that the government does “not know where it will lead”. Hardly very reassuring. The Bank of International Settlements says: “Devising exit strategies from these enlarged balance sheets will be an issue that will preoccupy us for some years to come.”

As Andrew Sentance concludes: “The Bank of England – along with other Central Banks – faces the challenge of moving away from emergency policy settings which have been maintained since the depths of the financial crisis. There may well be no easy time to embark on this process, given the world of disappointing growth and economic volatility which now appears to be the “new normal” for the UK and other western economies. But if we don’t start the gradual shift away from emergency monetary policy settings soon, the MPC risks having to play catch-up in the future: pushing up interest rates sharply and triggering a large negative shock to business and consumer confidence.”

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2 Comments

1. John.

   April 1, 2012 at 1:43 pm

   None of this banking illusion, perhaps delusion is more apt, has much to do with any tangible value. The great central banking swindle is, at it’s core, a system of trickery and theft, which has been legitimised and empowered by complicit governments to infect legitimate free trade and commerce and enslave the entire planet in usury debt.

   It is clear that at some rapidly approaching point those faceless power brokers behind the government approved central banking swindle will have stolen enough wealth and hold enough money power to be able to start dictating to the government of any individual country how they want them to behave and accordingly, the world to be run.

   Some argue, with ample evidence, that this is already the case in many countries and a string of assassinated leaders in modern history who’ve endeavoured to limit the central banking crime syndicate bear witness.

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2. Lynne

   April 1, 2012 at 7:36 pm

   This site has been infiltrated by the establishment in my opinion. My channel is MrLotineGuy

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