Graphic: Central banks' balance sheets explode due to corona crisis

Central banks' balance sheet totals have exploded since the coronavirus crisis. Not only in Europe and the United States, but also in other major economies. The chart below shows that the balance sheets of five major central banks have increased by more than 60% since then. At the beginning of last year, the balance sheets of the Federal Reserve, ECB, Bank of Japan, Bank of England and Swiss central bank accounted for $16 trillion, but now it has exceeded $26 trillion.

Central banks bought government bonds on a large scale to push interest rates down further. The Fed Announced last year to buy unlimited government bonds, while the ECB launched its new PEPP buyback program and expanded it twice. The Bank of Japan and the Swiss central bank went a step further by adding stocks to their balance sheets.

The Swiss central bank also uses its balance sheet to suppress the value of their own currency. It does this by putting Swiss francs into circulation and exchanging them for foreign currency. For example, this central bank has added a few hundred billion in foreign exchange reserves in euros and dollars to its balance sheet in recent years.

Central banks' balance sheet total has exploded due to the corona crisis (Source: Bianco Research)

Where is inflation?

Central banks have therefore bought up assets on a large scale and parked them on their balance sheets. But why doesn't that lead to hyperinflation? The answer to this question is that a large part of this 'extra money' does not end up in the real economy. Central banks withdraw bonds from the market, but banks only receive reserves from the central bank in return. They can't use those reserves to buy other assets. They also cannot lend these bank reserves to consumers and businesses. So it's just an asset swap between commercial and central banks, where no more money comes into the economy.

The purchasing policy of central banks only has indirect effects. As the central bank continues to buy, bond prices and stock prices are rising. As a result, investors feel richer and it helps governments to borrow cheaply. And countries are doing so en masse, because the corona crisis appears to be a good excuse to completely abandon fiscal discipline. This leads to more economic activity, but at the same time to an increase in debt. It also leads to more speculation on the financial markets. It is therefore questionable whether this monetary policy will contribute to economic stability in the longer term.

This contribution was made from Geotrendlines