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How much has global money supply grown since the 2008 financial crisis?
Given major central banks’ QE programs create new bank reserves by buying securities on the secondary market via balance sheet expansion, we can measure the central banks’ balance sheet to approximate the scope of money supply growth.
Central bank balance sheet in focus
Federal Reserve (active principal reinvestment program)
Bank of England (active principal reinvestment program)
European Central Bank (active QE program)
Bank of Japan (active QE program)
Next, I would like to refer to several handy charts from
Total central bank asset (excluding PBOC) went from about $4 trillion to $10+ trillion ending August 2015, so that is more than $6 trillion of new reserve created post 2008.
Is it too little or too much?
The amount makes sense under the context of severe private sector deleveraging, as QE programs represent public sector re-leveraging to fill the void. This was not, and will not be, a one-to-one replacement of organic private sector lending (hence the distortion effect in the form of asset price inflation).
The below chart shows the deleveraging of U.S. households post 2008, and releveraging by the U.S. Government to combat the risk of deflation:
This would argue that the Federal Reserves’ policies have been rational under their reaction function.
What are the banks doing with the excess reserves?
Banks have been lending, but a significant amount of excess reserves are being parked at the Federal Reserve to earn(0.25%):
Banks under regulatory constraint from further lending
Regulatory requirements made it more difficult for the banks to lend out their reserves. Banks were everyone’s favorite punching bag post 2008. Compliance, capital requirement, and other procedures increased business operating costs and dimmed banks’ appetite to take risk (and as a result, constrained the growth of money supply).
QE did push up asset prices though, which is great for asset holders (anyone with stocks, bonds, houses, multi-family units). It also punished savers and those without properties.
Next article09 26 2015 | by Victor Xing | Capital Markets