All Finished With Quantitative Easing
NEW YORK – January 21, 2019
For the first time in the new reality (after 2008), the annual differential of the dollar balance of the largest central banks of the world (Fed, ECB, NBK, Bank of Japan, Bank of England, SNB) went negative.
In November 2018, there was -$350 billion and in December, -$ 170 billion. A year earlier, the peak was plus +$3.15 trillion, which coincided with the absolute maximum of the world stock market in dollar terms. That is, a year ago, the capitalization of world stock markets in dollars was at the highest level in their entire history, and the annual influx of central bank money was over $3 trillion dollars.
Since then, the markets went into their strongest fall since 2008 - this was fully synchronized with the decline in the annual increase in liquidity from the Central Bank and the general trend of tightening the monetary policy.
The total assets of the Central Bank are $21.5 trillion ($5.4 trillion in China, $5.35 trillion in the ECB, $5 trillion in the Bank of Japan, $4.1 trillion in the Fed, $750 billion in the Bank of England, and $855 billion in the SNB)
The Fed began to reduce the balance in January 2018 and a year later it sold $400 billion worth of securities. For the first half of January, 2019, the balance sheet showed a decline of $25 billion. By the end of 2018, the cumulative balance reduction for 3 months was $120 billion; currently, the rate of contraction can reach $150 billion for the quarter, or about $50 billion for the month.
The ECB actually suspended the asset repurchase program at the beginning of December 2018. 2.4 trillion euros were bought over the entire time.
In the beginning of 2019, natural fluctuations in the range of 30-50 billion euros are possible, but any systematic procedures for asset repurchase or balance sheet increase within the framework of bank lending have been stopped. Therefore, a significant change in the ECB's balance sheet in the next 3 months is not expected.
The Bank of Japan has radically reduced the rate of repurchase of assets, by nearly 4 times. With more than 80 trillion yen per year to 25-30 trillion, it is expected to decline to 20 trillion at the beginning of this year, with prospects for reaching zero. From August 2018 to January 10, 2019, the volume of government bonds on the balance sheet of the Central Bank of Japan has not changed; in fact, the redemption program was terminated in the autumn of 2018.
The Bank of England hit the brakes back in March 2018, although before that the repurchase volumes were insignificant compared to the main central banks.
As for the balance of the People’s Bank of China, it is it is largely related (and in fact directly) to the current account, balanced on the financial account. In other words, if the positive balance of the current account is not sterilized by China’s private sector in the form of capital outflows on a financial account, then the PBC’s balance will build up, otherwise it won’t. In fairness, it is worth noting that this logic worked until 2014. Since 2015, the PBC has maintained a balance sheet with a moderate growth trend not at the expense of gold reserves, but at the expense of bank funding. For 3 years, the PBC has issued loans of $1.5 trillion. But you need to understand that to some extent the liquidity deficit of banks in the period from 2015 to 2018 was associated with the structure of the balance of payments. But this is a separate issue.
In any case, the PBC from 2015 is not a supplier of new liquidity either to the global capital market or to the internal one.
In fact, it is not entirely fair to include the NBK on an equal footing in G3 (the Fed, the ECB and the Bank of Japan) in view of the specifics of the Chinese financial system and Chinese banks. Dollars, euros, yen, francs and pounds directly go to the global capital market and participate in cross-funding, while the yuan is not and mostly concentrated within China.
No balance sheet changes occurred in the first half of January. The balance sheets of the Central Bank of Japan and England are equivalent to the end of December. All that has increased the ECB ($30 billion) due to technical procedures for gold and foreign currency reserves being offset by a reduction in the Fed, so in the end about zero. The total balance of the world Central Bank will continue to decline in the first quarter of 2019, which will put pressure on world markets.