The world’s big four central banks’ balance sheets have ballooned to more than $13trn in total as a result of their quantitative easing (QE) programmes – and look set to expand further.
As the chart above compiled by Hermes shows, one half of the world’s total central bank assets has been amassed in just seven years – that is, since the last US recession (represented by the grey section in the chart) ended in mid-2009. This liquidity injection is equivalent to about three quarters of US GDP, or 1.25 times that of China. But despite all this asset buying, Hermes group chief economist Neil Williams observes QE has been a less-than-perfect remedy, and in the faster-growing US and UK has probably had its day. “By distorting financial markets, suppressing saving and increasing the funding strains on many pension schemes, QE may be fast becoming a problem not the solution,” he says. “With central banks the biggest sponsor of bonds, private institutions may increasingly struggle to find the bonds they need. It’s doubtful they can step away without unintended consequences. Their own ‘skin in the game’ also makes this unlikely.” The big risk for pension funds, Williams adds, is that this ‘looser for longer’ policy may have many years left to run. Indeed, he believes QE could rumble on for a lot longer if the precedent set by the US Fed in the 1930s is anything to go by. “The last time the US Fed did QE proper was to pull its economy out of the 1930s depression,” he says. “Then, it ran QE unbroken for 14 years up to 1951 – despite double-digit inflation touching 20% in 1947. Clearly this was a different time. But, if it’s in any way a guide, we could say we are today only about half way through our QE!”
