02.01.12

Living in a QE World

We almost always comprehend data better in a graphical form.  These charts display the actions of the various central banks in a way that easily shows the magnitude of their interventions.

QE is an expanding of balance sheets via increasing bank reserves.  The purpose of QE is to increase bank reserves through purchases

of fixed income securities in order to lower interest rates.  This makes fixed income securities relatively unattractive/overvalued and pushes investors out the risk curve.  This should increase buying for riskier assets such as stocks, pushing them higher in price.  Theoretically these higher prices should lead to a wealth effect and increased economic activity.

Given this definition and purpose, it is fair to compare the size of these balance sheets (now $15 trillion) to the capitalization of the world’s stock markets (now $48 trillion).

Prior to the 2008 financial crisis, the eight central bank balance sheets were less than 15% the size of world stock markets and falling.  In the immediate aftermath of Lehman Brothers’ failure, these eight central bank balance sheets swelled to 37% the capitalization of the world stock market.  But keep in mind that the late 2008/early 2009 peak was due to collapsing stock market values combined with balance sheet expansion via “lender of last resort” loans.

Recently, the eight central bank balance sheets have spiked back to 33% of world stock market capitalization.  This has come about not by lender of last resort loans, but rather by QE expansion (buying bonds with “printed money“) even faster than world stock markets are rising.

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Via Jason Zweig