During the year 2021, there were many occasions when we heard about the bazooka, in particular, the fiscal stimuli that were approved in Europe, but also the legislative packages approved and to be approved in the US, however beyond the fiscal part and below the noise radar what is certain is that major economies have long been covered by a gigantic bazooka, which could become a weapon of mass destruction. I am referring to the gigantic stock of assets that the world’s main central banks have amassed since the financial crisis of 2007/2008, when the FED, ECB, Bank of Japan and Bank of China together held around $5 trillion in assets.
The Fed, which until then had taken a more cautious stance, aggressively entered this championship in late 2008, surpassing the ECB in 2013 to reach a peak in 2014 at $4.5 trillion, still less than the amount the Bank of China held in the on the order of $5.5 trillion. Interestingly, even before the appearance of COVID, ECB, Bank of Japan and Bank of China were roughly equated with $5.2 trillion each, while the Fed was normalizing its monetary policy and had declined to $3.7 trillion. With the COVID pandemic, the FED, once again, aggressively entered and quickly dethroned the remaining ones in 2020, however, and somewhat unnoticed, the fact is that the ECB did not take long to regain the leadership, which it maintains to this day, with nearly $10 trillion in assets, while the Fed is at $8.6 trillion, and the other two are in the order of $6.3 trillion.
Altogether there are $31 trillion, in these four central banks alone, approximately one third of the world’s GDP, which is occupying the space of a significant part of the market, namely in the bond segment of sovereign debt and mortgage credit. The immediate consequence of this scenario was the weakening of the Euro versus the US dollar since the beginning of 2021, leaving the aftereffects of this liquidity bubble for an unknown future, as never before has such level of unsupported money creation existed. His withdrawal being mishandled is a risk, not imminent, but potentially devastating.
