Yellen & Co.’s $13 Trillion Stimulus Boon Just Keeps Givingby , , and
Outsize balance sheets morph from crisis tool to normal state
Central bankers pave the way for government growth efforts
Imagine central bank stimulus worth $1,700 for every person on Earth.
It’s not the next leap into monetary science fiction, it’s the reality of the balance sheets being run now by just three central banks -- the U.S. Federal Reserve, the European Central Bank and the Bank of Japan. Their $12.7 trillion in government bonds, loans and other assets -- built up through decisions to combat first the financial crisis, then persistently weak inflation and growth -- is the equivalent of about 17 percent of a year’s global output and still climbing.
By buying and holding government debt to drive down borrowing costs and by remitting funds earned on those securities back to national treasuries, central bank chiefs Janet Yellen, Mario Draghi and Haruhiko Kuroda are in effect collaborating with their political counterparts to stretch crisis support into the distant future.
“It’s never going to be the central bank governor holding the finance minister’s hand and saying, ‘Read my lips, we’re never going to sell,’” said Richard Barwell, an economist at BNP Paribas Investment Partners in London. “But if the market infers that the balance sheet is going to stay big for the foreseeable future, it’s as good as a stealth money-drop.”
Central banks have long held outside assets. What’s new is the unspoken abandonment of a previous article of faith in monetary policy -- that, aside from times of financial meltdown or war, balance sheets should be kept lean and interest rates should be the main policy tool.
With record debt, tepid growth, muted inflation and low real interest rates, advocates of large central bank balance sheets say it could facilitate a much-needed fiscal fillip. Nobel laureate Joseph Stiglitz, a professor at Columbia University, says central banks themselves have “called for more fiscal policy” and should therefore backstop efforts to deliver.
Critics caution that the bloated balance sheets are just fueling asset bubbles and throwing sand in the wheels of a banking system struggling to maintain profitability in a low-yield world. Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg View columnist, said in an interview in Singapore that he’s favoring cash due to the dislocation that monetary policy is causing.
“There’s enormous risk in public markets because that’s the one that central banks have distorted to the greatest extent,” El-Erian said.
But the advocates for using central bank balance sheets to hold down borrowing costs are in control for now, and there’s no end in sight. On current guidance, there seems little chance that assets held by the Fed, ECB or BOJ will be significantly run down this decade.
The People’s Bank of China -- with the world’s biggest central bank balance sheet of about $5 trillion -- is somewhat of an exception. It hasn’t resorted to an outright quantitative easing program and its total assets have declined about 10 percent from October 2014 as it spent reserves to prop up a weakening currency.
Fed officials wrote down their exit strategy in September 2014, leaving enough room for themselves to adjust it as the economy requires. Today, all maturing debt is reinvested, in effect providing the U.S. Treasury with a returning customer for its financing needs. Fed officials have avoided saying much of anything yet about the timing of when they might let the balance sheet run down.
Signals on how the ECB plans to continue its own QE program, initially scheduled to end in March 2017, may be on offer this week after the central bank meets in Frankfurt. Draghi has said assets from the to-date 1.7 trillion euro ($1.9 trillion) program will be re-invested, and other policy makers have signaled that means until at least 2020 -- a neat 10 years after the ECB began buying European government bonds as part of a predecessor program to QE.
In Japan, the central bank balance sheet has soared to 459.8 trillion yen ($4.4 trillion). While prohibited from buying bonds from the government directly, the BOJ is hoovering up debt in the secondary market at such a pace that analysts worry about a supply shortage.
“A central bank can roll over, hold and eventually extend maturity of its held assets towards infinity,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. “Since the central bank transfers its interest income to the government, its holdings are effectively retired -- the cost of this debt will be zero from a government perspective.”
The Japanese government can now issue debt paying just 0.1 percent over 10 years; the German government can borrow over the same period for free.
The central bank boon is also shaping as a money spinner for cash-strapped treasuries. In the U.S. last year Congress legislated a one-time draw of $19 billion of Fed surplus capital to pay for investment in highways. In the euro area, the ECB has been able to remit more than a billion euros in profit to its constituent national authorities last year, while the BOJ remitted 390.5 billion yen in the fiscal year through March.
It’s that nexus that’s blurring the lines between monetary and fiscal policy and fueling questions over whether central banks and governments are part of the same consolidated balance sheet, or if they’re separate and independent. Taken to the next level, indefinite balance sheet elevation verges toward “helicopter money,” where the central bank finances fiscal expansion outright with permanent and explicit monetization of those funds.
But we’re not there yet, and for now it’s all about blurred lines and implicit fiscal backing.
“The bonds held by central banks still represent public debt and in principle have to be paid back,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which oversees about $121 billion. “What the huge central bank bond holdings have meant, though, is that it has made it easier for governments to spend to the extent that it has contributed to ultra-low interest rates.”