The far-reaching effects of central bank policy

The impact of central banks should not be underestimated. And I don’t just mean their impact on economic growth and interest rates. Central banks are also a driving force of financial markets. As the chart above shows, the size of G4 (US, Eurozone, UK and Japan) central bank balance sheet as a % of GDP has risen relentlessly over the last 20 years, and global equities have more or less followed suit. The correlation has become even tighter since the financial crisis – a period that, not by coincidence, has seen unprecedented stimulatory monetary policy. In the last 20 years, only two major equity rallies have not been accompanied by significant increases in global central bank liquidity: the internet bubble (2000-2001) and the housing bubble (2006-2008). Surely something to dwell on for a minute.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s