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5 trillion and counting

As per the latest reports of the Fed, the ECB, and the BoJ, their balance sheets have collectively been blown up by over 5 trillion dollars since March. And we are not finished by a long shot. The Fed has just announced to buy portfolios of individual corporate bonds. The ECB will do more of the same in the in any case super-tight European high yield market, and the BoJ keeps itself busy buying everything including equity ETFs. The others will likely get to equities in due course.

It is fair to say that the largest economies on the globe as well as our financial system as we know it would have collapsed under the weight of the health and subsequently government-induced crisis unless the largest central banks had lent every helping hand imaginable. 5 trillion can monetise a lot of assets, including every scrap and junk piece of financial instruments. Those had to be taken out from the bank and corporate accounts to bridge essential institutions into a post-crisis scenario.
The stock market is telling it all, isn’t it? The S&P has since the crash in March rebounded so hard that we are about to test the highs of February. It feels like there is no end to the rally, and the junkier assets are, the more they are being sought after by market players front-running the central banks’ largesse. The Fed has so far been the most generous in creating newly minted funds, adding around 3 trillion to its balance sheet of now over 7 trillion dollars, while ECB and BoJ added 1 trillion each.
Remember in the wake of the financial crisis, when we bemoaned in this space that there were no more markets, only intervention. In the past 3 months, we have upped the ante to exponentiated readings from there. We have come to a point where all rate curves in major currencies are manufactured and will be kept at flat and near-zero levels. Equity valuations have long become detached from fundamentals. Real estate has been a bubble for a while. The national debt has become a meaningless number.
If only this monetary avalanche were to produce an economic performance commensurate to its efforts, it would be ok. But there is no such thing. Economies on a real basis are contracting. Like with the financial crisis, new money is buying us time but doesn’t translate into economic activity. Instead, it is slushed around in the financial system and lifts asset prices ad infinitum. There are only half-hearted approaches such as infrastructure spending in America and Europe’s periphery, but they have so far just been plans.
With the exception of China, possibly, there are no seminal and constructive actions to be identified in the world. The enormous funds are predominantly being employed to support legacy structures and protagonists, those that are responsible for where we are today. Incredible potential capacity is being squandered if not even destructively applied, and it keeps rewarding the ones who caused and accelerated the system’s aberrations.
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