Tapering and quantitative tightening will be prominent topics in 2022, so I feel we need a reminder here
Central banks DON'T print money
QE simply forces the private sector to swap away duration intensive, coupon bearing bonds for 0 duration, 0 yielding deposits/reserves
1/9
Central banks DON'T print money
QE simply forces the private sector to swap away duration intensive, coupon bearing bonds for 0 duration, 0 yielding deposits/reserves
1/9
Central Banks expand their balance sheet by creating reserves and buy bonds from the private sector.
The private sector now has less bonds and more reserves.
That's it, just a swap.
No ''money'' has been created.
Yeh, but what if the CB buys from another entity?
2/9
The private sector now has less bonds and more reserves.
That's it, just a swap.
No ''money'' has been created.
Yeh, but what if the CB buys from another entity?
2/9
Same story, one difference
Pension funds and asset managers can't hold reserves, so they now have new bank deposits
Those are still inert, 0 duration, likely 0 yielding assets that don't find their way to the real economy
They find their way in M2 though, be careful...
3/9
Pension funds and asset managers can't hold reserves, so they now have new bank deposits
Those are still inert, 0 duration, likely 0 yielding assets that don't find their way to the real economy
They find their way in M2 though, be careful...
3/9
M2 is a decent yet imperfect measure of ''real economy'' money - simply stated, it measures bank deposits in the system
Cool, but as we have seen above, not all newly available bank deposits are the same
A pension fund can't do much ''real economy inflationary'' with it
4/9
Cool, but as we have seen above, not all newly available bank deposits are the same
A pension fund can't do much ''real economy inflationary'' with it
4/9
Also, please stop plotting Central Banks balance sheet charts against asset prices?
Japan started QE decades ago, we've been there already.
Here is the BoJ sheet as % of GDP from 2013 to 2018.
It increased from 30% to 100%!
5/9
Japan started QE decades ago, we've been there already.
Here is the BoJ sheet as % of GDP from 2013 to 2018.
It increased from 30% to 100%!
5/9
And here is the chart of JPY measured in Gold.
According to the theory of ''Central Banks print money'', JPY measured in Gold should have tanked to zero.
It went nowhere.
Why?
6/9
According to the theory of ''Central Banks print money'', JPY measured in Gold should have tanked to zero.
It went nowhere.
Why?
6/9
Because the real money printers were not printing.
Commercial banks were not lending to an already overleveraged private sector.
7/9
Commercial banks were not lending to an already overleveraged private sector.
7/9
And the Japanese government was raining in budget deficits year after year.
Notice as even if the outright budget deficits as % of GDP were large, the fiscal impulse (the pace of growth in deficits) was shrinking quick.
The second derivative matters a lot.
8/9
Notice as even if the outright budget deficits as % of GDP were large, the fiscal impulse (the pace of growth in deficits) was shrinking quick.
The second derivative matters a lot.
8/9
Central Banks balance sheet and excess reserves in the system are very important drivers of asset class performances and risk sentiment.
But as we head into 2022 and everybody will be talking about tapering and QT, please bear this in mind: Central Banks don't print money.
9/9
But as we head into 2022 and everybody will be talking about tapering and QT, please bear this in mind: Central Banks don't print money.
9/9
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