The Folly Of The Money-Printers

There is no great mystery as to where today’s fiscal mayhem, bubble-ridden financial markets, stagflationary main street economy and egregious redistribution of wealth to the top of the economic ladder came from. Namely, the Eccles Building and its fellow traveling central banks around the planet.

As recently as the year 2000, the combined balance sheets of the world’s central banks stood at approximately $3 trillion, which represented 8% of the world’s $35 trillion of GDP. That ratio was only slightly higher than the 3-5% ratio that had prevailed prior to the 1980s.

By 2021, however, global GDP had expanded by about 2.7X to $95 trillion, but central bank balance sheets had virtually gone into monetary orbit, rising by 15X.

That’s right. At approximately $45 trillion, the combined balance sheets of the world’s central banks now amount to 47% of global GDP. Stated differently, central bank credit relative to the real economy is now six to ten times larger than it use to be.

Accordingly, the world financial markets and operating economies alike have been flooded by cheap central bank credit and excess liquidity like never before in the history of the planet. And all that bad money ended up not in higher real growth or even normal growth, but manifested itself in broadly measured monetary inflation. This took the form of bubbles, distortions, rampant speculation, unproductive financial engineering, malinvestments and now soaring prices for goods and services.

In this global monetary race to the bottom, the Fed was clearly the lead horse, and the vast expansion of its balance sheet during the last two decades from $500 billion to a recent peak of $9 trillion reflects that. As shown below, what had historically been a balance sheet ratio of 6-8% of GDP prior at the turn of the century soared to 16% of GDP at the time of the financial crisis in 2008-2009 and then took another flying leap upward to 36% of GDP at the peak of the stimmy craze in 2021.

The picture below is not just some statistical curiosity. The plain fact is that neither the main street economy nor the financial markets were built to handle such massive amounts of central bank credit. Accordingly, most of it ended up as monetary bloat—the adverse consequences of which plague markets and economies alike from stem to stern.