Eoin Treacy's view

I first created the total central bank assets chart in 2014. A couple of years ago I shared the formula with Ben Hunt at Epsilon Capital in a gesture of goodwill following his mention of the size of central bank balance sheets in one of his missives. He subsequently used it and since then the measure has proliferated. I have seen it in a considerable number of investment bank reports, but I have never received a favourable mention for creating it. In future I will be keeping the calculation of indicators proprietary, for the benefit of subscribers.

The measure contracted from its peak in March 2018 to a low in November before popping on the upside ahead of the Fed decision to pause hiking interest rates at the end of the year. It has since returned to test the region of the November lows and there is a clear downward bias. That is reflective both of the Federal Reserve’s continued pace of balance sheet run-off and the strength of the Dollar.

This was a reliable indicator of the effect of quantitative easing on asset prices over the last decade but we are now in a new era where fiscal stimulus is also an important consideration. I have been thinking about to how to create a companion measure for fiscal stimulus.  With the USA, UK, France, Italy, Japan and China all engaged in deficit spending I thought it would be instructive to compile an additional indictor to put a solid number on just how much fiscal stimulus is underway.

The one limitation of the data is the mismatch when various countries report their figures.

Nevertheless, fiscal stimulus provided by governments has risen from $200 to $800 billion over the last 12 months. China accounts for the vast majority of that move with a $552 billion deficit at last report.

$800 billion has been the upper side of the range which has persisted since 2012 but that range is well above the levels that prevailed ahead of the financial crisis.

Central bank balance sheets have contracted by $600 billion since January but government deficits have expanded by $400 billion over the same period. That suggests net tightening has been limited to about $200 billion globally.

The willingness of the Chinese government to run deficits, global central bank willingness of at least maintain the size of their balance sheets and the strength of the Dollar represent the most important factors in the supply of liquidity for the continued expansion of asset prices.