The Race to Balance Sheet Expansion Continues

on May 8, 2020
Updated: Dec 19, 2022

The German Constitutional Court ruling dictated most of this week’s price action on the FX universe by saying that some ECB Asset Purchase Programs (APPs) were “illegal”. Simply put, the quantitative easing (i.e. a central bank buying bonds issued by its own government) went too far, and the ECB acts outside its mandate.

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Europeans do have an interesting way to fight a crisis. In the aftermath of the 2008 Great Financial Crisis, the Eurozone sovereign crisis began. While other parts of the world began the long road to the economic recovery, Europe was sinking fast to the pressure of high credit spreads.  Mainly due to the inability of its economies to service the debt load.

It took a while until markets regained trust in the Eurozone. The now-famous Mario Draghi’s words “whatever it takes” to support the Euro, put an end to the sovereign crisis. Yet, it could have been avoided.

The same could be said in this new crisis.

All Major Central Banks Expand Their Balance Sheet

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Quantitative easing became a monetary policy tool in the hands of central bankers around the world. Moreover, it passed from buying only government bonds to corporate bonds of all sorts and even junk bonds in some cases.

In Japan, and now in the United States as well, central banks buy ETFs (Exchange Traded Funds). A quick look below at the Bank of Japan’s ETF holding in Dollars reveals a staggering 60%-70% of the ETF universe held by Bank of Japan.

The point here is that ever since former FED chair Ben Bernanke launched the original quantitative easing program, it was implemented by central banks around the world. Some banks innovated earlier than others (e.g., Bank of Japan), some were reluctant, but in the end, the result is similar – the main central banks in the world keep expanding their balance sheet by accumulating assets.

Which brings into question the real aim of the German Constitutional Court. If the APP programs are popular around the world, from East to West, why would Germany oppose it?

It appears that German savers see their wealth threatened by the reckless decisions taken at the ECB. However, what they forget is that their own central bank, Bundesbank, was an active participant in the ECB APP programs – like all major central banks in the world.