The World’s Money Bubble: Then and Now (It Could be Worse)

Much has been said about how developed governments have been deficit spending as if they’re at war since 2007-2009. And you might expect the story to be similar on the monetary side. After all, the central bank balance sheet expansions that we’ve seen over the past few years look unprecedented. The reality may surprise you. We’ve charted the change in notes in circulation over WWI below and included a chart of central balance sheet expansions over the past 5 years. As you’ll see, it’s clear that wartime monetary easing was way in excess of what we’re seeing today. The central banks that have expanded their balance sheets the most recently are at worst comparable to neutral countries in WWI. See for yourself below. It could be much worse…


Click to enlarge. [Feel free to use this chart on your website.]


Here are the central bank balance sheet expansion numbers for 5 major developed countries over the past 5 years:


Click to enlarge. [Feel free to use this chart on your website.]

See here for our collection of rare historical economic data.

Posted Feb 11, 2013
  • Jim

    Are you not missing the fact that the balance sheets and circulation of money was from a much smaller base so the X increase is not a true measure if taken at face value?  I cannot see how the US is ever going to repay the debt in any substantial way and at some point interest rates need to normalize which means they will over shoot to the high side and drive us into a recession.  The rise in interest rates will accelerate the debt to a point that it becomes unmanageable.  We need to have some type of debt default or reset.  This will be painful, but groups of people are going to have to accept significantly less than a 100% return of their initial investments in order to get the debt down to a manageable level.  We have not even talked about derivatives which are toxic and are only a Black Swan event from exploding.  Reckless government spending along with extremely poor monetary policy cannot be swept under the rug.  It will be dealt with at some point as the market give no country a free pass.

    Jim Willam   

    • rafael barbieri

      The story you paint above very widely believed it seems.  It seems like an incredibly crowded mindset.  Literally, I can’t go a day without reading about the monetary systems demise or US debt default.    

      Just to bring some balance to the discussion, because ultimately isn’t our goal to do our best to understand reality?

      Here are questions worth pondering:

      What does it mean for the US to pay off its debt?  What is a treasury securities?  Are the remotely similar to a corporate bond?  A EZ bond?

      The Fed targets monetary policy by setting short term rates.  Why would the Fed need to normalize rates?  What are normal rates?  What would cause rates on treasury securities to rise?  

      Why do we have to have a default?  

      What is a manageable level for of US debt?  Isn’t the US debt being managed now considering their is more then enough for treasury bonds?  

      In the event derivatives, which are private securities, exploded would this cause demand for treasuries and dollar denominated deposits/reserves to rise or fall? 

      If the market gives no country a free pass, why are the outcomes in Japan and the US vastly different than some EZ nations?  Are US and individual EZ nations similar monetarily?  If so, why do make participants trade their liabilities in different manners.    

      This isn’t meant to offend anyone.  It just makes me very uncomfortable to go with the crowd when the above questions seem to go unanswered more often than not.  

      Looking forward to a response!  

      • anon

        The old saying “If you can’t dazzle them with brilliance, baffle them with BS.” really is being applied here. The reality is we are clearly headed toward a one world currency system. And the quickest way to achieve this is to systematically collapse all the current systems so that there will be limited resistance to the new one that will take its place.

  • EggShells

    I think the full picture may be bigger than the Federal Reserve’s balance sheet.

    The fragility of the financial system depends on the relationship between the total amount of financial assets (cash, debt assets, deposits, stocks, etc.) and real assets (the future stream of goods and services.) The more financial assets outpace real assets, the more fragile the financial system. The more holders of the financial assets know they are not going to realize the full value of their assets, the more eager they are to take risks for higher returns. And the more likely the financial system will crash.

    The Fed’s balance sheet only represents part of the total financial assets in the world economy. The other parts include public debt, corporate debt, equity, a good part of housing values, and God-know-what risky assets have been acquired by too-big-to-fail banks and hidden from view. I would assume the total assets have grown at a more frightening pace than the Fed balance sheet.