Central Banks’ Balance Sheets: Is the Worst Over?

"Central Banks Halt Balance Sheet Shrinking, Bringing Stability to Risk Assets and Cryptocurrencies"

Central banks around the world have ceased shrinking their balance sheets, a strategy they employed last year to curb inflation that destabilized risk assets, including cryptocurrencies. The quantitative tightening strategy has ended, and the cumulative balance sheet of major central banks, including the US Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BOE), and Bank of Japan (BOJ), has bottomed out. This information was sourced from The Market Ear newsletter and tracked by macroeconomic research firm TS Lombard. Thursday’s edition of The Market Ear noted that “the ‘delta of the delta’ has reversed lately. Possible tailwind for markets.”

Expansion of central bank balance sheets is generally considered bullish for risk assets, including bitcoin. This is because entities involved in financial markets are often the first recipients of newly created money through balance sheet expansion, according to a theory proposed by 18th-century Irish-French economist Richard Cantillon. These entities use the money received to drive asset prices higher.

It is still unclear whether the Fed’s recent extension of loans to local lenders will lead to fresh money creation. Meanwhile, the BOJ continues to print money through bond purchases, compensating for the ECB and BOE’s shrinkage. The Chinese credit impulse has recently bottomed out, indicating renewed credit expansion relative to the size of the economy.

The end of quantitative tightening by central banks is a significant development for risk assets, including cryptocurrencies. The strategy was implemented last year to control inflation, but it had an unintended consequence of destabilizing risk assets. The cumulative balance sheet of major central banks has bottomed out, according to data from TS Lombard and The Market Ear.

Expansion of central bank balance sheets is generally considered bullish for risk assets, including bitcoin. This is because entities involved in financial markets are often the first recipients of newly created money through balance sheet expansion, according to a theory proposed by 18th-century Irish-French economist Richard Cantillon. These entities use the money received to drive asset prices higher.

The Fed’s recent extension of loans to local lenders may or may not lead to fresh money creation. The BOJ continues to print money through bond purchases, which compensates for the ECB and BOE’s shrinkage. The Chinese credit impulse has recently bottomed out, indicating renewed credit expansion relative to the size of the economy.

Overall, the end of quantitative tightening by central banks is a positive development for risk assets and cryptocurrencies. The cessation of the strategy, which was implemented to control inflation, had unintended consequences that destabilized risk assets. However, the expansion of central bank balance sheets is generally considered bullish for risk assets, including bitcoin. The recent developments with the Fed, BOJ, ECB, and BOE are worth monitoring to see how they impact the markets.

Martin Reid

Martin Reid

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