Public debt is skyrocketing as central banks expand their balance sheets to record levels.
“The amounts being purchased are enormous, and it just tells you how much support is needed when the economy is closed down,” said Torsten Slok, Deutsche Bank’s chief economist. “Just have a look at how long it took to unwind from the financial crisis of 2008 and 2009. Now we are adding at a pace that is multiples faster.”
Group of Seven central banks bought $1.4 trillion of financial assets in March: five times as much as the previous monthly record set in April 2009.
According to analysts at Morgan Stanley, the Federal Reserve, European Central Bank, Bank of Japan, and Bank of England will expand their balance sheets to $6.8 trillion by the time the injections are over.
The Fed is willing to buy unlimited amounts of U.S. government bonds and mortgage-backed securities, as well as lend trillions to corporations and municipalities through temporary purchases of their obligations. Through this program, public debt has expanded its balance sheet to the tune of $41 billion per day.
The euro zone, Japan, and the U.K. programs have increased purchasing programs. Canada, New Zealand, and Australia, initiated purchasing programs for the first time. Emerging markets are poised to follow suit.
“They’re all moving in the same direction,” said Aditya Bhave, an economist at Bank of America in New York. “At some point, unconventional easing stops being unconventional.”
Policymakers will soon need to try and keep borrowing costs low. “For now, both the Fed and the ECB will continue to ramp up their buying,” said Yoshinori Shigemi, a global market strategist for JPMorgan Asset Management Japan Ltd. in Tokyo, but they won’t get anywhere near Japan’s levels. “If the market eventually starts calming down, they don’t need to force themselves to buy more.”
Deutsche Bank’s Slok warned: “We just have to get used to a new world where central bank balance sheets are so much bigger.”