Economist Patrick Artus analyzed in his “World” column that hyper-expansionary monetary policies pursued by central banks have led to increased mistrust in ordinary money, which should benefit cryptocurrencies such as Bitcoin or Libra .
chronic. Since 2008, the central banks of the OECD countries have been implementing hyper-expansionary monetary policies: the Fed’s intervention rate is now 2%, the ECB’s intervention rate is 0%, and the Bank of England’s intervention rate is – 0.5% 0.75%, Bank of Japan 0%: In all cases, interest rates are well below growth rates.
From 2008 to 2019, the size of the US central bank balance sheet grew from $900 billion to $3.9 trillion, the euro area from €900 billion to €3.1 trillion, the UK from £80 billion to £570 billion, and Japan from 120 to 570 million yen. We know that it is the size of central bank bond purchases, not the flow of bond purchases, that determines long-term interest rates. The sheer size of central bank balance sheets explains why long-term interest rates are so low: 1.8% in the U.S., -0.2% in Japan, -0.5% in Germany, and 0.7% in the U.K.
Risks associated with continued expansion of central bank balance sheets are often not analysed. However, their balance sheets have grown from $2.2 trillion in 1996 to $2.3 trillion today, a more than tenfold increase! This expansion will continue: whether it’s the European Central Bank, the Bank of Japan or the Federal Reserve. Until now, the “old macroeconomics” held that excessive central bank creation of money would lead to inflation. But we can clearly see that this is no longer the case. Inflation remains extremely low (1.5% in the US, 1.0% in the Eurozone, and 0.6% in Japan, excluding oil).
The real risk associated with continued expansion of central bank balance sheets today is “fleeing money”. In a small or emerging country in the OECD, if the central bank creates too much currency, the economic agents of the country start to worry about the devaluation of this currency and protect themselves from losses by taking refuge in foreign currencies, especially the US dollar. For example, in Turkey, the monetary base (liquidity created by the central bank) increased from £120 billion in 2012 to £530 billion in 2019, while the exchange rate rose from £1.9 to £5.80 to the dollar over the same period. In Argentina, the monetary base increased from £1.90 to £5.80 in 2012 200 billion pesos in 2019 increased to 1.25 trillion pesos in 2019, the exchange rate during the same period changed from 5 pesos per dollar to 58 pesos per dollar. In these countries, currency flight caused by excessive currency creation has led to violent capital outflows and sharp exchange rate depreciation.