Balance sheet alchemy

The euro was launched in January 1999.

You can see below how the European Central Bank’s balance sheet changed since.

ECB Balance Sheet 2012 v 1999

This is no mere technicality for experts. It’s the core mechanism supporting the social arrangement around which today’s society revolves: money.

Over 14 years the European Central Bank put close to 1 trillion euros into the accounts of commercial banks. These accounts increased tenfold in the period, from 106 to 1,057 billions.

This was achieved first through cheap loans granted by the ECB to commercial banks. The banks were able to leverage these generous injections of primary cash and create many trillions of secondary money by extending loans to their own customers and by buying shares, bonds and other “products” from the financial markets.

Loans granted by commercial banks went for a large part into property markets, which caused enormous increases in house prices and also went massively to financial institutions, which used the money to take extra positions in financial markets, causing booms and busts in various areas of these markets.

A relatively modest portion of the new money trickled down into the “real” economy (apart from property) where ordinary folks buy cars and other mundane stuff on credit. Some went to companies, more often the larger ones. Among the latter, the now famous private equity groups, whose business is to buy companies mainly with borrowed money to achieve maximum return.

After the financial crisis of September 2008, the ECB, like other central banks, was forced to extend even more credit on even cheaper terms to commercial banks to save them from total illiquidity.

And more recently, from 2011, the ECB was forced to start buying sovereign bonds to prevent excessive rise in interest rates on debt from countries in trouble.

No doubt it will continue this sort of policy in the hope of saving the euro, supporting financial and property markets and preventing the economy from going into severe contraction.

This, of course, amounts to giving ever larger doses of the drug that triggered the patient’s illness.

To keep abreast of monetary developments visible on the ECB balance sheet, check regularly the section “weekly financial statements” on the ECB web site

index.en.html

Fear not, remember all this is very small beer in the universe.

Love,

Leo

Copyright © Leo Foresta 2012

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