The world’s central banks have pumped £3 trillion into the global financial system since the crisis, the equivalent of 8pc of the world economy, according to new analysis by Fathom Consulting.
The figures will intensify fears that the extraordinary injection of liquidity is responsible for rising stock markets, rather than any underlying pick-up in corporate health or investor confidence.
Erik Britton, a director at Fathom, compared the development to throwing lighter fuel on a barbecue. The question is, he said, “whether the coals are lit”.
The warning is the result of the extraordinary measures to prop up the financial system, which have seen central banks resort to strategies such as buying up bonds to keep the flow of money circulating.
Fathom’s economists are worried that last year may have marked the high point of the global recovery. “It remains unclear how much of the equity market rally has been ‘genuine’, rather than simply a ‘mopping up’ of that extraordinary injection of liquidity,” they warned. “As that stimulus is gradually withdrawn, further gains in equity markets will be harder to achieve.”
To reach the £3 trillion figure, presented in its calculations as $5 trillion, Fathom measured the liquidity injections made by the world’s four major central banks, by tracking how their balance sheets changed in the wake of the crisis.
The analysis of data for the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England shows their assets were relatively stable through 2006 up to mid-2007. They then started to climb rapidly as the global financial system began to unravel.
The central banks’ assets swelled from around $4 trillion at the start of 2006 to just short of $9 trillion by the end of February this year. “The increase in the size of G4 central bank balance sheets since mid-07 has been around $5 trillion to end Feb-11, or 8pc of global GDP,” reported Fathom.
The Bank of England was the smallest contributor to the headline figure. So far, it has pumped £200bn into the system through quantitative easing (QE), its programme of buying government bonds to keep the money flowing. The European Central Bank (ECB), which sets monetary policy across the eurozone, emerged as the biggest contributor to the headline figure.
By Emma Rowley 6:00AM BST 26 Apr 2011
Source: The Telegraph