The Age Of Permanent QE

View this email online | Add newsletter@businessinsider.com to your address book
		Tech Entertainment Wall Street Markets Strategy Sports Lifestyle Politics Europe Video Latest Thursday, February 2, 2012 The Age Of Permanent QE In a new note, Spyros Andreopoulos at Morgan Stanley takes a big picture look at central bank balance sheets, and what he calls the "coming of age" of QE. Whereas at first, central banks use their balance sheets surgically -- e.g. unthawing specific markets -- it's not the dominant strategy for the Fed, the Bank of Japan, the Bank of England, and the ECB to expand their balance sheets broadly at any sign of trouble or deflation. It's now to the point where there collective balance sheets are nearing 36% of GDP. Andreopoulos writes: Normative considerations aside, what will actually happen? Central bank balance sheets are likely to remain bloated for a long period of time – indeed, the balance sheet expansions might even end up being quasi-permanent. First, even if all goes smoothly and the recovery proceeds slowly but surely, it will probably take central banks many years to exit, even if you discount the fiscal dominance argument. Asset sales would have to proceed with the utmost caution – indeed, risk-aversion implies that central banks would rather err on the side of caution and sell too little, too late – just one of the reasons why we are worried about inflation in the long term. Second, if (i) the recovery remains bumpy, with more growth scares; and/or (ii) we revert to recession at some point over the next few years, it seems almost certain that balance sheets will be deployed again. So, in the near-to-medium term, the only way for balance sheets seems to be up. Finally, because of the possibility of economic shocks, the unwind of balance sheets might even take the shape of ‘two steps forward, one step back’. That is, unless we are wrong in the above and balance sheets can indeed be reduced rapidly, a balance sheet reduction that’s on the way could be interrupted by a large deflationary shock, which necessitates renewed expansion, and so on. Read » Also On Money Game Today: CHART: The 1-Month And 12-Month Return Of Every Major Stock Market In The World CORELOGIC: Home Prices Fell For 5th Straight Month In December Bernanke Testifies, 'We're Obviously Not Satisfied With Where We Are' In The Economy Abercrombie & Fitch: It's Just Not Cool Anymore Advertisement CHART OF THE DAY: Actually, There Was Some Awesome Jobs News Today CHART OF THE DAY: Your Dreams Of A Housing Rebound Just Got Smashed CHART OF THE DAY: The Mother Of All Head And Shoulders Share this: Facebook Twitter Digg Reddit StumbleUpon LinkedIn The email address for your subscription is: dwyld.kwu.jobhuntportal11@blogger.com Change Your Email Address | Unsubscribe | Subscribe | Subscribe to the Money Game RSS Feed Business Insider. 257 Park Avenue South, New York, NY 10010 Terms of Service | Privacy Policy

If you believe this has been sent to you in error, please safely unsubscribe.