Have Central Banks Finally Reached Their Limits?

American Money

After years of unprecedented intervention, central banks around the world may finally be reaching their limits. Record amounts of liquidity have allowed financial markets to rebound from the depths of the financial crisis, but governments need to face reality and reduce debt loads, according to a new report.

The Bank for International Settlements — a powerful group representing global central banks — raised economic concerns in its latest annual report released over the weekend. Monetary easing programs in the euro zone, United Kingdom, Japan, and United States have failed to provide sustainable growth, and only delayed much needed fiscal reforms.

Stephen Cecchetti, head economist at BIS, explains, “So far, continued low interest rates and unconventional monetary policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system.”

When converted to U.S. dollars, the four major central banks have expanded their balance sheets to more than $13 trillion, according to Hayman Capital. In comparison, the amount was $3 trillion ten years ago. Central banks now account for at least a quarter of all global gross domestic product, a sharp increase from only 10 percent in 2002. In April, the Bank of Japan announced plans to nearly double its monetary base to 270 trillion yen by the end of next year.