Exploding the debt reduction myth

Since the crisis US$60 trillion of debt has been created globally versus US$15 trillion of GDP. That is a ratio that is clearly concerning for central bankers though they rarely address it head on. Does the net worth of a central bank matter? It is not a question that they want  to answer. But when you look at the leverage ratio of central banks, their assets versus capital, we are in the territory of Lehman Brothers prior to its implosion in 2008.

The Federal Reserve is 78 times levered and the Bank of Japan 79 times. The European Central Bank is at 30 times. If you ask anyone if this matters  you will get a shrug. Of course, central banks cannot go bust in a traditional commercial sense, but that is not the real issue.

The problem is whether a financially weak central bank is able to conduct monetary policy in the way it wants to? A weak central  bank has to deal with that problem and also the issue of credibility and trust.

Abdallah Nauphal – Insight, a BNY Mellon company

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