Diminishing Returns for QE Programs

Tim Strauts: In today's chart, we are going to look at the balance sheets of the three major central banks: the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan. To make the relative sizes comparable, the chart shows the size of each balance sheet as a percentage of GDP. So, while the Federal Reserve has a much larger balance sheet then the ECB, because the U.S. also has a much larger economy than Europe, it has a smaller relative percentage today. The practice of quantitative easing was started by the Federal Reserve in late 2008 as another way to stimulate the economy when interest rates were already at 0%. The overall effects of the practice are controversial, but the perceived success of the U.S. program encouraged Europe and Japan to institute quantitative-easing programs of their own.

Japan's "Abenomics" program is attempting to break the country out of persistent deflation by dramatically stimulating the economy. So far, Japan's program has boosted equity markets but hasn't created sustained improvement in the economy, and no one really knows the long-term effects of increasing your balance sheet to almost 70% of your annual GDP. Japanese policymakers are desperate and feel that this is one of the last options available to try to break the economy out of its long-term slump.

The European Central Bank began its quantitative-easing program in early 2015 after several years of contracting its balance sheet. At around the same time, the Federal Reserve stopped expanding its balance sheet. Today, the U.S. is moving in the opposite direction of Europe and Japan. The U.S. quantitative-easing program has had the biggest economic impact because they acted first. Subsequent programs by other countries have needed to be larger to get the same economic effect. While the actions of the Federal Reserve have been controversial, it is clear that the U.S. is in the best economic position going forward.