Despite the news coverage, the Federal Reserve is not the largest central bank in the world. Ditto for the European Central Bank, the Bank of Japan, and the mighty Bank of England. Could it be the shareholder-owned, if not controlled, Swiss National Bank? We respond in the negative. In total, this leaves us with, really, only one logical explanation: China.
To keep it’s currency on the cheap end of the scale, China buys dollars for the express purpose of selling yuan. In time dollar denominated assets are purchased with the proceeds, further pushing down our domestic bond yields. In keeping with the cheap currency strategy, the People’s Bank of China sets it’s sights on export driven growth. At a summation of 5.5 Trillion US Dollars, the PBOC edges out the ECB by only a hair. According to Yardeni Research (chart below), this brings total central bank assets just under $20 Trillion.
For sake of ease, a ballpark estimate of a bit over 20 Trillion US Dollars worth of credit has been birthed onto planet earth via the central bank brain-trust in the last decade. Unlike 1929 and the mess of years that followed, this was viewed by modern bankers as a necessary evil to keep the gears of the business world from grinding to a halt. Up for debate on a seemingly daily basis is the morality of these moves and the knock-on effects of unraveling the ball of string. We will have our answer to the latter soon enough.
While the United States depends on other countries around the world to demand our debt to keep us solvent, China depends on other world powers to buy goods and services from them to stoke the fire that is their growth. It is safe to say we live in an interdependent world where the binary winner/loser scenario is anything but ordinary. This may be hard to see in the polarizing climate that has developed politically in recent years. The spirit of modern-day economics, however, tends not to be so partisan. There are two side of this coin, mind you; a rising tide may lift all boats, but treacherous waters will sink us all together. So while China may be a threat to United States leadership, they are so because of our help – and vise versa.
In the name of being less Boolean, growth and degeneration are both contagious in such a connected world.