There is nothing more deceptive than an obvious fact.

–Arthur Conan Doyle, “The Boscombe Valley Mystery”


  • Major central banks’ balance sheets (Fed, ECB, BoJ) have increased by about $10Tn since the collapse of Lehman Brothers in 2008.
  • There is nothing extraordinary about this fact.
  • This is also how much the IMF estimates the global shadow banking system has lost in about that period.
  • Is this a coincidence?
  • I do not have the data for the shadow banking monetary liquidity globally, but looking at data for the US, shadow banking liquidity has fallen by about $5tn while the Fed’s balance sheet has increased by about $4tn since the 2008 crisis.
  • Still think it is a coincidence?
  • The core of our monetary system is money as credit. If the commercial banks/broker dealers cannot perform the collateral intermediation process as necessary for the monetary liquidity to reach its designated purpose, the central bank has to step in and lend its own balance sheet.
  • The collapse of Lehman Brothers struck directly at the core of the shadow banking system and caused monetary liquidity to collapse as a result. However, in the years that followed, developments on the regulations side (Basel, Dodd-Frank) have further prevented the banks to provide enough monetary liquidity.
  • As long as shadow banking liquidity continues to deteriorate, the central banks will have to plug in the difference just to keep the monetary liquidity from going down.
  • For example, the Fed’s balance sheet stopped growing in 2014 and that’s about when the ECB’s started growing again.
  • Global liquidity is still predominantly in USDs and a lot of that is generated in the offshore dollar market. The ECB, BoE, BoJ have become the de facto dealers of last resort in there. They are providing an extraordinarily formal backstop of this global dollar funding market.
  • This is a good thing. The increase in central banks’ balance sheets is a source of stability, not a reason for concern.
  • We are formalizing the shadow monetary liquidity. As long as this is ongoing, it would be difficult for a sustained rally in the USD.
  • The financial crisis of 2008 has put a lot of economics taboos out for discussion. How money is created in a fiat sovereign monetary system is one of them.
  • Going forward, central banks’ balance sheets may not only not shrink, but they may continue to increase if the central banks allow public (retail) access to them. As the process of digitalization advances and as cryptocurrencies continue to spread, they may not have a choice.