It has been evident for the past three years that the central banks are the backstop to prevent a global debt deflation because of wildly excessive sovereign debt levels. As a result, we have witnessed a massive expansion of balance sheets (money printing) of the four major central banks as appears in Chart 1. See page 10 below for outline of the recent Federal Reserve policy stimulus.
The ECB is right in there in the big leagues of asset expansion (Chart 2), having taken ECB assets from 16 to 32% of GDP over the past 4 years. It is now planning further expansion to an extent as yet unknown.
The obvious failure of austerity imposed on the troubled debtors in the eurozone, as signified by the move back into recession, the spiking of interest rates in the over-indebted countries earlier this summer and the inability to reduce debt:GDP ratios had created a renewed sense of panic. This is what has pushed the ECB authorities to hit the panic button with last week’s announcement of a new bond buying program, euphemistically called Outright Monetary Transactions (OMT). It is aimed at reducing Italian and Spanish bond yields to some unknown level in order to reduce fears of a euro break-up and give the troubled debtors more time to adjust, and hopefully, save the euro.