As liquidity disappeared in 2008, central bank’s balance sheets as a percentage of GDP exploded as the public/private central banks stepped into the liquidity breach buying everything in sight while simultaneously lowering rates. The interesting lack of inflation during this period of monetary expansion/creation is a serious indication of the destruction of money and credit that went on in the private sector.
With corporate balance sheets groaning with cash and liquidity appearing to have returned, the question remains; what next? Low rates and massive balance sheets for the next few years, or try to deflate central bank balance sheets. Current interest rate levels and swollen balance sheets indicate central banks believe the crisis to be far from over. Or, perhaps like Japan the dominance of central banks in the debt markets is now fashionable. It all feels quite uncomfortable and the Spanish party hasn’t even started yet.