FRACTIONAL FLOW

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CENTRAL BANKS’ BALANCE SHEETS, INTEREST RATES AND THE OIL PRICE

In this post I present a more detailed look at developments in central banks’ balance sheets, interest rates and the oil price since mid 2006 and as of recently.

Paper and digital money are human inventions. Most people truly believe it is money that powers the society and their lives because they have never had reason to think otherwise. Money does not create energy, but it allows for faster extraction from stocks of energy (like fossil fuels) and influences consumers’ affordability of energy.

It is humans’ ability to use external energy that gives humans leverage over other animals. The financial system in general does not recognize oil for what it is, it treats it like another commodity.
We (the aggregate human hive) moved to use more financial debts as a way of pulling resources for consumption (like oil) forward in time when Limits To Growth (LTG) was written. In recent years global credit/debt creation went exponential. The workings of financial debts (created “ex nihilo”) was not included in LTG and the effects of debts are rarely recognized when Gross Domestic Product (GDP) is estimated and its future trajectory projected.

This post takes a closer look at the question:
•   “Could the cumulative effects of the strong growth in oil prices starting back in 2004, which signaled a tighter oil supply/demand balance, upon working their way through the economies, have contributed to forcing the central banks’ to deploy their tools of lower interest rates and growing their balance sheets – measures which have mitigated some of the effects of higher priced oil?”
It is recommended to read this post as an extension to my post “Global Credit growth, Interest Rate and Oil Price – are these related?” where I showed that apparently something fundamentally changed in previous mid decade.

Data from the big western central banks, US Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE) and Bank of Japan (BoJ) have been lifted from the article “Chart Of The Day: The Fed (And Friends) $10 Trillion Visible Hand” which recently was published by Tyler Durden at ZeroHedge.

Figure 1: The chart above is a composite of two charts. The bottom chart shows the developments for the total central banks’ assets on the balance sheets and the interest rate for Federal Reserve [Fed], European Central Bank [ECB], Bank of England [BoE] and Bank of Japan [BoJ]. Developments in total central banks’ assets in US$ Trillion are shown by the green line and plotted versus the outer right hand scale.  Developments in the interest rate (%) are shown by the dark blue line line and plotted versus the inner right hand scale.  On top of the chart and with synchronized time axes is overlaid the development in the oil price (US$/Bbl, Brent spot), red line and plotted versus the left hand scale.

Figure 1: The chart above is a composite of two charts. The bottom chart shows the developments for the total central banks’ assets on the balance sheets and the interest rate for Federal Reserve [Fed], European Central Bank [ECB], Bank of England [BoE] and Bank of Japan [BoJ].
Developments in total central banks’ assets in US$ Trillion are shown by the green line and plotted versus the outer right hand scale.
Developments in the interest rate (%) are shown by the dark blue line line and plotted versus the inner right hand scale.
On top of the chart and with synchronized time axis is overlaid the development in the oil price (US$/Bbl, Brent spot), red line and plotted versus the left hand scale.

Since the start of the global financial crisis (GFC) in 2008 the western central banks (Fed, ECB, BoE and BoJ) have grown their total assets above $10 Trillion and added around $7 Trillion to their balance sheets in the last 7 years.

The overlay with the developments in the oil price on the chart with central banks’ (CBs) balance sheets and interest rate (ref also figure 1), creates the impression that massive CBs liquidity injections and considerable cuts to the interest rate renewed the support for the oil price after it collapsed from its high in the summer of 2008.

The oil price has remained fairly stable since 2011 (around US$110/Bbl) as the western central banks continued to expand their balance sheets at an annual average rate of around US$1 Trillion and kept interest rates low. Then add the expansive credit/debt creation of other big economies, like Brazil and China, during this same period.

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