For me, this remains one of the most important, and least appreciated, charts of the financial crisis.
It measures the so-called “monetary base” in these different economies: the amount of notes, coins and money kept in banks’ reserves at the central bank. In short this is the most potent and liquid kind of money there is – that is theoretically only a step away from being spent.
As you can see, the monetary base has increased in Britain by a factor of five since 2007. That’s unprecedented, and is a direct consequence of the £375bn in quantitative easing that has been carried out by the Bank of England. It underlines how enormous was the slug of money this involves (if, like me, you find it hard to get your head around the sheer scale of £375bn, check out this post).
To put it into perspective, the keystone of Japan’s much-lauded “radical” new economic policy is for the Bank of Japan to double the monetary base in the country. But a brief glance at the chart above shows that even that will still be dwarfed by what the Bank of England has done.*
There are three disturbing takeaways here: 1) that despite all this stimulus the UK economy is still more than 2% smaller than it was at the start of the crisis. What is responsible for the blockage? The banking system? The international economy, which still refuses to rebalance and suck in UK exports? 2) That despite this enormous, unprecedented expenditure by the central bank few out there in the real world appreciate the sheer scale of this policy, which has already had a distinctly perverse impact on wealth levels across the country.
Third and finally, the Bank of England is sitting on a bed of nitroglycerine. At some point there is a chance this money will indeed start to be spent, which could imply a big inflationary risk in the future. Plenty of food for thought for the incoming Bank of England Governor, Mark Carney.
* This applies to the pre-crisis period as well. Between 1997 and the early part of the crisis Japan increased its montary base by a factor of 1.7, meaning it still wouldn’t compete with the Bank of England’s moves.