This page has been archived and commenting is disabled.
Sterilizing The Sterilization - A Monetization By Any Other Name
Yesterday we announced the ECB's plan of €16.5 billion in liquidity withdrawal via term-deposits. What we missed is that this is one of the biggest circuitous monetization schemes imaginable as these very term-deposits are eligible as collateral against the ECB's repo facility. In other words, this is very much like pulling oneself out of the toxic asset swamp by one's bootstraps. It gives the impression of a liquidity tightening event when in reality it could easily become leveraged loosening. And here we were thinking that the ECB could go ahead and do something sensible for once. Expect reprisals from Germany once it is understood that toxic bond monetization by JCT is now implicitly permitted.
From BofA's Jeffrey Rosenberg:
We believe undermining the Euros valuation vs. the dollar stands the threat of indirect debt monetization of Greek and other periphery debt. Despite its claims to the contrary, today’s ECB announcement on operational details of its Securities Markets Programme of direct secondary market purchases of sovereign debt suggests the possibility the ECB could end up effectively sterilizing its own sterilization. This occurs as the term deposits used for sterilizing the EUR16.5bn of purchases last week itself are eligible as collateral against ECB repo liquidity. To us that means that the liquidity drain of collecting deposits from banks could be effectively unwound in the scenario whereby the bank used those term deposits as collateral against ECB repo lending, a possibility explicitly permitted in today’s announcement. While we believe such a scenario is highly unlikely, the perception it creates of debt monetization nevertheless is the larger issue to the near term outlook for the Euro, in our view.
And here is BofA's brief on what theoretical sterilization, or off-balance sheet debt monetization, should look like:
Debt monetization is the process where the central bank prints money to purchase government debt. The ECB’s “Securities Markets Programme” purchases government debt – presumably of the peripheral countries – printing money to do so. However, the ECB announcement ensured “sterilization” of that impact. That means that the newly printed currency would be absorbed or“sterilized” leaving the impact on monetary policy unaffected.
Sterilization can take place through many channels. Increased deposits held at the ECB from banks or the sale of existing short term debt of other governments or the issuance of new short term debt. Selling other ECB holdings of debt would reduce the amount of money in circulation as the amount received in return for the debt is in effect taken out of the system.
»
- 5522 reads
- Printer-friendly version
- Send to friend
- advertisements -
On the other hand banks were really interested in participating in this tender. 223 banks bid for a total of €162,7Bn for the total of €16,5Bn on offer, a 10:1 bid ratio. And the interst rate? 2,28% (for a weeks term deposit)...not bad.
can I participate? Whats the number?
Well maybe not...at the second reading one read 0,28% :-(
One pulls oneself up by one's bootsraps.
Don't mean to nitpick but there's no sense in sounding like the Festrunk Brothers. Thw world is watching.
Hey Yortuk this liquidity tightening gives me big bulges. Now is the time for the monetizations!
http://www.hulu.com/watch/19591/saturday-night-live-the-festrunk-brothers
update: better
Stealth monetization while claiming not to monetize is the same as financial fraud.
This is good old-fashioned book-cooking a la Enron.
So, who's going to jail?
+1
Oh, wait, they are central bankers. That means they can do whatever they want.
That money-tezation talks I can't deny, I heard it once, it said "Good-bye".
It is a short term funding and it will not remove permanently liquidity that *will* be needed in case a bank goes under and credit dries up again. Yes it will be misused, but the idea is fine as it tries to prevent emergency measures when the house is already burning, like re-printing QE money that was removed from the market.
It is a bad situation overall and no end in sight.
Lend for 0,28% and borrow for 1% in a LTRO doesn't make sense. Who will do that?
Funny how we can suddenly monetize like mad when banks are imperiled, but nations must in-debt themselves and then be austere. It's almost like an insider group of banksters control everything.
correct, nations exist to serve the wealth "banking interests", not the other way around. Since the rich own all of the politicians, countries will sacrifice themselves to save their banks.
The casino just registered a small earthquake.
The Banks' interests are aligned directly in opposition to populations everywhere:
1. Wages going up - Bad for banks ( tighter monetary policy) - Good for populations
2. High Unemployment - Manna From heaven for banks ( bennie Mae ZIRP policy justified) - Disaster for populations.
etc etc. bennie Mae's interests are completely aligned with the banks, as are the CBs around the world. The IMF is the godfather - as the only entity not subject to congressional/political pressure.
Thats how the game is set up. Of course strategically it makes a lot os sense for the banks, Bennie Mae etc continually spout motherhood/applepie - how they only care about grandma/small businesses etc. It keeps the opposition at bay. Clear enough?
if only it was clear to everyone,
any time a politician says they are doing us good, beware...
what I find so funny is when we talked about the health care, protecting New Orleans, or even going to war, how much it would cost mattered...but when it comes to bailing out banks...suddenly people on CNBC are saying the Feds balance sheet is infinite...so, there was money after all???
Color me confused. Is this QE or not?
1) They buy bonds and put cash in the hands of the banks.
2) They issue special 7 day deposits to sop up the liquidy from (1)
3) They accept the deposits (2) as collateral for repo lending which puts the cash right back in the hands of the banks.
So that pattern makes it look like QE. It looks like a duck, but I don't think it is a duck.
The US QE was 1.75T. It was well defined and very predictible once it got going. The market got used to the idea that there was a size buyer of coupons every week. That is not the case with the ECB effort. We have no idea how much they will do. We have no idea when they will do it. It is unlikely they will be buying any sovereign bonds unless there is renewed selling of the PIIGS. The objectives are different.
This policy is not going to accomplish much and it is going to be disliked by all. The Germans will hate it because, "It smells like QE". But if you're in Spain you would say, "This does nothing to promote growth in our economy".
For this to be QE it has tobe a minimum of a committed $500b program. What we have today is a cat and mouse game with the market. $20b so far is just a drop in the ocean. Either they step this up or it is destined to fail.
I cant imagine that banks will ever take step 3). Because in 2) they get 0,28% in interste and for 3) they have to pay 1% (fixed).
my guess something else is going but the moving hands on the shells are distracting from it...
I didn't even understand you simplified explanation, but thanks for trying
Popo Where are the cops? Are there any cops?
Since the banks are well represented by Bennie Mae / IMF etc - question is who speaks for the opposition? ie. who speaks for the 99.9% of the population who are not banks and whose interests ar directly opposed to the banks?
I would think in a democracy - it would be the administartion and congress. Oops!
Another point we would stress regarding sterilisation is that the transmission mechanism from monetisation to inflation comes more through a rise in velocity, driven by a decline in people’s faith in the currency, rather than an increase in the money supply per se. For example, in the first half of 1921, Germany was experiencing outright deflation; by the second half of that year it was experiencing an annualised inflation rate of over 500%. This move in inflation was not driven by a sharp increase in the pace of monetisation by the Reichsbank, but rather by a huge move up in velocity driven by higher inflation expectations.
http://ftalphaville.ft.com/blog/2010/05/18/233726/sterilised-and-scandalised/
Beware the velociraptors, nature finds a way with money creation by the Ordivician trilobytes.
So it looks as if the ECB is engaging in "sterilization" by perception control and analysts are calling bullshit. This just confirms my belief that the tools to actually reabsorb liquidity do not exist in any practical terms. The only way to actually reabsorb excess liquidity is through agressive taxation, both on sales and on income (in a steeply progressive manner) Since this is not practicable even by an authority with dictatorial powers, sterilization is functionally impossible. If you warm and nurture their eggs, expect Velociraptors.
http://www.chicagofed.org/webpages/publications/speeches/2009/09.09_CFRN...
our TARP went to bolster no existant reserves of banks, it either was used speculation or kept on the book...it was not lent by banks...so other than asset bubbles it seems no inflationary...mean while credit collapsing, reducing money....will it be different for Europe
weren't foreign speculators an issue in Germany hyperinflation?, not that goes against your point, if speculators feed, inflation occurs for same reason...expectations
"Run away you English kanigits or I will be forced to taunt you a second time!" - MP & THG - French Castle Scene.
A group of people with a certain set of predispositions or agenda will NOT deveate and follow what you assume is a "lawful or cordial or long term socially cohesive" behavior set just because (a) you think they have turned over a new leaf, OR (b) their written material can be construed as same, because their behavior set has not grown and/or their agenda has not changed.
It is our misconception that is the issue, not their continued "interesting" behavior.
You should acknowledge Ropingdown, who mentioned this yesterday.