Wednesday, December 28, 2011
ECB's "liquidity injections" just reinforcing deflationary forces already in place
The ECB's balance sheet (total assets) is now up to $3.5 trillion. That's 25% larger than the Fed's. (All this "money printing" eh? So where's the inflation? Why is gold falling?)
When the ECB expands its balance sheet, it buys bonds from the public and replaces those bonds with reserves (denominated in euros). Those reserves pay 25 basis points, however, the bonds paid far more. (Case in point: Italian bonds pay near 7%.)
So you can see how this “liquidity” operation is stripping a HUGE amount of interest income from the private sector in Europe. HUGE! If you sold an Italian bond to the ECB you just lost 675 basis points of income!
So rather than being inflationary or “stimulative,” the whole thing is massively deflationary because of the interest income reduction that is going on. This will exacerbate already weak economic trends in the Eurozone in 2012!