The ECB Continues Its Untenable Monetary Policy

So you think the Federal Reserve Dollar is dead? Give it a second look! While the investing world focuses on the weakness of Federal Reserve Notes [FRN] I can take no relief from a Euro that looks good only from the front.

Don't believe reports that the ECB is draining liquidity these days. A comparison of the weekly financial statement of the European Central Bank [ECB] from December 29, 2006, and from December 28, 2007, results in a hefty shock. The balance sheet grew by more than 30% from 1.15 to 1.5 trillion Euros within 12 months. Despite all the claims about a responsible monetary policy the ECB is further away from it than ever before.

Today's release of a continuation of record breaking money printing excesses again proves that Jean-Claude Trichet (triche=cheat) only knows how to create more debt without corresponding values. Money supply M3 growth remained at its record level of 12.3% in November, with the 3-month average rising to 11.9% (11.7%.) The ECB has never reached its M3 target growth rate of 4.5% since the inception of the Euro.

But back to the ECB's balance sheet:

• Lending to banks rose by 41.4% from 450 to 637 billion Euros YOY.
• The black box of the ECB, so called "Other assets" zoomed more than 50% form 218 to 327 billion Euros.

These rapidly expanding figures corespond with a time of weakening growth in the Eurozone and exploding current account deficits in Portugal, Spain and Greece where real estate speculation may induce a slump similar to the situation in the USA. Consumers are over-extended on both sides of the Atlantic.

If the ECB were really in the game of fighting inflation it has no other option than to raise rates at its next governor's meeting on January 11. Short reminder: Eurozone inflation has zoomed past the 3% mark. The ECB's inflation target is 2%.

Don't worry too much about a rate hike (which all creditors are waiting for in order to get interest rates above true inflation) as the ECB has to avoid further inflows into the Euro that could create a speculative bubble.

As for European banks; don't lend them your money. When banks advertise 6% interest for the balances on checking accounts on business TV I am left with the question why they don't approach the ECB where they are supposed to get it for 4% or 5% at the discount window?

Comments

[Yogibear]

It may be interesting to note, that the bulk of the balance sheet increase originated in october till december 2007, coincidentally exactly in those months that the markets needed a lot of liquidity because of the liquidity crunch. So, to my opinion, the first conclusion of the article is wrong to begin with.

[User 137128]

The euro is the ultimate fiat currency. Spain, Italy, France, when have these countries exercised fiscal discipline? Under the guise of a 'euro' they have have been made bedfellows with fiscally responsible Germany. Short the dollar in 2008 and you'll be swiss cheese.