Central banks have shored up financial markets again with freshly digitized money. New money that has no corresponding value in the economy and is solely used to support unsupportable prices of illiquid investment instruments.
After the give-in of the Bank of England
earlier this week, which came to the rescue of financial institutions
where managers are obviously not worth their money but still want to
cash bonuses before bankruptcies. After this 10 billion pounds stint in
the UK the European Central Bank said its discount window has handed
out 3.9 billion Euros on Wednesday.
According to the Wall Street Journal,
The heavy use of the marginal lending facility -- the highest since October 2004, when banks borrowed €7.9 billion -- surprised money-market dealers, as it is regarded as lending of last resort.
"It is most remarkable, because it happened not at the end of the statement period but in the middle of it," said Jose Alzola, chief European economist at Citigroup.
The rate at which banks can subscribe to the deal is well above current interbank rates and a percentage point above the ECB's minimum refinancing bid rate of 4.00%. "There is no economic rationale for that; markets are flush with liquidity," said Cornelia Bahn, a trader at WGZ Bank.
On Tuesday, the ECB pumped an extra €33 billion of one-week money into the markets in view of overwhelming demand for its regular main refinancing tender. The ECB allotted €190 billion funds, compared with liquidity needs of €157 billion.
The ECB had withdrawn almost 114 billion Euros from its short term financing operations in the week ending September 21, the weekly financial statement shows.
Eurozone M3 Growth Slowed Marginally in August
Surprisingly the ECB's massive injections of freshly digitized money into a system suffering from a credibility problem did not blow up money supply M3 significantly.According to an ECB press release the high levels were maintained:
The annual rate of growth of M3 stood at 11.6% in August 2007, after 11.7% in July 2007. The three- month average of the annual growth rates of M3 over the period June 2007 - August 2007 rose to 11.4%, from 11.1% in the period May 2007 - July 2007.Lending to all sectors rose again in August. Consumers still seem not to take notice of rapidly deteriorating economic conditions in Europe.
The Federal Reserve system did not sit on its hands either. Data from the Fed New York shows it allotted $38 billion in 4 repos on Thursday and accepted primarily MBS and agency backed collateral.
One thing can be taken for granted: Central banks will continue on the path of reckless monetary inflation, cheered by indebted governments who seem to understand shit about monetary policy.
Fed chairman Ben Bernanke can be expected to continue to manufacture the cheapest-cost product the Fed has to offer - (electronic) cash.
As we know the Fed can only guarantee cash, but not its purchasing power.
In the Eurozone the situation appears a bit different. ECB president Jean-Claude Trichet wants to keep inflation in check but is bullied by French president Sarkozy whose government could break on higher rates. But word from Trichet is missing. Where is he, asks not only Edward Hugh.
Ironically the ECB could be forced to lower rates again to rein the runaway Euro which endangers the gentle economic blossom in the stronger Eurozone members and threatens recession for countries like Spain and Italy.
Don't let yourself be fooled by the current calm in markets. This could be the silence before the perfect storm. If you look for a safe shelter, try gold. At the time of writing it trades at $738 per ounce.