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Trichet the fiscal magician conjures with the usual smoke and mirrors

|Includes: SPDR Gold Trust ETF (GLD), PHYS

The president of the European Central Bank has dismissed suggestions that its decision to buy government bonds might stoke inflation and urged nations to implement programs that will put them in a "sound fiscal situation."

Jean-Claude Trichet said in an interview with the German daily Handelsblatt, published Friday, that risks to European taxpayers won't arise from the new eurozone rescue package "if all governments concerned are faithful to all their commitments."

He stated that the ECB was not embarking on quantitative easing, that it would withdraw the liquidity that they will inject mainly through "tendering term deposits" whatever "tendering" means.

To this I would say that:
1. No EU country has ever towed the fiscal line in the past and as past results are indicative of future performance, there is no reason to believe that they are going to tow the line now, especially when for many, their political positions will be placed under the same pressure as Greece, where BTW just yesterday a bomb went off outside the jail where members of the ex military junta are held.

2. Locking the liquidity in a term deposit "jail", only means that you are pushing the release of the liquidity into the future. You may be able to soak it up temporarily, but you are not "sterilizing" it. The problem therefore does not go away, the inflation risk is still there. So all that is happening is that he is storing up latent liquidity and therefore latent inflation.

3. All that liquidity which is locked up will earn interest and that interest has to be paid by somebody and for every Euro spent on paying a debt, a Euro cannot be invested in growth or spent in the economy, unless more debt is incurred.

4.A quick review of the ECB's own framework, shows that the methods which it intends to use have never been tried before which to me is like offering the terminal cancer patient a few final experimental drugs.

Like the members of the Fed, the idea is evidently to keep your job by keeping the problems in the air and then hopefully pass them on to a successor before they collapse around you.

All the risks that are fueling gold, do not dissipate just because the witchdoctor says that they do.

Disclosure: Long Gold