Central Banks Continue on Path of Monetary Inflation

Thursday, September 06, 2007

The European Central Bank donned its two masks again on Thursday. With one hand the ECB decided at its monthly meeting of the governing council to leave the key interest rates unchanged while the other hand continued to create fresh money, showering bidding banks with 42.2 billion Euros in a new overnight tender that drew an average rate of 4.13% or 13 basis points more than the current key overnight rate.
The Bank of England (BoE) left its key interest rate unchanged at 5.75% too.
In the USA the Federal Reserve allotted a total of new $23 billion in a 1- and 2-week tender besides replacing yesterday's 1-day repo.
And they want to make us believe markets are returning to normal. Money market rates tell a very different picture and I rather rely on the data than the propaganda coming from central banks. And in this reality banks are scrambling to borrow funds at rates significantly higher than what the priests of ever expanding credit would like to see implemented.
if there were no crisis, why did the ECB announce the creation of more new fiat money on Thursday. According to a press release the ECB will stage another additional 3-month tender on September 11. What is worrisome for those who see an inseparable link between inflation and money creation is the fact that the ECB set no maximum amount for this repo. So we can expect that banks will be showered with a new unprecedented cascade of credit.
Need more proof that the liquidity and credibility crisis has reached new heights? Take Australia. The Reserve Bank of Australia announced today it would accept more crap as collateral in its repos in the coming 6 weeks.
To see how the Fed sets the discount margins of the asset and mortgage backed crap in its repos follow this link for more outrage. The Fed now accepts MBS and ABS without a market price at 70% to 90% of their face value. Call it outright manipulation and putting value onto debt that has none!
But they begin to cover their backs. After the long denial that there is a banking crisis Fed governor Randall S. Kroszner told bankers how the Fed assesses crises. A short snip:
As a final thought, I counsel policymakers and market participants alike to remember that no two crises are the same.
He is at least honest to the point by saying the Fed has no clue either how to overcome the current crisis.
Not so ECB president Jean-Claude Trichet. Money supply explodes but in his new view the ECB needs more data to learn about the crisis. As this borders on the surreal here a hint to Trichet: Look at your exploding money supply and the ECB statutes where it says that money supply M3 growth should not exceed 4.5%. This target has never been reached since the inception of the Euro.
As this leads to the conclusion that monetary policy has failed one more time I am happy that I am not alone with this view: Gold raced to a new 2007 high of $696 per ounce and this is probably only the prelude to a new all-time high to be seen within the next 6 months.


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