ECB Sterilization - Trichet's Maginot Line?
Northern Trust
Paul Kasriel
May 12, 2010
ECB President Trichet has stated that the ECB will sterilize any purchases of sovereign debt it purchases in the secondary market. In other words, the ECB will drain by other means the amount of base money it creates through sovereign debt purchases. If credit creation by euro-area financial institutions and the euro money supply were surging, then Trichet would be correct in prescribing sterilization. But is Trichet fighting the last inflation war? Chart 1 shows that growth in both credit creation by euro-area monetary financial institutions and the euro M3 money supply is hovering near zero.
Chart 2 shows that the change in euro-area consumer prices has indeed moved back into positive territory at an annual rate of 1.5%. But if Milton Friedman was correct that inflation is everywhere and always a monetary phenomenon, then Trichet need not worry about a sustained acceleration in euro-area inflation given what currently is happening to euro-area money and credit aggregates. Rather, if he does not get these aggregates growing, Trichet might be creating the conditions for the euro-area's lost decade a la Japan. So, go ahead and walk on the wild side, Claude. Practice unsterilized sovereign debt purchases for a while.
Fed's Swap Line Adds to Balance Sheet
by Asha Bangalore
The Federal Reserve reestablished swap lines with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan and the Swiss National Bank in response to short-term U.S. dollar funding strains in Europe as of May 10, 2010. With the exception of the $30 billion swap line with the Bank of Canada, details pertaining to the other central banks have not been disclosed. The Fed has reopened the dollar swap line announced in December 2007, after the onset of the financial market crisis, to address stresses of U.S. dollar funding in overseas markets. This facility expired on February 1, 2010 and has now been reopened. At its peak, roughly $600 billion of accommodation was provided through the Fed's swap arrangements with foreign central bank (see chart 3). A significant amount of accommodation is again likely to raise the overall size of the Fed's balance sheet until financial market conditions stabilize.
Small Business Survey: Government Seen as a Hindrance to Growth
The Small Business Optimism Index of the National Federation of Independent Business moved 3.8 points to 90.6 in April. The sub-indexes of the survey offer important insights about the status of small businesses. In April, the percent of survey respondents reporting poor sales as the most important problem fell to 29%, the lowest since February 2008. The level is still at a troubling response but the downward trend of the index is important. The April survey results also show a big jump in the number indicating that government requirements are problematic (15% vs. 11% in March). This response contradicts the view that the government is supposedly an advocate of small business. The recent health care legislation could be the culprit.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
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