ECB Sterilization --Trichet's Maginot Line?
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 1
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.
Chart 2
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Author: Paul Kasriel
Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
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Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.
Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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