ECB Sterilization Details Sketchy
traderdannorcini.blogspot.ie
ne of the big selling points by Draghi and those favoring the ECB bond buying program, to assuage investor fears of its inflationary impact, was that the purchases would be offset or sterilized so as to provide for “price stability”. I suspect that this was emphasized to deal with the strong German opposition to the plan as the German experience with hyperinflation during the Weimar republic has deep roots in the German national psyche.
The question that myself and others have, is exactly how this sterilization is supposed to proceed. What will the ECB buy in order to reduce the amount of money in circulation in those nations that ask for the “bailout mechanism”?
Remember, any of those troubled nations’ bonds that get purchased by the ECB mechanism will be sitting on the balance sheet of the ECB in exchange for Euros. One assumes that the nations will of course spend these Euros to meet their various obligations, whether those be pensions, salaries, infrastructure, medical, etc. That means this money can reasonably be expected to go into circulation. So what exactly does the ECB then do to extract a corresponding amount of money out of circulation so as to render its bond buys neutral?
I for one am most anxious to see the details as I do not believe for one moment that in practice this is what is going to happen. This for certain is going to be an interesting laboratory experiment.
It also seems to me that gold is not buying into any sterilization talk. It would not be sitting at a mere 14-16 Euros off its all time high if it did!
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2012-09-06 14:45:44
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