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--- Lainaus ---The European Central Bank is Trapped. Here’s Why.

Several of the major central banks are stuck in a trap of their own making.

This includes the US Federal Reserve, the Bank of Japan, the European Central Bank, and others.

The credit-based global financial system we have constructed and participated in over the past century has to continually grow or die. It’s like a game of musical chairs that we have to keep adding people and chairs to in order for it to never stop.

This is because cumulative debts are far larger than the total currency supply, meaning there are more claims for currency than there is currency. As such, too many of those claims can never be allowed to be called in at once; the party must always go on. When debt is too big relative to currency and starts to get called in, new currency is created, since it costs nothing other than some keystrokes to produce.

It’s like this for most major countries:

In other words, claims for dollars (debt) grows far more quickly than the economy’s ability to generate dollars, and is far larger than the amount of dollars in existence. When this becomes too much of a problem, the amount of base money is simply increased by the central bank.

Base money is a liability of the central bank, and it’s used as a reserve asset by commercial banks. Broad money is the liability of commercial banks, and it’s used as a savings asset by the public. Treasuries are liabilities of the federal government, and they’re used as collateral by the central bank and commercial banks.

In other words, liabilities are collateralized by other liabilities, all the way down.


For decades, whenever economic growth was sluggish, central banks would reduce interest rates and encourage more credit growth (a.k.a. debt accumulation) which leads to spurts of economic growth. Whenever the economy was booming, they would increase interest rates and discourage credit growth, to try to cool things off.

The problem is that this level of micromanagement, with an understanding that the core system would always be bailed out if need be, contributed to higher and higher debt levels relative to GDP, both in private and public realms, and lower and lower interest rates.

We haven’t seen this level of disconnect between inflation and interest rates since the 1940s, which is the last time that sovereign debt as a percentage of GDP in the developed world was as high as it is now.


However, the European Central Bank arguably has the hardest job of all.

This was very apparent in the head of the ECB Christine Lagarde’s recent interview.

She was asked, “how will you get the balance sheet down?” while being shown the ECB balance sheet on a screen.

She answered, “It will come. It will come. In due course, it will come.”

The interviewer paused, confused, and then asked, “…how?”

And she answered, “In due course, it will come.” And then smiled.

She offered no answer, no description, no clarification, and had rather awkward expressions throughout the exchange.

This is because, like most central banks, there is no plan. It won’t come. Sovereign debt will be monetized to whatever extent it needs to be, or it’ll collapse. And for the ECB it is particularly tough, because they have to monetize debts of specific countries more-so than other countries.

--- Lainaus päättyy ---
Lainailin vain noin 10% artikkelista koska se on sen verran pitkä.

25.5 lähetetyssä Brysselin kone-radio-ohjelmassa Helsingin yliopiston kansantaloustieteen emeritusprofessori Vesa Kanniainen juttelee ajankohtaisia asioita eu:sta ja eurosta. Uskon, että monet hänen kannanottonsa saisivat hommalaisenkin hyväksynnän.



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