Excerpt GEAB 75 (May 2013) - BoJ, Fed, ECB : with different methods, contrasting futures

- Excerpt GEAB nr75 of May 15, 2013 -

As we see on a daily basis, central banks play a major role in the crisis’ management. In order to see the unfolding of the global systemic crisis more clearly, we must understand how they act, the limits, the advantages, and disadvantages of their interventions. We have therefore decided to explain, in broad terms, the principal Western central banks’ policies. In particular we will see that the ECB on the one hand, and the Fed and the Bank of Japan (BoJ) on the other, use different tools and that the expression “printing press” really only applies to the last two.


As we have explained on numerous occasions in previous GEAB issues, the crisis’ visible effects have been significantly slowed thanks to the injections of liquidity into the financial system, far more than we might have thought at first given the scale of the crisis. The central banks, and primarily the Fed, have been very significant players in this fire control by flooding the ground to avoid a further outbreak.

In simple terms, a central bank’s usual role is to facilitate interbank operations by means of short-term loans to commercial banks, to stock up on their reserves, and finally to control money supply by varying refinancing rates to encourage or slow down the availability of credit (34). It’s only in the case of difficulties, for example when banks didn’t want to lend to each other at the end of 2008 due to a lack of confidence, or when it was necessary to re-launch the economy at any price, that “unconventional” monetary policies are adopted. This is, of course, the current situation as everyone knows.

As we will see, these policies basically consist of supplying new money, either to the commercial banks when they are in difficulty (in exchange for debt securities of variable quality), or to the economy indirectly by buying bonds or other financial products. This injection of newly created money ex-nihilo inflates the central banks’ balance sheets (see chart below) since in return they receive bank or state debt.

Nevertheless, only considering the growth of different central banks’ balance sheets hides different methods, because the ECB doesn’t use quantitative easing in the Anglo-Saxon fashion. It’s therefore necessary to analyse the mechanisms used by each of them more closely.
Fed, BoE, BoJ and ECB balance sheets, base 100 as at 2007. Source : Société Générale.
Fed, BoE, BoJ and ECB balance sheets, base 100 as at 2007. Source : Société Générale.


With their taste for colourful expressions, the Americans have taken on Ben Bernanke’s (35) phraseology to describe the Fed’s policy as a helicopter dropping masses of dollars on the United States. We can also call this the printing press and which, broadly speaking at least, closely reflects the Fed’s policy or more recently that of the BoJ. Nevertheless, it’s really a printing press operating indirectly. In fact, by its quantitative easing (QE), the Fed buys US Treasury Bonds and the sale proceeds of these bonds finances government spending. It also buys mortgage backed financial products, that’s to say, put in simple terms, it lends funds indirectly to build or buy houses.

The sums are huge, currently amounting to $540 billion per year for Treasury Bonds and $480 billion for mortgage backed securities. The US Government budget deficit being around $ 1.1 Trillion, the Fed therefore covers half of this amount and additionally injects an equivalent amount into the real estate sector. With such sums is not surprising that real estate prices should stop falling or that Fannie Mae was able to repay the Federal Government: with less than one million new starts a year (36), as a rough estimate the Fed gives a $500,000 subsidy for every house built.


If the BoJ recently began practising the same policy as the Fed, it’s not the case of the ECB. Germany wouldn’t allow it, particularly for fear of the inflationary risks that this policy would encourage. For all that, the ECB supports the economy in several ways nevertheless. The first resembled the steps taken by the Fed and came to an end in September 2012: the SMP (Securities Markets Programme) was in fact the $210 billion Treasury Bond purchase of countries affected by sovereign debt risk. But in addition to the amount being much less, the big difference from the Fed’s quantitative easing is that the liquidity created on purchase is cancelled out later (37) during other operations, which only increases the money supply in the short term. This programme’s successor, called OMT (Outright Monetary Transactions), is similar but imposes a requirement on the country concerned to follow rules of good behaviour, rather like an IMF intervention. We will see that this new programme hasn’t yet been used, but just its existence has considerably reduced the pressure on the Eurozone countries in difficulty. In smaller amounts, sterilisation of the money created: these actions are, therefore, really less aggressive than the Fed’s and don’t carry the printing press tag (38).

The other type of ECB action is only related to commercial banks. These are LTRO operations (Long-term Refinancing Operation) which are loans to the commercial banks. Usually, these “long-term” loans are for three months, but given the exceptional circumstances they have been extended to three years and, exceptionally, the amounts have been increased. Since these are loans to banks in difficulty, the money created is cancelled out on reimbursement (if reimbursement takes place). Moreover, we will see that this money doesn’t exit the banking system and doesn’t cause strong inflation. During the two large operations of this type in December 2011 and February 2012, the net volume of agreed loans totalled around 500 billion Euros (39).

Thus we see that the ECB uses much more conventional and much less risky methods than the Fed or the BoJ, which may explain part of the apparent difference in performance between the US and Eurozone economies. Incidentally, we note that the ECB balance sheet began to decrease significantly from mid-2012 (see chart above). Nevertheless, in taking on certain doubtful debts from the commercial banks, the ECB runs the risk of weakening its balance sheet all the same, which is why it only uses these tools prudently.


We can clearly see the effects of the QE policy in Japan’s case: in a few months, the announcement of the BoJ’s action has greatly exacerbated the Yen’s fall with the objective of kicking off inflation again. In effect, they are the usual consequences of quantitative easing, however they haven’t really materialized in the United States for several reasons, as we explained in the GEAB N°72: mainly the fall in the speed of money circulation, the benefit of the reserve currency which provides a strong demand for dollars, commercial banks preferring to shelter their assets at the Fed rather than benefit the economy and, finally, newly created money which has remained in the financial system rather than reach the real economy.

All the same it would, at the very least, be an exaggeration to claim that there has been no effect similar to the Japanese case. In the United States the flow of free money has inflated a new credit bubble (and has, in particular, brought about a recovery in real estate prices) and pushed the stock exchanges to new highs (above all, Fed money has benefited financial markets). By authorising the Treasury to issue debt at low rates of interest, public debt has exploded. And none of the real economy’s problems have been solved.

Actually, the US economy only holds together thanks to the Fed. That’s why it can’t withdraw its support. Because without it there would no longer be enough US Treasury Bond buyers at current interest rates, which would climb to unsustainable levels as a result. Without the Fed, real estate would resume its downward spiral. Without the Fed, the stock exchange would plunge.

Therefore, only external events would cause the Fed to bring this policy to an end. A relapse into recession in the United States will weaken the dollar just like in 2007- 2008 (see chart below) and, if the fall is too hard, will require a halt in the accommodative policies to fix the currency: in fact, the United States’ biggest fear is that the dollar loses its reserve currency status and has to submit to the same rules as other currencies (40), which was about to happen in 2008 when the whole world started to doubt the dollar’s solidity.

Dollar exchange rate in Euros (USD/EUR), October 2005 – August 2008. Source : La Tribune.
Dollar exchange rate in Euros (USD/EUR), October 2005 – August 2008. Source : La Tribune.
It could also be domestic policy, with strong scepticism over the Fed’s policy, which could call the printing press into question. Or Ben Bernanke’s successor (whose term of office comes to an end in January 2014) who may consider that, over time, the risks of continuing this policy are too high.

Finally, there could be pressure from the international community wishing to reform the international monetary system in which a weak currency can’t play an important role: yet in continuing its policy once the dollar became a currency just like any other, the Fed would weaken it excessively so it couldn't claim to retain a major role.

Fed support is thus a drug hiding American problems whilst they are getting bigger and will cause the fall to be even more painful. It can’t continue indefinitely without putting the American economy in danger. It’s only a matter of time before it comes to a painful end. The recession which is about to begin, the end of Bernanke’s term of office and the increasingly lively discussions over international monetary system reform; all these factors are coming together to announce the end of US quantitative easing at the beginning of 2014 at the latest.

Notes :

34 For more information on how central banks work, read the very educational posts on the les-crises.fr, or Wikipédia.

35 A phrase which he himself borrowed from Milton Friedman. Source: Federal Reserve, 21/11/2002.

36 Source : Census Bureau.

37 Source : BCE.

38 For more information on the differences between OMT and QE read ZeroHedge (19/09/2012).

39 Of the €1 trillion from these two operations, about half has been a transfer of existing short term loans to LTRO operations. That's why we speak of €500 billion Euros in net volume.

40 For example, as we see, it can allow aggressive QE without too much inflation, in part thanks to the dol - lar's status. And that also allows it to only have to print dollars to pay for its imports.

Mercredi 4 Décembre 2013
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GEAB N°90 - Contents

- Published on December 15, 2014 -

Global systemic crisis 2015 – Oil, currencies, finance, societies, the Middle East : Massive storm in the Western port!

. « Global systemic crisis: the end of the West we have known since 1945 »
. The oil crisis is systemic because it is linked to the end of the all-oil era
. The US in one hell of a state
. Europe post-Ukraine: lots of questions
. Three missions for the new Europe: resolve the Ukrainian crisis, put Euro-Russian relations back on the right path, avoid a European QE
. Middle East: traditional alliances’ big waltz
. Saudi Arabia, Iran: the allies change sides
. And Western « values » in all this
Read the public announcement

2015 – new phase of the crisis: the oil systemic crisis

. The impact of speculation
. Price War
. Systemic oil crisis and finance
. Systemic oil crisis and geopolitics

Investments, trends and recommendations

. Oil: beware!
. Energy intensive industries like airline companies
. Renewable energy: the good and the bad
. 2015: Euro & Yen rebound
. Gold: still safe

Evaluation of our anticipations for 2014
(from GEAB N° 81 in January 2014): a 69% success rate