Tuesday, June 18, 2013

ECB OMT Explained

An excellent primer by Paul DeGrauwe on what happens when a central bank buys government debt, as the ECB has promised to do under the OMT if conditions warrant (Draghi's "big bazooka").

1 comment:

FrédéricLN said...

Interesting for sure, but I'm not sure the conclusion holds — my skills in economics are too low (economists may say they are non-existent — I'm an engineer and statistician, I already had difficulties with the courses in economics as a student).

I just wonder whether the two key arguments of Mr DeGrauwe wouldn't annihilate each other.

The first one is about theory (basic accountability), the second one is about recent facts (inflation does not happen).

a) "a CentralBank lending to the government" is a neutral operation for the public sector as a whole.

(BTW — that's clear to everyone, I guess ; but the circuit CentralBank -> Commercial Bank -> Government is neutral too, for the same reason. It's just more expensive, as a column in Les Echos.fr puts it :

http://www.lesechos.fr/opinions/points_vue/0202826024622-un-krach-obligataire-a-l-horizon-576136.php

"Les banques (ont emprunté) à la banque centrale à court terme à un taux de refinancement très bas (aujourd'hui 0.5 %) et (acheté) des obligations d'Etat de bonne signature et versant un coupon faible, mais supérieur, aujourd'hui 1,6 % en Allemagne et 2 % en France.")

The only consequence is a larger "money base" (la planche à billets). If the number of "banknotes" was increased by say 10%, and if all banknotes were competing to buy the same goods as before, the prices of the goods would increase by 10%.

The CentralBank buying gov't debt just means that the government commandeers 10% (more precisely 9%) of all goods issued, and other buyers see their purchasing power reduced to 91% of what it was.

But

b) That does not happen, because there is not any connection left, since the 2008 crisis, between the amount of debt, and the money stock (M3). Inflation just doesn't happen.

----

I'm just bothered by the logical consequence: hey guys, forget taxes, forget production, forget effectiveness at work… just borrow to your central bank, it's a very simple "jeu d'écritures" that costs nothing to the public sector AND nothing to the taxpayers and money holders!

From my humble point of view, these huge amounts of bonds (or: of banknotes, if the CentralBank lends directly to the government) that don't appear on the markets of goods and services (that are not part of M3,… that have fallen into the liquidity trap…), *they must be somewhere*. Their Empire should strike back.

I was already wondering since years :-) ( http://demsf.free.fr/index.php?post/2011/06/02/Ponzi-planetaire , http://demsf.free.fr/index.php?post/2010/05/10/Petard-a-inflation ), I haven't made much progress since. I still have the feeling that Mr DeGrauwe's paper introduces, as seriously as possible, some kind of "maginomics".

But it's also more likely that I just haven't understood the point.