An interesting move by the ECB would be to offer short to medium term notes in the market place.

As discussed over the years, unlike other currencies, the euro has no ‘risk free deposits’ available to anyone other than member banks and foreign governments.

This has probably caused substantial numbers of investors to sell their euro for other currencies rather than hold any of the available euro denominated financial assets.

If so, ECB notes could mark the return of these portfolio to ‘normal’ allocations to euro denominated financial assets, which would offer strong support for the euro vs other currencies.

And with the ECB measuring success by the strength of the euro, this could be an attractive proposition.

It would attract euro deposits from the banking system, which the ECB can easily accommodate by continuing its current policy of liquidity provision for its member banks as needed.

Additionally, and not that it actually matters for inflation, lending, aggregate demand, etc., most monetarists would not include these notes as part of the ‘money supply’ but instead as an anti inflationary ‘sterilization’ measure.

11 Responses

  1. I wonder what would Germans have to say about this (strong euro)… Although the German public would rejoice over strong euro – the exporting sector would start deteriorating.

  2. It could also make the light bulb go off in more people’s heads that these government securities are not loans but the private sector’s savings. Talking heads would wonder why the increased buying in these and corporation are bring back fund to Europe to put in these and why people are taking money out of European savings to buy them. Then they would hopefully come to the conclusion you pointed out – these instruments are safer and a guarantee. Then some of the bright ones would say to themselves, “hey, these people are not lending money; they are parking savings in these bonds.” Then the even brighter ones would say to themselves, “hey this is the same with other currency issuing nations that issue debt securities.” Then the really really bright ones would say, “hey no one is loaning the US et all money they are simply saving in these instruments – this debt is our savings.”

    Yeah, world economy then saved!

    1. @Crake,

      Yes, but with the bond market “defying all logic” you’d think that at least financial types would have figured this out by now. Not those sharp tacks at Zero Hedge and many money managers, tho. The obvious often escapes notice when cognitive bias is strong.

      And why have most economists not figured out by now that amoral rational utility maximization over a lifetime assuming a representative agent is elegantly simple and also empirically simplistic due to, e.g, non-ergodicity, ontological and epistemological uncertainty, reflexivity and feedback, cognitive-affective bias, subjective framing, institutional and social factors, and fallacies of composition.

      The human mind is a quirky device.

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