What's Going On At the ECB by Nathan Lewis


	I thought I'd take a look at what has been going on with the ECB. http://sdw.ecb.europa.eu/browse.do?node=bbn129 This is a complicated chart. The top light blue line is total base money. The dark blue line is banknotes and coins. Obviously, there has been a major contraction of base money, which always gets one's attention. It has been entirely concentrated in non-banknote base money, basically deposits at the ECB. These deposits have two basic elements: deposits of banks (bank reserves), and deposits of nonbank entities, basically governments. Bank deposits are rendered in pink. We see that there was a big surge higher in mid-2011, and that has been mostly retracted, so the total has returned to nearly the early-2011 level, which is about the same as early 2008. Government deposits have grown somewhat, especially non-euro-area government deposits. I think this is related to euro-linked currency boards, and other central banks with euro-related reserves. There is also a bank term deposit element, rendered in orange. This is not a form of base money IMO, because it can't be used as money "on demand." However, a bank can probably choose to leave it as a demand deposit when it matures, so it is a sort of backup-reserve in that sense. Here's what the foreign exchange value of the euro has looked like. It has been in a range for several years, with no particular rise beginning at the end of 2012, although it may now be breaking a bit higher. Here is the asset side of the balance sheet. We see that bank lending, in various forms, is a quite large component, which is different from the Fed, which doesn't have a lot of "discount" lending, i.e., direct lending. There's also a large category of "other assets." What's that? The light blue line is total bank lending. Of the bank lending component, most of it consists of the famous "long-term refinancing operations," or LTROs. Basically, this is a longer-term loan to banks. It has been running off recently. There has also been regular (short-term) refinancing (i.e. loans), and a small element of "other claims on banks," which I think is bank debt (bonds). There was a little issue of weak banks basically issuing their own debt and sending it straight to the ECB (because nobody else would buy it). It looks like this has run off for now. That's it for now. I think this may be related to what's going on with the Fed, which we will talk about more later.

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What's Going On At the ECB?