Notes From Underground: How one would go about the sterilization of the European quantitative easing

In the latest tales of Jean Claude Trichet, the ECB’s sovereign bond purchases is not a real quantitative ease because the large liquidity addition is to be cleaned up quickly so as not to be inflationary. When the FED and the Bank of England did its QEs, there was no talk of STERILIZATION because the financial systems were in desperate need of large doses of liquidity. Bernanke and company are now trying to figure out ways to free up the FED balance sheet with talk of reverse repos, term deposits and, most significantly, the selling of MBSs into the market. The BOE has not even contemplated removing the QE and they allude to the idea that another £25 billion may be added as a precaution.

Why is Trichet constantly talking about sterilization when the program is barely nine days old? We believe that Trichet promised the Germans sterilization as soon as some stability was brought to the European debt markets. As we know now, the German Central Bankers were very unhappy about the ECB flip-flop on QE and probably got Trichet to promise that he would remove the addition as soon as possible. The ECB will not want to upset the DEBT markets so we think that the intervention into the EURO currency market would be the next best thing. The Sarkozy camp likes the weakening EURO, but the idea of punishing EURO speculators is irrisistible in the short term.

In addition, it would probably remove some of the heat on Merkel. The icing on the cake is that other central banks would join in as the effect would be equity markets rising and GOLD falling, for due to the effects of algorithmic risk models, a weak EURO on a daily basis sets the wheels of the risk -off trade in motion. We advise being watchful of EURO FX buying in a coordinated fashion. Beware the European owners of the torture chamber.

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