Investing

Every financial news service, blog or magazine is talking up the fed and ECB's flood of liquidity. Unfortunately almost no one has done the hard yards to determine if in fact there has been a net liquidity injection.

I was perplexed as to why the fed would only reduce the funds rate by .25% at the same time as using alternate methods to increase liquidity. If they actually wanted to increase the supply of money all they needed to do was lower the fed funds rate which seems simple enough. Of course they didn't want to do that because inflation is so high.

What they instead have tried to do, by slight of hand, is create the appearance of pumping money into the economy without actually doing so. This trick is supposed to improve confidence (the current crisis is in part one of confidence) as long as no one realizes what's going on.

Well... John Hussman has done the work and determined that the 500bln that we heard about from the ECB was in fact a net withdrawl of liquidity (as it was done at the time of a repo auction when an even larger amount of repos had just expired). What we were not told is over 500bln of repos expired and the ECB added 500bln back - net results was a drain.

A similar game is going on with the US Federal Reserve. They keep announcing liquidty injections, on days when repos exprie, which are vastly overstated once you net out the liquidty withdrawls from the repos. The net fed injection has only been around 20bln.

The bottom line is that central banks are not massively reflating the economy. This is not so good for gold or other precious metals (though there are a lot of other bullish factors for them) and it greatly increases the chance of a recession sooner rather than later.