Central Banks: All Hands On Deck

Last week's post (11/22) on global economic supply and demand provides a reasonably good
backdrop for today's coordinated easing actions by the world's major central banks (Scroll down
for the post).

Dropping rates on currency swap arrangements frees up US dollars especially to provide liquidity
support for the global financial system and particularly for the EU, which has been experiencing
not just large deposit outflows but basic money outflows as well. When S&P downgraded ratings
for 15 major banks yesterday, the CB chiefs likely decided they had to act pronto. It may well be
that even major US banks were starting to run into funding problems, but I cannot tell for sure, as
the Fed was letting some of it own balance sheet run off in recent weeks.

China also put through a mild reduction on bank reserve requirements today. This may underscore
the urgency of the actions to ease liquidity, as it did appear China was hoping to get more
confirmation that local inflation had begun to decelerate before easing policy.

As alluded to above, the Fed may be heading up the liquidity injection action as demand for
dollars has been strong through the global system recently.

The actions today reflect a long standing thesis on this blog, namely that when the credit side of
the broad money supply starts contracting, currency liquidity has to be provided to prevent a
liquidity squeeze and to ameliorate a developing credit squeeze. We see both now in Europe,
particularly in its southern tier.

However, the provision of a large flow of dollars to the EU especially is at best a credible
stopgap measure and is testimony to the danger the EU has passed into now that its financial
system is being disintermediated. There is an old saying about Italy's economy: "Situation
critical but not serious". Well, to riff off of that, I think it is fair to say that the EU's economy
is not just in critical condition but that the situation is getting serious as well. Officialdom in
the EU has to cut out the bullshit and take the hard and costly measures to save it, or be prepared
to let the markets take it apart. Time is growing very short.