Saturday, June 29, 2013
Opening the Cage to the Excess Reserve Monster
Re: Bank of England Softens Liquidity Rules for Banks
Central banks are doing their utmost to sustain the bubble economy. Their main tool is expansion of the money supply. But most new money is created by the banks via their lending operations, not outright central bank creation of reserves. If the banks do not increase lending, then the newly created central bank reserves simply find their way onto banks' balance sheets as excess reserves held at the central bank itself.
I have long predicted that the central banks will loosen their rules to entice the banking industry to increase lending, using their excess reserves as the tip of the upside down pyramid of new money creation. This action by the Bank of England to soften its own liquidity rules is a step in that direction and an indication that it is not concerned that its action will cause the destruction of money's purchasing power.