Money Circulation on the Eurozone- 'Banks’ Deposits' under the lens

Análisis monetarista de la situación europea usando MV=PY

"...This premise, which recalls the gold standard days, assumes a static relationship between money supply, prices and money velocity as per MV=PQ, but with a V set in concrete, which explains how the ECB ended up impaling itself on the Great Financial Crisis. It sparked the crisis in Europe by hiking key rates in July 2008, due to its total inability to understand that the collapse of the securitisation market would also collapse V!

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If there is one thing that we can learn from the study of the functioning of a modern monetary system, it is that a central bank actually has no control whatsoever of money supply creation. Of course, it can increase the size of the “monetary base” by buying private-sector held securities on financial markets and replacing them with pure electronic money, as per quantitative easing. But the only way it can increase “real money supply” is for it to engage in a famous “helicopter drop”, which has never been tried by any of the major modern central banks.

The operational truth of today’s financial systems is that only commercial banks create money when they grant loans (as in “loans make deposits) and they can do so without the slightest size limitation, because even in the case of required reserves ratio restraints, the central bank to which it is dependent will have to provide it as much as these same reserves as it needs, because otherwise it would totally lose control of its benchmark interest rates!

The ECB’s insistence that it can navigate M3 money supply via adjustments in benchmark interest rates is in reality a subterfuge to avoid admitting that its interest rate moves have no impact on the cost of money. Since this is one of the major variables in determining investment projects and consumption via the credit cost channel, its real aim is to modulate the growth rate of the real economy. We can even say that that, when it hardens monetary policy, it is trying to increase the unemployment rate of the active population (decline in payroll costs), one of the key variables of its neo-classic bias, as illustrated by the famous ISLM curve.