Alan T Dixon DECA

Credit Default Swaps & Bond Buying via way of Stimulus Injections causes Deflation

Thus forth with in the event like Alberto Gallo of RBS indicated, when the EU issues stimulus and uses the stimulus to buy sovereign bonds at a two to one rate, there is a shrinkage of the money supply. Thus to extrapolate further, for every bond bought with stimulus there is only one new bond issued. Another way to look at it is when interest rates are high the yield on bonds is higher, thus as bonds mature they are increasing the money supply; so to issue low interest rates with CDS Stimulus will reduce the amount of bonds in the market, which in turn reduces the money supply. Further more when stimulus money is used to swap the bonds current value to prevent future default on the bond, the ECB is effectually reducing the money supply intandem with lowering interest rates by way of buying bonds back before they mature, which as an effect reduces inflation and stymies long term growth.