- Banks changed their liability maturity structures by switching from fixed deposits to debt securities and transformed illiquid mortgages to asset-backed securities on the asset side.
- The net effect is that banks borrow less short-term and invest less long-term. The term transformation and thus, the overall liquidity must have other origins:
- Hedge Funds; they made on the carry on the yield curve by borrowing short and investing long without any finance restrictions.
- Hedge Funds's money in the mean time does not enter goods markets but creates asset price inflation on the capital markets.
- To conclude, M3 might not be a good indicator for goods inflation but for asset inflation and financial stability in an era of non-restricted financial innovations.
Dear ECB, if you want to use banking information, use just the most plausible variable, i.e. credit growth to private sector and communicate it like that!
