,
13 tweets,
3 min read
Read on Twitter
1) Thread: This week’s ECB decision is historic. They have done something very similar to proposal here philosophyofmoney.net/dual-interest-…
2) Dual rates is monetary rocket-fuel. Be in no doubt. Media coverage appears oblivious to significance. 
3) ECB has moved to a zero interest rate on excess reserves up to 6x required reserves. Banks with excess reserves below this level can now borrow reserves at negative rates and deposit with ECB, generating positive carry.
4) Furthermore, using TLTROs banks will be able to borrow from the ECB itself at -0.5% under certain conditions and earn positive carry if these transactions result in them holding higher excess reserves, but less than 6x required reserves.
5) On reflection it is astonishing this has been approved. TLTROs and tiered reserves are a far more significant monetary innovation than QE. Macro policy econs need to wake up on this. If legal, the limits to monetary policy have just been lifted.
6) The critical psychological breach is a central bank engaging in a marginal increase in reserves which under certain conditions will generate negative net interest margin to the central bank. Official interest rates are now having the net effect of transfers to private sector.
7) In contrast to standard negative rates, to forward guidance, or QE, the marginal effects of these policies are increasingly powerful. For example, cutting the TLTRO rate further and paying zero interest on a larger share of reserves.
8) This is not surprising, and needs to be watched. It may now be the best policy indicator in the Eurozone.
9) Hats off to Draghi. He left with a dismissal of ‘monetary innovation’ having just landed one of the most significant innovations monetary history.
10) On reflection, his ‘infinite’ QE looks a deliberate distraction, which has worked. ft.com/content/7f9a16…
11) Back of envelope calculations.
12) New post: Draghi's historic farewell. Obfuscation hides revolution. philosophyofmoney.net/draghis-histor…
Corrected! h/t @_Dom_White_
