Three balls in Frankfurt and New York: a Decade of Deflation?

The FT has a story reminding us that the FED is currently playing a game of 'go on, I'll trust you, how much do you want for that?' that would shame a small town pawn shop.

The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

The ECB has similar tactics:

Eurozone banks increased sharply their use of mortgage-backed debt and similar structured bonds last year in order to raise money from the European Central Bank, helping to avoid liquidity problems in financial markets.

The volume of asset-backed securities pledged as collateral in ECB market operations to provide funding to banks reached €215bn ($315bn) by the end of last September, the bank said in data released on Thursday.

It is worth remembering that this massive liquifaction of the banking system was one of the key features of Japanese economic policy during the decade of deflation. The central banks are playing a very dangerous game here and it cannot last for many more months without addicting the banks to cheap funds and very low liquidity premiums - an addiction the Japanese example shows is very difficult to recover from.

Update.Credit slips has an interesting if perhaps overly bearish macroeconomic perspective on the potential for an extended period of deflation.