30 November 2011

Currency Wars: Fed Acts To "Increase the Availability of Dollars Outside the United States"

Several people have asked what I think about this.

I wrote about this just yesterday.   I could not ask for a better straight man than Ben Bernanke.

"I think the major monetization is already occurring in the Eurodollar markets, and an ongoing stealth bailout of European debt, in order to save the big money center banks at home and broaden the reach of the Dollar.

And this is why the Fed stopped reporting on Eurodollars some years ago, as a component of M3. It was to pave the way for the monetary equivalent of a financial neo-con, to addict European governance to the US dollar and pave the way for a stronger position for the dollar as a one world currency."

Currency Wars: The Anglo-American Century and Why the Financial Engineers Hate Gold and Silver

Here is a primer on the Fed Swaps. Keep in mind that it is written by the Fed.

I had also suggested after the bell that there would be an effort to blow off the downgrade of the big money center banks. I suspected there would be a more singular effort to pump up the SP futures from the Fed's house banks, but it appears the Central Banks, led by the Fed, decided to hit the markets with a major sugar rush of cheap dollars. That is US dollars.

"I will be surprised if they do not try and rally stocks in the face of this to put the brave face on and whistle past the graveyard once again. This is what traders like to do when they have been caught offsides by the news. But they may not be able to sustain it without official help from the strong trading desks of the financial sector."

The Chinese cut reserve requirement ratio on their banks by .5 percentage points. This will help them release more of their huge hoard of US dollars back into the global financial system.

This action, led by the US Fed, has had a marked effect on commodity prices in dollars. So the beneficiaries, or at least those protecting their wealth, are those holding precious metals and positions in dollar sensitive commodities.

Although the Fed will say that there is no potential loss in this to US taxpayers, in fact there is ALWAYS a loss to be realized at some point in the deliberate mispricing of risk.  This loss will be taken by all holders of US dollars.

This is not QE3 and does little to help the US economy per se.  This is just a big serving of a quick energy drink to ease the short term liquidity problem in Eurodollars. It is also timed to dull the news impact of the bank downgrades.

When the sugar rush wears off, and it will because this is does little to help the average person in the real economy, we will see how the markets react to the ever growing piles of paper dollars covering the landscape of a mismanaged and ruined economy.

But it was extraordinarily kind of the Fed to announce this just in time for the banks and the hedge funds to repair some of the damage from the stock market decline before they close their trading books on November.

The Eurozone problems have not been solved by this. The US domestic economy has not been improved by this, except to weaken the dollar and increase commodity prices.

It has only bought the Western banks some time, and further addicted the world to US dollars. This is government of the one percent, by the one percent, and for the one percent.

NY Times
Central Banks Take Joint Action to Ease Debt Crisis
By Binyamin Appelbaum
November 30, 2011

WASHINGTON — The Federal Reserve moved Wednesday with other major central banks to buttress financial markets by increasing the availability of dollars outside the United States, reflecting growing concern about the fallout of the European debt crisis.

The central banks announced that they would slash by roughly half the cost of an existing program under which banks in foreign countries can borrow dollars from their own central banks, which in turn get those dollars from the Fed. The banks also said that loans will be available until February 2013, extending a previous endpoint of August 2012.

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the banks said in a statement. The participants in addition to the Fed are the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank.

The move makes clear that regulators increasingly are concerned about the strain that the European debt crisis is placing on financial companies, which are facing increasing difficulty in borrowing through normal channels the money that they need to fund their operations and obligations.

The European Central Bank borrowed $552 million through the existing facility during the week ending Nov. 23 to meet the liquidity needs of European banks. Data for the past week is not yet available.

Under the new terms of the program, the existing interest rate premium of 0.1 percentage points on those loans will be reduced by half, to 0.05 percentage points, effective Dec. 5.

The other central banks said they had also agreed to make similar loans of their own currencies as necessary, but they noted that the only extraordinary demand at present was for dollars.

Stocks surged after the action was announced, with European markets up more than 4 percent in afternoon trading, while United States stock futures were up sharply.

“U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses,” the Fed said in its statement.