Fed to print "unlimited amount" of US dollars to give to Europe

[ThaBigP]

http://www.guardian.co.uk/business/2...s-with-dollars

Under the terms of the deal, banks will be able to bid for unlimited amounts of US dollars at fixed interest rates in three separate auctions. The first of these will be on 12 October.

Nick Parsons, head of strategy at National Australia Bank, said the decision to provide unlimited liquidity well into 2012 was a big show of support to the global banking system.

[ThaBigP]

... it's all over but the cryin' now ... and food riots ... and martial law ... and a new global government and currency. No, I'm not stretching for dramatic effect.

[erdawiro]

Liquidity swap arrangements ≠ food riots, martial law, and global government

[ThaBigP]

Liquidity swap arrangements ≠ food riots, martial law, and global government

Technically, you are correct, although I did not equate the two. I'm thinking more about the massive inflation among western monetary systems that are underpinned by the US dollar that will follow ...

Incidentally... we've already HAD food riots and martial law due to commodity inflation caused by our money printing we've already done over the last few years ... it just hasn't happened here yet ... it's happened in frail economies on the perhiphery.

http://atimes.com/atimes/Global_Economy/MA15Dj02.html

http://www.guardian.co.uk/environmen...-east-protests

http://www.cnbc.com/id/41317486/Food...ially_to_Blame

http://www.ft.com/intl/cms/s/0/1503e...#axzz1Y6zBs0z3

You can't simply manufacture trillions of units of fiat currency - that just so happens to underpin the value of most of the modern world's own monetery systems - and expect no ill consequence, or you simply don't know what you're talking about. Here in the US, much of that liquidity has been held back behind the "liquidity trap" of banks' reserve accounts - hence, the hue and cry that "the banks won't lend!" - which they don't understand is the only thing keeping commodity prices relatively affordable here at this point. Once that funny money spills out, either through increased economic activity whereby those reserve accounts might be drawn down, or on the flip side, those funds drawn down to pay out the tanked obligations the money was created to paper over in the first place.

We will have even more funny money out there, behind other dams, as a result of this (as if we didn't have enough). Further, consider this:

During QE1, we swapped subprime-mortgage-backed-securities, which had collapsed in value, for digitally printed money dumped in the reserve accounts of those banks at the Fed. We did this to make the banks solvent again, at least on paper, after the value of those securities collapsed. But...we paid top, pre-collapse, prices for those securities. We had to ... if the point was to make the banks solvent again. Now we have a pool of US currency backed by subprime-mortgage-backed-securities at a wildly overstated, non-market-based value sitting out there in those reserve accounts. To keep the money there, the Fed has been paying interest on those reserve accounts (to keep the flood behind the dam).

QE2 was rolling those securities and proceeds (remember, not worth the money the Fed printed to buy them) into Treasury bonds in a further effort to mop up the supply and keep interest rates low, which is an unnatural condition for such a heavily indebted entity. We're essentially trying to fill only one side of a bathtub.

Now this...we're supplying liquidity to European banks ...

Why? Isolvency concerns.

Why? Sovereign debt issues - many of them are heavily exposed to EU member states' bonds and several defaults are threatening (Greece, Italy, Portugul, Spain, Ireland already been a problem ...)

What does that mean? That means those banks are holding as assets paper that isn't worth what they paid to obtain them.

What do they have to do? They need to find somebody to buy those paper assets at the price they would have been valued at *prior* to the present debt crisis, and let THAT sucker take on the counterparty risk of those shaky bonds.

Wait, that sounds like WE are going to be that sucker! Right you are ,...

Wait, that also sounds like the SAME shellgame we played with those subprime-mortgage-backed-securities during QE1! Right you are again...

Wait ... if the problem is holding a paper asset, based solely on debt, and therefore bearing counter-party risk ...

yes...

...isn't the US dollar just a paper asset, based solely on debt, and therefore bearing counter-party risk?

Right you are...

They're swapping paper around, with criss-crossing lines of counterparty risk among members who are all broke ...

[iceberg]

Liquidity swap arrangements ≠ food riots, martial law, and global government

i don't think that's what he said. *BUT* if we're printing money and auctioning it off, where is the real value in the money? there isn't. what is the real value of the money i worked my ass off for if they're just giving it away.

a long time ago in a town called clinton oklahoma i talked with my manager about giving away some advertising to get more advertisers in and he said "never give away what you're trying to sell".

while this isn't a direct comparison it does equate getting value for value. without just looking at the action alone, what are the *potential* ramifications of this action? has it ever been done before? if so, by who and what were the results?

and finally, we're getting our asses handed to us by the chinese and owe them a fortune, why do we feel we have to go fix the worlds problems by means that only exaggurate our own?

[erdawiro]

i don't think that's what he said. *BUT* if we're printing money and auctioning it off, where is the real value in the money? there isn't. what is the real value of the money i worked my ass off for if they're just giving it away.

a long time ago in a town called clinton oklahoma i talked with my manager about giving away some advertising to get more advertisers in and he said "never give away what you're trying to sell".

while this isn't a direct comparison it does equate getting value for value. without just looking at the action alone, what are the *potential* ramifications of this action? has it ever been done before? if so, by who and what were the results?

and finally, we're getting our asses handed to us by the chinese and owe them a fortune, why do we feel we have to go fix the worlds problems by means that only exaggurate our own?

It's a loan, we're not just giving something for nothing. The Fed exchanges dollars for another central bank's operating currency at the market rate. After a specified amount of time - 3 months in this case, I think - the central banks buy back their currency and pay interest to the Fed. Swaps like this are going on right now, but they are 7-day swaps instead of 3-month. The foreign central banks assume all risk because they are the ones lending dollars to risky local banks. The Fed is in a virtually no-risk situation because their lending directly to the central banks.

This doesn't effect the value of the money you worked for and it doesn't exacerbate our own problems.

[iceberg]

It's a loan, we're not just giving something for nothing. The Fed exchanges dollars for another central bank's operating currency at the market rate. After a specified amount of time - 3 months in this case, I think - the central banks buy back their currency and pay interest to the Fed. Swaps like this are going on right now, but they are 7-day swaps instead of 3-month. The foreign central banks assume all risk because they are the ones lending dollars to risky local banks. The Fed is in a virtually no-risk situation because their lending directly to the central banks.

This doesn't effect the value of the money you worked for and it doesn't exacerbate our own problems.

ok. so when was the last time we auctioned off a loan for a specified period of time?

[ThaBigP]

ok. so when was the last time we auctioned off a loan for a specified period of time?

QE1 (mortgage securities). But ... we never unwound from that "temporary" fix before we "needed" QE2 (Treasuries). Now we have ... EUQE? It's precisely as I said - broke-asses are swapping paper around as furiously as they can, paper-for-paper swaps all underpinned by a combination of assets of no tangible value and some of wildly overstated value, denials and casual dismissals notwithstanding.

[erdawiro]

ok. so when was the last time we auctioned off a loan for a specified period of time?

Around 3 weeks ago, during the week ending on 8/24. It was a 7-day swap with the European Central Bank at a rate of 1.1%. Before that there was a 7-day swap with the Swiss National Bank at a rate of 1.08%.

This really isn't a big deal.

[erdawiro]

Here is a more detailed explanation from the Fed's website:

In general, these swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve. Dollar liquidity swaps have maturities ranging from overnight to three months.

When the foreign central bank loans the dollars it obtains by drawing on its swap line to institutions in its jurisdiction, the dollars are transferred from the foreign central bank's account at the Federal Reserve to the account of the bank that the borrowing institution uses to clear its dollar transactions. The foreign central bank remains obligated to return the dollars to the Federal Reserve under the terms of the agreement, and the Federal Reserve is not a counterparty to the loan extended by the foreign central bank. The foreign central bank bears the credit risk associated with the loans it makes to institutions in its jurisdiction.

The foreign currency that the Federal Reserve acquires is an asset on the Federal Reserve's balance sheet. Because the swap is unwound at the same exchange rate that is used in the initial draw, the dollar value of the asset is not affected by changes in the market exchange rate. The dollar funds deposited in the accounts that foreign central banks maintains at the Federal Reserve Bank of New York are a Federal Reserve liability.