February 23, 2011

What happens when Quantitative Easing (QE2) ends in June?

Filed under: Uncategorized — bigcapital @ 1:12 am
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What happens when Quantitative Easing (QE2) ends in June?

Wednesday, February 23, 2011 –

The Congress : “There is no need for us to support Quantitative Easing Part 3” confirmed by the Senate last week.

I remain surprised that in the business press there is little if any discussion about what will happen when Quantitative Easing II expires in June.

From a congressional standpoint, there has been discussion designed to force an early end to the program. Others have gone in the opposite direction mentioning a possible QE3.

In my view, the economy is slowly picking up. Deflation is less an issue, manufacturing activity is up, and consumers are spending a bit more. Corporate profits have exceeded expectations for Q4 2010.

On the downside, the housing market shows no signs of improving and might not have yet bottomed. Trouble in the middle East could disrupt oil shipments. China appears to be experiencing uncontrolled inflation and an asset bubble that is about to burst. Europe is experiencing continued sovereign debt issues. Some analysts believe that the UK is in stagflation. Commodity prices are increasing rapidly. Corporations have no pricing power. The US labor market will take years to repair. And finally, US Budget deficit is out of control!!!

This all points to a tenuous financial environment at the time of QE2 expiration. For 2011, YTD stock prices might be negative.

Any yet the business press seems quiet on this issue …

Read more: Count Down to Quantitative Easing Removal ends in June.

For 2011, YTD stock prices might be negative.

Which would be unlike the quantitative easing that the CABAL (Fed) have been subjecting our economy to… The CABAL chairman told us when he implemented QE1 and Q2, that it was for the good of the economy, to spur economic growth, job creation, and keep interest rates down… Well… That’s strike one, two and three… Go grab some bench, Mr. CABAL Chairman! And that’s all I can say about that right here, right now, as this is the kinder

Since the CABAL introduced quantitative easing in March of 2009, inflation has taken off, just as I told you back almost two years ago that it would… No, we’re not seeing wage inflation, or housing inflation… But get a load of these things that have increased phenomenally since March 2009.

The average price of gas is up 69%… The price of oil is up 135%… Corn is up 78%… Sugar is up 164%… And I could go on, but I think you get the picture. Now, on the other side of the employment that was supposed to improve with QE, the number of unemployed people is up 25%… The number of food stamps recipients is up 35%… The national debt is up 32%… And then the last thing they told us would improve or remain steady was interest rates… Hmmm… Well, the 10-year Treasury is up 100 basis points in the past three months alone! Sorry to be the one that had to tell you these things, but if you only watched cable media, you wouldn’t know about these things, and when the Conference Board called to survey you about how confident you were about the economy, you would be singing the praises of the CABAL for all they had done for you!

December 30, 2010

The Federal Want To Pressure Down U.S Dollar Worldwide

Filed under: Uncategorized — bigcapital @ 9:23 am
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The Federal Want To Pressure Down U.S Dollar Worldwide

There is a saying in the investment business, “don’t fight the Fed.”

Fed Swap Lines Purposely Keeping Dollar Weak

Central banks provided two pieces of market supportive news in the past 48 hours.

China announced its intent to buy Portuguese bonds, and the Federal Reserve extended its “swap lines” deep into 2011:

# China Ready to Buy Up to $6.6B in Portugal Debt (Reuters : )

# Fed Extends USD Swaps With Major Central Banks (Reuters : )

Via Reuters, the swap lines, at first set to expire next month, will now run til August 1st.

The lines were first opened to the ECB and SNB — the European and Swiss central banks respectively — and were later expanded to multiple additional central banks, including those of Sweden, Mexico and Brazil.

The August extension applies to the Fed’s counterparts in Europe, Japan, Canada, England and Switzerland.

So why is the Fed doing this? Straight from the horse’s mouth (official Fed statement):

“[The swap lines] are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets.”

That’s the official justification. A between the lines reading is slightly more self serving: The Fed wants to keep the dollar weak — or otherwise keep it from rising too much.

As you can see, from 2002 onward the $USD had been declining — a trend perceived as good for everyone. As Americans gorged on “stuff,” the vendor finance arrangements put in place by China and Middle East oil exporters allowed the party to continue unabated.

Long term interest rates were kept low via the recycling of $USD back into treasury bonds, in turn keeping mortgage rates low and perpetuating the housing bubble. Meanwhile many emerging markets enjoyed rapid growth — courtesy of a binging U.S. consumer — as the leverage and credit boom radiated outward.

But then, as things fell apart in 2008, the $USD saw a dramatic surge. A wave of panic swept the globe as the supernova debt boom collapsed. Trillions of dollars in credit flows evaporated, and American investors effectively “short” dollars (via overseas investments and ‘carry trade” type arrangements) had to cover with a vengeance.

As the chart shows, the $USD saw another upward surge in early 2010, first on China fears, and then eurozone sovereign debt fears as the Greek situation ignited. (This is when the Economist’s Acropolis Now cover was published — a keepsake to be sure.)

So, as you can guess, one of the many fears keeping Ben Bernanke awake at night is the possibility of a surging $USD.

Not only is the dollar a “risk-off” fulcrum, balanced against “risk on” for all other paper asset classes, a rising buck is also a political headache for the Obama White House and other American interests seeking a U.S. export revival.

So, back to those swap lines. Why and how would they be an attempt to keep the dollar down?

Well, first consider what a swap line actually is. From the Federal Reserve 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.

In layman’s terms, we can think of a swap line as a standing guarantee of U.S. dollar liquidity. If you (as a central banker) ever need greenbacks in a pinch, you know you’ll be able to procure them instantly, no matter how “tight” the open market may be.

This standing guarantee reduces the odds of another violent $USD spike of the type we saw in late 2008. In a way, one can think of it as “short squeeze insurance.”

The many players around the world who are “short” U.S. dollars — by way of lending arrangements denominated in dollars and so on — have spiking dollar risk implicit in their positioning.

What the Fed has essentially said to these players is, “It’s okay for you to keep borrowing in dollars, because in the event of a new liquidity crisis we will create accessible dollars for you (via the channel of your local CB).”

Consider, too, the conditions under which all these central banks would be pushed to draw on their $USD swap lines at the same time.

By definition, these would be crisis conditions in which availability of $USD was scarce relative to near-term surging demand.

In such conditions, the Federal Reserve would have to create more dollars to meet existing outsized demand (as crisis-driven preferences for holding $USD, or covering short $USD obligations, would create a shortage).

So the liquidity promise is also a sort of printing-press promise: In the event of another crisis, the Fed will be on its toes and ready to “print” however much fresh $USD the world needs.

The really neat trick is, simply in making this promise, the Federal Reserve can achieve its aim of keeping the $USD down. This effect is produced even without the Fed doing anything.

How? Simple:

* The Fed has promised $USD liquidity will be there “if needed.”
* This promise can be “taken to the bank” — literally.
* Commercial institutions can thus rest easier with short-dollar liabilities.
* To wit, whether one is a bank, a commercial operator or a speculator, it’s very tempting to borrow in $USD these days — to leverage the greenback via some form of debt arrangement and participate in the “carry trade.”

But this move could also be considered risky due to the possibility of carry trade reversal and crisis-driven supply/demand crunch … and so, with the extension of the Fed swap lines, Uncle Ben has stepped up and said “Hey, no problem, carry trade away — we’ll be there in a tight spot (via printing press) to provide liquidity for you.”

And so the dollar stays suppressed, and everyone stays happy (apart from those pesky “non-core” inflation watchers, and anyone else feeling a cost of living crunch).

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