How the Fed Prints Money Under the Guise of Currency Swaps

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Whoops!…Oh dear!…It looks like Ben fell off the wagon again!

Such a shame. He had been doing so well ever since he put that bottle of “Old Q.E.” back on the shelf last June… and got sober. But a few weeks back, he tripped up on his 12-step program and started nipping at the bottle again. Slowly at first… then to excess.

Yes, it’s true, dear reader, Federal Reserve Chairman Ben Bernanke, is printing money again. That’s bad enough. But this time, after he prints it, he sends it over to Europe. Crazy, but true. The chart below tells the tale. It shows the quantity of currency swaps on the Fed’s balance sheet.

Encore Presentation

What are these things?

Technically, they are an exchange of one currency for another currency. Functionally, they are a loan.

Typically, one side of the swap pays interest to the other side of the swap, depending on the prevailing interest rate differentials between the two currencies. [For more about swaps, click here.] During the crisis of 2008-9, the Fed supplied nearly $600 billion of this form of credit to various financial institutions. Eventually, as credit conditions improved, the borrowers unwound these swaps, causing them to disappear completely from the Fed’s balance sheet…until late last year.

The Fed is ramping up its currency swap activity again. As we noted in the January 6th edition of The Daily Reckoning:

Whenever a central bank cannot provide direct, overt assistance to a specific insolvent investment bank or government, not to worry, a central bank can still provide indirect, covert assistance.

The recently announced “backdoor bailout” of European financial institutions illustrates the point. The European Central Bank (ECB) cannot directly bail out the insolvent governments of Greece, Italy, Spain, Portugal, et al. Meanwhile, the US Federal Reserve cannot directly rescue Europe’s insolvent banks.

Enter the indirect bailouts… Here’s how they work:

The Fed extends unlimited lines of credit to the ECB under so-called swap agreements. The ECB, in turn, provides dirt-cheap capital to Europe’s struggling banks. Then, the banks – understanding an unspoken quid pro quo – use the dirt-cheap financing to buy the high-yielding bonds of Greece, Italy, Spain, et cetera.

So if you follow the money, the Fed is lending money to the Greek government…and all along the way, the insolvent European banks are making money they don’t deserve to make, while US taxpayers are losing money they don’t deserve to lose…

As recently as a few weeks ago, the amount of dollar swaps – i.e., loans – with the ECB was only $2.4 billion. “For the week ending December 14, however, the amount jumped to $54 billion,” the Journal reports… Thus far, the Fed’s indirect bailout of Europe is relatively small, at a mere $62 billion. But we should expect that number to grow…a lot. And as that number grows, the Federal Reserve will be providing yet one more reason to buy gold, silver and other hard assets…

Since we aired those remarks, the Fed has added another $41 billion (and counting) in currency swaps to its balance sheet – bringing the grand total to $103 billion, as of January 18th. That little green doodad at the upper right of the chart below represents $103 billion of currency swaps. (The fact a $103 billion increase on a chart of Fed assets is barely visible says something about how out-of-control the Fed’s activities have become).

Eerily Famililar

Importantly, these currency swaps are not replacing some other asset on the Fed’s balance sheet. In other words, the Fed did not sell $103 billion worth of Treasury securities in order to provide $103 billion worth of currency swaps to the ECB. Instead, the Fed conjured this fresh cash into existence out of thin air. Since announcing the “emergency” swap lines on November 30, 2010, the Fed’s balance sheet has increased by $100.7 billion – a mere rounding error away from the $100.8 billion in currency swaps the Fed added to its balance sheet over the same timeframe.

The mainstream financial press has not seemed to notice – or care – that the Fed is printing dollars and sending them to Europe…even though this new Fed operation is a kind of “QE3” without any headlines or fanfare…and without any direct US-based beneficiaries.

What does interest the press, however, are the “improving credit conditions in Europe.” LIBOR rates have retreated a bit from their recent highs, for example, which means that European banks are finding it easier to obtain short-term credit.

Of course they are! The Fed is flooding the European financial markets with cheap credit, thereby lowering the demand for credit from traditional sources in the private sector. But unless the Fed intends to single-handedly bail out every insolvent bank and government in Europe, the short-term balm it is providing will achieve absolutely zero long-term benefit…except for the owners of precious metals.

This “Backdoor QE Operation” will merely kick the can down the stradas, rues and calles of Europe, while adding hundreds of billions of dollars to the Fed’s balance sheet. This new Fed operation is inflationary… and it will become more inflationary if/as/when the volume of currency swaps on the Fed’s balance sheet continues to grow.

While watching, remember to add a few precious metals to your portfolio.

Regards,

Eric Fry
for The Daily Reckoning Australia

Eric Fry is the Editorial Director of Agora Financial.

This article originally appeared in The Daily Reckoning USA.

Eric J. Fry
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.
Eric J. Fry

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8 Comments on "How the Fed Prints Money Under the Guise of Currency Swaps"

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masalai
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Screwed….

Lachlan
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Thanks Eric.

Nalliah Thayabharan
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US President John F. Kennedy planned to exterminate the privately owned Federal Reserve System. In 1963 he signed Executive Orders EO-11 and EO-110, returning to the government the responsibility to print money, taking that privilege away from the privately owned Federal Reserve System. Shortly thereafter, President John F. Kennedy was assassinated. The professional, triangulated fire that executed the President of the United States is not the most shocking issue. The high- level coordination that organized the widespread coverup is manifest evidence of the incredible power of a “hidden government” behind the scenes. Another myth that all Americans live with is… Read more »
Nalliah Thayabharan
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In 1811 the charter for the Illuminati Ashkenazi Khazar Rothschild owned Bank of the United States which was in control of the US money supply expired and the US Congress voted against the renewal of the charter. At the time Andrew Jackson (who would become the 7th President of the US from 1829 to 1837) said, “If the US Congress has a right under the US Constitution to issue paper money, it was given them to use by themselves, not to be delegated to individuals or corporations.” Nathan Mayer Rothschild who owned Bank of the United States which was in… Read more »
Nalliah Thayabharan
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The political and economical leadership of the US has chosed to cartel profits and transformed the US economy to serve the colluding and unlawful oligarchy. The US banks are borrowing money at near zero interest from the US government, then lending it to the US government at even mere fractions higher interest than they are paying. The net interest margin made by the US banks by lending the money back to the US government in the first 6 months of 2011 is $211 billion. The financial crisis was created by the Zionsits owned biggest US banks to consolidate power. The… Read more »
palmer
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Woww that was strange. I just wrote an very long ccomment buut after I clicked submit myy comment didn’t
show up. Grrrr… well I’m not writing all that over again.
Anyways, just wanted to say excellent blog!

Nalliah Thayabharan
Guest
US President John F. Kennedy planned to exterminate the Illuminati Ashkenazi Khazar Zionists owned Federal Reserve System. In 1963 he signed Executive Orders EO-11 and EO-110, returning to the government the responsibility to print money, taking that privilege away from the Illuminati Ashkenazi Khazar Zionists owned Federal Reserve System. Short ly thereafter, President John F. Kennedy was assassinated. The professional, triangulated fire that executed the President of the United States is not the most shocking issue. The high- level coordination that organized the widespread coverup is manifest evidence of the incredible power of a “hidden government” behind the scenes. Another… Read more »
Nalliah Thayabharan
Guest
Abraham Lincoln worked valiantly to prevent the Rothschild’s attempts to involve themselves in financing the Civil War. Interestingly, it was the Czar of Russia who provided the needed assistance against the British and French, who were among the driving forces behind the secession of the South and her subsequent financing. Russia intervened by providing naval forces for the Union blockade of the South in European waters, and by letting both countries know that if they attempted to join the Confederacy with military forces, they would also have to go to war with Russia. The Rothschild interests did succeed, through their… Read more »
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