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Monday, May 11, 2015

The Fed's Backdoor QE - Central Bank Currency Swaps?

I have made the assertion that the Federal Reserve is running a shadow QE program alongside it's official QE programs...here.
http://econimica.blogspot.com/2015/05/veneer-of-us-growth-normalcy-has-worn.html
I've asserted that the Fed likely uses offshore locations to maintain Treasury purchasing.  What I've neglected to show is a potential means and opportunity to achieve this (motive is obvious).


The means and opportunity to this scheme appear to be the Fed's creation of currency swaps to provide US dollars to other country's central banks.  In December of 2007, the FOMC (Federal Open Market Committee) announced that it had authorized temporary reciprocal currency arrangements (central bank liquidity swap lines) with the ECB (European Central Bank) and the SNB (Swiss National Bank) to provide U.S. dollars to these central banks.  By April '09, the swap lines were extended to 11 more central banks including banks of England, Japan, Australia, Brazil, Canada, Mexico, Korea, Sweden, Denmark, Norway, and Singapore.  The Fed's opaque accounting on this topic has maintained that the swaps are not being utilized.  However, in October 2013, the Federal Reserve and the partner central banks announced that their existing "temporary" liquidity swap arrangements--including the dollar liquidity swap lines--would be converted to standing arrangements that will remain in place until further notice.  Interesting that something not in use would be converted to permanent status?!?


The chart below highlights the purchasing of US Treasury debt since 2002 by nations without Fed sponsored central bank swap lines (specifically China, Russia, & OPEC) vs. the nations mentioned above, all with central bank Fed swap lines since April '09...(July '11 seems to have been a breaking point due to the US debt ceiling debacle...on this month, long held trends in Treasury buying reversed).
  • China, Russia, and OPEC (on record dollar trade surplus' over the July '11 period until now) did not follow previous patterns of recycling nearly 50% of dollar surplus' into Treasury debt.  Instead, sitting on record dollar trade surplus', they turned to net US Treasury sellers from July '11 onward.
  • Since the advent of the central bank swap lines in these 13 nations, the nations with little or no dollar surplus', purchased unprecedented quantities of US debt.  The only notable change in these nations being the addition of the Fed swap lines allowing these central banks to create and loan untold quantities of US dollars...the dollars to be utilized to maintain the appearance of market demand for record low yielding US debt (one can only speculate if dollars were/are also loaned by these central banks for other purposes?).
 


The chart below highlights the radical change in the largest purchasers of US Treasury debt...China, Russia, and OPEC.  As of July '11 these buyers owned 36.5% of foreign held Treasury debt but today have fallen to 26% of total foreign held.  Stunningly, on their combined departure as a net buyer, "foreign demand" for US Treasury debt was so high that yields were pushed to record lows?!?



On the largest buyers departures, where did the new demand come from?  Since '08, BLI (Belgium, Luxembourg, and Ireland) purchased a stunning $567 billion in Treasury's.  More shockingly, since July '11 BLI purchased $409 billion vs. $158 billion in Treasury purchases for the 5 core EU nations...all while China, Russia, and OPEC net sold $110 billion. 



A review of all the nations with Federal Reserve swap lines and their ramping US Treasury purchases (Denmark is omitted). 



So, though no one can "prove" the Federal Reserve is providing the backdoor funding for foreign held US Treasury's and correlation doesn't necessarily imply causation...the evidence sure seems to point that way.

15 comments:

  1. Great article, Chris, but you have picked up some bad habits from the Internet in terms of spelling and grammar. In the context in which you are using it, the word should be "Treasuries" not "Treasury's."

    The apostrophe is typically used for abbreviating two words. For example: "The national Treasury's (Treasury is) insolvent." The apostrophe is being misused on the Internet very frequently, and it is disturbing to me to see this trend. Anyone who writes blog articles should know better.

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    1. Hey Anon,

      thanks for reading the article.

      Regarding my grammar and spelling...it is atrocious and for this I apologize. Duly noted and I'll change my practice on plural of Treasuries! Thanks.

      Delete
  2. If we talk about grammar then in any grammar is known as a possessive pronoun and not necessarily an abbreviation such as is, are. In other words it is normally refer to ownership that falls in the subject in question such as Peter's house or kitchens' table and not Mary's driving this morning.

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    1. Would you recommend a couple of sites that may move us grammatically challenged in the right direction (Grammar 101, not the Masters Program)?

      Thx

      Delete
  3. great article. Anon dude picking apart apostrophe needs to relax. The greater message is what you need to read and understand. Picking apart someone else because you are disturbed by poor grammar is YOUR problem, not the author's'

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  4. Great rotation out of bonds will not happen.

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  5. To those puzzled, as I was, by the EU leaders meekly following Washington's directive to impose sanctions against Russia even though the economy of the EU would suffer serious harm: The swap lines between the Federal Reserve and the central banks of the EU indicate the extent of their financial interdependence. In light of the perilous bank stability situation in the EU and poor economic growth, the EU leaders can be understood to fear any move by the Fed or Washington to cut off EU bank access to Fed funding.
    The prospects of Greek default, possible default by others of the PIIGS nations, and contagion in the German banking sector from the Austrian Hypo/Heta bond default show some of the perils faced by the EU financial sector. The IMF is now backing away from further Greek bail-outs, demanding that the EU and ECB take further write-downs of Greek debts. Further write-downs will have direct impact on EU taxpayers.
    Under the Fiscal Stability Treaty, all the Euro-zone nations undertook to guarantee the debts of each other - any default forces the other nations to shoulder the burden. If there is a cascade of defaults in the PIIGS, the non-defaulting Euro nations may be swamped by the added debt obligations.

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  6. I really think you hit the jackpot.

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    1. Funny...once upon a time I thought if I just showed the lies and the disinformation for what it was...people would be moved to action. Knowledge is power and the like. Unfortunately, what has become clear on so many issues is the vast majority is ok with the lies, ok with the disinformation. They would rather attack those that question the system rather be confronted with their complicity in a fraudulent and immoral scheme.

      I guess I write this stuff because I want to know the truth (best as I can figure) and I'm glad to share it...even if there's only a small cadre with the intellectual curiosity to go beyond the BS typically offered.

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    2. When I talk about the kinds of information you present in your blogs, I get a denial reaction. I can only think of two attitudes that can account for this denial:
      1: willful blindness, a term used in the court decisions on Enron, particularly those convicting Skilling, Fastow and Lay to avoid the consequences of their actions by pleading ignorance,
      2: abdication of personal responsibility. Trusting congressmen, the president and the courts to do the right thing. I don't have to examine it further because its not my role in life.


      The defenses to the perception of reality are quite strong. I dont have a good answer on how to affect the public.

      What I can do is contrive preparations against the possible outcomes, and to urge others to do likewise.


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  7. they are ok with disinformation because they know the system is in trouble, the greater the trouble the more they are ok with it because they connect it's fall with their own, plus modern ideas don't accept absolute forms of truth which means the disconnect is total and serves to re-enforce the bound state. the many aberrations that result from this craziness are visible are not one-offs at all and point to a core failure in the model itself. but not the failure of the innate centre within people... this is the ultimate thing not to be known. that we are not the system and its going to be so obvious it can't fail to bring a better world. but you won't be thanked for pointing this out before it happens, or afterwards. that's the strangeness of this

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  8. "...Fed swap lines allowing these central banks to create and loan untold quantities of US dollars"

    Literally they are (digitally) counterfeiting US dollars?

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    1. The now permanent "swap line" agreement involves foreign central banks "selling" their currency to the Fed in exchange for dollars. However, the Fed doesn't use the foreign currency while the foreign CB's loan the dollars into existence (or pass them through their agents) for the Treasury purchases.

      Obviously, the Fed states the swaps aren't being utilized...but how the dollars in such large quantities are ending up in these select financial capitals and being used for Treasury purchases is truly a "mystery". Whether slight of hand accounting or like schemes with these nations, I don't know. But buying by these select foreigners in locations with no dollar sources for the purchases continues (and these dollar amounts are so large that they are not Russian oligarchs or the like).

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  9. I have always wondered why debt laden Japan constantly buys treasuries. It makes no sense.

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  10. Japan's commitment to soak up US debt has to do with it's post-WW2 surrender arrangement. Japan is only a sovereign nation on the surface. In reality, however, it is more like a US colony.

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