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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Fed macro policy

Posted by WARREN MOSLER on October 30th, 2008


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(email exchange)

>   
>   On Wed, Oct 29, 2008 at 11:45 PM, Morris wrote:
>   
>   This is the 64,000 dollar question…will unlimited FED lending to ENTIRE
>   world-with IMF help-created recovery? Push on string? Hyper inflation?
>   Question of the day…would love others inputs.
>   

I’d say yes, it’s inflationary and the channels at least as follows:

1. The outstanding international dollar debt was an expansionary force when it was growing, to the extent the USD borrowings were spent. Some of that USD spending was overseas, some in the US.

Growing debt, if directed towards spending, is expansionary.

For example, you may borrow to build a house, or buy a new car.

But if you borrow to fund financial assets, your pension fund, or to buy mortgage backed securities, for example, it’s merely the rearranging of financial assets.

This increased ‘leverage’ and has no direct effect on demand, beyond the demand created by the financial institutions themselves. This includes all the hiring of employees for the financial sector which all counts as GDP.

(While this may not be deemed ‘useful output’ it is accounted for as GDP, like bridges to nowhere, and does function to support people’s livelihood. Yes, better to have employed them doing something deemed useful, but that’s another story)

2. Should the USD loans default, the financial institutions lose capital, meaning the shareholders (and bondholders, depending on the size of the loss) lose their nominal wealth. This may or may not reduce spending. Most studies say it’s a weak effect at best.

And for each institution to continue to function it needs to replace capital.

(In our ‘loans create deposits’ world, infinite capital is available at the right price, if the government has a policy to sustain domestic demand.)

For US institutions with USD denominated capital, losses result in a reduction of their USD capital.

Their liabilities remain the same, but their assets fall.

And any assets sold to reduce USD funding needs are sold for USD.

3. Institutions with capital denominated in other currencies, go through the same fundamental process but with another ‘step.’

When their USD assets are impaired, they are left with their USD liabilities.

They now have a ‘mismatch’ as non dollar assets including non dollar capital are supporting the remaining USD liabilities.

To get back to having their assets and liabilities matched in the same currency, they need to sell their assets in exchange for USD.

Until they do that they are ‘short’ USD vs their local currency, as a rising USD would mean they need to sell more of their local currency assets to cover their USD losses.

Technically, when the assets they need to sell to cover USD losses are denominated in non dollar currencies, this involves an FX transaction- selling local currency to buy USD- which puts downward pressure on their currencies.

Additionally, they need to continue to fund their USD financial assets, which can become problematic as the perception of risk increases.

4. The Fed’s swap lines ($522 billion outstanding, last i saw) help the rest of the world to fund themselves in USD.

In an effectively regulated environment, such as the US banking system, this works reasonably well but still carries a considerable risk that we decide to take as a nation for further public purpose. (it is believed the financial sector helps support useful domestic output, etc.)

Any slip up in regulation can result in the likes of the S&L crisis, and arguably the sub prime crisis, which results in a substantial disruption of real output and a substantial transfer of nominal and real wealth.

The Fed is lending to foreign CB’s in unlimited quantities, secured only by foreign currency deposits, to world banking systems it doesn’t regulate, and where regulation is for foreign public purpose.

The US public purpose of this is (best I can determine) to lower a foreign interest rate set in London called ‘LIBPR,’ and ‘perhaps’ to ‘give away’ USD to support US exports.

The Fed yesterday, for example, announced $30 billion of said lending to Mexico and Brazil for them to lend to their banks. The Fed must be a lot more comfortable with Mexico and Brazil’s bank regulation and supervision than I am, and certainly than Congress would be if they had any say in the matter.

5. The problem is that once the Fed provides funding to these foreign Central Banks, who then lend it all to their banking systems, they remove the foreign ‘funding pressure’ that was causing rates to be a couple of % higher over their (didn’t change our fed funds rate). Taking away the pressure takes away the incentives of the pressure to repay $US’s introduces.

The Fed is engaging in a major transfer of wealth from here to there. Initially its prevents the transfer of wealth back to the US, as would have happened if they had been forced to repay and eliminated their USD liabilities and losses.

That same force if continued develops into large increases in USD spending around the world as this ‘free money’ going to banking systems with even less supervision and regulation than ours soon ‘leaks out’ to facilitate increasing foreign consumption at the expense of USD depreciation.

Note the bias- the ECB gets an unlimited line and Mexico is capped at $30 billion.

This means the Fed is making a credit judgment of Mexico vs the ECB, which means the Fed is aware of the credit issue.

Conclusion, the Fed is beginning to recognize the swap lines are potentially explosively inflationary, as evidenced by not giving Mexico unlimited access.

The swap lines are also problematic to shut down should that start to happen, just like what shutting down lending to emerging markets did in the past.

Shutting down the swap lines would trigger the defaults that the unlimited funding had delayed, and then some, triggering a collapse in the world economies.

It’s a similar dynamic to funding state owned enterprises- the nominal costs go up and the losses go up as well should they get shut down.

Keeping them going is inflationary, shutting them down a major disruption to output and employment.

It is delaying the circumstances that were headed toward a shut down of the European payments system, but leaving the risks in place for the day the swap lines are terminated.

7. Bottom line- it looks to me that the swap lines are a continuation of the weak dollar policy Bernanke (student of the last gold standard depression) and Paulson have been pushing for the last couple of years.

This time they are ‘giving away’ dollars to foreigners, in unlimited quantities, ultimately to buy US goods and services.

They are doing this to support export led growth for the US, at the direct expense of our standard of living. (declining real terms of trade)

They are doing this to increase ‘national savings’- a notion applicable under the gold standard of the early 1930′s to prevent gold outflows, and where wealth is defined as gold hoards. This notion is totally non applicable to today’s convertible currency.

It is a failure to understand the indisputable Econ 101 fundamental that exports are real costs and imports real benefits.

They believe they are doing the right thing and that this is what’s good for us.

The unlimited swap lines are turning me into an inflation hawk longer term.

But the USD may not go down against all currencies, as potentially the inflation will hit other currencies as well.

Where to hide? I’m back to quality rental properties and energy investments.

The world is moving towards increased demand with no policy to make sure that doesn’t result in increased energy consumption and increasing inflation.

Comments welcome!

Warren


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42 Responses to “Fed macro policy”

  1. jcmccutcheon Says:

    Wow! Awesome piece. Among the best I’ve read to date. Any insight on the Euro vs the Dollar and the Euro vs the Brazilian Real.

    Reply

  2. jcmccutcheon Says:

    Also, if Obama wins. It stands to reason that the US will adopt anti-OIL-complex policies and more alt-energy friendly policies. Granted, there is no guarantee what the rest of the world will do, but wouldn’t that effect your bullish energy investment call?

    Reply

  3. warren mosler Says:

    unsure on the euro vs the $US. things in the eurozone are still coming apart rapidly, and national deficits are climbing and financiall problematic.

    so it’s all timing. the $ swap line advances first stop $ deflation and then keep going in that direction into $ inflation.

    And they also slow the selling of euros for $.

    But they only can delay it, not stop it.

    Then there’s the issue of incentives for fraud, much like the s and l crisis here where unsupervised s and l’s were scooping up fdic funds and using them for personal gain.

    Not that it would happen with all the honorable people we are dealing with, but if it did it would leave a CB, like the ECB, with a debt to the Fed and no asset on the other side, and the only way out would be selling euros to buy $.

    as for Obama, does he have a plan to cut energy consumption? I haven’t seen one.

    sorry about the vague response on the swap lines and the currencies. need to keep pondering it. never seen anything like it before, apart fromt he emerging market $ debt that blew up. That generally caused their currencies to hold firm until the sudden collapsed when the $ lending was pulled.

    Reply

  4. Vipul Says:

    So maybe Ron Paul had a point about being paranoid that the Fed is some kind of secret cabal that will lead to our ruin? Is the Fed even legally allowed to do this? If not, can’t someone sue them to stop?

    Obama is going to have a carbon cap and trade system and promote sales of hybrid vehicles. That should raise cut consumption somewhat.

    Reply

  5. warren mosler Says:

    It’s not all that secret- on all the news wires, numbers published every week, etc.

    And the Fed truly believes it’s the right thing to do for our well being. They just happen to be wrong this time.

    Hybrids shift energy consumption to the grid which means less gasoline which helps our trade position. But total energy consumption is a different matter that a carbon cap only indirectly alters.

    Reply

  6. Ted Says:

    Right on point. Execellent piece. All one had to do is notice growth in money supply for the last few years and well, here we are today. Speaking of energy, I bought into coal and natural gas reserves in the Appalachian region a few years ago before the explosion of energy prices began. It was a wise investment.

    Reply

  7. Jim Baird Says:

    The problem with any alt energy investment is that it will take years to make any difference. Personally, I’m in favor of a large buildout of generation IV nuclear – either pebble bed or my personal favorite, Thorium molten salt reactors. But even if Obama were to go against the dems ahjo are leery of nuclear and do a crash R&D program, I wouldn’t expect much difference inside of 10 years. The financial problems are relatively easy to take care of – the Govt. just has to spend money. But changing real investments takes time, time we may not have before some nasty stuff happens…

    Reply

  8. RSG Says:

    Ted, FYI natural gas prices are back to where they were in 2004

    Reply

  9. Ted Says:

    For the moment. However, if I was a betting man, I would place a large bet on prices exploding. All commodity prices have wild price swings. Its the natural of commodities. But with global population increasing and consumption rising fuel prices have nowhere to go but up. In fact, I’am using this lull in prices to increase reserves. Remember, in the late 1990′s oil was around $20 a barrel. And as inflation increases commodity prices rise. Thats my 2 cents.

    Reply

  10. Ted Says:

    Yes J. Baird, I agree 100% on increasing nuclear capacity. It’s an idea who’s time has come.

    Reply

  11. Paul Palmer Says:

    Most energy is for transportation, mostly provided by petroleum.
    Electricity consumption has two important components: base load and peak load. Base is roughly 50%, peak is roughly 50%. Electricity consumption varies by 50% during time of day; think about power consumption on hot days in August at 2pm, vs. at night when nobody is up.
    Base load in US is coal and nuclear. About 60/40. You don’t ever want to turn these things off; in fact from time to time utilities have to pay people to take excess electricity because that is cheaper than turning them off. Peak load is almost all natural gas, because it has high output/capital $, and minimal startup/stop penalties. Keep in mind these “peaking” power plants are off half the time.
    The solution is find something else to supply “peak” power other than natural gas, and burn that for transportation Pickens is onto this, but wants to do Wind Power. Solar power has a much better match with peak usage.
    It’s only when everyone is on electrical cars, plugged in at night, that we need to think about cheaper/greener “base” load. Nuclear, right now, does almost nothing but displace coal, which although dirty, we have plenty of. It does not displace natural gas or petroleum products at all. Next nuclear power plant is scheduled to come on line in 2015. Not the solution for anything anytime soon.
    The bigger issue is transportation. If we saved our natural gas (by going solar for “peak” electricity), we could use that, but that’s almost as much a conversion issue as going all electric. The only short-term solution is as Warren has suggested, drastic conservation. Which we could have done long ago, for example, by switching to sandwich composite construction as on the original Consulier race cars….

    Reply

  12. Ted Says:

    Yes solar is great to. I like all alternative fuels. And now we have to begin using them, basically no choice. I still love coal though.

    Reply

  13. Rob K. Says:

    Not to change the subject, but anyone care to comment on this linked article….is this guy believable, or another doomsday-er?

    http://www.pbs.org/newshour/bb/business/july-dec08/psolman_10-21.html

    Thanks,

    Rob K.

    Reply

  14. vipul Says:

    The other trouble with nuclear is the most of the fuel for that is also imported, from Russia I believe.

    in fact renewables can be used for baseload power too, either because of wide distribution (the wind is always blowing somewhere)

    http://gristmill.grist.org/story/2008/10/16/11328/229

    this though would require a vastly upgraded national electric grid, which Obama has plans for

    http://www.barackobama.com/pdf/factsheet_energy_speech_080308.pdf

    or in the form of solar thermal plans, which can theoretically store heat and use that to generate electricity 24 hours. They are building a couple in california now, I think one actually started operations this month.

    Reply

  15. Rob K. Says:

    Nuclear fuel comes almost exclusively from Canada (CCJ, others) and Australia (BHP), along with Nigeria and Central African Republic. There is a fair amount from the Kazak’s; perhaps you’re referring to dismantled nuclear agreements, which is a small but significant portion of ‘highly enriched uranium” (HEU agreement)?

    Reply

  16. Milken Says:

    This time they are ‘giving away’ dollars to foreigners, in unlimited quantities, ultimately to buy US goods and services.

    Warren how can China take this lightly? They are doing “work” for our dollars and sending us many real goods and now we are going to give away hard earned dollars. Notice the nations we are “giving” dollars to and neutralizing china’s dollar hoard. They will not like this will they?

    reservedplace.blogspot.com

    An obvious solution to America’s problem of unwelcome persistent trade deficits with countries which restrict capital inflows is to simply limit the amount of dollar assets that their governments and their agents are allowed to own. Alternatively, foreign government holdings of dollar assets could be penalised by levying a special withholding tax on their returns. By tackling the problem at source using an instrument (control of trade counterparts’ reserves accumulation) that directly influences the objective (the trade deficit with a particular country), this approach – call it Reserves Control – provides an efficient solution in the spirit of Mundell’s Principle of Effective Market Classification, which should recommend it to economists. The sanctioned country would either have to allow their currency to appreciate against the dollar, select certain exports to be given priority access to the American market, or buy more American products of some kind. Unlike conventional trade restrictions, such as tariffs or import quotas, Reserves Control would affect all industries the same, with no opportunity for lobbying by firms and trade unions etc to obtain favourable treatment for their particular interests. Reserves Control would be difficult to evade, given the volume of dollar asset purchases necessary for a country to sustain a significant trade surplus with the USA.

    Reply

  17. warren.mosler Says:

    good question.

    i’d guess they haven’t requested any fed swap lines, and with over $1 trillion in $ reserves they probably are not inclined to request the fed swap lines.

    also, a portion of these funds will likely go to buying goods and services from china.

    Reply

  18. Mike Norman Says:

    The Fed’s massive accumulation of foreign reserves can in no way be construed as bearish for the dollar. Indeed, the large holdings of dollar reserves by foreign central banks has been one of the bearish factors for the buck over the years. (Just like large gold holdings of CBs kept the price of gold from rising much.) It’s going the other way now. I see the dollar rising in a big way. Furthermore, at some point the Fed will act to slow growth in the monetary base. It will do this by raising interest rates, probably for a long time. This will cause further gains in the dollar.

    Reply

  19. Jim Baird Says:

    I take the swap lines as the Fed’s attempt to “defend” the value of every other currency in the world. Given the history of such efforts, I’m looking for a dollar “superspike” some time in the next year or so that will virtually wipe out the value of most other currencies, perhaps eliminating the Euro altogether. While this might finally allow me to take my wife on a proper trip to Paris, I worry about the political repercussions down the line…

    Reply

  20. mike norman Says:

    Jim, I agree.

    Reply

  21. jcmccutcheon Says:

    So Warren thinks that the dollar is going to go down because we are giving it away to the tune of possibly 1 billion. Mike says the dollar is going up because the Fed is accumulating foreign reserves and foreign CB’s are accumulating dollar reserves. Mike seems to have a point here. Hasn’t the desire to save net dollars by foreigners increased due to this crisis? Is the Fed’s injection of dollars into the foreign exchange system enough to alleviate the increased demand?

    Side bar. If the dollar is stronger, would’nt the price of crude oil continue to moderate in USD terms as the OPEC countries get more real value for the black gold?

    Reply

  22. bruce Says:

    the question i have with acquiring rental real estate is if interest rates rates rise the cap rate required for investing will rise and thus prices for properties fall. This must be balanced against depreciting dollars and inflation which will cause nominal prices to rise and thus rents increase. Which will be the more powerful force.

    Reply

  23. vipul Says:

    Rob,

    Yes, I think you are right, here’s what I was referring too:

    “The United States also relies on Russia for half its fuel”

    http://web.mit.edu/newsoffice/2007/fuel-supply.html

    The currency discussion is loosing me, but is it that the dollar will decline until the Fed stops the swap lines, at which point we’ll have this “superspike.”

    Reply

  24. Mike Norman Says:

    Clearly the Fed’s recent actions have staved off the very dollar superspike that Jim B spoke about. The dollar has weakened a bit, reflecting this. But for how long? By Warren’s own admission these loans open up the prospect of massive fraud. Even in good times a certain percentage of loans go bad and we are not in good times. Yet foreign CBs will need to repay the Fed—in dollars—and the only way to do that is to sell their own currency for USD. There is no default among CBs as in the private sector. Even if the CBs were to default (unthinkable for the ECB) the Fed could sell foreign currency reserves to try to get back what it is owed. (As Warren stated.) No matter how you look at it they’re on the hook to us, having borrowed in our currency. That alone should keep the dollar well bid. It’s like the government enforcing tax collection to give value to fiat money. The fact that CBs will need dollars to repay to the Fed, keeps the dollar bid. I don’t see it any other way.

    Reply

  25. Mike Norman Says:

    By the way, the Fed’s most recent Statement of Condition is out and it covers the period through October 30. Under the item, “Other Federal Reserve assets” the amount is now $546 billion, up $23 billion in the past week. A footnote describes “Other Federal Reserve assets” as “Includes assets denominated in foreign currencies and any exchange-translation assets, which are revalued daily at market exchange rates.”

    This is the total of the current swap lines. It’s all happened in the past 3 months.

    Reply

  26. warren.mosler Says:

    mike, the fx reserves received via the swap line are funds held as collateral vs the dollar advances.

    initially this eases the demand for $ overseas somewhat, and more so should it get out of hand and into consumption as it usually does in the emerging markets when they borrow $.

    when the fed pulls the plug the dollar gets stronger, and as the anticipation of the need to pull the plug increases, the foreign currencies start falling and their inflation rates rising.

    Jim, not the wrong way to look at it! Fits with the overall weak dollar policy theme of the fed as well.

    yes, it will’fail’ when the fed pulls the plug, just like all the failures in history where the imf at first lent in increasing amounts, and later pulled the plug

    Reply

  27. GeorgeR Says:

    Hi Warren…glad you’re well. Trying to figure out your inflation conclusion. Destruction of assets over past year has been massively deflationary. $700b rescue package allows credit to flow again but doesn’t mean someone would want to borrow. You’ve discussed need for huge fiscal stimulus for that, so far not forthcoming. So we’re still in a deflation mode. Now we see Fed lending “unlimited” $US to foreign central banks who in turn lend regardless of credit quality. Are you saying that this Fed lending will turn the environment from deflation to inflation?.,..thanks

    Reply

  28. Mike Norman Says:

    Yes, Warren, I understand that. What I find remarkable, however, is that most of these loans have occurred in the past month. (Fed went from about $100b of foreign currency holdings to $546 billion in the past three weeks!) Yet that has hardly impacted the dollar’s strength. One could surmise that dollar demand is so huge it is dwarfing or will end up dwarfing what the Fed has been doling out. If the Fed curtails these loans even to a small degree, Jim B’s “superspike” occurs. I am surprised that some clever and well financed operator, who is short the euro, is not out there in the media exposing the fact that the Fed is lending to foreign CBs and letting our guys fail. Just putting it in those terms might be enough to raise a ruckus and bring political pressure down on this practice. The clever operator would clean up. I AM short the euro and doing all I can via my show to expose this. Hehe.

    Reply

  29. Milken Says:

    “By Warren’s own admission these loans open up the prospect of massive fraud. Even in good times a certain percentage of loans go bad and we are not in good times.”

    I thought the fraud had already been committed, with bad loans made all over the world to people who will not be able to repay. I hear numbers like 500 trillion relating to certain financial house of card derivative stuff and wonder how much effect a few hundred billion has on that kind of number. If 500 trillion type stuff gets cut in half, we have 250 trillion, how does 2 or 3 trillion affect that 250 trillion that went to money heaven? They will try to inflate the dollar hoard, but the credit stuff blowing up will go down faster, one hedge fund guy told me imagine the hindenberg zeppelin blowing up and losing all its hydrogen gas, and you trying to reflate it with a bicycle pump – which force is more powerful?

    “Yet foreign CBs will need to repay the Fed—in dollars—and the only way to do that is to sell their own currency for USD. There is no default among CBs as in the private sector. Even if the CBs were to default (unthinkable for the ECB) the Fed could sell foreign currency reserves to try to get back what it is owed.”

    Who would they sell the currency too? Mrs. Watanabe?
    I have heard about talk here in the USA of having 2 Dollars, one that circulates within the country, and then all those dollars that are outside the country – I guess so that it would be easier to cheat/screw/or stiff the outside dollar holders, why couldn’t other countries also have currencies like this – one for inside and one for outside?

    “No matter how you look at it they’re on the hook to us, having borrowed in our currency. That alone should keep the dollar well bid.”

    My friend in Ukraine is on the hook to me, I gave him 5 billion dollars to buy a house, now he has his house in the ukraine and won’t pay me my money, I called the local police in ukraine to arrest him and give me title to the house and the police chief there was his brother and told me to go fly a kite, so now what do I do? I was told maybe to get Cheney to take him on a hunting trip and have shooting accident, but maybe ukraine guy is wise to this. So I called my blackwater buddy to go do some mercernary stuff and enforce my will and get me some repayment, he said if I will give him my daughter for marriage he will go do that, but Sada said no, she does not like blackwater mercenary brute, so I guess I will have to get on plane with my rifle and go visit ukraine guy and have wild west shoot out like the old days.

    “It’s like the government enforcing tax collection to give value to fiat money.”

    The government has not been able to collect taxes from all those crooks in the USVI who cheat the tax system, and many of them are US citizens, how are they going to enforce payment on people thousands of miles away whose brother is chief of police and not even US citizen? As warren told me long ago, all civilization and monetary regime rest on the government ability of some thug to put a gun in your face and make you OBEY, but I think a tax man in new york gonna have hard time putting gun in guys face in ukraine and make pay up – what do you think? I can arrest warren mosler and throw him in jail if he cheats on his taxes and my IRS guy is better than his super duper tax cheating accountant guy – but is gonna be hard to throw guy in ukraine in jail eh?

    Reply

  30. warren mosler Says:

    george, thanks, biked 15 miles to day.

    yes, the risk is there if it grows past maybe 1 trillion which it may. will be watching the numbers every thursday at 4:30

    but if the fed decides to pull the plug it all can go the other way

    mike, yes so far the $ short does seem to be larger. and yes, should the fed pull the plug that will support the $ spike theory.

    Reply

  31. GeorgeR Says:

    Thanks Warren…biking is good……wish I used mine!….what’s magic about $1trillion. Does it equate to a budget deficit number?

    Reply

  32. Jim Baird Says:

    Unfortunately, I’m broke right now and can’t afford to make any bets – otherwise I’d be loading up on Euro shorts. (My wife called me today and told me she might be getting laid off – guess we won’t be going to Paris, after all! She’s a recruiter, and the hospital she works for is going broke and just instituted a hiring freeze, so not much recruitment going on. Any progress on that payroll tax holiday, Warren?)

    Reply

  33. Mike Norman Says:

    Yes, GeorgeR asks a good question. What’s magic about $1 trillion? Seems like $546 billion is already pretty large. Furthermore, if traders got even the slightest hint that the Fed or any other central bank needed to unload, they’d be front-running that trade. We used to do it all the time in the commodity pits where I traded. We knew who the big brokers were. Anytime we’d see one of those guys step into the pit, the minute they tipped their hand we’d be front running his trades, getting a position on before he could get his order filled. Given that intervention in the past usually occurs in fractions of billions$, even if the Fed were to sell a couple billion, the pile on effect would be huge once traders got wind of what they needed to do.

    Reply

  34. Milken Says:

    “My wife called me today and told me she might be getting laid off”

    Don Trump told me his ex-wife had so many lawyers they had to charter several busses to get them all to the courthouse, if you don’t have a good prenup you better divorce her now BEFORE she loses her job and becomes a financial vampire on your dwindling wealth. A crooked judge will probably have more sympathy for your alimony and child support payments while she is working then after she is laid off.

    Warren I am very glad to hear you are bicycling, that is a good example for everyone else to get healthy. Make sure you wear a helmet, wouldn’t want a tragic bicycle accident to damage that big brain of yours!

    Reply

  35. anon Says:

    You say,

    “The Fed is engaging in a major transfer of wealth from here to there. Initially it prevents the transfer of wealth back to the US, as would have happened if they had been forced to repay and eliminated their USD liabilities and losses.”

    I don’t see this, unless you imply that Fed swaps by easing foreign dollar money markets are indirectly allowing foreign banks to defer or hide recognition of their credit losses.

    Still, I see no wealth transfer. I see sovereign risk for the Fed, but no wealth transfer as of yet.

    As an easing of dollar markets, it may be inflationary by definition, providing you allow the interpretation of inflationary to include counter-deflationary as a possibility.

    I see no difference in the inflation/deflation risk dynamics as between domestic USA Fed policy and foreign currency swaps outside the USA.

    Reply

  36. anon Says:

    Sorry, missed this first part in above comment:

    Foreign banking systems don’t need to borrow US dollars from the USA in order to fund US dollars in their own systems. As you say, loans create deposits, and this is true for the creation of dollar loan/deposit books offshore. When those loans go bad, foreign bank equity is destroyed and as you say, the foreign banking system becomes short US dollars. This puts upward pressure on the dollar and on LIBOR. But it has no necessary effect on domestic USA wealth.

    The Fed’s provision of dollars through swaps creates sovereign risk exposure for the USA.

    You say,

    …. above comment

    Reply

  37. anon Says:

    Following on:

    The Fed swaps don’t resolve the short dollar FX exposure due to dollar loan losses. Those with FX exposure don’t need to fund their exposure in dollars. They need the opposite. They need to convert domestic currency assets to dollars in order to repay dollar liabilities and hedge the balance sheet.

    They then need to continue with any remaining dollar funding, which is complicate by a knock-on liquidity/solvency issue. But this funding issue is separate from FX exposure per se. Fed swaps help the system with residual dollar funding needs and costs, but have no use in assisting with FX exposure.

    Reply

  38. Milken Says:

    http://blogs.cfr.org/setser/2008/11/01/two-two-trillionaires/

    Setser weighs in….

    Reply

  39. warren.mosler Says:

    lots of good stuff. to review:

    30- nothing magic about a trilliion, just thinking that might be when it get’s the fed’s attention. maybe the media too

    32- :)

    34- it’s transfer of weath if it doesn’t get paid back and if it gets spent on real goods and services. that may not happen but there on no controls on not letting that happen either. domestic fed policy doesn’t go directly into spending on real goods and services. the swap lines are supposed to do that either, but, as above, there are no controls and the temptation and incentives make it a near certainty

    35- the foreign banks had already funded their dollar assets, but were having trouble rolling over that funding. the fed lines have filled that need, and probably a lot more so, as above.

    36- right, it only eases carrying that short, and encourages it to grow. it’s when the fed pulls the plug that it falls apart

    Reply

  40. Mike Norman Says:

    >>the foreign banks had already funded their dollar assets, but were having trouble rolling over that funding. the fed lines have filled that need<<

    Or the assets could have been sold and proceeds used to buy dollars in the open market to meet the liabilities as per Anon’s suggestion. However, that would have had a depressive effect on the assets (possibly impacting U.S. institutions’ asset holdings) and it would have driven the dollar way up. Fed swaps kept both from happening. Too bad, we hear a lot of talk about a “strong dollar,” yet when faced with a “gift” that would have resulted in a dramatic appreciation in the dollar without having to lift a finger, policy makers in the U.S. chose to keep the buck weak.

    Reply

  41. warren mosler Says:

    exactly. reinforces the idea they are engaged in a weak dollar policy as they believe export driven growth superior to growth driven by domestic demand.

    Reply

  42. Milken Says:

    Warren, how do you get Sada or any american who has lived on Mt. Olympus and tasted the good life to compete with a 3rd world worker who lives 15 to a room with no air conditioning and has done hard manual labor their whole life? I have travelled extensively, and in most cultures once they experience the easy life, making them happy about working hard again is very difficult for the respective governments. The greatest economist of them all, the great god Jehovah understood that once they tasted the fruit of knowledge, it was all over, so he commanded adam and eve to go forth and multiply and make new ignorant human babies who don’t know what they are missing while they slave in the factory or the field.

    You are not going to get spoiled shopping machines to put down that macy’s bag and punch a card in the factory line and have any competitive productivity to the starving 3rd world worker. If you are saying this is the direction our government leaders are going to try and take this nation, make us get back to work in the factories and fields, I predict they aren’t gonna get that princess mule to plow like they used too and there will be lots of frustration all over. If Jintao wants to turn his people into domestic spending shopping machine princesses to rival the american ones, who will do all the real work? Africa?

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