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?

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.

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

Setser weighs in….

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.

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

“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.

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!