DJ Fed’s Plosser:We Will Continue To Support Dollar Funding Issues -CNBC

*DJ Fed’s Plosser:We Will Continue To Support Dollar Funding Issues -CNBC

This means unlimited, unsecured, Fed $US loans to foreign central banks.

Hope they don’t game us this time…

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22 Responses to DJ Fed’s Plosser:We Will Continue To Support Dollar Funding Issues -CNBC

  1. Ron Paul:

    “FEMA is not a good friend of most people in Texas. All they do is come in and tell you what to do and can’t do. You can’t get in your houses.” [Eliminate FEMA]

    “If politicians simply cannot bear to implement actual cuts to actual spending, just freezing the budget would give the economy the best chance to catch its breath, recover and grow.” [Freeze spending]

    “I recently introduced HR 1098, the Free Competition in Currency Act. This bill eliminates three of the major obstacles to the circulation of sound money: federal legal tender laws that force acceptance of Federal Reserve Notes; “counterfeiting” laws that serve no purpose other than to ban the creation of private commodity currencies; and tax laws that penalize the use of gold and silver coins as money.” [Let people create their own money]

    What could possibly go wrong?

    Rodger Malcolm Mitchell

    Reply

    Robert Kelly Reply:

    @Rodger Malcolm Mitchell,
    Maybe Ron and his son Rand can father their own new country where only self sufficient people are allowed in. No crime. No foreign aggression. No one gets sick. Infrastructure lasts forever. Everyone is home-schooled. They can trade in coconuts and call it Crusoeland.

    But to my earlier point, it would be nice to have less career politicians and more true public servants. Someone like Warren, who could really make a difference, essentially has no chance in our current system.

    Reply

    Mario Reply:

    @Robert Kelly,

    But to my earlier point, it would be nice to have less career politicians and more true public servants. Someone like Warren, who could really make a difference, essentially has no chance in our current system.

    the only way you’ll ever get that is to first take the money and lifetime perks out of sitting in political office. Pay them as if they really were civil servants.

    Truly, truly, I say to you, a servant is not greater than his master, nor is a messenger greater than the one who sent him.

    Reply

  2. Alex says:

    The debt money system needs to change period. Money needs to be put in the power of democratic governments, elected by the people and not central bankers.

    Ron Paul is the MOST IMPORTANT human alive in America today.

    Spend your fiat useless paper dollars on electing Ron Paul, while the paper is still worth something in exchange.

    Ron Paul will become America’s new founding father, the re-founding, the new George Washington…yes that is how important this is.

    Mosler is not wrong. He just refuses to state that THE SYSTEM IS THE PROBLEM and it is the system that needs to chnage.

    Reply

    WARREN MOSLER Reply:

    Congress has all the control over the Fed it wants.
    The problem is they don’t understand how the monetary system actually works.
    And many of Paul’s remarks completely miss the mark as well, and to a serious fault.

    See my proposals on this website.

    Reply

    Robert Kelly Reply:

    @Alex,
    Your Ron Paul prediction is a tad ambitious. If he can’t get traction within his own party, he may have trouble fathering our “new” nation. The Fed is not the problem.
    One aspect of Ron Paul that is encouraging is that he is not a politician pre se. We need many more like him instead of the career glad handers that run our government. We need more Ron Pauls and Warren Moslers- people who have accomplished something outside of government- to participate in the debate. That is the part of our system- representative democracy- in need of improvement. We are poorly represented.

    Reply

  3. So, the U.S. will pump more dollars into the world economy, many of which will return to the U.S. If inflation remains low, this will stimulate the U.S. economy.

    If inflation does not remain low, the Fed will raise interest rates, which also will stimulate the economy by forcing the government to pay more interest. See: http://rodgermmitchell.wordpress.com/2009/09/09/low-interest-rates-do-not-help-the-economy/

    So what is the problem?

    Rodger Malcolm Mitchell

    Reply

  4. Mario says:

    be on the lookout folks with your debit cards and bank account fees…it appears the banks are leaning into putting up a new debit card usage fee…yeah that’s right…a fee to use your own debit card. If the gov. won’t subsidize them on the back-end card usage, then they will try to get somebody else to instead.

    http://bucks.blogs.nytimes.com/2011/08/25/banks-test-monthly-fees-for-debit-cards/

    Reply

    pebird Reply:

    @Mario, Time to dust off the checkbook and slow down the lanes at retail.

    Reply

  5. Mario says:

    Hope they don’t game us this time…

    well I’m sure we both know what they say about hoping in one hand….

    in other words odds aren’t so hot for the dollar these days seems to me

    Reply

    Mario Reply:

    @Mario,

    this could be the way the US wants to become an export nation eh? Currency appreciation via forex swaps…heck Europe “theoretically” should even be able to buy our stuff too since we’re bankrolling them…except all we’re doing seems to be propping up failed systems all over the freaking world…this is clearly not sustainable.

    Reply

    Luigi Reply:

    @Mario,

    Ah, they lend dollars to other countries, to buy US products? What’s the logic?

    Reply

    Mario Reply:

    @Luigi,

    no as I understand it, they are lending dollars to EU banks that hold eu/dollar positions that are basically underwater. In turn the Fed gets euros for lending them USD. This keeps the game going essentially as more dollars are being sold (by the Fed no less) and more euros being bought (by the Fed). If the Fed stayed out of it and allowed these “investments” to unwind instead then the euro would go down (selling euro) and the dollar would go up (buying dollar). But instead the Fed props them up and gives them dollars which in turn hurts our currency and is also leaving us with a potentially disastrously sour deal on our hands in the long run. The Fed’s been doing this for a long time (since the 80’s I think) but particularly since the GFC. For some reason the Fed thinks it’s responsible for all of Europe too…at the expense of the US dollar no less.

    In terms of exports, no real goods or services are being exchanged and the likelihood of that happening is low I think..but ON PAPER it looks more attractive and also is more attractive for those already in the export business in the US importing to Europe b/c exchange rates begin to favor that scenario more and more as the USD goes down and the EU continue to go up. However “on the ground” aggregate demand and nfa is really not changing at all, b/c this is just another form of extend and pretend between two elites that happen to live across the pond from each other as they say.

    that’s how I understand it. Anyone feel free to correct me if I’m wrong anywhere with this please and thank you!

    Mario Reply:

    @Luigi,

    looking further into forex swaps, it appears it’s more b/c EU financial institutions are in a dollar squeeze with their commercial paper and need more liquidity. Instead of making those institutions just buy more dollars which would strengthen the US dollar, the Fed steps in and just gives it to them in exchange for euros, so essentially the Fed is long the EU/USD.

    macrosam Reply:

    @Luigi,

    Fed lending USD to keep LIBOR down, which many mortgages reference here in the US.

    macrosam Reply:

    @Luigi,

    Fed is also lender of last resort for USD, USD is the world reserve currency.

    Unforgiven Reply:

    @Mario,

    ” Instead of making those institutions just buy more dollars which would strengthen the US dollar…”

    Buy them with what?

    Mario Reply:

    @Unfogiven,

    Good point. I guess with euros? So what makes a swap a swap versus just a purchase?

    Personally I’d like to know myself! LOL ;)

    ESM Reply:

    @Luigi,

    An fx swap is nothing more (or less) than any one of the following 3 things (which are all equivalent, except for very minor details):

    1) a spot fx trade plus an offsetting forward fx trade;
    2) a dollar loan by the Fed to the swap counterparty plus a Euro loan to the Fed by the swap counter (for the equivalent amount of Euros at the spot fx rate); or
    3) a dollar loan by the Fed to the swap counterparty, collateralized by an equivalent amount of Euros held in an account for the Fed).

    So if the spot fx rate is $1.44 = 1 Eur, and the 1yr forward fx rate is $1.43 = 1 Eur (as determined by the interest rate parity formula), then one way of doing a $1MM notional 1yr swap would involve the Fed giving the counterparty $1MM, and the counterparty giving the Fed 694,444 EUR. At the end of 1 yr, the counterparty would return the $1MM, and the Fed would give the counterparty back 699,301 EUR (which it would have because of interest earned on its original Euro balance).

    The problem with these swaps is that there is negative credit convexity for the Fed. If the counterparty defaults, the Fed will be out $1MM and will have 699,301 EUR as compensation. However, the counterparty will never default if the Euro rallies versus the dollar (relative to the original forward fx rate). It will only default if the Euro falls in value versus the dollar. So, it’s a heads you break even, tails you lose scenario for the Fed.

    It is straightforward to quantify the cost (i.e. the negative expectation value) of this negative convexity , and the Fed should be doing it. Every dollar swap the Fed does has a negative expectation value and is essentially a subsidy for the counterparty, although if the counterparty performs on the swap, the Fed ends up losing nothing in the end. To the best of my knowledge, that has been the case for every fx swap the Fed has done so far.

    Mario Reply:

    @ESM,

    thank you ESM! I get the general gist of it but need to research it all further so I get it all more completely. you rock man thank you!

    At the end of 1 yr, the counterparty would return the $1MM, and the Fed would give the counterparty back 699,301 EUR (which it would have because of interest earned on its original Euro balance).

    Is this interest being earned while the Fed holds the euros and is that the subsidy you mentioned for the counterparty? And where is the interest coming from that is being earned? The Fed support rate for reserves?

    However, the counterparty will never default if the Euro rallies versus the dollar (relative to the original forward fx rate).

    why is that? b/c it would require even less euros to pay back the loan to the Fed?

    Why does Europe need forex swaps in the first place?

  6. rvm says:

    And if the loans are not paid back this would have meant just regular US government spending?

    Reply

    Mario Reply:

    @rvm,

    yup and not even into our own COUNTRY!?!? ridiculous

    Reply

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