Wednesday, December 10, 2008

Largest Fed holding? Foreign currencies!



While the public, lawmakers and the know-nothing media rail against the government's intervention to protect the U.S. economy, there has been zero mention of the massive buying of foreign currencies by the Fed. (Read: massive selling of the dollar.)

Foreign currency holdings of the Fed have gone from virtually zero three months ago, to above $600 billion and are now the single biggest asset on the Fed's balance sheet.

Foreign currencies are non-convertible, so all the Fed has is a piece of paper. In constrast, most of the U.S. bank regulated assets that the Fed lent against to help domestic institutions are cash flow positive.

There should be huge public outcry over this, but there isn't.


7 comments:

googleheim said...

Where did the Fed get these holdings? Were they acculmulated as a function of the spike in the dollar during the dollar rush?

What will this do to the dollar?

How will the Fed "get rid" of these holdings if they can or when they want?

Do they issue anything against these pieces of paper?

Can they use them to spike the dollar and break up the EURO or force 1 Euro = 1 Quid, or lower the dollar to appreciate the Yuan?

just out of curiousity.

what about oil? can they use these papers to manipulate oil prices to make them go even lower, or on the contrary make oil prices stabilize and go up ?

Mike Norman said...

They got them as a result of forex swaps conducted with foreign central banks. Functionally, they are dollar loans to foreigners.

googleheim said...

which side of the double entry accounting sheet would we expect these to be :

1. in the event they are worth more in the future ?

2. in the event they are worth less in the future ?

i.e. pardon my myopia, but is this considered an "account receivable" ?

jimbo said...

Googleheim:

The reason they opened these swap lines and accumulated these currencies was reduce the value of the dollar, after the spike. They felt that it was better for all Americans to be poorer in order to encourage exports, which they mistakenly think are a benefit.

The possibility remains that these swap lines could increase parabolically, if the banks holding the dollars loaned out require more and more to keep up their payments. If this happens, watch for a day of reckoning when the Fed can no longer keep this under the radar, and some enterprising memeber of congress hauls Bernanke in to ask why we are loaning, unsecured, hundreds of billions of dollars to foreign banks, some of them in unstable, barely regualted former communist regimes.

When and if that happens, we could see a dollar superspike that could cause most international trade flows to essentially collapse, the Euro to disappear, and other assorted fun. interesting times, eh?

googleheim said...

See my other posts, I guess.

I postulated that Fed created the rush to the dollar ( which Peter Schiff bit hard on when he ran to the hills ) in the first place, then softened the blow as a graceful consideration of our Euro buddies.

Let's trace these monies and see which foreign countries and companies get the dough to :

1. Deforrest old growth forrests
2. Make things cheaper than we do ( Memory like Korea bailout in 90's, steel dumpsters, cars, whatever )
3. Sell arms to Sudan
4. Buy oil from Sudan ( 10% of China oil comes from Sudan by a company that Warren Buffett invests in )
5. etc etc

London is burning and I live by the river.

googleheim said...

Also :

Trace the monies to German, Austrian, Russian, Eastern Block companies who are engaged in building Iran up.

Also, same companies' businessmen who are able to bribe foreign customers and there is a convenient form for this expense for tax deductible purposes in Holland and German tax codes.

Or did Clinton help to get the EU to remove those ?

Who cares ?

Mike Norman said...

Jimbo,

If ANY member of Congress brought this issue up I'd be impressed. Seeing that would give me a lot more confidence that there was at least somebody at the policy level who actually understood what really mattered.

Ironically, I think this will end up to be a huge money maker for the Fed (but not the American people). By accumulating a vast foreign exchange hoard and, thus, crushing the dollar's rally, they will profit handsomely now that the dollar's trend goes lower once again.

In the end it will have come and gone without mention--from lawmakers, the media or any of the economic mainstream.

The Fed will have a big score and American citizens will find their standard of living reduced vis-a-vis the rest of the world.

-Mike