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U.S. Dollar Swap Lines Removed Will Push Dollar Higher
By Gold Economist: Jay Taylor
Goldinvestor.com
Friday - February 5, 2010
Category: Investment, Gold, Mining
Another major element of the massive expansion of global U.S. dollar credit was the arrangement between the Federal Reserve and various central banks around the world. As pointed out by Bryan Rich, a contributor to Money and Markets, a Weiss group publication, this was a major element of the effort to offset major forces of global credit deflation following the Lehman Brothers implosion of last year. Following is an explanation by Bryan Rich in his latest missive in Money and Markets dated January 30, 2010:
"When the credit crisis was at its peak, banks around the world were hesitant to do any short-term lending with other banks. As a result foreign bank-to-bank lending rates for dollars, the world's primary business currency, shot up. That restricted access to dollar borrowing and pushed a lot of consumer interest rates higher in the U.S. and abroad."
"By providing these currency swaps with other central banks, the Fed helped to inject dollar liquidity into banks around the world. And it was well needed."
"In short, it was good for the global financial system because it helped reduce the fear premium that was causing market interest rates to soar."
"You can see this clearly in the chart below. In panel A, while the Fed and other central banks were cutting benchmark interest rates to the bone (the white line), the Libor rate (the orange line), or the rates at which banks make short term loans between themselves, was going in the opposite direction."
"Subsequently, when the dollar swap lines were rolled out, you can see in panel B how this divergence was reversed."
The Implication for Currencies
"Most importantly for currencies, what these currency swaps did was increase the supply of U.S. dollars in the global markets — a negative drag on the value of the dollar."
"So with the Fed announcing that it will close its currency swap lines with foreign central banks by February 1, the unlimited access to dollars by foreign central banks has come to an end."
"This development is easily a positive for the dollar."
"Let's take a look at the timeline of these developments and the respective performance of the dollar ...
As you can see from the chart, following the Fed announcement that the swap lines would be extended through October, the dollar has gone through a period of decline. Since December, when the Fed announced these facilities would be ending in a little more than a month's time, the dollar has been on the rise."
"When they opened these massive swap lines in late 2008, the goal was to alleviate the dollar liquidity crunch at banks around the world. However, in the process they increased the supply of dollars around the globe — a negative consequence for the value of the dollar. But now that these lines will be closed, it's clearly a dollar-positive development."
"And with the weight of evidence leaning in favor of the dollar at this stage, as I laid out here in my article last week, this latest announcement by the Fed provides more reason to believe in this dollar rally."
Regards, Bryan
Editor:
Policies by the ruling elite have once again succeeded in coning masses of people on Wall Street and Main Street into gaining faith in the ability of human beings central plan markets. In fact, while intervention has some short term benefits like taking another does of heroin has for an addict, longer term the kind of massive intervention undertaken with swaps, bailouts and major stimulus packages are highly pathological over the longer term.
All that has been accomplished is a delay in the inevitable and I think the equity markets are suggesting policy has pushed the B wave up about as high as it can go. That some of these stimulus efforts like the international dollar currency swaps between central banks are being removed is evidence of the hubris among policy makers. They may actually think the markets needed their help to restore economic stability and growth. But Austrian economics know better. By impairing the ability of markets to sift the wheat from the chaff, you can be guaranteed a process of mal investment will continue even as the level of debt grows exponentially and thus ensures a massive credit default. No amounts of swaps, bailouts or monetary and fiscal stimulus can fix this problem. I believe we are nearing the point of no return and unless massive amounts of money are put into the hand of the masses, we are in my view heading for a massive deflationary depression worse than that suffered by our grandparents during the 1930s.
Mr. Taylor is editor of J Taylor's Gold, Energy & Techn Stocks newsletter. A native of Ohio, he has resided in New York since 1973 when he began working there for Barlcay's Bank International. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares.
In 1981 he began publishing North American Gold Mining Stocks, which preceded his current newsletter. His continuing interest in gold mining prompted him to study geology at Hunter College in New York City, supplementing his MBA in Finance & Investments. Throughout his career Mr. Taylor worked as a commercial, then as an investment banker. Most recently, he worked in the mining and metals group of ING Barings in New York. Prior to that he was involved in the first gold loan made in modern times in the U.S. to Amax Minerals, a 250,000 oz. loan facility led by Citicorp.
In 1997 he resigned from ING Barings to devote himself full time to researching mining & technology stocks, writing his newsletter and assisting companies in raising venture capital.
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