Does everyone understand what went down this morning between our Federal Reserve and the European Central Bank? I venture that less than one in ten thousand Americans know that their pocket was legally picked today by international central banks. This morning the Fed executed a “dollar swap” with the ECB that essentially allows the tottering European banks to have an endless and cheap supply of new US dollars flow to them through the ECB.
When I saw this barely coherent report on the online edition of today’s WSJ blandly talking about “making dollars available” to the ECB, I almost tossed my cookies. My take on what had actually happened was corroborated by a couple of phone calls to one of my Washington spies who sent me the summary page of “the Fed memo” (about what the Fed did) that was hastily circulated to members of Congress to soften any awkward outcries to the press.
RR readers know the precarious sovereign debt positions of countries like Greece, Spain, Italy, … . There is little chance that the euro will survive as the European currency, let alone continue on its vaunted march to becoming a competing reserve currency to the US dollar. Recall that bankrupt countries borrow from commercial banks to finance their existing debt and continue funding their insane social programs. Lenders to some countries have already taken ‘haircuts’ on the amounts loaned. More of this is on the way since none of the eurozone countries have any foreseeable chance of growing their way out their debts. Instead, many of their economies are shrinking.
So here’s the situation. A growing number of eurozone countries, up to their eyeballs in debt, owe on their purchases of stuff like oil, other commodities, and their international trade imbalances. The bills must be paid in dollars. Their banks are tapped out of dollars (they can still borrow euros from the ECB which can print them, but euros won’t do) so they must borrow from the only source that will still give them the time of day, the ECB. But the ECB is fresh out of dollars.
So Mario calls Ben and asks for a dollar/euro swap along the lines that was set up way back when “to provide dollar liquidity to foreign banks”. This essentially means that the ECB sends over to the Fed some euros – at TODAY’S EXCHANGE RATE – and the Fed sends over some newly printed US dollars which get credited to Europe’s banks, who in turn lend them to the heavily perspiring eurozone countries.
In theory the Fed gets its dollars back along with some below market interest income when the ECB is able to repay. But if the ECB can’t come up with the dollars as stipulated, then there is no default. The built-in swap provisions allow the ECB to roll over the debt (er, I mean swap) and get more dollars if it needs them for more euros at the bygone fixed exchange rate. This can go on indefinitely, and it means the Fed is on the hook for continuing to print more dollars to pay European debt with no end in sight, and no way to cash in on the collateral euros it holds in the ECB account. The way it’s set up, this debt cannot default.
Now I know, dear reader, that you think this is a post in which I’m pulling your leg, and that it should really be posted on April Fool’s Day. Unfortunately, I’m dead serious. Without a single elected representative having had a say in this, the Fed has committed to have the dollar follow the euro into what most likely will be an inflation death spiral. And the American taxpayer will become the lender of last resort to the profligate socialist governments of Europe. You can get your own snootful on this through a careful read of the memo’s summary page I mentioned above – Download Fed Memo_111130.
I wonder if the fact that 70% of the profits for our international corporations comes from trade with the eurozone has anything to do with this quietly arranged European bailout that went down today. Like the Chinese don’t want us to go broke, these multi-national corporations (and we?) don’t want Europe to go broke. You may want to call your congressional rep and hear what s/he has to say about all this. And that’s how we play kick the can.