The Fed Intervenes in US Dollar Gives Inside Information to Goldman Sachs

Why Did the Dollar Go Up?

Remember when the dollar went up when everyone thought it should be headed down? This interview between congressman Alan Grayson and Ben Bernanke could explain a strong reason why. In it Bernankereluctantly admits that the Fed used 1/2 a trillion in foreign currency operations.  Since this is a central bank move to fight the tide, it must have cost us a considerable portion of that money (did we lose $100 billion of it, $200 billion of it? Will we ever know?) to prop up the dollar. I highly doubt the Fed has the authority to do this. The Fed claims the authority but Alan Grayson is questioning this. In fact does the Fed have unlimited authority? Could they spend $2 trillion to prop up the dollar? Where exactly does the Fed’s authority end. Also, did any investment bank get inside information on this allowing them to go long on the dollar? For some reason I think if you check Goldman’s currency positions at the time right before the massive intervention, they did go long on the dollar.

The Video of the Exchange

[youtube=http://www.youtube.com/watch?v=n0NYBTkE1yQ]

Excerpt from the Exchange Between Grayson and Bernanke.

Grayson’s questioning focused on the Fed’s handouts to FOREIGN central banks in Europe and other countries. These “Central Bank Liquidity Swaps” rose from a total of $24 billion at the end of 2007, to over $553 billion by the end of 2008.

Grayson: “So who got the money?”
Bernanke: “Financial institutions in Europe and other counries.”
Grayson: “Which ones?”
Bernanke: “I don’t know.”
Gryson: “Half a trillion dollars and you don’t know who got the money?”

Grayson: “Well, look at the next page [in Bernanke's written report], the very next page has the U.S. dollar nominal exchange rate, which shows a 20 percent increase in the U.S. dollar nominal exchange rate at exactly the same time that you were handing out half a trillion dollars. You think that’s a coincidence?”
Bernanke: “Yes.”
Grayson: “hah-hah-hah-hah!”

The Fed is Private

Some comments have been made about Grayson laughing at Bernanke. However, Bernanke is lying and it is costing taxpayers billions, possibly trillions. Why is Bernanke lying about such an obvious fact that his intervention caused the dollar to increase in value? Why is he so uncomfortable answering this line of questioning? Bernanke seems to be using an opaque instrument (currency swap) to cover up the Fed’s move to increase the value of the dollar.

What is a Currency Swap?

Is a foreign exchange agreement between two parties to exchange principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal value. - Wikipedia

It sounds innocuous enough, but why $1/2 a trillion?

Many people who work in finance speak with extreme confidence, but don’t help much in pointing out theincontrovertible corruption in the system. In the beginning we heard that mortgage backed securities were great because they provided liquidity, but then we learned they have a tendency to melt down the financial system. Now, no one seems to condescend to us about mortgage backed securities anymore, but if we allow it, the industry will keep coming up with new “instruments.”

One advantage to creating new instruments all the time is the ability to declare that its critics are ignorant (as other people would be to the amount of change in my pocket – that is right, only I know.) However, fraud is always opaque. The blog Taxes and Trade supported the swap as an extremely good idea. Here is an excerpt.

The Fed came up with something even better. They created dollars and then used the dollars to obtain foreign currencies by trading the dollars with foreign central banks for their currencies.

Here’s how a currency swap works. The Federal Reserve and the foreign central bank each create their own government’s bonds. Then they trade bonds of equal value with each other. Whenever the foreign central bank wants to trade back, they can. This strategy has three extremely beneficial effects:

1. It stabilizes currency markets. Foreign central banks get dollar reserves that will get sold right away, boosting their collapsing currencies versus the dollar.

2.It increases the money supply. In order to engage in these swaps both the Federal Reserve and the foreign central banks create new money, thus alleviating the world’s deflation. (Right now, the main problem in the world is deflation, as indicated by falling prices of stocks, oil, and precious metals.)

3. It weakens the dollar The immediate effect of the currency swaps is to weaken the dollar versus these other currencies, which helps the competitiveness of American products in world markets. - Trade and Taxes

However, the swaps did not weaken the dollar, they strengthened it. Something unasked in this analysis is why the Fed needs to create liquidity and why currency swaps are the way to do it. The Fed can create more liquidity anytime it wants, it does not need currency swaps to do so. That is the benefit of having control over a nation’s money supply. The problem generally is that while finance types tend to state that actions lead to specific outcomes, oftentimes the outcomes do not happen and a different outcome happens. So the credibility of finance has greatly declined.

Why is the Fed Answering Questions at All?

Its important to know, the Fed is completely private. It only reports to its member banks and to investment banks. Bernanke can take his clothes off and show his bare ass to Grayson, and there is nothing Grayson or anyone else in Congress can do about it. The Fed is completely independent from the government and does not need to answer FOIA requests or any other types of requests.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKr.oY2YKc2g

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7CC61ZsieV4

Bloomberg submitted a FOIA to the Fed and they fought it. The court ruled that:

“improperly withheld agency records” by “conducting an inadequate search” after Bloomberg News reporters filed a request under the information act. She gave the Fed five days to turn over documents it told the reporters it located, including 231 pages of reports, and said it must look for more at the Federal Reserve Bank of New York, which runs most of the loan programs.

However, what is going on here? While we appreciate the ruling and we think its right, it does not make legal sense. The Fed does answer requests in order to maintain the illusion that it is part of the Federal government, which it is not. Why is the judiciary providing these judgements and continuing the illusion that the Fed is public? The better approach is to admit the Fed is not subject to public inquiry, understand why, and then have the government take over the Fed. As long as the Fed is private, attempts to control it for the benefit of the population vs. banks will never take place.

Bernanke lies quite a bit. His constituents are concentrated financial power, not voters. He also does not work for the government, but somehow controls the currency of the government. He is enriching his constituents at great cost to voters.

Bernanke is lying in his exchange with Grayson, because he is trying to downplay the interventions on the part of the Fed, how they benefit the Fed’s elite constituents. Bernanke also has essentially gone rogue and is taking the Fed into a place it has not historically been by interpreting the Federal Reserve Act as broadly as possible. The total estimate of the corrupt bailout is $12.4 trillion at this point, and the Fed and Treasury continue to shovel US taxpayer dollars into the coffers of the ultra-wealthy.

References:

Read about the Federal Reserve Act here.

http://en.wikipedia.org/wiki/Federal_Reserve_Act

http://en.wikipedia.org/wiki/Federal_Reserve_System#List_of_member_banks

http://tradeandtaxes.blogspot.com/2008/10/federal-reserve-doing-exactly-right.html

Deciding on Investments

Right, your decision of course. However, I have this philosophy to prevent me from over holding assets I think will depreciate. I say this not to try to convince you, but to let you know the logic.

The logic is this:

No one can know the future, and every future state can be stated in terms of probability. – this is why holding on something physical which has value no matter what (aside from a nuclear war) is a better option then to dedicate to something on the paper. land is a land, especially with a good climate. Currencies are subject to many factors out of our control (especially, political)

Of the asset I am holding, what is the probability it will go up vs. probability it will go down. – see point one. At least, IMHO the probability of currency going down is greater than that for land. Devaluation of the dollar is inevitable. If there is a full scale war future of currencies is so vague – I do not want to bet on it. Under no circumstances any war will touch places like bahamas. You may consider buying futures for commodities (e.g. oil) Anything which has limited supply is better than currency of a bankrupt country and any other currency which is tied to it. Also, keep in mind that US can not fight a war. It can bomb well but is is not a war winning strategy. US would lose to China for sure and maybe even to Iran. Hell, US could not even pacify Iraq and Afghanistan!

If the basic principle can be agreed to that an asset is headed down, then the attempt should be made to exchange it as soon as possible. – Timing of the market is impossible. You will never buy at the bottom. You have to decide what you believe in long term and act accordingly

Now I was wrong 6 months ago, when the US dollar began to surge even as the economy severely faltered. But I think the long term trend is apparent. – Agree 100%!

The Decision Making Process

Often discussed is all the technical details of investing generally and currency investing particular. We read 4 books on currency trading, all of them left us with a vocabulary of currency terms, but without much currency knowledge. It is also very hard to find good web sources. One of the biggest problem many investors have is knowning when to get out of an asset that is over valued. The problem faces people that currently hold the dollar. We know that the financial situtation of the country is seriously erroding and the US is on its way to being a very different country, and a worse place to live. After spending $12.4 trillion, mostly as a gift to the ultra-wealthy, the rest of the population will be left to pay off the bill, and the bill for the war in Iraq (another gift to the ultrawealthy). The exchange below is between me and Toly Novik on the topic of getting out of the dollar:

______________________________

Shaun: I have done some research but don’t have a great feeling about any particular currency. South Korea seems a bit unstable, but I don’t want to necessarily buy more Chinese or Japanese, but I don’t see a better alternative out there. Since we decided to outsource the value adding parts of our economy to China, and keep the non value added portions (mortgage backed securities and law) in the states, China is now the new power. Its sad that now Boeing is primarily an aircraft painting operation. However, I have heard they do great paint jobs on jets made from parts elsewhere.

FYI, as for your property idea, I don’t think it will happen fast enough to guard against a fast slide the the dollar which I think is likely in the next 6 months.

Toly: I think slide will take longer. it will be gradual for 1-2 years and then collapse

Shaun: Right, your decision of course. However, I have this philosophy to prevent me from over holding assets I think will depreciate. I say this not to try to convince you, but to let you know the logic.

The first part of the logic is this:

No one can know the future, and every future state can be stated in terms of probability.

Toly:  This is why holding on something physical which has value no matter what (aside from a nuclear war) is a better option then to dedicate to something on the paper. land is a land, especially with a good climate. Currencies are subject to many factors out of our control (especially, political)

Shaun: The second half of the logic is as follows

Of the asset I am holding, what is the probability it will go up vs. probability it will go down? As soon as the probability of it going down exceeds the probability of it going up, I should sell immediately, regardless of how long I think it will take, because things like inertia and being distracted by other events can interfere with me “timing” the release from the asset.

Toly: At least, IMHO the probability of currency going down is greater than that for land. Devaluation of the dollar is inevitable. If there is a full scale war future of currencies is so vague – I do not want to bet on it. Under no circumstances any war will touch places like bahamas. You may consider buying futures for commodities (e.g. oil) Anything which has limited supply is better than currency of a bankrupt country and any other currency which is tied to it. Also, keep in mind that US can not fight a war. It can bomb well but is is not a war winning strategy. US would lose to China for sure and maybe even to Iran. Hell, US could not even pacify Iraq and Afghanistan!

If the basic principle can be agreed to that an asset is headed down, then the attempt should be made to exchange it as soon as possible. – Timing of the market is impossible. You will never buy at the bottom. You have to decide what you believe in long term and act accordingly

Shaun: Clearly, the logic I am presenting is not fool proof. I was wrong 6 months ago, when the US dollar began to surge even as the economy severely faltered. But I think the long term trend is apparent.

Toly: Agree 100%!  The only currency I would seriously consider is Chinese and Russia. The reason is obvious: China has the majority of US debt and Russia has oil (you may try currency of UAE for the same reason). But as I stated before – I do not trust currencies. Not because they are rigged like stocks (while China intentionally keeps its currency at a low level) but because it is very sensitive to political decisions and politicians are the last people to trust (even Goldman is more trustworthy and this IMHO should tell you something). Additionally, central bankers in US and Europe are too connected and may (will) organize a global currency default using IMF and World Bank as obedient weapons.

Jim Rogers on the RMB

There is a lot of reason for the Chinese currency, known as the RMB to appreciate vs. the US dollar. Here are a few of them.

1. China continues to grow
2. The US is actively attempting to devalue the dollar (both in terms of currency purchases and in terms of expanding they money supply in response to the crisis
3. By purchasing power parity standards, the RMB is undervalued significantly vis-a-vis the dollar

This is the current exchange rate between the dollar and the RMB

Here Jim Rodgers provides more detail

In this video he describes how to get into the Yuan. He describes an online bank called Everbank.

https://www.everbank.com/

They open bank accounts in RMB for Americans. According to Jim Rogers, this bank is backed by the FDIC.

In fact one can see the FDIC label on the bottom of the Everbank web page. We are thinking of opening an account there. If we do, we will list experiences here.

On The Dollar

Inflation Concerns Due to Money Supply

One of the concerns regarding the dollar, even though it is serving as a safety currency now is the expansion of the money supply.

See this quote from F William Engdahl.

“By the first week of December, that expansion of the monetary base had jumped to a staggering 76% rate in just 3 months. It has gone from $836 billion in December 2007 when the crisis appeared contained, to $1,479 billion in December 2008, an explosion of 76% year-on-year. Moreover, until September 2008, the month of the Lehman Brothers collapse, the Federal Reserve had held the expansion of the Monetary Base virtually flat. The 76% expansion has almost entirely taken place within the past three months, which implies an annualized expansion rate of more than 300%.”

Amazingly according to Engdahl, the Fed itself is holding $2 Trillion in junk paper. Also, banks are themselves not sending out money as new loans as much as investing in Treasury paper. This is one of the reasons why the banks are not divulging how they are spending the TARP funds, in addition to the fact that if they did this, the public would understand how bad a loss the government would take. He says further…

“That means once banks begin finally to lend again, perhaps in a year or so, that will flood the US economy with liquidity in the midst of a deflationary depression. At that point or perhaps well before, the dollar will collapse as foreign holders of US Treasury bonds and other assets run. That will not be pleasant as the result would be a sharp appreciation in the Euro and a crippling effect on exports in Germany and elsewhere should the nations of the EU and other non-dollar countries such as Russia, OPEC members and, above all, China not have arranged a new zone of stabilization apart from the dollar.”

This is a highly educational article and is very much recommended.

Reference

http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Hyperinflation/hyperinflation.html

Nassim Nicholas on Banking Complexity

Here Benoit Mandelbrot and Nassim Nicholas describe how increased volatility of the market. Interestingly, complex math and computers on the part of finance does not improve the stability of finance.

Here he talks about how skepticism is domain dependent.

Michael Hudson on What Supports the Dollar

This is complex, however it explains what supports the US dollar. It has to do with our the financing of our debt, which is done by importing foreign capital to buy treasury bills, and the reluctance of these countries to repatriate these monies for fear of placing a downward pressure on their currencies. However, increasingly these foreign central banks are prevented from buying US companies and therefore they are limited to treasuries of US stocks. Something we never knew is that the quadrupling of oil prices in the 1970’s was in response to the US quadrupling of grain prices (what they bought from us). Treasury told OPEC countries that if they did not recycle their petrodollars into US investment that it would be considered an act of war. The US is actually preventing other countries from using these dollars in any other way but in purchasing securities or Treasury bonds.

Michael Hudson on What Supports the Dollar

This is complex, however it explains what supports the US dollar.

Interesting Take from Ron Paul

This start off discussing Gaza, however, Ron Paul discusses the likelyhood of very large inflation.

CEPR on the Dollar

In the Present Environment Storm Clouds are Everywhere

The article below is very interesting. There are several factors working against the dollar. One is the trade deficit (which is pointed out below) and the other is the budget deficit, which is becoming so large that it is more likely than not that the government will choose to monetize the debt by pumping up inflation rather than paying back the debt honestly. Obviously inflation reduces the value of a currency vs. other currencies — all things being equal. This is explained by this course

http://www.chrismartenson.com/crashcourse

However, in the current state, there has been a devaluation because oil prices, stock prices, and

The bigger question is where to put money. Its very hard to find a safe haven at this time. See the  following:

1. The Pound is overvalued
2. The Euro is risky as Europe was infected with some of the same financial fraud as the US
3. Smaller currencies which benefited from the financial bubble are suspect as that bubble recedes and that money is required elsewhere to cover margin calls. Russia is a perfect example of this (http://www.rferl.org/Content/Worst_Russian_Financial_Sector/1200407.html)
4. Middle Eastern currencies will now recede as these on trick pony economies (selling the rest of the world petroleum) main revenue earner moves back to its normal price level
5. Asian economies, based upon exporting to the West must run out of gas as the West can no longer buy at the same rate as in the past

So, while putting down the US dollar is easy, finding a safe haven is not such a simple analytical question.
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Republished from: http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/watch-the-dollar/

Watch the Dollar

By Dean Baker

The housing bubble was the first to burst, but it will not be the last in this global recession. These days, it’s the impending bust of the dollar bubble that should be getting more attention.

The U.S. dollar has been severely overvalued since the late 1990s, which has led to an enormous trade deficit that peaked at almost 6 percent of U.S. GDP in 2006 ($900 billion in today’s economy). This is unsustainable. Eventually, it will force the dollar to fall to a level where trade is close to balanced.

That process was already gradually underway. The recent crisis, however, has sent investors scrambling to the dollar for safety, causing it to soar against most other currencies. The rising dollar, coupled with recessions in much of the rest of the world, will cause the trade deficit to rise again.

But once the financial situation begins to return to normal (which might not be in 2009), investors will be unhappy with the extremely low returns available from dollar assets. Their exodus will cause the dollar to resume the fall it began in 2002, but this time, its decline might be far more rapid. Other countries, most notably China, will be much less dependent on the U.S. market for their exports and will have less interest in propping up the dollar.

For Americans, the effect of a sharp decline in the dollar will be considerably higher import prices and a reduced standard of living. If the U.S. Federal Reserve becomes concerned about the inflation resulting from higher import prices, it might raise interest rates, which could lead to another severe hit to the economy.

As for 2009, the ongoing collapse of the housing bubble, the coming collapse of the commercial real estate bubble, and the ensuing wave of bad debt will all be major sources of drag on the U.S. economy-even if the dollar bust happens later.

Indeed, subprime mortgages were just the trigger for a much broader crisis. Plunging house prices are now leading to record default rates on prime loans as well, with most of the fallout ahead of us. We’ll also see much higher default rates on car loans, credit card debt, and other forms of consumer debt, because homeowners can no longer draw on their home equity to pay other debt.

Commercial real estate faces its own reckoning. When the housing market began to fade at the end of 2005, it kicked off a boom in nonresidential construction. In less than three years, this sector expanded more than 40 percent. There is now considerable excess capacity in retail space, office space, hotels, and other nonresidential sectors-leading to falling prices, plunging construction, and another major source of bad debts for banks.

In short, beware the happy talk from those who say we are “turning the corner,” ignore the daily ups and downs of the market, and tighten your belts. This is going to hurt.

– This article was published in the January/February 2009 issue of Foreign Policy.