Thursday, December 29, 2011

The Federal Reserve's Covert Bailout of Europe

QE will continue to infinity...and beyond.  If the ECB/EFSF/ESF/pick your acronym will not bail out Europe, the Fed will. 
If they do not, the F UK US PIIGS will default, and we will see The Greatest Depression overnight.  This is not acceptable, and the alternative will be chosen: kicking the can a little further down the road via currency devaluation.

When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.
America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here. (but not by SD readers!)
The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange ...
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