View Full Version : Imminent Unwinding of Currency Swap Means Massive Dollar Crisis

31st January 2010, 19:18
The Imminent Unwinding of Currency Swap Could Mean an Imminent US Dollar Crisis! (http://seekingalpha.com/instablog/121744-mark-anthony/46203-unwinding-of-currency-swap-looming-us-dollar-crisis)

The Daily Gold (http://harveyorgan.blogspot.com/2010/01/commentary-jan-2810.html) blogger Harvey Organ reports (http://harveyorgan.blogspot.com/2010/01/commentary-jan-2810.html) that ECB and other Central Banks are terminating the currency swap with the US Federal Reserve Bank as of Feb. 1, 2010. How they are going to unwind the currency swap is something very interesting to watch. It could finally trigger the long expected US dollar crisis: Collapse of the US treasury market and the US dollar itself.

In a currency swap, two central banks print their own currency out of thin air and swap them in a zero interest loan according to the exchange rate. Then after a period of time, they return the loaned currency to each other. For example the FED will loan US dollars to Bank of England (BOE (http://seekingalpha.com/symbol/boe)) while BOE loans British Pounds to the FED. Upon the end of currency swap agreement, they unwind the trade by the BOE returning the US dollar, and the FED returning the British Pounds.

The question is how they are going to be able to unwind? The total swap is believed to be as high as US$500B. Some say as high as US$2T. If the central banks merely locked up the cash in a vault, they could easily return the money. But that would defeat the whole purpose of currency swap. Instead of being locked up in a vault, the swapped currency must have been SPENT in some way. Then the question is how do they get the money back if it is already spent, sold out or otherwise given away?

For example I long suspected where did the British get the money to buy US treasuries over recent times? According to latest official data (http://www.ustreas.gov/tic/mfh.txt), UK's holdings of US treasuries was up $145.1B in 12 months, while China's holdings went up only $76.4B.

Where did the UK get the money to buy US treasuries? Unlike China which earns US dollar from its trade surplus against the USA, The UK has a huge trade deficit against the USA. It spend US$2 buying US goods for each US$1 it earns selling products to the USA. Where did they get the US dollars to purchase US treasuries? If it was not from trade balance, it must be from the give out by the FED, in the name of currency swap. It cost UK nothing to print British pounds and then exchange for the dollar, just like it costs the FED nothing to print the dollars.

In a sense, FED is secretly buying our own debts through foreign hands, via the currency swap agreements!!!! Now, how is the currency swap going to be unwinded? What magic are they going to pull this time, asn the BOE has already SPEND out the US dollar in buying US treasuries. It does NOT have the money to return to the FED.

Likewise, probably the FED does not have the money to return to BOE either. They must have spent out the British Pounds as well as other foreign currencies, in repeated attempts to sell foreign currency and buy US dollars, to support the dollar, in recent times.

It's going to be fun to watch how the unwinding can be done. If my speculation is right, BOE must sell its holding of US treasuries to raise US dollar to unwind the loan, and the FED must also need to sell dollar and buy British Pounds to unwind its loan as well. Both would be fatal blow to the value of US treasury and US dollar.

Time to run to precious metals as your financial safe haven. Don't run to euro, as the eurozone is crumbling down. Don't run to Japanese yen. Japan has an even worse debt problem. When Japan collases under its debt it must sell US treasuries to salvage its own currency, which will trigger a domino effect leading to the fall of the dollar. The only thing safe are precious metals and commodities.

Ardent Listener
31st January 2010, 19:43
The article starts off good but then it goes on.............

But unlike most other precious metal bugs I will not tell you to run to gold, or silver. Every one talks about gold as if it is the only safe haven. When every one talks about one thing, be careful. The world is not in shortage of gold. The world has plenty of gold that could easily lasts a couple thousand years if we do not produce gold any more. Warren Buffet famously critized gold by saying that you dig out the metal from the ground, and then dig another hole to hold up, and have to pay armed guards to watch it, what for?

I am also questioning the wisdom of silver investment. Silver bugs have been calling for silver shortage for years. But I never see any solid data to back up the claim of shortage. If there is no shortage, if a precious metal's price is only supported by investment demand, then there is a problem because anything that is purely supported by investment demand, is by definition a bubble, the investment demand could easily turn into investment supply in an instance.

The only good precious metal investment, must be one which is based on REAL industrial shortage, not by the hypothetical investment demand. If there is an industrial shortage, the price MUST go up regardless what investors believe. And price movement due to real shortage, on the other hand, can create solid and reliable investment demand. Such precious metals will provide the best performance way much better than gold.

The only two precious metals I see solid data to support a supply shortage case, are platinum and palladium. Of course my favorite is PALLADIUM. My most favorite mining stocks are Stllwater Mining (http://stillwatermining.com/) (SWC (http://seekingalpha.com/symbol/swc)) and North American Palladium (http://www.napalladium.com/) (PAL (http://seekingalpha.com/symbol/pal)), the only primary palladium producers. Russia's Norilsk Nickel (http://www.nornik.ru/en) (NILSY.PK (http://seekingalpha.com/symbol/nilsy.pk)) is world's largest palladium but they are mainly a nickel producer. South Africa's Anglo Platinum (AGPPY.PK (http://seekingalpha.com/symbol/agppy.pk)) and Impala Platinum (IMPUY.PK (http://seekingalpha.com/symbol/impuy.pk)) produces by-product palladium. Watching Platinum Today (http://platinum.matthey.com/) on related PGM metals news, and KITCO (http://kitco.com/market) for price movements.

I have to question the wisdom of buying palladium or even platinum if the dollar and most other major curriences were to tank. If that were to happen does he really think those metal's idustrial demand wouldn't sink too?

31st January 2010, 20:03
The article starts off good but then it goes on.............

Based on this post I would have to guess that you are an interloper here. But your total of over 1300 post belies that fact. What gives?

31st January 2010, 20:03
Let's go to the ecb main website for a slightly different story.


"In coordination with other central banks, the European Central Bank (ECB) confirms the expiration of its temporary liquidity swap lines with the Federal Reserve on 1 February 2010. These lines, which were established to counter pressures in global funding markets, are no longer needed given the improvements seen in the functioning of financial markets over the past year. Central banks will continue to cooperate as needed.

In this context, the Governing Council of the ECB has decided, in agreement with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to stop conducting US dollar liquidity-providing operations after 31 January 2010."

31st January 2010, 20:12
"The only two precious metals I see solid data to support a supply shortage case, are platinum and palladium. Of course my favorite is PALLADIUM."

As much as I like palladium (I don't own any platinum because I think it is overpriced), I acknowledge that it is an industrial metal subject to the global economy. The long-term trend is good, but I would not be surprised to see a strong correction in the next year or so.

Ardent Listener
31st January 2010, 20:19
Based on this post I would have to guess that you are an interloper here. But your total of over 1300 post belies that fact. What gives?

"What gives" ? As I wrote, the part of the article that Silversurfer posted was good, but the rest of the article, that I added in my post, didn't make sense to me. I hope that answers your question.

31st January 2010, 22:19
Misassumptions Concerning The Argument For The US Dollar And Gold
Posted: Jan 30 2010 By: Jim Sinclair Post Edited: January 30, 2010 at 4:44 pm

Dear CIGAs,

Fed’s Currency Swap Lines: A BIG deal for the Dollar"

This article written in good faith, I am sure, but fails on three points.

1. It properly defines the basic currency swap between central banks but fails to follow the money through the transaction to its final destination.

The swaps done with the ECU, Swiss, British and other non-US central banks were for the purpose of bailing out those non-US banks that were the losing debit counter party to major US derivative dealers.

In order to reverse these swaps without non-US central banks having to borrow dollars in the dollar market from others, effecting short term interest rates and upsetting the economic apple cart, the banks bailed out would have to miraculously invent some way to pay back the dollars.

Ask how much of this can in fact be paid back by the non-US banks now. The answer is very little.

The proper conclusion then is if the swaps were to be closed it would impact the short and medium term rates up to one year because it would require the final recipient of the cash to have re-cashed itself miraculously which they have not.

2. How often has the Federal Reserve informed you of what they intend to do before they have actually done it? The answer is rarely unless the MOPE had a purpose that would replace the need to do what was announced or deliver another valuable product. Keep in mind it is hard to sell bonds in dollars when the dollar is moving lower and other central banks wish diversification.

If in fact the swaps were to be repaid you would hear about it after the fact because as it would have already impacted interest rates and the value of the US dollar. Swaps like those now in place do impact currency values. Therefore to pre-announce it would work against the interest of the Federal Reserve’s counter-parties on the swaps. It is akin to sinking your partner on purpose and in public.

3. The only time you can conclude a swap is closed is by hindsight investigation of balance sheets of both parties. This means that this report you received is offering an opinion of what they feel will happen based on MOPE with no solid who, where and when actionable intel.

4. Then you are making a recommendation on the interpretation of MOPE which is usually just what MOPERs wants you to think.

The second is:

"Put your faith in charts. They are much more truthful than people!"

This communication came from an excellent and reliable chart reader. However, I find point one somewhat prejudice, and the second point to be correct but not defined as to the term of impact.

Charts give you guidance according to the definition of what time scale charts you are looking at. Short-term developments cannot be equated to long-term predictions.

This email basically says those that argue fundamentals do it because they market what they make their living by doing it. Can that argument not be applied to a person who sells a technical service? How about those that understand both the technical and the fundamental and do not do either for a living? You can only attack by claiming the later source is simply wrong because he is simply stupid.

Please keep in mind that even if both were right, the right they would be correct, this time, is on a SHORT TERM fundamental or technical event that would end reversing itself at the ending or simply becoming a non-factor when completed.

That has no relevance to insuring yourself against the mountain of debt, the mountain of bankrupt states and nations, the mountain of liquidity that has no practical means of being withdrawn and the weakness of the western world’s economies.

It is also important to keep in mind that any major currency that declines in value increases the demand for gold within that area when paper currencies are in general question as to storehouses of value.

Both parties sending these communications mean well, but have overlooked key parts of the argument they make.

Respectfully yours,