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IPFS News Link • Federal Reserve

Rabobank: MMT-rump

• Zero Hedge - Tyler Durden

After noting for the nth time yesterday that not all currencies are equal, and that the Eurodollar system--that is to say, offshore USD liquidity--remains a structural issue regardless of the recent introduction of (too small) Fed swap lines with (too few) central banks, it's not surprising that we saw movement on that Front. Indeed, the Fed introduced a new repo facility for any central banks that with an account with the Federal Reserve Bank of New York, who can now swap their holdings of US Treasuries held on account for good ol' USD cash. The key takeaways from this move are as follow:

1. The stress on USD liquidity is real and isn't going away despite the alphabetti spaghetti of Fed channels to try to get USD from A (them) to B (everyone);

2. It means country C (and let's just say 'C' is particularly apt in this instance) doesn't have to sell US Treasuries to gain access to USD, alleviating the risks of a move higher in Treasury yields should this need to happen on scale in what are currently far from normal market conditions;  

3. However, it is not actually going to solve any real problems if country C (or D or E) are short of USD, as those USD are still gone once they have been used to pay for imports or settle USD debts; yet

4. The fact that the universe of foreign central banks being offered this facility is now anyone, not G-10, speaks volumes about the structural issues relating to the global role of the USD; and hence

5. This is net structurally positive for USD even while it looks negative.

In short, the Fed might, in its navel-gazing kind of way, only care about smooth functioning of the US Treasury market; yet this is still a step towards one of the only logical end-points of having USD as de facto global currency – the Fed as not just US but de facto global central bank. Don't like that? Well, the other end-points are that the system collapses due to a lack of USD and/or USD being far too high for all involved, which will make what happened in Q1 look like a picnic; or that the system lasts in some places lucky enough for the Fed to look up from its navel at, which will be similar globally if not as bad.


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