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The Strong Dollar is Getting on the Nerves of Foreign Central Banks

To support their currencies, foreign central banks are selling US treasuries at a strong pace.
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Weekly Change in Foreign Custodial Holdings 2022-09-29

Capital Flows

"Foreign central banks' holdings of US Treasuries at the Fed custody facility are dropping fast (almost $40bn in just one week)."

Why the Dumping?

It's not really dumping in the classic sense. Foreign central banks seek to shore up their currencies. 

China's SOEs in On the Act

Japan and China are both in on the act, the latter perhaps more than anyone knows.

China's SOE reserves are not in official estimates of China's US treasury holdings. What many considered "dumping" of official assets was really hidden in SOEs.

Huge Structural Shift Creates Feedback Loops

  • The Fed now wants a stronger dollar to stop inflation.
  • Previously the Fed wanted a weak dollar to stimulate inflation. 
  • And previously, foreign central banks wanted weak currencies to support exports to the US consumers, the buyers of last resort.
  • Now foreign central banks are screaming "uncle".

Nations that import food and energy are getting hurt even more than the US on the inflation front. 

Even though the dollar is getting stronger, the Fed is attacking export mercantilism of Japan, China, and Germany by recession-inducing rate hikes to kill consumer demand. 

Fed Portfolio Losses

Meanwhile, the Fed is now underwater on it's huge pile of QE holdings. John Hussman sums up the situation nicely.

Mark to Market Accounting

"With $8.8 trillion in bonds averaging ~8-year maturity, year-to-date market losses of ~15%, and just $48 billion in capital, the Federal Reserve would definitely be insolvent if it needed to mark to market."

Questions of Legality

Dollar Scarcity?

Richard Russell discussed dollar scarcity in 1964.

Curiously, a literal explosion in dollars results in a "scarcity". But countries that borrowed dollars are having a terrible time paying back those loans.

Free Money Via QE

Let's also discuss free money via QE. The Fed forced money down banks throats and it now pays interest on those reserves parked at the Fed.

The Fed reports this data monthly, last updated September 27. 

Reserve Balances

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Reserves of Depository Institutions August 2022

Reserve Balance Rate

Interest Rates on Reserve Balances

Free Money Calculation

The Fed gives taxpayer money to banks at an annualized rate of 3.15%. 

3.15% of $3.3 trillion is $103,950,000,000. The Fed is shrinking its balance sheet but with every rate hike bumps up the interest it pays on reserves. 

Reverse Repos

Overnight Reverse Repurchase Agreements 2022-09-30

Simultaneously, the Fed is doing $2.425 trillion daily in overnight reverse repos. These are allegedly "temporary" but the amount keeps growing over time. 

I think we need a new definition of temporary. 

Until the Fed Breaks Something 

Many people, including me, have stated the Fed will keep hiking until it breaks something. 

Actually, it should be clear the current central bank governance system is broken beyond repair. 

It's Our Dollar But Your Problem, 2022 Style

To understand what's going on with the dollar, interest rates, and credit gone wild, we need to review history.

This monetary madness all stems from Nixon ending convertibility of gold.

Please consider It's Our Dollar But Your Problem, 2022 Style

At this point it is unclear what will replace the current broken setup, but please don't suggest Bitcoin because the odds of that are roughly zero.

This post originated at MishTalk.Com.

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