Uncoordinated Coordinated Action

“I don’t care what the other kids are doing,” my mother used to say, “you’re not doing it!… If the other kids jumped off a cliff, would you?”

Until yesterday, I always thought her question was rhetorical. But now I realize the correct answer should have been “Yes.”

All the major central banks of the world jumped off a cliff yesterday…and the European Central Bank (ECB) jumped right after them.

Almost everyone watching the event unfold hailed this “coordinated central bank intervention” as a powerful and courageous step toward “ending the crisis.”

But central bank intervention never ends a crisis; it merely pretends to. When the world’s major central banks jumped off a cliff yesterday into “Hyperinflation Gulch,” they did not begin soaring toward resolution; they began plummeting toward demolition.

A “coordinated action” is not a priori a “constructive action.” Lemmings, too, coordinate their actions. And even if they imagine themselves to be flying when they jump from a cliff, their furry little bodies will nevertheless splatter on a boulder below.

The metaphor is clear, but I will repeat it anyway: The world’s largest central banks are lemmings…and no investor who wishes to save his own furry, little skin should follow their lead…at least not without some kind of golden parachute.

According to yesterday’s official press release:

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

These central banks have agreed to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points…

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant… These swap lines are authorized through February 1, 2013.

So what does it all mean? On the surface, not much. The announcement merely promises to trim half a percentage point off the cost of borrowing dollars from a central bank. In other words, very short-term dollar-denominated credit just became a little bit cheaper.

Big wow!

The overly indebted — perhaps fatally indebted — financial institutions who will avail themselves of this lending facility will be just as indebted tomorrow as they are today. Cheapening credit fixes nothing; it merely enables a broken condition to function for a while longer.

“Effectively, the Fed has reduced the cover charge for alcoholics at the bar, but it has not changed the fact that the people at the bar are alcoholics,” says Dan Greenhaus, the chief global strategist for BTIG. “It has not affected the reason why people were demanding dollars, and that is overall nervousness in the euro zone.”

Despite this grim reality, investors flocked into global stock markets yesterday to buy anything and everything with a ticker symbol. “More people bought stocks than know what a central bank swap line is,” quipped Peter Tchir of TF Market Advisors.

A few people also bought gold and silver yesterday. And some of those folks might actually know what a swap line is…and they might also have identified the most important storyline issuing from yesterday’s central bank announcement: A new phase of monetary destruction is underway. All the kids are doing it. All the largest central banks are committing to printing money in some way, shape or form.

“The fix is in,” as Bill Bonner likes to say.

And even the ECB is in on the fix, despite numerous official pronouncements to the contrary. According to German Chancellor, Angela Merkel, for example, Germany will never allow the ECB to engage in any form of “debt monetization” — aka, money printing. But yesterday’s actions suggest a revision of this hard-line stance may be in the works.

The ECB may not overtly — and by itself — engage in money-printing. But if all the other kids are doing it, that’s different. After all, if all the other kids are debasing their currencies at the same time, is it really currency debasement?

“Central banks are desperate to stop stresses from building in the global banking system,” explains Dan Amoss, editor of the Strategic Short Report. “They are going to ignore the fact that most European banks are insolvent and offer these banks easier and easier access to long-term funding.

“Once the central banks start lending to insolvent banks, there can be no orderly exit. When sovereign defaults occur, there will be an acceleration of money-printing to keep the system propped up.”

Who knows what’s next? Probably, we can look forward to a new era of clandestine bailouts, backdoor lending facilities with inscrutable acronyms and global monetary game-playing that will look a lot like a massive money-laundering operation.

At this point, some readers may be confused. They may be asking themselves, “How is a swap line the same thing as money-printing?”

Here’s how…The final paragraph of yesterday’s press release says:

US financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to US households and businesses.

In other words, if you were to follow these “new” swap lines all the way back into the Fed’s tool shed, you’d find all the same old, trusty tools that have always been there…especially that same old, trusty printing press, and the Fed “is prepared to use these tools as needed to support financial stability and to promote the extension of credit to US households and businesses.”

In other words, the new swap lines that the Fed is providing are both unlimited and open-ended. The Fed’s balance sheet will not limit these lines, “as needed” will. That’s money-printing. In fact, that’s institutionalized money-laundering.

What are unlimited and open-ended swap lines, after all, if not an institutionalized form of “layering” — an activity the Patriot Act specifically defines as “money-laundering”? According to the Act, “layering is the stage of laundering in which the origin and trail of funds introduced into the financial system are hidden by creating layers of transactions.”

Hmmm…let’s see now…if the Federal Reserve prints dollars, then “swaps” those dollars with some foreign bank, that then distributes those dollars to make loans, make new investments, repay credit lines etc. etc. etc., those original “ill-gotten” dollars from the Fed would have flowed through so many layers that no one could ever trace their source back to Ben Bernanke’s printing press.

Perhaps someone should notify the authorities. The Fed is engaged in highly suspicious, un-American activities. We may have a domestic terrorist on our hands…or at least a domestic monetary terrorist.

Bad news for the dollar, good news for gold.


Eric Fry,
for The Daily Reckoning