By: Lynette Zang
Overnight many of the global centrals banks came together to abort a money market and bank run in Europe (think back to 2008 in the US). This extraordinary action makes it quite clear that the global banking system was on the very edge of collapse. This action is intended to calm the markets, but like the many extraordinary actions that have taken place since 2008, the happiness shown in the market today, is most likely to be a temporary fix since, yet again, it addresses a symptom (liquidity) rather than the illness (solvency).
What they did
In a coordinated effort, central banks in the USA, Europe, Canada, Britain, Switzerland and Japan pushed to increase liquidity by lowering the cost on existing US dollar liquidity swaps to other central banks. In effect, the Fed is handing over money to other central banks and they in turn, lend dollars to banks in their countries that need funding, but those central banks retain the liability. This was supposed to be a short-term temporary arrangement that was set up by the Fed in 2007, it is now of unlimited duration and stay in place until at least February 2013. Read more about it here http://www.federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm a new twist is that banks can now get unlimited swap lines in any currency.
What else was done?
China’s central bank cut their banks reserve requirement. This is the first time in three years that has happened. They did it to encourage lending/borrowing and therefore, stimulate their economy. They had raised the reserve requirement to “fight inflation” so it seems that stance has changed and globally, inflation is clearly being embraced.
What it means
Global inflation. While governments must create debt in order to create money, central banks (private for profit) create money out of thin air. The more money that is created, the less value it has. This is an invisible tax on the population, because if it takes more and more of any currency to buy the same goods and services and your income does not go up at the same level at the same time, your standard of living will decline.
Ron Paul said, “rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis. Central banks are grasping at straws, hoping that flooding the world with money created out of thin air will somehow resolve a crisis caused by uncontrolled government spending and irresponsible debt issuance. Congress should not permit this type of open-ended commitment on the part of the Fed, a commitment which could easily run into the trillions of dollars. These dollar swaps are purely inflationary and will harm American consumers as much as any form of quantitative easing.”
Under all of this fear is the derivative market, a time bomb waiting to explode. The CDS (credit default swap) is the derivative used and speculated with, attached to the solvency of the bond markets, it has a notional value of $30 trillion and is integrated throughout the global banking system. When that market implodes, who can bail that out?