The Greek Dollar Swap Window[1]

8/8/2019 The Greek Dollar Swap Window[1]

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THE GREEK DOLLAR SWAP WINDOW

Jim Willie CB October 20, 2010

The Chinese are clever people. Their leaders play a good game of chess in the globalscramble for commodity supply and financial dominance. Their patient strategy has tiedthe arms & legs of the USGovt, using their own debt securities as the binding rope. Theaccumulate almost reached a staggering $1000 billion, the bitter fruit of the Low CostSolution to invest in China from a decade ago. While much attention has come to saber rattling over currency manipulation and tiny 25 basis point interest rate hikes, evenbattles over rare earth metals, something has been happening in Europe of importancethat involve a Chinese back door to dump USTreasurys. To be sure, the USGovt deficitsand monetary policy have invited a selloff in the USDollar. In the latter months of 2009and early months of 2010, the Jackass wrote frequently about the absurd notion of an

Exit Strategy from 0% and Quantitative Easing. The USFed lost heavy credibility andlooked just rather obtuse. The Japanese ZIRP and QE twin diseases were not themonogrammed cufflinks the USFed would choose for sartorial splendor. My forecastwas for no Exit from 0%, but rather an embrace of QE2, the exact opposite. Wehave it. Only the details remain on the QE2 initiative. Bernanke looks scared, haggard,and a little desperate, like a captain on a ship listing to port and taking on significantwater in the lower chambers. At least the water is at zero cost.

The Jackass forecast of QE2 was correct and quite easy, since fundamentals drove thecall, not wishful thinking or the errant but popular notion that time heals all financialwounds. Not this time, since almost no effort to reform or to restructure debt have

occurred. The Financial Regulation Bill handed the USFed more power, not less,another correct Jackass forecast. That too was an easy call, since the banker lobbywould obviously write the legislation. The Exit Strategy was shown to be a ruse, purehope laced next to the Green Shoots nonsense. My expectation of a Plaza-2 Accord isthat it too will never happen, since it requires significant cooperation among the major and some minor nation central banks. To be sure, an orderly decline in the USDollar isurgently needed. It will not happen since the USGovt and USFed policies areutterly hostile and destructive toward the monetary system and in particular toward the USTreasury Bond holders. They are the USGovt creditors, and theUSGovt is showing disrespect, while making wild accusations at them. The CompetingCurrency War will continue, accelerate, jump tracks, turn more hostile, and even pit

former allies against each other. The spirit of cooperation between Japan and Chinahas been totally de-railed. Europe has grown angry over a higher Euro exchange rate,one certain to slow the EU Economy. The upcoming G-20 Meeting in South Koreaalready has one member planning to shun the gathering, Brazil, the new Latin Americanpartner to China.



PREPARE FOR TARP-2The mortgage world is topsy turvy. The big US banks are facing additional credit lossesagain. My expectation is for a grand TARP-2 initiative to bail out the big banks,soon to come, already introduced as a topic of discussion. The USFed will do itsusual denial, then in a few months mention its urgency. This second chapter program

will cause much more problems and generate extreme anger even with the dividedUSCongress. The first TARP was caused by market declines. This TARP will bemotivated to aid the big banks when accused of criminal behavior, very different. Thesame old arguments will be trotted out about Too Big To Fail Banks, systemic failure,depression, and an end to the American great society. Insolvent if not bankrupt entitiescontrol the USGovt finance, including its Printing Pre$$. The TARP-2 will pass but notbefore at least three or four months of haggling. The focal point will be Bank of Americaand JPMorgan Chase, two important banks. Part of the political cover will be that Bankof America did the USGovt a favor by taking on the Merrill Lynch and Countrywide toxicload of debt, and is weighed down by its burden. Part of the political cover will be thatJPMorgan Chase is weighed down by the burden of size and broken businesses. The

USFed will come out with research on why the TARP-2 is necessary and how the worldwill end without it, written by JPM analysts. So the USGovt will come to their rescue withTARP-2, perhaps a $1 trillion package of bank aid. One must wonder if TreasurySecy Geithner is being set up for a fall. The put-backs of large blocks of creditportfolios have been demanded by PIMCO, Blackrock, and the Federal Reserve of NewYork (owned by the Wall Street firms). Geithner led the FRB of New York during theentire mortgage bubble episode, its sumo regulator. The bank mostly on the damagedreceiving end is Bank of America.

In the end TARP-2 will pass with at least $500 billion in new big bank rescue aid, whichwill require the big banks to provide strong meaningful home loan balance reduction.

The package will contain a provision to kick in, which will deliver another $500 billionupon other contingencies. The total $1 trillion bank aid package would cause afirestorm. A key provision to win over public support will be promises by the bigbanks to finally give home loan balance reductions, what the people demand.That will enable the American public to agree to the package, except one year later theywill be shown more revolving doors and dead end corridors. The major challenge for theUSGovt and Wall Street firms will be to handle the court challenges. The legal actionshave taken center stage, a development that has raised the stakes considerably. Lookfor Fannie Mae to play a key role in the TARP-2 package. They will likely be the BadBank for wrecked home loans to a much greater degree, even the benefactor to courtsettlements where concessions are given to the victims. They will portray themselves asthe New Resolution Trust Corp, from soup to nuts.

Then by the end of 2011, the nation will embark on QE3, since nothing will be fixed andthe USEconomy will by then be caught in a nightmarish whirlwind of price inflation,recession, and declining wages. It was called Stagflation, and it is coming in fierce style.The USFed overlooks the high cost of Quantitative Easing, namely higher priceinflation without the benefit of higher wages. In fact, a quantum jump up in the entirecost structure is in the works, with its attendant profit margin pressures and



discretionary spending pressures. So higher costs but lower wages, a monstroussqueeze on corporations and households, invites more crisis. The nation has nocapacity for solution. Such is the utterly obvious outcome of QE2. Behind closed doorsin conference rooms laden with polished marble or hardwood, the banking leadersrealize the squeeze coming to the USEconomy from QE2. The movement to have

Fannie Mae serve as the Politburo property owner for a sizeable slice of Americana willbe in full swing.

NEW DOLLAR SWAP WINDOW (MADE BY CHINA)China is dumping USTreasurys by way of the Europe, using a back door whose designwas handed to them. Their support of the Greek Govt debt jammed that door wideopen. Thus the rising Euro currency without justification, one of a few factors. Usage of the window has led to an indirect Chinese forced devaluation of the USDollar, anextremely clever action. China has never appreciated being repeatedly called acurrency manipulator. From 1999 to 2005, the USGovt gave full support to the ChineseGovt, as the Yuan currency was pegged to the USDollar. The USGovt saw the policy as

providing stability to the USDollar at a time when foreign investment by US firms in theMiddle Kingdom was brisk and strong. In a three-year period, the US multi-nationalfirms invested $23 billion in Chinese industrial plants, like the 160 Wal-Mart plants. Themisguided USGovt and hapless US economists eagerly awaited the great bounty fromLow Cost solutions that exploited cheaper Chinese labor, lower tax structure, evenabsent regulations. A decade wave of corporate profits evaporated, amidst growing debtand the housing bust. Meanwhile, the Chinese Govt would accumulate $2.5 trillion insavings, held as USTreasurys for over $800 billion. Suddenly, China is a currencymanipulator. However, the vast monetization initiatives enacted by the USGovt andits partner USFed with $1.5 trillion in freshly printed money to support the US$-based bonds which few foreign creditors wanted, that action is highly

manipulative to currencies!!

The missing piece is that the Wall Street helm has ignited the currency bonfire by notpursuing a multi-lateral agreement by USGovt creditors. They have never beenconsulted on monetary inflation, debt monetization, and austerity measures. The UnitedStates acts unilaterally with great privilege, as they claim some of sort of glorifiedmission, a Manifest Destiny ridden atop bond wagons. The Chinese apparently have aplan to swap their USDollars for Euros, using the Greek back door.

A well placed bankster source in Europe passed an opinion along. The Jackass wasaware of the Chinese nibbling with purchases of Greek debt. However, the initiative hada clever motive for an expanded role. The German Euro supporters have been caughtflat-footed, inattentive to guard the door. By refusing to permit a default in SouthernEurope of sovereign debt, the Euro Central Bank and EU leaders have exposed avulnerable pathway soon possibly to turn into a highway. The bankster source wrote,"After having de-facto bought Greece, the Chinese are now members of the Eurosystem or Greece is now a member of two currency systems, to be used at will. SoChina will now use its USTreasury Bonds to buy Euros, which will be used to buy Greek Govt bonds. These bonds will be guaranteed by Germany. This is very clever and no



one saw the dual usage of the system, except a few very clever people. The politiciansin Berlin and banksters in Frankfurt were sleeping at the wheel as usual and now will

pay a heavy price." It goes deeper. Greece has agreed to support EU recognition of fullmarket economy status for China, while China has agreed to support the call by Greecefor UN mediation over Cyprus.

The Chinese have essentially created a Dollar Swap Window, a small oneadmittedly. It will grow over time. Attempts to rein it in will be difficult. Imagine runawaytraffic at the window, the galloping process of the Greek Dollar Swap Window. TheEuropeans eagerly opened the window for China to invest money in Greek Govt debt,which European nations did not want to commit to. So China has a small pipeline inwhich to shove USTreasurys, to convert them to Euros with full blessing and approval of the Euro Central Bank, and to buy a stake in Greece. Beijing could not give a dragon'sbig toe of concern for Greece. They wanted a window to dump USDollars. Next lookahead, and remain objective. The Chinese might be motivated to invest in Spanish Govtdebt, some Portuguese Govt debt, and later some Italian Govt debt and even some

French Govt debt. Leave Ireland alone, a lost cause, after a foolish decision to adoptthe suicidal IMF austerity plan. They are headed toward systemic failure.

So China has found a clever back door Dollar Swap Window. So far it only has a Greeklabel on the glass with Greek trucks on the dock, with Chinese standing in line. Soonthe Latin debt will open up adjoining windows in an expanded Dollar Swap Windowfacility. The USFed and USDept Treasury were not invited to this planned project. Thekey point upcoming is not the volume of European sovereign debt to be covered byChina, even at discount in implied write-downs. The key point is other broader usage of the window. Watch and observe how the Chinese will eventually be accused of swapping far more USTreasurys through the window than purchased Greek Govt

debt, or any other sovereign debt. The Chinese will attempt to dump as muchUSTreasurys as they can before the window closes, shut under pressure by theUSGovt. In the meantime, the Euro currency rose to touch 141 per greenback unit twoweeks ago. That is a rather impressive run from 127 in early September. The Europeanfundamentals do not justify such a big 11% move. At 140 the exchange rate is still lofty.If the Chinese expand the usage of their clever new Dollar Swap Window, the Eurocould rise to 150. Such is the heavy price paid by the EuroCB and EU leadership for refusing to permit a Greek Govt debt default. The Open Door Policy to China found aback door!!!

REVOLT AGAINST THE USDOLLARChina is dumping USDollars on a relatively substantial scale. They are buying resourceproperties. The volume is large in absolute standards, but minor when considering theChinese rack up monthly trade surpluses with the United States over $20 billion. Chinahas agreed to pour another $7 billion into Brazil's oil industry. A recent deal with Repsolof Spain to buy a 40% of its Brazilian business gave China access to the estimatedreserves of 1.2 billion barrels of oil & gas in Brazil. The price premium paid to RepsolBrazil, which values the company at nearly twice previous estimates, is a sign of twofactors. China is willing to pay up in order to lock in its future energy supplies. China



might regard its USTreasurys as over-valued, and therefore discount them. Thisyear alone, Chinese companies have laid out $billions buying up stakes in Canadian oilsands, a Guinean iron ore mine, oil fields in Angola and Uganda, an Argentinean oilcompany, and a major Australian coal-bed methane gas company.

To be sure, some bids have been interrupted, like with Canada's Potash Corp andAustralian giant mining firms. The aluminum giant Chinalco failed in their attempt to buyAnglo-Australian Rio Tinto in 2009. China must keep itself supplied, and feed its growth.China has grown to become the second largest oil consumer in the world, far outstripping its domestic supplies. The Neptune consultancy estimates that it will needto buy two companies the size of British Petroleum each year for the next 12 years tomeet its growing domestic energy demand. Furthermore, its demand for electricity isgrowing each year equivalent to Britain's entire output. The volumes in such deals seembig, but compared to USTreasury holdings and monthly trade surpluses, they are small.On the margin, China must find a destination for its new surplus while it dumpssome of its bloated US$-based assets. Watch for quiet hidden expansion of their

new handy European Dollar Swap Window. It explains in part the Euro currency rise,beyond what many analysts expected, including the Jackass.

The USGovt and USBanking leaders have other USDollar problems. Arab states havelaunched secret moves with China, Russia, and France to stop using the US currencyfor oil purchase. The demise of the USDollar is clearly an exaggerated claim, but thepath toward its long drawn out demise is fast becoming laid out. These nations areplanning to move instead to a basket of currencies. It might include the Japanese Yenand Chinese Yuan, the Euro, even Gold and possibly a future unified currency designedby the Persian Gulf states. Confirmation of the talks came to the UK Independent byboth Gulf Arab and Chinese banking sources in Hong Kong. Meanwhile, oil revenues

to OPEC states have been reduced in value by the USDollar devaluation. OPECmembers seek a $100 crude oil price in order to counter US$ exchange rateweakness. The US$ DX index has fallen 13% since June. OPEC member nations arepaying little attention to compliance quotas, and much more attention to reducedpurchase power of their income. The nominal value of OPEC oil export revenue will be$818 billion in 2011, a nice 10% rise from last year, according to USDept Energyforecasts. However, the entire rise will be eaten up by the US$ devaluation, which noOPEC nation agreed to. They do not vote at Fed Open Market Committee meetings onUS monetary policy. That makes them angry, motivated, and defiant. The consensusis growing for a $100 crude oil price, which is considered a reasonable target.Witness the upcoming rise in the entire USEconomy cost structure, led by a rising crudeoil price. The only potential detour on the path to $100 oil is the platforms for financialmarkets eroding, sinking, and possibly collapsing.

GOLD & SILVER BREAKOUT & CONSOLIDATIONMotive should no longer be to capture the cheap artificial price like in 2008 and 2009under $1000 or $1200 for gold or in the teens for silver. Now the motive is to get out of the USDollar, avoid its declines, and stay clear of dangerous monetary downdrafts andwhipsaws. The present day objective should be to preserve money as in avoid the



harmful effects of currency debasement. One should prepare potentially for the US$to lose 30% to 50% more purchase power before end 2013. Gold & Silver are muchmore than hedges against the lost US$ purchase power, a breakdown in the monetarysystem, or an insolvent dysfunctional corrupt banking system. They are investments inreal money finding true value in fair markets. The true equilibrium price for Gold & Silver

in my view is at least double the current price. Paradoxically, the same loss of purchasepower for all major currencies is in the works. The media anchors and pundits arestarting to comprehend the risk. They say a rising stock market is required to keep evenwith the falling USDollar. Exactly!!

One thing for sure, the Western Govts plus the Japanese Govt will go toextraordinary lengths to invest good money after bad in supporting the brokensystem until it becomes a ruined system. It was clear to the Jackass in September 2008 that the US banks suffered a death experience. In the last couple months, anincreasing number of people among the system control team are realizing the moribundcondition without remedy. They recognize the insolvency as growing worse, even for the

US Federal Reserve balance sheet. The $1.4 trillion in mortgage related securitiesheld by the USFed, including leveraged mortgage bonds (see Collateralized DebtObligations) might actually be worth between 60% and 80% less than book value.My rough calculation shows the USFed to be a cool $1 trillion in the hole, an oversizedvat of red ink. The role of bond buyer of last resort is very costly. The most insolventbanking institution is not Bank of America, but the USFed itself. The Powerz believestheir free money output can bring the big US banks back to life. Each major initiative likeQE2 guarantees another $1000 lift to gold and $40 to silver, all in time, as the potentialtrue target. Next up is TARP2, a guarantee, to save the banks whose transgressionsare being laid out in a grand spectacle.

The MERS property title database has no legal standing. The REMIC mortgage fundvehicle does not achieve assignment and perfection of title. The entire mortgagefoundation in the US banking system appears to be faulty and defective. Short cuts toenable fast bond trades, short cuts to avoid income taxes, have left the big banksvulnerable to the extreme. When the states imposed moratoriums on homeforeclosures, one might safely conclude that the mortgage securitization industry isdead too. The best protection is Gold & Silver, since sovereign debt paper andmortgage debt paper might soon be recycled into Kleenex tissues.



The gold price will consolidate here, enough to enable the powerful buyers in The DirtyDozen to continue their huge relentless purchases. The group permitted a smallpullback in order to grab a much greater volume in the next round of purchases.

The $1300 target was met and surpassed. Support can be found at the juncture of theupper rail to the trend channel, meeting the new aggressive trendline from the breakout.Never in 30 years has a breakout occurred with gradual stair step patternexhibited in my knowledge for any major price item over a full two month period.A message was made and heard, to break the market. Absolutely nothing has beenremedied or repaired, no reform whatsoever. In fact, every resistance to reform hasbeen evident, from banksters dug in. The TARP-2 package is being discussed behindclosed doors. Instead of liquidating the big banks, they will continue to ruin theUSDollar so as to prop the insolvent banks. They do not lend because of their profound insolvency, as they lack equity. They do not lend because their Loan LossReserves were indirectly confiscated by the USFed, with interest paid.

THE LAST ASSET BUBBLEUnlimited USDollars will be devoted to support a broken system, rather than liquidatecredit portfolios. They will not be plowed under, to make the soil fertile again. TheUSGovt needs the public 401k and IRA funds, and using tax law benefits as inroads,they will someday soon clutch them. They must feed the USTreasury Bond bubble.After that seizure, they will pursue the bank savings. The USGovt needs the publiccertificates of deposit, and using tax law benefits as inroads, they will someday soon



clutch them. The accusations of a Gold bubble are as ludicrous, baseless, anddistracting. They wish to deflect attention from the approved USTreasury bubble.

Given the heavy risk loaded in the mortgage bond arena with all the controversy over home foreclosures, the USAgency Mortgage Bonds are looking highly problematic,

possibly worthless bonds. The nationalization of Fannie Mae stretched an umbilical cordfrom Fannie to Uncle Sam in a marriage made in a Banana Republic. The risk to theUSDollar is total and absolute. The USDollar will fall hard, but so will all the major currencies in a round robin of destroyed value. The winner in the CompetingCurrency War in progress is Gold & Silver. The billboard reads $2000 gold and $50silver, directly ahead, just a matter of time.

Documents

The Greek Dollar Swap Window[1]