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All $600 Billion of QE2 cash (and dollar deflation) left the US to rescue non-US banks

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posted on Jun, 12 2011 @ 01:20 AM
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Another excellent article at Zero Hedge explains how QE2 was meant to rescue european banks with the expectation that the money would come back to buy treasuries.

www.zerohedge.com...
For the chart below, left hand axis is for:
Blue - Cash assets of large-domestic banks
Red - Cash assets of small-domestic banks
Green - Cash assets of foreign banks
Black - Red Reserve Assets (right hand axis)



The chart above has tremendous implications for everything from US and European monetary policy, to exhange rate and trade policy, to the current account on both sides of the Atlantic, to US fiscal policy, to borrowing and lending activity in the US, and, lastly, to QE 3.

What is the first notable thing about the above chart is that while cash levels in US and US-based foreign-banks correlate almost perfectly with the Fed's reserve balances, as they should, there is a notable divergence beginning around May of 2010, or the first Greek bailout, when Europe was in a state of turmoil, and when cash assets of foreign banks jumped by $200 billion, independent of the Fed and of cash holdings by US banks. About 6 months later, this jump in foreign bank cash balances had plunged to the lowest in years, due to repatriated fungible cash being used to plug undercapitalized local operations, with total cash just $265 billion as of November 17, just as QE2 was commencing. Incidentally, the last time foreign banks had this little cash was April 2009... Just as QE1 was beginning. As to what happens next, the first chart above says it all: cash held by foreign banks jumps from $308 billion on November 3, or the official start of QE2, to $940 billion as of June 1: an almost dollar for dollar increase with the increase in Fed reserve balances. In other words, while the Fed did nothing to rescue foreign banks in the aftermath of the first Greek crisis, aside from opening up FX swap lines, one can argue that the whole point of QE2 was not so much to spike equity markets, or the proverbial "third mandate" of Ben Bernanke, but solely to rescue European banks!
...


The article goes on to show that 12 of the 20 primary US dealers as recognized by the Fed are foreign banks. The money left the country as fungible assets to the bank HQ.


...what happened is that the $600 billion in cash was promptly repatriated and used by domestic branches of foreign banks to fill undercapitalization voids left by exposure to insolvent European PIIGS and for all other bankruptcy-related capital needs. And one wonders why suddenly German banks are so willing to take haircuts on Greek bonds: it is simply because courtesy of their US based branches which have been getting the bulk of the Fed's dollars in 1 and 0 format, they suddenly find themselves willing and ready to face the mark to market on Greek debt from par to 50 cents on the dollar. And not only Greek, but all other PIIGS, which will inevitably happen once Greece goes bankrupt, either voluntarily or otherwise.


The article brings up a few points:
#1: The whole point of QE2 was not so much to spike equity markets, or the proverbial "third mandate" of Ben Bernanke, but solely to rescue European banks

#2: prepare for the Bernanke hearings and possible impeachment. For if it becomes popular knowledge that the Chairman of the Fed, despite explicit instructions to enforce the trickle down of "printed" dollars to US banks, was only concerned about rescuing foreign banks with the $600 billion in excess cash created out of QE2, then all political hell is about to break loose, and not even Democrats will be able to defend Bernanke's actions to a public furious with the complete inability to procure a loan.

#3: explains why the US dollar has been as weak as it has since the start of QE 2. Instead of repricing the EUR to a fair value, somewhere around parity with the USD, this stealthy fund flow from the US to Europe to the tune of $600 billion has likely resulted in an artificial boost in the european currency to the tune of 2000-3000 pips, keeping it far from its fair value of about 1.1 EURUSD.

#4: by far the most important. Recall that Bill Gross has long been asking where the cash to purchase bonds come the end of QE 2 would come from. Well, the punditry, in its parroting groupthink stupidity (validated by precisely zero actual research), immediately set forth the thesis that there is no problem: after all banks would simply reverse the process of reserve expansion and use the $750 billion in Cash that will be accumulated by the end of QE 2 on June 30 to purchase US Treasuries. ... Wrong. (Money was spent to cover european bank losses, it's not coming back).

#5: QE 3 is a certainty. The one thing people focus on during every episode of monetary easing is the change in Fed assets, which courtesy of LSAP means a jump in Treasurys, MBS, Agency paper, or (for the tin foil brigade) ES: the truth is all these are a distraction. ...In fact, it is the need to expand the Fed's liabilities that is and has always been a driver of monetary stimulus, not the need to boost Fed assets. The latter is, counterintuitively, merely a mathematical aftereffect of matching an asset-for-liability expansion. This means that as banks are about to face yet another risk flaring episode in the next several months, the Fed will need to release another $500-$1000 billion in excess reserves.

More at link.
edit on 12-6-2011 by Dbriefed because: (no reason given)




posted on Jun, 12 2011 @ 01:45 AM
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Not surprising since the US is (still) a de facto European colony (and no, not just because it's populated by people from Europe.) Think your ancestors who're fleeing oppression really built your country? Yeah, keep believing that crap.



posted on Jun, 12 2011 @ 02:12 AM
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3 Wars to fund and now Washington is just giving it away. This is the security of the American people and it's just taken out of their pockets to be sent overseas?

And now the Fed wants to print more money with nothing to back it. Worthless paper is what it will become.

If there was ever a tipping point into the next great depression. This is it and it'll make the first one look like a cake walk.

If I was an American, this would be the time to get out...and fast.





edit on 12-6-2011 by jude11 because: (no reason given)



posted on Jun, 12 2011 @ 07:54 AM
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This is why i don't believe America will collapse alone. The whole world is tied together in this shady currency system. It won't just be America that falls from a currency collapse but the whole world.



posted on Jun, 12 2011 @ 08:11 AM
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is it possible that what we are seeing is the forced compensation to all the toxic assets that were related to the housing scam??? fraud has been proven, not to mention severe neglect (who in their right minds shreds the promissary notes for all these mortgages???)...and well, considering it all, all those toxic assetts would have had to been bought back....
the banks have been forced to buy some of them back, but obviously not all of them, since they are still in business, and probably could have sold all their assetts and still not have had enough to buy all of them back!!!
they just found a quiet way to meet this legal requirement without tipping the public off as to just how big of a scam the whole thing was!!!



posted on Jun, 12 2011 @ 01:11 PM
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I'm in a thread right now where they are blaming speculators for commodity price ramps with no real evidence to support the notion.

I just used this article there and came to the same conclusion. We're headed for MUCH higher price ramps in all commodities, and QE3 is a certainty.

Good bye USD.


ETA:

I wonder where that hunger for Treasuries went? It's a really stupid policy to shovel money at failed banks in the hopes that those failed banks would prop up our failed sovereign debt market.

edit on 12-6-2011 by projectvxn because: (no reason given)



posted on Jun, 12 2011 @ 04:17 PM
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reply to post by Dbriefed
 


..Wow.. so much to be said. I think I could limit it to:

This is High Treason.



posted on Jun, 12 2011 @ 04:58 PM
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Originally posted by Rockpuck
reply to post by Dbriefed
 


..Wow.. so much to be said. I think I could limit it to:

This is High Treason.


Agreed,

But the frustrating part is that although all the evidence is there, why is no one up before a judge?

Not right.



posted on Jun, 12 2011 @ 05:03 PM
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Originally posted by jude11

Originally posted by Rockpuck
reply to post by Dbriefed
 


..Wow.. so much to be said. I think I could limit it to:

This is High Treason.


Agreed,

But the frustrating part is that although all the evidence is there, why is no one up before a judge?

Not right.


Yep that be because your whole system is corrupt form the top down...

the only justice we'll ever see is at the end of a pitchfork.



posted on Jun, 12 2011 @ 05:22 PM
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Originally posted by UcDat

Originally posted by jude11

Originally posted by Rockpuck
reply to post by Dbriefed
 


..Wow.. so much to be said. I think I could limit it to:

This is High Treason.


Agreed,

But the frustrating part is that although all the evidence is there, why is no one up before a judge?

Not right.


Yep that be because your whole system is corrupt form the top down...

the only justice we'll ever see is at the end of a pitchfork.


I want the pointy one!


I am actually excited to be existing at this point in history. Not just a spectator but soon as a contributor.



posted on Jun, 12 2011 @ 07:44 PM
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Originally posted by Rockpuck
reply to post by Dbriefed
 


..Wow.. so much to be said. I think I could limit it to:

This is High Treason.


Only if the money went to non-British Euro banks. Otherwise, no, it's not.



posted on Jun, 12 2011 @ 07:48 PM
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Originally posted by jude11
I want the pointy one!


I am actually excited to be existing at this point in history. Not just a spectator but soon as a contributor.


I'm excited, too. The Dark Ages was brought upon the world on purpose. Now we get to see the greatest power in the world being dismantled on purpose. And I get to see it live!




posted on Jun, 13 2011 @ 01:44 AM
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Just an FYI, this late Sunday night Bloomberg TV news seems to be making a case for QE3. Story line is that over the last few weeks the global market lost 7.3%, which means 3 Trillion dollars in wealth have vanished. (Between the lines is "What's a paltry $600B in another QE?").

________________________

Correction to the OP, Black line is Fed Reserve Assets, not Red Reserve Assets. I was upset when I posted.

For the chart below, left hand axis is for:
Blue - Cash assets of large-domestic banks
Red - Cash assets of small-domestic banks
Green - Cash assets of foreign banks
Black - Fed Reserve Assets (right hand axis)



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