Swap Line Strategy – Saving the Euro to Save the Dollar

American Monetary AssociationIn a perfect world, European financial problems would stay in Europe, Japan’s would stay in Japan, Canada’s would stay in Canada, and so on and so forth … but today’s interwoven world economy will have none of that. An economic crisis brewing elsewhere in the world is sure to be lapping against American shores before long.

That’s where swap lines come in and we’re not talking about trying to get a few bucks out of that old Betamax video tape machine on your local AM radio station. The swap line we’re talking about, which the Federal Reserve is quickly employing, is the one by which the Fed trades dollars to central bankers in other countries for an equivalent amount of their home currency. The point of a swap line is to head off a banking crisis like seems to be developing in Europe.

We’re pretty sure that helping prop up undercapitalized foreign banks isn’t Mr. Bernanke’s first choice of what to do with American dollars but it appears that countries like Spain, Portugal, Greece and Ireland are clinging to the edge of the toilet bowl by their fingers, preparing for the death spiral. The Fed talked tough at the beginning of this year about how they were going to extricate themselves from the financial markets, allowing them to correct themselves but, with news that foreign swap lines have been extended to August of 2011, it doesn’t appear that that day will be upon us any time soon.

Realistically, it will be years, if ever, before your tax dollars aren’t being used to fund the mentally unstable aspirations of underfunded bankers everywhere. It sounds to us like the Federal Reserve is in the process of being christened the central bank for the world, a fact that is sure to make Mr. Bernanke and cohorts squirm a little harder on the hot seat, especially in light of the fact they’re already not the most popular kid on the block back home due to the massive bond buying efforts of QE2.

While we kind of feel sorry for the Fed, you made this mess boys, so man up and lay down in it.

The American Monetary Association Team


Flickr / UggBoy UggGirl

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