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38 sats \ 4 replies \ @kr 19 Mar 2023 \ on: Coordinated central bank action to enhance the provision of US dollar liquidity bitcoin
can anyone elaborate on what this action means and the direct side effects you are anticipating?
The Federal Reserve provides dollar swap lines to major central banks, such as the European Central Bank (ECB). The process works as follows:
- The ECB allows European banks to give them US Treasuries at par value.
- The ECB then provides dollars to these banks.
- With the new dollars, the banks can handle any dollar deposit outflows.
- The ECB obtains the dollars from the Federal Reserve using the swap line.
- Throughout this process, no US Treasuries are actually sold.
- Any negative profit and loss (PnL) resulting from the transactions are borne by the central bank, which can stomach infinite losses.
- The dollar swap line balances increase, which will be reflected on the Federal Reserve's balance sheet.
This arrangement ensures that the financial system remains stable, and the banks can manage their dollar deposits without resorting to selling off US Treasuries.
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The sole fact that they can "stomach infinite losses" tells you how wrong this system is.
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appreciate the thorough explanation… how might this system break?
at what point can the central bank no longer “stomach infinite losses”?
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The currency breaks. The more they do so, the more they undermine trust in the currency.
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