JPow's Boss Sounds the Alarm
No, not Joe Biden. We're talking about JPow and every central bank chair in the world's de facto "boss," and that's the Bank of International Settlements, or BS for short.
**BIS, my bad (typo). Anyway, the Bank of International settlements is often called "the bank of central banks," which is a helpful analogy but somewhat overstates the importance of the institution. Most of the BIS's benefit comes from the research and analysis it provides, and in emergency situations, it's a central bank's central bank.
Okay, now that we've squared that circle, let's see what's going on. On Monday, the BIS dropped its hottest mixtape (aka "Quarterly Review") maybe ever. Acclimated to irrelevancy, the BIS took center stage this week as its latest Quarterly Review highlights an alleged $80tn "blind spot" looming over global financial markets. After digging through this egregiously long report, we're ready to call fact or cap.
Call: Fact. Hate to say it, but it's pure facts at the Peel.
But, but, the claim is mildly overblown out of context and majorly absurd considering the media's reaction to it. Let's see why.
Foreign exchange swap markets function like any other swap market-it's basically a market in which you can buy insurance against your own financial risk exposure. It's as if you loaded up on $AMC, and your homie did the same on $GME, and you both agreed to pay each other monthly premiums in order to get the other to cover your losses if (and when) they come.
That's a very dumbed-down version, but it exhibits the functionality of the market the BIS is worried about. (here's a full explanation by the legends at Investopedia).
Now, the BIS is exceptionally concerned about the seemingly unnoticed growth in the market of foreign exchange swaps. From $55tn in dollar debt just 10yrs ago, today's value exceeds $80tn-a figure that "exceeds the stocks of dollar Treasury bills, repo, and commercial paper combined," according to Reuters. It seems as if this massive exposure-and its relevance to the inflation fight-isn't getting the love it deserves.
The BIS uses the BOE's recent Truss-induced flare-up as an example of how incoming distortions could force an increase in dollar supply, thus hyping up inflation once again.
Not sure if you've noticed, but inflation has been a bit of an issue in 2022. The Fed would give up anything to get rid of it, and yet, volatility in foreign currency markets threaten to force JPow and the gang to start slinging even more dollars out of thin air, thus sparking higher inflation at literally the worst possible time.
But fate loves irony, and the past few years have not been kind to JPow. But hey, at least if inflation is up 10%, your paycheck will probably go up like 6% instead of the usual 2.1%. Congrats!
Corporis ut nisi enim sed voluptatem. Libero illum delectus sit vitae.
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