Dollar intervention details, dubious journalism

So very few people are aware of the ESF - the Exchange Stabilization Fund of the U.S. Treasury. Every major central bank or country has a similar facility. The ESF was started in 1934 partially as a response to perceived prior dollar manipulation by the Bank of England and others earlier in the decade.

The ESF home page contains this relatively simple explanation of what they can do and what their purpose is:
The legal basis of the ESF is the Gold Reserve Act of 1934. As amended in the late 1970s, the Act provides in part that "the Department of the Treasury has a stabilization fund …Consistent with the obligations of the Government in the International Monetary Fund (IMF) on orderly exchange arrangements and an orderly system of exchange rates, the Secretary ..., with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities."
In simpler terms, the ESF can not only deal in foreign currencies, but also in gold and "other instruments of credit and securities", totally legally. The ESF can serve a valid purpose in helping to stabilize the value of the dollar too - it's not my purpose here to discuss whether its right or wrong.

So, what about the nitty gritty details on the recent dollar intervention? Officially, all we really know is that the now approximately $7 billion dollars has been placed (per the most recent press release at the U.S. International Reserve Position page) and directed into something called "other (foreign currency assets invested through reverse repurchase agreements)" which is a very fancy way of saying that its a loan. For those who want more detail, a fuller definition is here.

That does tell us that it's probably in Euro based repos, but since the classifications are not terribly specific and we do know that governments have been known to not always be fully open and above board about what they're doing, we really don't know for sure what it is.

A close up of the period from Sept 2007 through early August 2008:


The actual timing and dollar details of the recent intervention are as follows:
  1. As of the reporting weeks ending June 13th & June 20th, $6.381 billion dollars were sold by the ESF in Euros (Euros were sold, dollars were bought). The ESF maintains the account balances in dollars, but the money is actually in Euros (or Yen for the Yen portion).
  2. During that first week, the value of the dollar index moved from 72.39 to 74.15 and then back to 73.43 the following week.
  3. The reporting of the ESF actions from the weeks ending June 13th & June 20th was not made public until July 14th.
  4. The dollar index closed at 71.87 on July 15th, which was the recent low.
The actual facts show that the ESF intervention preceded *any* other significant factor to the dollar move.

Regarding the many previous red dots on the chart that show probable intervention prior to June 2008, just the almost perfect match between the Euro ESF balance and the Euro value lines should tell the story of how well the various small operations worked. Even more, the two lines converge quite well between September 2007 and May 2008 and are strong evidence of the very probable small ESF interventions. Note also that the algorithm to determine probable intervention is proprietary... and feel free to ignore or disbelieve it in spite of the evidence of the closing gap. Also note that currency intervention can be done in both directions. And also note this quote, which is key in understanding interventions in general:
...dollar holdings of foreign governments and central banks rose by $41 billion in 1986 and kept rising this year; that represents their intervention in currency markets. Hence, at the exchange rates that prevailed last year, private capital inflows to the United States were not enough to finance its current-account deficit. "Without official intervention," Mr. Perry said, "the dollar would have fallen even further than it has." -- New York Times, 1987

As an aside, one of the oddest items about the ESF is that the best we can tell, about 70% of its initial funding in 1934 came from proceeds of F.D.R.'s confiscation of gold and its subsequent revaluation from $20 to $35/oz.

The following is commentary on dubious blogging / journalism, specifically in the dollar intervention area and regarding Mike "Mish" Shedlock and his recent blog about intervention and my work as posted on iTulip. Skip it if you're uninterested.

First, a definition: Dubious Journalism: Journalism that exploits, distorts, or exaggerates the news to create sensations and attract readers.

This is the chart he posted. He added both the dark blue trend line and the dark blue oval.


His first comment was "Assuming one buys the story, what stands out is 13 consecutive alleged interventions that all failed.".

Then we have his statement on intervention, either from GATA or the AP. The source was neither clear nor linked.
"It would take great sums of money to make any difference. The foreign exchange market is the largest in the world, with over $1 trillion traded each day."

Later on, we have "A Look At Japan's Intervention in 2003-2004" along with the following chart and this text: "If ever there was proof of the absurdity of currency interventions there it is. Ironically the Yen started plunging shortly after Japan stopped trying to force down the value of the Yen."


Lastly, we have the section on "The Primary Trend Cannot Be Suppressed", the first sentence of which is "The primary trend in currencies cannot be suppressed and even a cyclical countertrend move cannot be suppressed.".

There's also the roughly $55 billion swap agreement that the Fed has with the European Cental Bank and about another $10 billion with the Swiss Central Bank, both of which were ignored. The details of both are not public, but they do exist and are likely being used in other behind the scenes (by definition) operations.

Also, neither the European Central Bank nor the Bank of Japan were mentioned, and to imply by virtue of omission that central banks don't cooperate during periods of crisis is both ridiculous and again displays a large lack of understanding of the real world.

Tanta at Calculated Risk also observed some issues with Mish's incorrect conclusions about "evidence of walking away" and his theory on foreclosure timelines recently at Walking Away and Reading Delinquency Reports - another example of "issues" with Mish's analysis and treatment of facts.

Some may consider that this is a rant, and fair enough. But I maintain that the way Mish treated the actual facts and did not truly or fully explore the full details and facts etc. is less than wise to say the least, and is also actual evidence of very dubious journalism and blogging. Additionally, an actual refusal to look at and admit to the actual facts is very far from a professional attitude and approach.

And to express the conclusion another way and turn the volume up, Mish blew it big time and heinously as he has before by not only completely blowing it on obtaining and properly analyzing all the facts and data, but also compounding those errors by practicing dubious journalism via exploiting, distorting and exaggerating the actual facts to create sensationalistic effects and attract readers. Be very wary of any conclusions or analysis he makes - it could easily be quite dangerous to your wealth since he is apparently more interested in readership than the actual facts.

Mish's motto: "Pay no attention to that man behind the curtain."

Dollar intervention: Facts versus ideology
Gold price manipulation/control proof
Never believe conspiracy theories...