Last week's announcement of a government guarantee for money market mutual funds stated that the backing for the guarantee would be provided by the $50bn Exchange Stabilization Fund (ESF). Essentially, this is the fund which the US Treasury would use to fund intervention in the foreign exchange market if required, and includes the Treasury's share of the US foreign currency reserves (the rest being held by the Federal Reserve in its System Open Market Account). According to Michael Bordo, this is the first time in the ESF's history that it has been used for domestic purposes.
To RebelEconomist, this initiative begs the question, how can this foreign currency fund be used for domestic purposes? Well, the ESF does currently hold about $17bn in dollar securities, to provide dollars in case the US government wanted to sell dollars in the foreign exchange market, but the size of the guarantee accounts for the entire ESF, including its euro, yen and SDR assets. The implication is that, if the
For now at least though, no plans have been announced to draw on the much larger, and more iconic, US gold reserves.