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The Federal Reserve’s Nuclear Option: A One-Way Street to Oblivion

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The Fed cannot create a bid in bidless markets that lasts beyond its own buying.

We all know the Federal Reserve (and every other central bank) has one last Doomsday weapon to stop a meltdown in the global financial markets: creating trillions of dollars out of thin air and using the cash to buy assets that are in free-fall. This is known as “the nuclear option”–the direct monetizing of stocks, Treasury bonds, commercial real estate mortgages, student loans, corporate bonds, non-U.S. sovereign bonds, subprime auto loans, defaulted bat guano securities, offshore loans denominated in quatloos–you name it: The Fed could print money and buy, buy, buy to create and maintain a bid in bidless markets.

The idea is to stop a cascade of panic by buying assets in quantities large enough to staunch the avalanche of selling. The strategy is based on one key assumption: that no more than a small percentage of the asset class will change hands in any day or week.

Thus a low-volume sell-off in the $20 trillion U.S. equity markets can be stopped with large index buy orders in the neighborhood of $10 – $100 million–a tiny sliver of the total market value.

But in a real meltdown, popguns will no longer conjure a bid in suddenly bidless markets, and the Fed will have to become the bidder of last resort on a massive scale in multiple markets. We need to differentiate between loans, backstops and guarantees issued by the Fed and actual purchase of impaired assets.

After poring over all the data, the Levy Institute came up with a total of $29 trillion in Fed and Federal bailout-the-financial-sector loans and programs. The GAO found the Fed alone issued $16 trillion in loans and backstops:

The heart of quantitative easing and ZIRP (zero interest rate policy) is the Fed’s direct purchase and ownership of assets: residential mortgage-backed securities and Treasury bonds. The Fed has been operating not as the buyer of last resort but as the bidder who buys interest-sensitive securities to keep interest rates near-zero (known as financial repression).

The Fed’s purchases of impaired mortgages has also made its balance sheet “the place where mortgages go to die:” the Fed can hold impaired mortgages until maturity, effectively masking their illiquidity and impaired market value. We can see these two major purchase programs in this chart from Market Daily Briefing:

Despite all the talk of “tapering,” the Fed’s asset purchases on a grand scale continues:

Such a handy word, “taper:”

The Nuclear Option rests on another questionable assumption: markets only go bidless in brief panics, not because the assets have lost all value. The basic model of Fed emergency loan programs and asset-buying is 1907–a financial panic that erupts out of a liquidity crisis.

In a liquidity crisis, the underlying assets supporting loans retain their market value; the problem is a shortage of credit needed to roll over short-term loans on those still-valuable assets.

But what the world is finally starting to experience is not a liquidity crisis: it is a valuation crisis in which assets and collateral are finally recognized as phantom. I explained the difference between liquidity and valuation crises in In a Typhoon, Even Pigs Can Fly (for a while) (January 30, 2014).

Let me illustrate why the Fed’s Nuclear Option is a one-way street to oblivion.

What is the market value of a defaulted student loan that has no hope of ever being repaid by an unemployed ex-student debtor? The answer is zero: the “asset” has a value of zero and will always have a value of zero. It is not “coming back.”

What is the market value of a commercial mortgage on a dead mall that has no hope of ever being repaid by an insolvent mall owner? The answer is zero: the “asset” has a value of zero and will always have a value of zero. It is not “coming back.”

The New York Times recently published an article that nails the core issue in the entire U.S. economy: the top 10% is the only segment able to support additional consumption:The Middle Class Is Steadily Eroding. Just Ask the Business World     (Yahoo news version)

“The Biggest Redistribution Of Wealth From The Middle Class And Poor To The Rich Ever” Explained

This raises an obvious question: can the excess consumption of the top 10% support every mall, strip mall, premium outlet and retail center in the U.S.? Equally obvious answer: no. Most dead malls cannot be repurposed; the buildings are cheap shells, and while the land might retain some value for future residential housing, the coming implosion of the latest housing bubble nixes that hope: WARPED, DISTORTED, MANIPULATED, FLIPPED HOUSING MARKET (The Burning Platform).

What is the value of a company’s shares if that company has lost any means of earning a profit? Answer: the book value of the company’s assets minus debt.Given the staggering debt load of the corporate sector, the real value of many companies once their ability to reap a real (as opposed to accounting trickery) net profit vanishes is near-zero.

How about the value of Greek sovereign debt? Zero. The value of mortgages on empty decaying flats in Spain? Zero. And so on, all around the world.

This leads to a sobering conclusion: Should the Fed attempt to create and maintain a bid in bidless markets, it will end up owning trillions of dollars in worthless assets–and the market for those assets will still be bidless when the Fed stops being the bidder of last resort.

Let’s assume the Fed’s leadership will feel a desperate need to stop the next global financial meltdown in valuations. Offering trillions of dollars in liquidity will not stop sellers from selling nor magically create value in worthless assets. The Fed can only stop the selling by becoming the entire market for those assets.

The list of phantom assets the Fed will have to buy outright with freshly conjured cash is long. Let’s start with hundreds of billions of dollars in defaulting/impaired student loans. Once the debtors realize the system is swamped with defaults and can no longer hound them, the flood of defaults will swell.

The Fed can buy as many defaulted student loans as it wants, but it will never raise the value of those loans above zero. The market for worthless student loans will remain bidless the second the Fed stops buying.

The same is true of all the defaulted, worthless commercial real estate (CRE) mortgages on dead malls, decaying strip malls and abandoned retail centers: no amount of Fed buying will create a market for these worthless assets.

Dead Mall Syndrome: The Self-Reinforcing Death Spiral of Retail (January 22, 2014)

The First Domino to Fall: Retail-CRE (Commercial Real Estate) (January 21, 2014)

There is no technical reason the Fed cannot create $10 trillion and buy up $10 trillion of worthless or severely impaired assets; the Fed can become the owner of every dead mall and every defaulted auto loan in America should it wish to.

That would of course render the Fed massively insolvent, as its assets would be worth a fraction of its liabilities. But so what? The Fed can simply assign a phantom value to all its worthless assets and let them rot until maturity, at which point they vanish down the wormhole.

The point isn’t that “the Fed can’t do that;” the point is that the Fed cannot create a bid in bidless markets that lasts beyond its own buying. The Fed can buy half the U.S. stock market, all the student loans, all the subprime auto loans, all the defaulted CRE and residential mortgages, and every other worthless asset in America. But that won’t create a real bid for any of those assets, once they are revealed as worthless.

The nuclear option won’t fix anything, because it is fundamentally the wrong tool for the wrong job. Holders of disintegrating assets will be delighted to sell the assets to the Fed, of course, but that won’t fix what’s fundamentally broken in the American and global economies; it will simply allow the transfer of impaired assets from the financial sector and speculators to the Fed.

Anyone who thinks that is the “solution” should read QE For the People: What Else Could We Buy With $29 Trillion? (September 24, 2012).

The Retail Commercial Real Estate Domino with Gordon T. Long and CHS:

The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economyWith the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?

go to Kindle edition
We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work – and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read Chapter 1/Table of Contents

print ($20)       Kindle ($9.95) 

Things are falling apart–that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.


The Federal Reserve’s Nuclear Option: A One-Way Street to Oblivion


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February 6th, 2014 at 3:18 pm

Fed Rattling Emerging Markets to Keep U.S. Propped Up

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by Greg Hunter – February 5, 2014

Analyst and stock trader Gregory Mannarino says the market meltdown this week was caused by the Fed and weak economy. Mannarino says, “We understand there is a dynamic that has been changing here in the market with regard to the Fed’s purchasing mortgage-backed securities and bonds. This has rattled the emerging markets. They’re having problems with their currencies . . . The Federal Reserve has created an environment of distortions. By them pulling back some of this liquidity from the global economy, they’ve caused problems in these emerging markets, and this is being done on purpose.” What is the Fed trying to accomplish by destabilizing emerging market countries? Mannarino claims, “So, by rattling the emerging markets here, they are going to force investors into U.S. equities and into the U.S. bond market. It’s sort of a backdoor stimulus. . . . This just keeps the party going. That’s all this is.”

This may work in the short term, but it is not long term bullish for the markets. Mannarino warns, “We have this issue with the U.S. economy. They have been force feeding us nonsense . . . that we are in some kind of recovery. . . . This ISM number we got (Institute of Supply Management), we have not seen a pullback like this since 1980. It rattled the market. . . . We’re also getting mediocre earnings reports. We got unemployment numbers that are not good. So, this is spooking the market.” Looking at the big picture of the global economy, Mannarino goes on to say, “I am still a bull here in regards to the U.S. equity markets, but we all know where this is going. This is going to end terribly at some point. A complete financial meltdown is happening. You can see this already how the Federal Reserve has distorted this beyond the point of ridiculousness. Now, they are forcing the emerging market investor to look to the U.S. equity markets. At some point, people are going to see this whole thing is not sustainable. We are going to have a crisis of currency, a crisis of debt that is going to rock the core of the earth—period.”

This is a confidence game according to Mannarino. He says, “This is all about perception, not reality. If we were really in some type of a recovery, would we be talking about extending unemployment benefits for people? Would we be talking about more stimulus? Of course not, because there is no recovery. This is just smoke and mirrors across the board.” Don’t expect the market to plunge just yet because Mannarino says, “The Fed is counting on turmoil in the emerging markets to drive money into the U.S. market to keep the system propped up.”

Mannarino contends what you are seeing now is just a short term trade. In the longer term, Mannarino predicts, “Without a doubt, this is going to blow up. . . . I’ve been saying this for years now–we are headed for a pan global financial cataclysm. That’s a fact.” So, how does Mannarino plan to protect himself from this surefire coming calamity? Mannarino says, “I pull my gains out of the market, and I turn them into hard assets. I am the biggest precious metals bull out here. I can’t imagine a better place to be than in gold or silver, especially silver.”

Join Greg Hunter as he goes One-on-One with Gregory Mannarino of



After the Interview: Gregory Mannarino puts out free trades on his popular website You can check his track record on the site. This site requires no membership or fee.


Fed Rattling Emerging Markets to Keep U.S. Propped Up-Gregory Mannarino

[Greg Hunter]

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Written by testudoetlepus

February 6th, 2014 at 3:12 pm

Jim Willie – Does China Own The Fed?

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Rick Wiles interviews Jim Willie, to discuss a host of economic and geopolitical topics including China’s recent implementation of capital controls, acquisition of controlling interest of the Federal Reserve, and their subsequent plan to roll out a dual currency in the United States.

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Jim Willie – Does China Own The Fed?


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February 4th, 2014 at 2:27 pm

What Shadow Banking Can Tell Us About The Fed’s “Exit-Path” Dead End

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Over four years ago, in “Chasing the Shadow of Money“, Zero Hedge first presented a curious if perverse aspect of the Fed’s QE experiment in the context of the modern monetary system: the extraction of “quality” collateral by the Fed’s daily purchases of Treasury (and MBS) securities, and it replacement with reserves – a transformation which while boosting asset prices, results in an ongoing deleveraging of shadow liabilities, as well as a persistent slowdown in the velocity of collateral (due to both its increasing degradation and increasing counterparty risk). Our concurrent investigation into the properties of shadow banking led us to the correction conclusion back in March 2012, and explanation why, the Fed would have to do at least another $3.6 trillion in QE. We are now $1 trillion in, and rapidly rising even as the 10 Year equivalents held by the Fed now represents almost one third of the entire Treasury market: an unprecedented collapse in available private-sector collateral.

And while there has been a small if vocal subset of voices warning about the problems of collateral scarcity, and the implications for the global financial balance sheet if and when renormalization is attempted, for the most part, this remains a very much misunderstood process. Perhaps the main reason for this is that, as Peter Stella summarizes, “When it comes to reducing excess reserves, the ‘how’ matters as much as the ‘when’ and ‘how much’. Understanding this point requires mastery of the brave new world of shadow banks and re-hypothecation – a world that either did not exist or was truly in the shadows when most of us were taught about money and credit creation.”

Over the past 5 years we have attempted to provide a glimpse into how modern shadow banking (with a world in which rehypothecation is the “source” of tens of trillions in deposit-free credit money), however, the vast majority of modern economists and those espousing modern “magic money tree” theories, still view the world through the lens of a 1980s textbook, which is absolutely insufficient when attempting to explain marginal credit creation amounting to tens of trillions in the shadow banking system. Ironically, it was precisely the collapse in collateral chains and the freeze in shadow counterparty derivative exposure just before the failure of Lehman, captured with stunning precision by Matt King’s “Are the Brokers Broken?” report issued a week before the Lehman bankruptcy, that explained more about the perilous nature of modern finance, than any other paper written before or after (p.s. Yes, the brokers were, and still are, broken).

Not surprisingly, the topic of “high quality collateral” and specifically, its disappearance, has been the topic of not one but both of the last Treasury Borrowing Advisory Committee refunding presentations (here and here). And since Tapering was fundamentally, all about slowing down the rate of high quality collateral extraction, one can expect the next TBAC refunding presentation be a veritable screamfest of warnings from the likes of Citi’s Matt King and CS’ James Sweeney (sadly it seems they will fall on increasing more deaf ears). That said, if and when the Fed is compelled by the JPM/Goldman-chaired TBAC to finally slow down and/or halt the pace of collateral extraction, the question is what will happen then, especially as pertains to the all important shadow banking system.

About a month ago, the IMF’s Manmohan Singh wrote a White Paper titled simply enough “Collateral and Monetary Policy” where in 17 pages, which dealt precisely with this issue, which among other things did a great job of explaining the logic behind the Fed’s proposal to commence a reverse repo program which would be expanded to include non-bank participants, in effect expanding the eligibility of the Fed’s “reserves as collateral” away from pure-play bank institutions. However, more than anything, Singh was lamenting the ongoing collapse in the velocity of collateral, as follows: “The economy needs the collateral services that these securities can offer, which transfers with possession, not ownership. Securities in the market domain have a velocity; those at the central bank do not. So, D (excess reserves) does not substitute for C1 (good collateral) and thus there is a net reduction in overall financial lubrication.”

That also suggests that a perfectly centrally-planned market should be oblivious of counterparty (ownership less important than possession) risk, in order to preserve financial “lubrication” – a commandment which so far markets have failed to comply with. In fact the more Bernanke absorbs quality collateral, the lower the velocity of existing collateral. This is also one of the main difficulties facing the Fed. Recall slide 30 of the TBAC’s Q1 presentation appendix on liquid private collateral:



Here again is the punchline:

  • “the more restricted the private sector’s ability to create safe, liquid, and moneylike collateral, the harder the public sector must work to supply it through deficits and easy monetary policy”

In other words, until such time as the housing bubble has been reflated enough and yield-chasing through RMBS and CMBS securitization is once again a staple of the daily “financial innovation” (which makes housing a Treasury-equivalent HQC), there is little the Fed can do to truly pull away, and the Treasury will be forced to come up with any and every excuse to “supply collateral through deficits.” Hence the need for acute regional conflicts such as Syria et al.

But going back to the original topic, namely what are the (increasingly more limited) options for the Fed as it seeks to unwind QE from a shadow banking perspective, we go to the abovementioned Peter Stella, who over the weekend wrote an excellent article in VoxEU titled “Exit-path implications for collateral chains” dealing with just this. His summary:

QE is still on, but central banks are pondering exit pathways. Exit requires vacuuming up excess reserves, winding down massive securities holdings, and restoring normal interest rates – all without killing the recovery. This column points to the importance of a seemingly technical issue – the impact of the exit on the supply of high-quality collateral. This matters since collateral plays a critical role in today’s credit and money creation processes. When reducing excess reserves, the ‘how’ matters as much as the ‘when’ and ‘how much’.

First, here is what according to Stella “needs exiting”

The Federal Reserve balance sheet is much simpler than at the height of the crisis.

  • If Rip Van Winkle awoke today after a five-year nap, he would see only one key development in the Fed’s balance sheet – securities holdings higher by $2.9 trillion and deposits of depository institutions (banks) higher by $ 2.2 trillion.2

If he asked how this happened, Rip would be given a very simple answer.

  • The Fed bought securities to lower interest rates; it paid for them by creating bank reserves.

That is, the Fed credited the securities seller’s commercial bank with a deposit at one of the 12 Federal Reserve Banks, and the commercial bank then credited the seller’s account. On net, privately held securities were exchanged for Fed deposits.

If pressed further as to why banks are holding enormous reserves at the Fed, Rip would get an equally simple answer: Banks have no choice.

  • It is – for all intents and purposes – technically and legally impossible for a bank to transfer deposits at a Federal Reserve Bank to a nonbank.

Reserves in the US are defined to comprise bank deposits held at one of the 12 Federal Reserve Banks (plus qualifying vault cash).

  • Fed deposits may be transferred only to entities entitled to hold Fed accounts.

This is a key point when thinking about the various exit paths ahead. Fed deposits are not fungible outside the banking system, but Treasuries are.

Bullet point three is not exactly correct, but we’ll get into the nuances shortly. For the most part, this is an accurate and comprehensive summary of the bind the Fed-cum-Commercial Banking monetary creation mechanism has found itself in.

Stella goes on to explain the impact of the “portfolio effect” on collateral:

Large Scale Asset Purchases (LSAPs) have inadvertently caused a significant change in the composition of assets available in the open market.

  • The stock of marketable, highly liquid, AA+ collateral fell by trillions (disappearing into the Fed’s portfolio, i.e. System Open Market Account).
  • The stock of assets available only for interbank trade (bank reserve deposits at the Fed) rose by trillions.

The essence of this change has nothing to do with credit risk. Treasuries and Fed deposits are equally safe. But they differ significantly in their marketability. Anyone can trade Treasury securities; only banks can exchange Fed deposits. The massive importance nonbanks play in today’s markets means that this portfolio effect can be important. To understand why marketability beyond banks matters, it is necessary to understand the modern money and credit creation process.

The bolded above is also the reason why the Fed is currently considering ways to expand its reverse repo pathways (when the time comes to unwind liquidity) to non-bank actors as we explained before.

Stella then proceeds into a useful historical lesson, explaining why those who don’t or can’t grasp the nuances of shadow banking and modern money creation, are completely clueless as they approach the Fed’s action from the perspective of finance as it existed in the 1980s.

One cannot think straight about the future impact of different exit strategies without understanding of the role of bank reserves in today’s financial markets.

  • Banking and money creation has not worked for at least two decades in the way that most people learned in school.

The old system was rather simple in the textbooks. The basic assumptions were (i) all credit was provided by banks; (ii) all bank credit (assets) were funded by the issuance, or creation, of depository liabilities (money) subject to a reserve requirement; and (iii) central banks controlled credit/money/inflation by rationing bank reserves. A stable ‘money multiplier’ was hypothesised to allow central banks to accurately predict the eventual impact of changes in bank reserves on money and credit.


style=”border-style: none”The problem with the old theory of monetary operations is that none of the three assumptions has been true for at least a generation.


Most credit in the US is created by nonbanks; virtually all bank lending is funded by the creation of liabilities that are not subject to reserve requirements, and central banks do not ration reserves. In fact they take great pains to provide banks with the amount of reserves they desire. Central banks influence credit not by rationing the quantity of reserves but by altering the interest rate that banks must pay to obtain the quantity of reserves they desire.

  • Today, credit creation in general and money creation in particular are no longer tied to the stock of reserves (i.e. the stock of banks’ deposits at the Fed).

Today, bank deposits at the Fed have only one real role – to facilitate management of the payments system. They are used to settle transactions among banks. Thus:

  •     The old notion that the quantity of bank reserves constrains lending in a fiat money world is completely erroneous.
  •     Traditional monetary policy has virtually nothing to do with money.

This is clearly seen in the long-term evolution of reserves and credit.

  •     In 1951, total commercial bank deposits at the Fed were $20 billion larger than they were at the end of 2006.
  •     Over the same period, total US credit-market assets rose by over 10,000%.5

Plainly the stock of reserves is no longer connected to credit or meaningful measures of “money” via the old-notion of a reserve-ratio-based money multiplier.

Here, Stella gets into a tangent that while accurate is not comprehensive. He believes that “One of the unintended consequences of Fed LSAPs has been the withdrawal of high quality liquid collateral such as US Treasuries from the financial markets paid for by crediting commercial bank reserve accounts. As discussed above, the banking system as a whole cannot dispose of these assets (reserves). At the same time, banks are under massive pressure world-wide to deleverage. This can take place either by increasing capital (a bank liability), which is costly to shareholders, or by reducing assets. Thus banks’ massive holdings of reserves at the Fed are ‘deadwood’ as far as the banks and their credit-creation capacity are concerned. They may crowd out credit. The deadwood problem will get worse if the US tightens regulatory leverage ratios – that is, reduces the maximum ratio permitted between a bank’s total assets and capital.” This is correct, but there is more as we will shortly show.

Which brings us to what we believe is Stella’s punchline:

There is a great irony in the journalistic history of monetary policy. What many are calling central bank “money creation” “helicopter money” or “rolling the printing presses” may – in combination with tighter leverage ratios – lead to a tightening of bank credit and deflationary pressures. And all this is occurring while the spectre of uncontrolled credit expansion and monetary debasement are being decried countless times by those who have not recognized that yesteryear’s monetary paradigm is defunct.

Well, no. While indeed forced deleveraging and crowding out of “assets” with reserves may result in lower asset prices (if Basel III were to actually be implemented that is, instead of constantly postponed to some point in the indefinite future), the bigger question is how the Fed would respond to such a deflationary phenomenon. The answer: is simple – more of the same, resulting in such a deluge of nominal dollars in the monetary base that inevitably the reserve status of the US currency becomes questioned (especially if preceded by such Fed-confidence shaking events as the Non-taper debacle of last week). So while there may well be a nominal deflation problem in the future, the offset will be one and the same not only in the US but all developed world central banks (as the BOJ has recently shown can imitate the Fed so well when necessary). From there, the distance to a wholesale refutation of a broken fiat-monetarist-Keynesian paradigm is progressively shorter. And keep in mind, hyperinflation is not lots of inflation: it is an outright loss of faith in a currency (and/or loss of reserve currency status), for political or monetary reasons.

At this point Stella touches on a topic we have discussed before, namely the tactical, operational aspects of reserve drainage: whether they should proceed by reverse repo or term deposits. Needless to say, Stella is, correctly, a fan of the repo extraction route, and is why the Fed is also recently contemplating just this. In an ideal world, where the Fed actually gets to a point where it can implement not only a tapering without destroying Emerging Markets, but actually commence to withdraw liquidity from the market without the most epic market tantrum ever, this is the so called “exit pathways.”

Term deposits and reverse repos might appear very similar reserve draining tools to the proverbial Rip Van Winkle who slept through the radical changes in credit creation, collateral chains, and expansion of the shadow banking system.

  • To Rip Van Winkle, term deposits and reverse repos are both simple transformations of overnight deposits into 7, 14 or 28 day “term” deposits, or to 7-, 14-, or 28-day reverse repos.

Well informed observers, however, will immediately see the critical difference (a good start on getting informed is to read Singh and Stella 2012).

  • A reverse-repo has a portfolio effect that term deposits do not.

The reverse-repo takes cash out of the market and replaces it with high-quality collateral. Thus a key difference is the enlargement of the market supply of good collateral that banks and nonbanks would posses and thereby be able to use to fund their asset positions and create credit via ‘collateral chains’. (Technically this re-lending of collateral is called re-hypothecation.) Thus reverse repos add to financial lubrication in a way term deposits do not.


This ‘sweetener’ would soften the bitter medicine of rising interest rates and alleviate the so-called ‘high quality collateral shortage’ pointed out by Treasury Borrowing Advisory Committee members (US Treasury 2013).

The magnitude of the task would be substantial: somewhere in the neighborhood $3 trillion (or more) in reserve reduction.

What is the rough magnitude of the task if the Fed balance sheet were to remain at its current size?

  • In the two weeks ending 27 August 2008, average daily reserves held by depository institutions (banks) were $46.1 billion; required reserves were $ 44.1 billion.12 Of this, vault-cash used to satisfy required reserves was $36.4 billion and reserve balances held at FRB were $9.7 billion.
  • In the two weeks ending 21 August 2013, average daily reserves held by banks were $2.2 trillion – that’s trillion with a ‘t’; required reserves were $115 billion – that’s billion with a ‘b’. Of this, vault cash used to satisfy required reserves was $53.4 billion and reserve balances held at FRB were $2.1 trillion.
  • Thus bank excess reserves rose by $2.123 trillion during the last five years.

Of course, the Lehman bankruptcy convinced banks that they want more excess reserves than before, so the Fed will not need to drain the full $2.123 trillion. Let us say the task is to eliminate about $2 trillion in excess reserves. But of course the world does not stand still. The number could be closer to $3 trillion by the time LSAPs end.


What this means is that the change in the availability of good collateral could be quite significant.

So to summarize Stella’s take on the Fed’s exit pathways, when contemplating such an event on broader structural collateral limitations:

Many major central banks are thinking strategically about exit pathways – how best to return to normal central banking. The main point of this column is to point to a key issue – the role of collateral – that has been under appreciated by many economists who are not in daily contact with financial markets.


When economies strengthen and central banks begin to drain reserves from the system, they will inevitably alter the composition of private sector asset portfolios.

  • If good collateral is swapped for reserves, banks and nonbanks can use the collateral to fund create credition via what are known as collateral chains.
  • If only term deposits are swapped for reserves, or if interest rates are raised only through IOR, the opportunity to lengthen collateral chains will be missed.

In today’s financial world, these chains are critical sources of money and credit creation – the days of textbook money-multipliers are long gone.


When it comes to reducing excess reserves, the ‘how’ matters as much as the ‘when’ and ‘how much’. Understanding this point requires mastery of the brave new world of shadow banks and re-hypothecation – a world that either did not exist or was truly in the shadows when most of us were taught about money and credit creation.

All of the above deserves a careful re-reading in its original VoxEU format (found here).





And now for a quick, and important, tangent. Stella’s key contention is that Fed reserves parked with commercial banks are inert: that is, the securities (assets) they replace on bank balance sheets, could have participated in collateral chains and generally increasing the velocity of collateral, which by the way as Singh showed a month ago, has dropped to the lowest, 2.2, since 2007 and probably long prior:



This is correct, and through second-order effects (i.e., reflexivity) is forcing the continued deleveraging in shadow banking credit-money (ABS, repos, GSEs, etc), as we show every quarter following the release of the Fed’s Flow of Funds statement.

However, there is a very key trade-off to the banks, and perhaps this goes to the heart of the argument of just how the Fed engages in goosing risk assets, a topic which many still are confused by.

To make it all crystal clear, we present Exhibit A: a chart showing total loans and deposits at US commercial banks (local and foreign) just after the failure of Lehman, compared to their balance sheet as of the most recent week (as reported by the Fed’s H.8 statement).

What it shows is the following:



This is perhaps the one chart that explains not only all that is wrong with US banks currently, but also why the US stock market is where it is.

It shows, among other things, that while over the past five years, total loans and leases in US commercial banks have not increased by one dollar, total deposits have risen by $2.2 trillion to $9.5 trillion. Why is this important? This is what Singh had to say about deposits:

When central banks buy securities, one of the immediate effects is to increase bank deposits, which adds to M2 (in the U.S., practically the Fed has bought from nonbanks, not banks). Whether banks maintain those added deposits as deposits, or convert them into other liabilities (or, by calling in loans, reducing or moderating the growth of their balance sheets), is an open question.

Sure enough, as the chart above shows, the total loan hole resulting from the increase in deposits was plugged by none other than the Fed, which over the past 5 years has injected $2.2 trillion in securities into commercial banks, leading to the observed increase in total deposits to nearly $10 trillion.

Furthermore, we, or rather, JPMorgan is happy to respond to Singh’s “open question”, courtesy of none other than the London Whale fiasco, which “closed” said question quickly and effectively.

Presenting Exhibit B, which comes directly from page 24 of JP Morgan’s June 13, 2012 Financial Results appendix, in which the firm laid out, for all to see, just how it is that the Firm generated over $5 billion in prop trading losses in its Chief Investment Office unit – a department which had previously been tasked with “hedging” trades but as it turned out, was nothing but a glorified, and blessed from the very top, internal hedge fund, one with $323 billion in Assets Under Management! To wit:



The chart above shows the snapshot – from the horse’s mouth – of how a major “legacy” bank, one engaged in both deposits and lending, decided to use the “deposit to loan gap” which had swelled to $423 billion at just JPM (blue box in middle), and led to $323 billion in CIO “Available For Sale securities.”

What happened next is well-known to all: JPM’s Bruno Iksil, together with Ina Drew and the rest of the CIO group, decided to put on a massive bet amounting to hundreds of billions in notional across the credit spectrum (the one place where a position of this size could be established without becoming the entire market, although by the time it imploded Bruno Iksil was the market in IG9 and various other indices and tranches). The loss was just as staggering, and amounts to what is one of the largest prop bets gone horribly wrong in history.

The aftermath for JPM is well-known, and as was disclosed last week, the “tempest in a teapot” would cost JPM $950 million to settle everything.

However, what is more important for those concerned by goings on in the Shadow banking system, JPM revealed just how those supposedly “inert” reserves end up being transformed on a bank’s balance sheet into an ROI, without them ever leaving the bank.

As the London Whale showed without a shadow of a doubt, the key steps are as follows:

  1. Excess reserves (assets) are represented as cash deposits (liability)
  2. The excess cash is then used as collateral for margined securities – futures, swaps, options, and any other derivatives – that express a risky position, such as IG9 (long or short), or for that matter any security that simply needs initial margin, and better yet, allows massive leverage. For example the ES, aka E-mini contract, which as everyone knows is the main driver of market risk in the US capital markets, and which allows for constant resetting of risk-levels higher (in alignment with the Fed’s primary directive).

And that’s it. We, or rather JPMorgan, demonstrated how excess reserves, without ever leaving a bank’s balance sheet and being used to actually purchase securities, can be transformed, via lending and rehypothecation, and thanks to incremental leverage on the underlying cash, are able to generate far greater returns to commercial banks (or rather their prop trading groups, such as JPM’s CIO) than simply lending out said cash. This shows that for as long as the Fed is engaged in withdrawing quality collateral (via QE), a bank’s liquidity preference will always be to using reserve cash as collateral instead of lending it out (in the process further lowering the velocity of money, but who cares as long as the bank’s ROI is the highest possible). All of this, of course, is made possible thanks to Glass-Steagall which allows banks to take deposit, reserve or any other sources of funds, and lever them up via prop trading desks and generate outsized returns.

Which takes us back to Stella’s punchline:

There is a great irony in the journalistic history of monetary policy. What many are calling central bank “money creation” “helicopter money” or “rolling the printing presses” may – in combination with tighter leverage ratios – lead to a tightening of bank credit and deflationary pressures. And all this is occurring while the spectre of uncontrolled credit expansion and monetary debasement are being decried countless times by those who have not recognized that yesteryear’s monetary paradigm is defunct.

Ah yes, the spectre of uncontrolled credit expansion may be defunct, but that does not mean that the “helicopter money” created by the Fed is not re-entering capital markets. As shown above, and as anyone can see when looking at daily record highs in the S&P500, it most certainly is.

For that matter, banks couldn’t care one bit if the underlying reserves are inert and excluded from non-bank participants: what is far more important is that its margined equivalent in the capital markets, is perfectly fungible, and that the cash collateral supporting it can and will result in much higher asset prices with every day that Bernanke injects more liquidity into bank reserves and thus, deposits.

Of course, the flipside is the inverse: once bank liquidity preference inverts, if and when the Fed were to finally engage in exiting its current policy, one effect would be the immediate collapse of the stock market (and any other marginable) bubble.

However, the resulting monetary expansion via far more conventional lending channels would then promptly, and long-overdue, re-enter the broader economy. The paradox is that for the Fed to finally start “fixing” the economy, instead of the brokerage accounts of a few billionaires, it has to finally stop QE, because as long as it is running, the only “inflationary” sink hole will be global risk markets, and the only thing levitating are all asset prices enveloped in this bubble.

The far bigger problem is that once all those risky positions which have found a price-clearing manifestation through capital markets, and are leveraged exponentially more than the mere $2.2 trillion in reserves injected to date by the Fed, begin to unwind, the “flow” exodus away from paper and into physical assets of all shapes and sizes (i.e., BLS-measured inflation) will be precisely the long-deferred advent of all that inflation which the Fed had so far been able to redirect into market asset bubbles.

At that point, when faced with a liquidity tsunami in full reverse mode away from asset bubbles, the last thing on anyone’s mind unfortunately will be whether the proper liquidity extraction mechanism will be Reverse Repos or Term Deposits. 

But for things to get there, the US banking system has to be ready and willing to allow the great asset bubble deleveraging, which also means having bought sufficient amounts of hard assets in advance, mostly from their clients, ahead of the great “paper asset” unrotation. Keep a close watch for even more aggressive “sell” recommendations for gold, silver, and everything else that can be nailed down…


[What Shadow Banking Can Tell Us About The Fed’s “Exit-Path” Dead End]

[Zero Hedge]

Written by testudoetlepus

December 16th, 2013 at 3:24 pm

The USTBond Is Dying, A Wreck In Progress

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Flash Trading Hits USTreasury Bonds

by Jim Willie CB on Wednesday, 25 September 2013

The USTreasury Bond market breakdown is in progress, all part of the general USDollar global rejection that is taking the world by storm. Of course, residents inside the US Dome do not notice, since they only perceive it as the native currency. From conversations with common folk, discussions with investor types, and general observations for over 20 years, the Jackass belief is that only 5% to 10% of Americans are aware that the USDollar serves as a global financial instrument in contracts, the basis for trade settlement (mostly crude oil), with some extremely important consequences. A major development has begun, much like a metabolic life support system in concert with the Interest Rate Swap derivative contract. For two years or more, the USTreasury Bond market has been deeply dependent upon artificial demand derived from the derivatives. Entire bond rallies have been fabricated with 50:1 leverage, fully supported by the financial network propaganda. Without derivative flying buttress support, the giant USTBond Tower would have collapsed a couple of years ago. Now a new support system has been begun, a dangerous musical chairs long entrenched in the stock market. It has entered the bond market finally. Flash Trading!!

The USFed, the USGovt, and the Big US Banks urgently needed to stop the move in the 10-year bond yield (aka TNX). They needed to prevent a move above 3.0% on the USTreasury yield. They needed to avoid a calamity with both Interest Rate Swaps and USTBond carry trade reversals. They needed to avoid a trigger of sell stops. They needed to prevent the rest of the world selling off USTBonds within their reserves management systems, the foundation of their national banking systems. So the USFed and Big US Banks called upon themselves to place artificial high bids on USTBonds sold among themselves in a circle jerk of Flash Trading. They pushed the TNX below 2.9% quickly in the corrupt process. USFed Chairman Bernanke then backed off the Taper Talk threat, and the USTBonds rushed in a pathetic rally. The Jackass forecasted his retreat exactly, a bluff after a failed trial balloon. The bankers then resorted to the hidden work of computer algorithms. They altered the constructive dynamics of the bond market. They corrupted it one deeper level. The Flash Trade defense is pathetic, and will be revealed in coming weeks. The United States is in the process of being isolated on numerous fronts, as its monetary policy has merged with its military policy, both having merged long ago with its banking policy.

Sickness Seen In One Powerful Graph

The Rest . . . is here . . . .



“The USTBond is dying, a wreck in progress. As the old pillars fall and the new pillars rise, The Price of Gold will be set free.”…(A Must Read!)


| Gramercy Images |

Written by testudoetlepus

September 27th, 2013 at 12:35 am

Flash Trading Hits USTreasury Bonds

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BERNANKE THE GREAT, a photo by WilliamBanzai7/Colonel Flick on Flickr.


Flash Trading Hits USTreasury Bonds

home:  Golden Jackass website

subscribe:  Hat Trick Letter

Jim Willie CB, editor of the “HAT TRICK LETTER”

The USTreasury Bond market breakdown is in progress, all part of the general USDollar global rejection that is taking the world by storm. Of course, residents inside the US Dome do not notice, since they only perceive it as the native currency. From conversations with common folk, discussions with investor types, and general observations for over 20 years, the Jackass belief is that only 5% to 10% of Americans are aware that the USDollar serves as a global financial instrument in contracts, the basis for trade settlement (mostly crude oil), with some extremely important consequences. A major development has begun, much like a metabolic life support system in concert with the Interest Rate Swap derivative contract. For two years or more, the USTreasury Bond market has been deeply dependent upon artificial demand derived from the derivatives. Entire bond rallies have been fabricated with 50:1 leverage, fully supported by the financial network propaganda. Without derivative flying buttress support, the giant USTBond Tower would have collapsed a couple of years ago. Now a new support system has been begun, a dangerous musical chairs long entrenched in the stock market. It has entered the bond market finally. Flash Trading!!

The USFed, the USGovt, and the Big US Banks urgently needed to stop the move in the 10-year bond yield (aka TNX). They needed to prevent a move above 3.0% on the USTreasury yield. They needed to avoid a calamity with both Interest Rate Swaps and USTBond carry trade reversals. They needed to avoid a trigger of sell stops. They needed to prevent the rest of the world selling off USTBonds within their reserves management systems, the foundation of their national banking systems. So the USFed and Big US Banks called upon themselves to place artificial high bids on USTBonds sold among themselves in a circle jerk of Flash Trading. They pushed the TNX below 2.9% quickly in the corrupt process. USFed Chairman Bernanke then backed off the Taper Talk threat, and the USTBonds rushed in a pathetic rally. The Jackass forecasted his retreat exactly, a bluff after a failed trial balloon. The bankers then resorted to the hidden work of computer algorithms. They altered the constructive dynamics of the bond market. They corrupted it one deeper level. The Flash Trade defense is pathetic, and will be revealed in coming weeks. The United States is in the process of being isolated on numerous fronts, as its monetary policy has merged with its military policy, both having merged long ago with its banking policy.


As preface, consider a highly telling graph. No graph better demonstrates the failure of the last five years in monetary policy, and absent USEconomic recovery. The falling Money Velocity means the system is collapsing gradually. The infusion of phony new money is not addressing the key fundamental problem, insolvency of banks, businesses, households, and the USGovt. Putting a $20 bill in the hand of a manager of a broken business does not remove the insolvent condition. It only enables the manager to pay a part-time worker another few hours. The clueless cast of corrupt economists cannot notice, nor admit, that the QE & ZIRP monetary policy (hammer & sickle) is destroying capital by raising the cost structure. The capital destruction comes from businesses losing their profit margin, shutting down a business or business segment, cutting jobs, and putting equipment in mothballs or liquidating it. This is the biggest blind spot to economic policy. Obviously, the economists serve the syndicate, which benefits from toxic bond redemption with free money. The USFed is not engaged in a stuck stimulus, but rather a stuck destruction. The hammer & sickle are symbols of communist Politburo, no difference in contrast to the planned financial structure in the Untied States.



A recent event has occurred, which was brought to the table by an unexpected corner, but a reliable source, who has a banker friend. The bond market has converted into a Flash Trading arena within the bank syndicate to maintain bond prices. This is an explosive development, indicative of unsustainable sovereign bond prices kept up by round robin marked by internal sales within the Federal Reserve banks themselves. Worse, speculation is about to rise that the USFed as a financial firm is suddenly subject to capital rules, with inherent risk of failure. It has stacked up over $3 trillion in impaired assets, much of which are truly toxic. The Taper Talk at the USFed was a ghastly disaster, with financial feces flung in the central bank’s faces. The big new engine that will work to fracture the USFed itself is the reversal of the Big US Bank carry trade in USTBonds. Recall all their boasting about replenishing balance sheets with easy leveraged profits, spouted like junkie morons in 2011 and 2012. It has now backfired to force flatulence into the banker faces in addition to the flung feces. Of course, the financial networks report none of this. The unwind of bond carry trade is a basic phenomenon that any worthwhile bond analyst can observe and anticipate. It is the flip side to easy money gains, namely massive losses.

Two weeks ago, an extraordinary memo was received from a trusted colleague. It could be important in yet unknown ways. The USTBond market is broken, and the USDollar cannot be defended. The memo read as follows. “I spoke with an old banking friend of mine on Saturday who now works as an Executive Officer in the Regulatory Division of the Dallas Federal Reserve. The gist of the conversation was this. There was a panic teleconference among all of the Regional Federal Reserve banks on Thursday afternoon [Sept 5th]. The subject of this emergency teleconference was USTreasury Yields. The perilously low capital of the Federal Reserve was at issue in this meeting, and the fact that they could no longer afford to defend the USDollar at this point. All of the regional Federal Reserve Banks were ordered to unload as many USTreasurys and Mortgage Backed Securities as they could, even though they are selling at a loss, to provide immediate liquidity even at the expense of capital! Eventually, late Friday night a tranche of Treasurys was sold above market price to several Federal Reserve Member banks in order to drive down the yield! You can plainly see this sale on the 10-year USTreasury chart.” Big news! Panic setting in! Unsustainable bond arena! Flash Trading has hit bonds!

More important, WE HAVE NOW SEEN THE BEGINNING OF FLASH TRADING ON USTREASURY BONDS!! A grand round robin closed circle selling program will be relied upon in desperation to maintain price, just like with NYSE stocks in Algorithm Trading. The internal trading volume will grow and dominate the system, just like with the stock market where 80% of NYSE volume is from the perverse Algo Trading. No computer based trading like with Algo Trading is regulated, as the computers run wild. The dangerous times and the instability of bond markets will become major spectacles and news items. The risk will be transferred to stocks, which rise in value from more QE volume flowing into asset purchases, but which fall in value from creeping bond yields. Great instability will be a regular fixture in the US Stock market, and possibly many other national bourses around the world. The next several months will see some important bond market events and likely outsized derivative losses, complete with revelation of USTBond market rigging devices.


Make several conclusions right away. Panic has finally hit the USFed. They cannot defend either the USDollar or its obverse USTBonds, the trading vehicle. They are both at improper high valuations. Rising interest rates will next cause more sales, the dreaded convexity to come into play. The big US banks must unwind their leveraged USTBond carry trade, based upon the bond futures contracts. Watch big US banks sell their leveraged positions that in the past three years provided them supposedly easy profits. The positions are locked in high leveraged structures. The breakdown of the USTBonds and USDollar has begun, a long process having come full circle after the highly destructive ZIRP & QE, both engrained in monetary policy.

The breakdown in the currency and sovereign bond will be aggravated by Interest Rate Derivative dismemberment and colossal losses. The USTB & USD duo breakdown is the visual impact and reaction to the gradual geopolitical isolation of the United States. It was seen in a glaring glimpse with Syria, a call to war, a refusal, and the US looking like a deceptive player with blood lust. The world is reacting to misguided monetary policy maintained by the USFed that supports the Western banks (in toxic bond redemption) but causes nasty problems across the world (in higher food prices). As the USFed and its devoted big US banks conduct bond trading among themselves, the left hand selling to the right hand, it becomes more evident that the USTBond asset bubble is being revealed. The irony is that the aggravating factor is the big US banks unwinding their bond carry trade. Their leveraged sales will result in over-shoots in the bond yield, called Convexity in the trade. Beware of Convexity, and its destructive impact!


Normally the USFed has avoided the need for capital, in justification of its own solvency. It has not been subject to financial requirements, since not an operating financial firm. It is instead a financial fortress standing as headquarters to coordinate bank activity within a vast crime syndicate. Back in 2009, the USFed broke from tradition, by offering a small interest yield for big US bank excess reserves. Doing so raised many questions. The Jackass concluded soon afterwards that the USFed was insolvent, and desired the assets from big nearby banks to disguise and obscure its insolvency. Capital is of concern only when a liquidity crunch is anticipated. Therefore, the USFed appears very worried about a liquidity threat, perhaps from vast demands of USTreasury Bond redemption, perhaps from a breakdown of its own Primary Bond Dealer team.

The game must have changed recently and suddenly. One must speculate that perhaps the USFed balance sheet might eventually be wound down, causing some deep damage. The USFed might suddenly be scrutinized as a financial firm, where it is suddenly subjected to capital rules with risk of failure. Conclude that the USFed received a phone call from a higher power like Basel. As footnote, bear in mind that the public has long maintained an incorrect perception that that the USFed can defend itself from insolvency by padding its balance sheets with assets. This is not correct. This belief of infinite creation of electronic wealth to ward off deep insolvency is a baseless myth. They can add assets with equally offsetting debts, net zero. The USFed is going down the tubes into the sewer, next door to Fannie Mae.


The USFed is trapped. It has two lousy alternatives, to continue bond purchases within Quantitative Easing or to taper the QE bond monetization volume. Both result in total wreckage and systemic failure. Continuation is a slow death. Tapering is a quick death. They will choose the slow death, and deny the capital destruction effects all the way to an economic depression. Back in 2009, the Jackass was loud and vocal about the USFed being stuck with no Exit Strategy. At that time, they were trying to extricate themselves from the ZIRP corner, the zero bound interest rate. My forecast was for its continuation almost forever, since damage to the USEconomy would otherwise be quick, and rising borrowing costs to the USGovt debt burden would be intolerable.

The point was also made that the longer ZIRP is in place, the more likely it would remain as permanent, since a huge amount of bond purchases were being made, all to suffer big losses in a backup of rates. Worse, continued ZIRP would affect asset prices, which they could not afford to undergo a correction. In 2011, the USFed began the QE initiatives marked by bond monetization. The QE program itself was a correct Jackass forecast, denied openly by the USFed for months. The point was made that buyers of USTBond issuance would vanish, and the teetering USEconomy would not generate indigenous wealth to save in USTBonds. In 2012, the Jackass was loud and vocal about the USFed being stuck with no Exit Strategy from that destructive disastrous monetary policy again, as in ZIRP Forever and QE to Infinity. Both forecasts are being seen to come true. The FOMC meetings and recent Bernanke speech highlight their plight, no options, no exit, no relief, stuck with destructive monetary policy which cannot be halted or even reduced. In fact, QE to Infinity will be ramped up, with double the volume of USTBond purchases in the next several months. The foreign nations will diversify out of their USTBonds held in reserve, and foreign corporations will dump outright USTBonds, in what will become the grandest vote of no confidence toward US-UK bankers in modern history. The USFed must sop up the supply. The alternatives are truly horrendous.


PLAN A: BEING IMPLEMENTED: The USFed can continue QE and its heavy volume bond monetization. Doing so will sustain the rise in the cost structures, including food prices. As a result, the national economies suffer capital destruction, a direct (but unrecognized) consequence of shrinking profit margins and shrinking disposable household income. The mainstream news and bank leadership insists on calling it stimulus, when it is the exact opposite. It is the most powerful force to destroy capital in modern world history. The fierce recessions are assured to continue, the incomes fall, store liquidations to persist, systemic failure assured. The United States eventually will be faced with hot money exits in a very unique new development. The United States will be eventually shunned and the USDollar rejected, as global alternative to the US$-based trade will develop until a formal launch next year in 2014. However, the US will continue its usual path of creating (boogeymen) enemies, creating new wars, blasting the propaganda networks, but deny being the cause of the broad wreckage. The destruction of the US system will not come from fast rising rates, but instead from accelerating capital destruction, job cuts, recession identified as depression. In this Plan A scenario being adopted and embraced, the USFed will be compelled to amplify its QE bond buying volume, to lie about it, but it will be caught in the lies. The United States and the USFed will be blamed for the climax of collapses, which will occur gradually. The United States will rapidly be shunned, the USDollar rejected, and the US declared a global pariah.

PLAN B: TESTED WITH TAPER TALK TESTED, NOT TO BE DONE: The USFed could taper QE and reduce sharply the bond monetization. The results would be felt very quickly and suddenly, like what was seen in July and August. It was painful and shocking, but revealed the deep dependence upon the USFed easy money spigot, from the financial market perspective (quickly) and the economic perspective (more slowly). The financial markets would suffer incredible declines bordering on historical events like a sequence of Black Mondays (1987) and post-Lehman crashes (2008). The surprising direct effect from a strong tapering of QE would be something never seen before in the United States history. It would cause very well publicized hot money moves out of the US financial market in addition to the emerging markets. The global tightening would make for a global catastrophe. The investors in USTreasury Bonds would rapidly vacate the arena, since bond yields would rise quickly, putting strain on the interest rate derivative control levers to the point that the rate swaps could not prevent the rates from going up out of control. The big US banks would unwind their leveraged USTBond carry trade, and suffer outsized losses. The rapid rise in rates would deliver a well recognized death blow to corporate paper flow, the US housing market, the US car market, and put an end to student loans. The national USEconomy would suffer from higher interest rates, the fierce recession continue. A systemic failure would result within 12 to 18 months. The United States and the USFed would be blamed for the climax of collapses, which would occur rapidly. The United States would rapidly be shunned, the USDollar rejected, and the US declared a global pariah. Same outcome, faster pace.

The USFed is desperately trying to balance two horrible destructive options. The look of frustration and defeat is apparent on outgoing Chairman Bernanke’s face in press conferences. He realizes finally that his Doctoral Thesis is disproved by experiment, by his own hand at the USFed control panel. Yet the bankers must appear to be in control. They must defend the USDollar and USTBond, along with major paper currencies. They must defend the franchise central bank system. They must buy time to escape with their lives before they are forced to vanish, either willingly or by order.


Many are the pillars that support the current USTBond & USDollar phony fractured folly. In the Jackass view, The USTreasury Bond aint a market, but rather an empty room filled with market rigging machinery. It is an asset bubble. Tragically and inexorably, once an asset bubble is pricked, it cannot be held together. The prick event occurred with the Taper Talk, a highly misguided action taken. Perhaps the Basel masters wish to see the system collapse and banker fascist states honored openly. However, as the pillars fall, the Gold Price will rise like a phoenix and offer a breath-taking event to behold. The pillars are all breaking down, which will release the Gold Price. New pillars are being erected in support of the Gold Price. They mark tremendous changes, as in Paradigm Shift in the global structure of commerce and finance

1) USTreasury Bond Tower of Babel is breaking. The interest rate derivatives have offered the USTBond asset bubble hidden illicit deceptive support for over two years. Morgan Stanley is the chief agent for its application. The London Whale event (complete with greatly falsified losses) emerged in May 2012 as a result on such derivative losses, not the sovereign bond losses as JPMorguen liars reported. The losses are not $8 billion, but rather $100 billion. If the London Whale losses occurred after a mere 60 basis point rise leading to the May event, then imagine the derivative losses suffered from a 130 basis point rise from 1.65% in May 2013 to 2.9% in early September 2013. The Flash Trading practice is a last ditch to defend the USTBond & USD twin towers in South Manhattan. History repeats, transformed from physical towers to financial towers, but without the false flags waving atop the crumbling towers.

2) The Petro-Dollar defacto standard is breaking. Since the late 1970 decade, this standard has been at work. The Arab oil producing nations, led by the Saudis, have sold crude oil in US$ transactions, then cooperated in recycling the vast surpluses in USTreasury Bonds, with a fair amount in big US bank stocks as well. The OPEC cartel is showing signs of fracture, slowly disbanding amidst regularly spouted lies from the flairs of member nation mouths. The new dynamic is powerful and disruptive, the natural gas pipelines. The Syrian conflict is all about the natgas pipelines, with smokescreens created in the usual way. Watch Gazprom lead a consortium of NatGas Coop members, flex its muscles, and eclipse OPEC to the point of obsolescence. The irrelevance of OPEC will usher in the rejection of the Petro-Dollar, and threaten the House of Saud (where regime change is nigh). The other victim will be the USTreasury Bond, with accelerated sales from Persian Gulf abandonment.

3) USTreasury Bond diversification & rejection. Many are the channels of USTBonds returned to sender from emerging market nations and elsewhere. The USFed monetary policy has motivated many nations to diversify out of the very USTBonds being purchased with printed money in phoney baloney manner, due to perceived debasement, deeply resented. The Westerners call it euphemistically Quantitative Easing, but the Jackass prefers to call it hyper monetary inflation off the printing press with a Weimar nameplate. Entire national banking reserves management systems are in the process of undergoing change. Much USTBond sale volume will be returned from Indirect Exchange, in the payment for large asset acquisitions (like Chinese buying an African energy deposit, or Chinese payments for Russian oil). Much USTBond sale volume will come from conversion to Gold bullion. These players will be building the BRICS Bank, or replenishing sickly Western banks, maybe even central banks.

4) Central Bank Franchise System is failing in recognized full view. After four and a half years of utter nonsense from the major central banks, dispensation of more toxic bond patch solutions, redemption of toxic bonds with freshly printed money, payoffs to big banks revealed (often gone to executive bonuses), support of USGovt deficits, refusals to inspect official Allocated Gold accounts, assists in derivative coverups, gigantic interest free loans to Fed partners in the multiple $trillions, the game is over, the jig is up, the public aware. Too many events have resulted in a pulling back of the curtain to reveal the criminality of the central bank franchise system. Hidden from view is the narcotics money laundering and their participation. Hidden from view is the phony project in the late 1990 decade to accumulate gold for a new USDollar, which made a U-turn at the last minute. Finally the Flash Trading practice reveals the sustained USTBond by a new more dangerous artificial prop, which had been a tool devoted mainly for the US Stock market, as in the New York Stock Exchange.

5) The death of the COMEX gold market is within view. With thefts of private accounts (see MF-Global), with refusals to deliver in gold COMEX futures contracts (see June and July and August), with drained COMEX inventories (see the massive decline since January), with drained JPMorguen inventories (see the massive decline since January), with the regular price ambushes led by naked shorting (see mid-April ambush, and subsequent ambushes), the death of the COMEX is within view. They will someday in the near future halt the gold futures contracts, since they will have no gold inventory, and since they have refused to deliver on gold futures contracts routinely. In fact, the refusal to redeem gold accounts at the GLD Exchange Traded Fund, even to qualified investors, might be the smoking gun, or (to mix metaphors) be the thread which when pulled, unravels the entire sweater.

6) Gold Trade Settlement is the coming, a return of the Gold Standard. It has been inevitable, its return, since it is the only solution with any merit or legitimacy. No phony paper debt bond solution has stuck since 2008, since all are illicit and meaningless circle jerks in a debt patchwork. The old sound money adage is so true (from Von Mises school), that no paper money solution can fix a failing paper money problem. However, the new trade settlement system will usher in a new Gold Trade Standard in a different route. It will enter on trade settlement from peer to peer, using Gold Trade Notes as letters of credit, using a vast distributed system. It will bypass the big bank SWIFT system which has been abused by the United States Govt and UKGovt. They have used the SWIFT codes as weapons. The East resents it, not just Iran. It will bypass the FOREX system of currency exchange, a regularly corrupted pit mangled by the Western bankers (see the Exchange Stabilization Fund managed by the USDept Treasury). The Europeans are in the middle, not such hardened adversaries to Iran, since Iran is willing to sell oil & gas in Euro transactions.

The major currencies will be forced to scurry like cockroaches in the dark to find and source gold bars for renovation of the currencies themselves. The crumbling sovereign debt serves as flawed foundation for the major currencies. The climax blow will be the conversion of USTBonds and EuroBonds and UKGilts and JapGovtBonds into Gold bullion that kills the current system and opens the door to the new system. With great disruption, the new Paradigm Shift is in progress, unstoppable, but offering hope for a better day, a better system, a more fair system, with participants and savers given a just system. For three decades, Gold has had a nemesis in the USTreasury Bond. The USTBond is dying, a wreck in progress. As the old pillars fall and the new pillars rise, The Price of Gold will be set free. It will reach $3000/oz when the COMEX defaults from empty inventory and Shanghai arbitrage, then reach $5000/oz when the great conversion begins in earnest from USTBonds to Gold bullion, then reach $7000/oz when the Gold Trade Settlement is installed in its full glory. It is written. It shall be done.




From subscribers and readers:

At least 30 recently on correct forecasts regarding the bailout parade, numerous nationalization deals such as for Fannie Mae and the grand Mortgage Rescue.

“Jim Willie is a gift to our age who is the only clear voice sounding the alarm of the extreme financial crisis facing the Western nations. He has unique skills of unbiased analysis with synthesis of information from his valuable sources. Since 2007, he has made over 17 correct forecast calls, each at least a year ahead of time. If you read his work or listen to his interviews, you will see what has been happening, know what to expect, and know what to do.”

  (Charles in New Mexico)

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  (Austin in California)

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  (The Voice, a European gold trader source)



Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at For personal questions about subscriptions, contact him at

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[Flash Trading Hits USTreasury Bonds]

[The Daily Gold]

Written by testudoetlepus

September 26th, 2013 at 12:59 am

Cyprus-Style Confiscation Is Now Happening All Over The Globe

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a photo by WilliamBanzai7/Colonel Flick on Flickr.


Now that “bail-ins” have become accepted practice all over the planet, no bank account and no pension fund will ever be 100% safe again.  In fact, Cyprus-style wealth confiscation is already starting to happen all around the world.  As you will read about below, private pension funds were just raided by the government in Poland, and a “bail-in” is being organized for one of the largest banks in Italy.

Unfortunately, this is just the beginning. The precedent that was set in Cyprus is being used as a template for establishing bail-in procedures in New Zealand, Canada and all over Europe.  It is only a matter of time before we see this exact same type of thing happen in the United States as well.  From now on, anyone that keeps a large amount of money in any single bank account or retirement fund is being incredibly foolish.

Let’s take a look at a few of the examples of how Cyprus-style wealth confiscation is now moving forward all over the globe…


For years, there have been rumors that someday the U.S. government would raid private pension funds.

Well, in Poland it just happened.

According to Reuters, private pension funds were raided in order to reduce the size of the government debt…

Poland said on Wednesday it will transfer to the state many of the assets held by private pension funds, slashing public debt but putting in doubt the future of the multi-billion-euro funds, many of them foreign-owned.

The Polish government is doing the best that it can to make this sound like some sort of complicated legal maneuver, but the truth is that what they have done is stolen private assets without giving any compensation in return…

The Polish pension funds’ organisation said the changes may be unconstitutional because the government is taking private assets away from them without offering any compensation.

Announcing the long-awaited overhaul of state-guaranteed pensions, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.
He said that what remained in citizens’ pension pots in the private funds will be gradually transferred into the state vehicle over the last 10 years before savers hit retirement age.


For years, Iceland has been applauded for how they handled the last financial crisis.  But now it is being proposed that the “blanket guarantee” that currently applies to all bank accounts should be reduced to 100,000 euros.  Will this open the door for “haircuts” to be applied to bank account balances above that amount?…

Following the crisis in October 2008, Iceland’s government declared all deposits in domestic financial institutions were ‘blanket’ guaranteed – an Emergency Act that was reafrmed twice since. However, according to RUV, the finance minister is proposing torestrict this guarantee to only deposits less-than-EUR100,000. While some might see the removal of an ‘emergency’ measure as a positive, it is of course sadly reminiscent of the European Union “template” to haircut large depositors. This is coincidental (threatening) timing given the current stagnation of talks between Iceland bank creditors and the government over haircuts and lifting capital controls – which have restricted the outflows of around $8 billion.


European finance ministers have agreed to a plan that would make “bail-ins” the standard procedure for rescuing “too big to fail” banks in the future.  The following is how CNN described this plan…

European Union finance ministers approved a plan Thursday for dealing with future bank bailouts, forcing bondholders and shareholders to take the hit for bank rescues ahead of taxpayers.

The new framework requires bondholders, shareholders and large depositors with over 100,000 euros to be first to suffer losses when banks fail. Depositors with less than 100,000 euros will be protected. Taxpayer funds would be used only as a last resort.

What this means is that if you have over 100,000 euros in a bank account in Europe, you could lose every single bit of the unprotected amount if your bank collapses.


As Zero Hedge reported on Tuesday, a “bail-in” is now being organized for the oldest bank in Italy…

Recall that three weeks ago we warned that “Monti Paschi Faces Bail-In As Capital Needs Point To Nationalization” although we left open the question of “who will get the haircut including senior bondholders and depositors…. given the small size of sub-debt in the capital structures.” Today, as many expected on the day following the German elections, the dominos are finally starting to wobble, and as we predicted, Monte Paschi, Italy’s oldest and according to many, most insolvent bank, quietly commenced a bondholder “bail in” after it said that it suspended interest payments on three hybrid notes following demands by European authorities that bondholders contribute to the restructuring of the bailed out Italian lender. Remember what Diesel-BOOM said about Cyprus – that it is a template? He wasn’t joking.

As Bloomberg reports, Monte Paschi “said in a statement that it won’t pay interest on about 481 million euros ($650 million) of outstanding hybrid notes issued through MPS Capital Trust II and Antonveneta Capital Trusts I and II.” Why these notes? Because hybrid bondholders have zero protections and zero recourse. “Under the terms of the undated notes, the Siena, Italy-based lender is allowed to suspend interest without defaulting and doesn’t have to make up the missed coupons when payments resume.” Then again hybrids, to quote the Dutchman, are just the template for the balance of the bank’s balance sheet.

Why is this happening now? Simple: the Merkel reelection is in the bag, and the EURUSD is too high (recall Adidas’ laments from last week). Furthermore, if the ECB proceeds with another LTRO as many believe it will, it will force the EURUSD even higher, surging from even more unwanted liquidity. So what to do? Why stage a small, contained crisis of course. Such as a bail in by a major Italian bank. The good news for now is that depositors are untouched. Unfortunately, with depositor cash on the wrong end of the (un)secured liability continuum it is only a matter of time before those with uninsured deposits share some of the Cypriot pain. After all, in the brave New Normal insolvent world, “it is only fair.”

Fortunately, it does not appear that this particular bail-in will hit private bank accounts (at least for now), but it does show that European officials are very serious about applying bail-in procedures when a major bank fails.

New Zealand

The New Zealand government has been discussing implementing a “bail-in” system to deal with any future major bank failures.  The following comes from a New Zealand news source

The National Government are pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts, the Green Party said today.

Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.

“Bill English is proposing a Cyprus-style solution for managing bank failure here in New Zealand – a solution that will see small depositors lose some of their savings to fund big bank bailouts,” said Green Party Co-leader Dr Russel Norman.

“The Reserve Bank is in the final stages of implementing a system of managing bank failure called Open Bank Resolution. The scheme will put all bank depositors on the hook for bailing out their bank.

“Depositors will overnight have their savings shaved by the amount needed to keep the bank afloat.”


Incredibly, even Canada is moving toward adopting these “bank bail-ins”.  In a previous article, I explained that “bail-ins” were even part of the new Canadian government budget…

Cyprus-style “bail-ins” are actually proposed in the new Canadian government budget.  When I first heard about this I was quite skeptical, so I went and looked it up for myself.  And guess what?  It is right there in black and white on pages 144 and 145 of “Economic Action Plan 2013″ which the Harper government has already submitted to the House of Commons.  This new budget actually proposes “to implement a ‘bail-in’ regime for systemically important banks” in Canada.  “Economic Action Plan 2013″ was submitted on March 21st, which means that this “bail-in regime” was likely being planned long before the crisis in Cyprus ever erupted.

So what does all of this mean for us?

It means that the governments of the world are eyeing our money as part of the solution to any future failures of major banks.

As a result, there is no longer any truly “safe” place to put your money.

One of the best ways to protect yourself is to spread your money around.  In other words, don’t put all of your eggs in one basket.

If you have your money a bunch of different places, it is going to be much harder for the government to grab it all.

But if you don’t listen to the warnings and you continue to keep all of your wealth in one giant pile somewhere, don’t be surprised when you get wiped out in a single moment someday.

This article first appeared here at the Economic Collapse Blog.  Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.



Cyprus-Style Wealth Confiscation Is Now Happening All Over The Globe

[Conscious Life News]

The Fed Has Lost Control of the Bond Market!

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USAGI, a photo by WilliamBanzai7/Colonel Flick on Flickr.


In his most explosive interview with SD ever, CEO of Sprott Asset Management Eric Sprott discussed his thoughts on the Fed’s no-taper, why he believes the cartel took down gold this spring, the evidence that a bail-in is coming to the US and Canada, and the US fiscal debt crisis. Sprott stated the Fed could […]

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The post Eric Sprott Exclusive: The Fed Has Lost Control of the Bond Market! appeared first on Silver Doctors.

Written by testudoetlepus

September 24th, 2013 at 3:33 pm

Senate Puts Summers Back Into Shit Can

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Endless Summers, a photo by WilliamBanzai7/Colonel Flick on Flickr.


Larry Summers: Goldman Sacked
by Greg Palast for Vice Magazine
Monday, 16 September 2013

Joseph Stiglitz couldn’t believe his ears.  Here they were in the White House, with President Bill Clinton asking the chiefs of the US Treasury for guidance on the life and death of America’s economy, when the Deputy Secretary of the Treasury Larry Summers turns to his boss, Secretary Robert Rubin, and says, “What would Goldman think of that?”


Then, at another meeting, Summers said it again:  What would Goldman think?

A shocked Stiglitz, then Chairman of the President’s Council of Economic Advisors, told me he’d turned to Summers, and asked if Summers thought it appropriate to decide US economic policy based on “what Goldman thought.”  As opposed to say, the facts, or say, the needs of the American public, you know, all that stuff that we heard in Cabinet meetings on The West Wing.

Summers looked at Stiglitz like Stiglitz was some kind of naive fool who’d read too many civics books.

R.I.P. Larry Summers
On Sunday afternoon, facing a revolt by his own party’s senators, Obama dumped Larry as likely replacement for Ben Bernanke as Chairman of the Federal Reserve Board.
Until news came that Summers’ torch had been snuffed, I was going to write another column about Larry, the Typhoid Mary of Economics.  (My first, in The Guardian, 15 years ago, warned that “Summers is, in fact, a colony of aliens sent to Earth to turn humans into a cheap source of protein.”)

But the fact that Obama even tried to shove Summers down the planet’s throat tells us more about Obama than Summers—and whom Obama works for.  Hint:  You aren’t one of them. [Emphasis added.]

All these Cabinet discussions back in the 1990s requiring the blessing of Goldman Sachs revolved around the Rubin-Summers idea of ending regulation of the US banking system.  To free the US economy, Summers argued, all you’d have to do is allow commercial banks to bet government-guaranteed savings on new “derivatives products,” let banks sell high-risk sub-prime mortgage securities and cut their reserves against losses.

What could possibly go wrong?
Stiglitz, who would go on to win the Nobel Prize in Economics, tried to tell them exactly what would go wrong.  But when he tried, he was replaced and exiled.
Summers did more than ask Rubin to channel the spirit of Goldman: Summers secretly called and met with Goldman’s new CEO at the time, Jon Corzine, to plan out the planet’s financial deregulation. I’m not guessing:  I have the confidential memo to Summers reminding him to call Corzine.

[For the complete story of that memo and a copy of it, read The Confidential Memo at the Heart of the Global Financial Crisis.]

Summers, as Treasury official, can call any banker he damn well pleases. But not secretly. And absolutely not to scheme over details of policies that could make a bank billions.  And Goldman did make billions on those plans.

Example: Goldman and clients pocketed $4 billion on the collapse of “synthetic collateralized debt obligations”—flim-flam feathers sold to suckers and dimwits i.e. the bankers at RBS.  (See Did Fabrice Tourre Really Create The Global Financial Crisis?)

Goldman also cashed in big on the implosion of Greece’s debt via secret derivatives trades permitted by Summers’ decriminalization of such cross-border financial gaming.

The collapse of the euro-zone and the US mortgage market caused by Bankers Gone Wild was made possible only by Treasury Secretary Summers lobbying for the Commodities Futures Modernization Act which banned regulators from controlling the 100,000% increase in derivatives assets, especially super-risky “naked” credit-default swaps.

The CMFA was the financial equivalent of a fire department banning smoke alarms.

Summers took over the Treasury’s reins from Rubin who’d left to become director of a strange new financial behemoth:  The combine of Citibank with and an investment bank, Travelers. The new bank beast went bankrupt and required $50 billion in bail-out funds.  (Goldman did not require any bail-out funds–but took $10 billion anyway.)

Other banks-turned-casinos followed Citi into insolvency. Most got bail-outs … and got Larry Summers–or, at least, Larry’s lips for “consulting” or for gold-plated speaking gigs.

Derivatives trader D.E. Shaw paid Summers $5 million for a couple of years of “part-time” work.  This added to payments from Citigroup, Goldman and other finance houses, raising the net worth of this once penurious professor to more than $31 million.

Foreclosure fills the Golden Sacks
When Summers left Treasury in 2000, The New York Times reports that a grateful Rubin got Summers the post of President of Harvard University—from which Summers was fired. He gambled away over half a billion dollars of the university’s endowment on those crazy derivatives he’d legalized.  (Given Summers’ almost pathological inability to understand finance, it was most odd that, while President of the university, he suggested that humans with vaginas aren’t very good with numbers.)

In 2009, Summers, Daddy of the Deregulation Disaster, returned to the Cabinet in triumph. Barack Obama crowned him “Economics Tsar,” allowing Summers to run the Treasury without having to be questioned by Congress in a formal confirmation hearing.

As Economics Tsar in Obama’s first term, did Summers redeem himself?

Not a chance.

In 2008, both Democrat Hillary Clinton and Republican John McCain called for using the $300 billion remaining in the “bail-out’ fund for a foreclosure-blocking program identical to the one Franklin Roosevelt had used to pull the US out of the Great Depression.  But Tsar Larry would have none of it, although banks had been given $400 billion from the same fund.

Indeed, on the advice of Summers and his wee assistant, Treasury Secretary Tim Geithner, Obama spent only $7 billon of the $300 billion available to save US homeowners.

What would Goldman think?
As noted, Goldman and clients pocketed billions as a result of Obama’s abandonment of 3.9 million families whose homes were repossessed during his first term.  While American homeowners were drowning, Tsar Summers torpedoed their lifeboat:  a plan to prevent foreclosures by forcing banks to write-off the overcharges in predatory sub-prime mortgages.  Notably, Summers’ action (and Obama’s inaction) saved Citibank billions.

Loan Shark Larry
The deregulation disaster machinery is not done with mangling Americans.  While not-for-profit credit unions, lenders of last resort for working people and the poor in the US, have been under legal and political attack, a new kind of banking operation has bubbled out of the minds of the grifters looking for a way to make loan-sharking legit.

One new outfit, for example, called “Lending Club,” has figured out a way to collect fees for arranging loans charging as much as 29%.  Lending Club claims it cannot and should not be regulated by the Federal Reserve or other banking police.  The recent addition to its Board of Directors:  Larry Summers.

If you want to know why Obama would choose such a grifter and gamer to head the Fed, you have to ask, Who picked Obama?  Ten years ago, Barry Obama was a nothing, a State Senator from the South Side of Chicago.

But then, he got lucky.  A local bank, Superior, was shut down by regulators for mortgage shenanigans ripping off Black folk.  The bank’s Chairwoman, Penny Pritzker was so angry at regulators, she decided to eliminate them:  and that required a new President.

The billionaires connected Obama to Jamie Dimon of J.P. Morgan, but most importantly to Robert Rubin, former Treasury Secretary, but most important, former CEO of Goldman Sachs and mentor of Larry Summers.  Without Rubin’s blessing and overwhelming fundraising power, Obama would still be arguing over zoning on Halsted Street.

Rubin picked Obama and Obama picks whom Rubin picks for him.

Because, in the end, Obama knows he must choose a Fed chief based on the answer to one question:  What would Goldman think?

Phi Beta Iota:  Larry Summers is the poster child for all that is wrong with the USA.



Greg Palast: Senate Puts Summers Back Into Shit Can

[Public Intelligence Blog]

The On-Going Collapse Of The U.S. Treasury Bond Market Is A Disaster In The Making

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Source: Lee Rogers, Blacklisted News

With an endless amount of criminality originating from Washington DC and the on-going rush to war against Syria there is one very critical development that has gone largely unnoticed outside of financial circles. The U.S. Treasury bond market which has been artificially propped up through the Federal Reserve’s bond purchasing policies has really started to unravel over the past few months. The interest rate on the 10-year note has quickly moved up from roughly 1.5% this past May and is now floating around the 3% mark. We have also seen the U.S. government run massive annual deficits around the $1 trillion mark that are piling on to an already enormous debt level. The official U.S. national debt total recently passed $16 trillion and that’s not including all of the unfunded liabilities which would make that number multiple times higher. If both the national debt level and bond interest rates continue to rise, it will soon become impossible for the U.S. government to service its existing debt obligations. Needless to say this type of situation would cause an untold amount of havoc to not only the American economy but the global economy as well. To counter this possibility the Fed will likely expand their bond purchasing programs but we are quickly reaching a point where these policies will soon have no effect in bailing out the system.

There is no question that the bond market has been in a bubble artificially inflated by the Fed. For some time now the Fed has enacted aggressive debt monetization policies by purchasing billions of Dollars’ worth of U.S. government debt with money that they simply created out of thin air. Despite all of these massive bond purchases it is fairly obvious that they are starting to lose control of the market. The Fed is now the most significant buyer of U.S. government debt as real demand is vanishing. The general market is finally starting to realize that buying U.S. government debt is a horrible investment. This is one of the reasons why we are seeing the bond market crash with interest rates greatly rising in such a short period of time.

China which has previously maintained an enormous appetite for U.S. government debt has been quietly diversifying and reducing their purchases. Between China and Russia both countries currently hold a combined total of over $1 trillion worth of U.S. government debt which is roughly 25% of all debt that is foreign owned. With geopolitical tensions on the rise between the U.S. and both countries it would not be implausible for them to more quickly diversify from these holdings. The fact that both China and Russia have become huge net buyers of gold is evidence of this. On top of this total foreign demand for U.S. government debt has also significantly declined in recent months.

Currently the Fed is creating $85 billion out of thin air each month to buy both U.S. government debt and mortgage backed securities. The Fed and their economic propagandists have referred to this policy as quantitative easing or QE. In the long term these policies do nothing but dilute the value of the U.S. Dollar as they increase the total aggregate amount of Dollars in circulation. The greater number of Dollars in circulation the less each Dollar is worth and the more it costs to obtain goods and services. Despite claims otherwise this by definition is inflation and it is clearly reflected to anyone who shops regularly.

The economic propagandists will have you believe that the Consumer Price Index or the CPI is the most accurate measure of inflation available. This is nothing more than a big lie. The CPI is a statistical calculation that has been consistently manipulated in order to make people believe that inflation is low. In its current form the CPI doesn’t even include food and energy in its calculation which makes the statistic an utterly meaningless measure of true inflation. The main reason why the central planners always refer to the CPI is because it allows them to falsely claim that inflation is low and this gives them the supposed justification to implement their reckless policies of money creation. The phony numbers also allow the U.S. government to rip off senior citizens whose social security payments do not get properly adjusted to the true rate of inflation. If let’s say the CPI were calculated using the statistical formula used during the 1970s the CPI would be closer to 10% instead of 2% as is currently claimed.

There should be no question that the U.S. Dollar is being devalued. In fact since the establishment of the Fed back in 1913 the U.S. Dollar has lost roughly 99% of its original purchasing power. This in of itself makes the U.S. Dollar a lousy long term investment and this is important to understand in the larger context of what’s happening with the bond market. The reason being is because as bad as a long term investment in the U.S. Dollar is, an investment in U.S. government bonds is far worse. Due to the Fed’s manipulation of the bond market these debt instruments offer a rate of return far less than the real inflation rate. So as it stands now it is extremely difficult to comprehend why anyone in their right mind would want to buy them. By purchasing these bonds you are in essence loaning money to the U.S. government in return for future interest rate payments that will be paid in devalued Dollars. Combine this with the Fed’s continued ultra-loose monetary policies and there is simply no way to predict how much purchasing power a Dollar will have a couple of years from now let alone 10 years or 30 years from now.

The Fed has put themselves into a situation that they can’t get out of. Fed Chairman Ben Bernanke has for some time talked about having an exit strategy to end their QE programs when there really isn’t one. In fact it looks as if the Fed’s exit strategy consists solely of them talking about having an exit strategy. Recently the buzz word “tapering” has been put out by various Fed officials and financial news propagandists. The Fed is not tapering or cutting back on their QE programs but is instead just talking about the possibility of doing so. If the Fed cuts back their bond purchases they will risk losing complete control over the bond market. The bond market has fallen dramatically over the past few months with the Fed just talking about the possibility of cutting back bond purchases. If the Fed actually went ahead and stopped or even just slowed down their purchases the reaction in the bond market would be violent to the down side.

Without the Fed’s on-going intervention interest rates would be much higher due to decreasing general market demand for U.S. government debt. The problem for the central planners is that if rates rise even just a few percentage points the U.S. government could face problems servicing their existing debt obligations. The U.S. government is already dependent on running massive deficits to keep the entire system operating. There is also a decreasing amount of people participating in the work force and fewer people with full time jobs. This means that less tax revenue is coming into the system which will force the U.S. government to borrow more. This poses a serious problem because if they can’t pay the interest on their existing debt obligations, borrowing more money to continue the status quo becomes impossible.

The talk about tapering and exit strategies from the Fed is meaningless as they will have no choice but continue their QE programs if they want to keep the system from imploding. In fact not only will they have to continue these policies but they will have to expand them in order to artificially cap interest rates on the bonds. The proper course of action would in fact be to abandon these programs and let the system implode so the market can reset itself. As painful as this would be in the short term this would at least be the start of a more permanent long term solution. Unfortunately this is not a politically feasible option. It is highly unlikely that the Fed will sit idly by and risk the U.S. government reaching a point where they are unable to service their debt obligations. It is also equally as unlikely that the empty suits in Washington DC will balance the budget and drastically reduce their spending hence avoiding the need to borrow. With this in mind, it appears obvious which direction the Fed will move towards.

Unfortunately for the Fed they are reaching a point where even endless QE policies are going to be entirely ineffective at controlling the bond market. At some point these policies will result in so much inflation that it won’t matter how many bonds they purchase. When this happens there will be no real demand for U.S. Dollars and even less demand for U.S. government debt because inflation will have run out of control. As stated before, nobody will want to buy a debt instrument that is going to pay them interest back in a currency whose future purchasing power is in question. We are already starting to see this with the increased demand for physical gold and silver. This represents a growing number of people who are losing faith in the long term stability of the U.S. Dollar and are converting out of Dollars and into more tangible assets.

Another aspect to this collapsing bond market is the fact that interest rates for home mortgages generally correlate to the movement of Treasury yields. As the rates on these bonds move up so too will mortgage interest rates. In fact we have already started to see this happen over the past 3 months as the rates for both 15 year and 30 year home loans have risen sharply. These higher interest rates will reduce the demand for home loans resulting in less demand for homes which will cause home prices to move sharply lower. This is just one of many negative economic consequences that will undoubtedly result from a collapsing bond market.

In closing what’s happening is really quite simple. If the Fed continues printing endless amounts of money the Dollar’s purchasing power will eventually be destroyed and if they do nothing the bond market will crash resulting in the U.S. government being unable to pay its bills. No matter what course of action the Fed takes the end result is not going to be good. Besides being great for Israel and the Jewish lobby, this looming economic disaster could be one possible reason why the Obama regime is poised for a military strike on Syria based off of extremely dubious circumstances. The U.S. financial system in its current state simply cannot be sustained so why not start a war to distract people from what will undoubtedly be a horrific mess. If this results in a World War 3 type scenario, Obama could draft unemployed young people into the military under the guise of national security. This would help reduce the amount of young people on the streets rioting and protesting against his evil regime during an economic collapse. A war would also provide cover for the Fed to justify the expansion of their bond purchases and the Obama regime to blame the poor economy on the war. Whether or not the American people would buy into any of this is a whole other question especially considering that most Americans are against military intervention in Syria.

Despite all of that, what is happening in the bond market is extremely important. This is definitely something everyone should pay attention to over the next several months. It will be interesting to see what the Fed’s next move will be but it will likely consist of more money creation and bond purchases. After all, they will do whatever it takes to keep the evil Zionist controlled Washington DC enslavement system afloat as long as humanly possible.


The On-Going Collapse Of The U.S. Treasury Bond Market Is A Disaster In The Making


Written by testudoetlepus

September 10th, 2013 at 12:58 am