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Globalisation debt & banking

Old 17th Jul 2011, 21:19
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How the Ponzi was won

Derivatives: A Capital Markets Gong Show For Whom The Bell Tolls

-- Posted Friday, 1 July 2011 | | Source:

By Rob Kirby

Back in early March, 2011 – PIMCO’s Bill Gross were calling for much higher rates and telling the world that they were selling U.S. Government Bonds.

PIMCO's Bill Gross Says to Sell U.S. Treasuries Now
……To wit, he predicts that when the Fed’s QE2 bond-buying binge ends at the end of June, there will be nobody to take the Fed’s place as last-resort buyer of U.S. Treasuries at artificially low rates. Treasury yields will need to ramp up sharply by 1.5 percentage points to attract private buyers. Given that the ten-year U.S. Treasury is currently yielding only 3.5%, a 1.5 percentage point jump would equal a 43% increase in interest rates (1.5/3.5). That’s a big move in interest-rate land and would have a significantly negative effect on bond prices

As you can see, not only did the anticipated rise in interest rates NOT materialize – rates have actually fallen:

Remember folks, Bill Gross [PIMCO] is reputed to run the world’s largest bond fund. Not only was Gross wrong – in investment terms he was SERIOUSLY WRONG – a great many percentage points wrong. Not only did 10 yr. bond rates not go up by 150 basis points – they have indeed FALLEN by more than 50 basis points.

This illustrates a point; namely, that being the biggest in your space [and having former Fed Chairman Alan Greenspan acting as advisor to your company] doesn’t ensure that you NEVER, EVER make a poor market call and “lose-your-shirt” – so to speak.

Accordingly, it sure is a good thing that the world’s biggest derivatives player - J.P. Morgan - has “seemingly” NEVER, EVER made a bet even “1 % wrong” with their 80 Trillion derivatives book. The Morgue has a Market Cap of roughly $180 billion. A wrong bet of a mere 1% on their ‘book’ would translate to a loss of $800 billion dollars eviscerating their entire capital base more than four times over. The knock on effect from such an event would trigger multiple tsunamis reverberating through the global financial system. Sounds absurd, but it’s pure math.

Either J.P. Morgan NEVER makes a mistake or they get a pass if / when they do make a mistake. Back in early 2006, Business Week reported,

President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006,

What that means folks, is: J.P. Morgan’s derivatives book constitutes national and international security and they along with other large derivatives player are NECESSARILY excused from wrong way bets. The obscenely large derivatives books of J.P. Morgan and other select money center banks are being used to execute U.S. monetary policy and to achieve other arbitrary financial market outcomes. This has been occurring since at least the mid 1990’s and severely ramped-up in the mid 2000’s.

Additionally, what can be said for J.P. Morgan can also be said for the likes of B of A, Citibank, Goldman Sachs – all with derivatives books [currently] ranging from 44+ to 79+ Trillion in size. Take note of the TOTAL derivatives for Commercial Banks at 243 Trillion:

TABLE 1 excerpted from: OCC Quarterly Derivatives Report Q1/11

Commercial Banks Vs. Bank Holding Companies

The Office of the Comptroller of the Currency [OCC] tells us, in the Executive Summary of the Q1/11 Report that derivative contracts remain concentrated in interest rate products, which comprise 82% of total derivative notional values. Credit derivatives, which represent 6.1% of total derivatives notionals, increased 5.3% to $14.9 trillion. It is the settlement of these interest rate derivatives – specifically int. rate swaps of duration between 3 and 10 years – that creates artificial scarcity of physical U.S. government bonds.

The OCC’s quarterly derivatives report is published three months in arrears and typically runs about 30 – 35 pages in length. All but one page of this reporting deals with data on the Commercial Bank level. Commercial Bank reporting falls under the purview of the Office of the Comptroller of the Currency. It’s in the Commercial Bank reportage ONLY where we get a glimpse of bank activity in precious metals:

excerpted from: OCC Quarterly Derivatives Report Q1/11

ONLY one page of the quarterly derivatives report [table 2] gives us a high level view of derivatives at the Holding Company Level. Bank Holding Com pany reporting falls under the purview of the Federal Reserve and DOES NOT INCLUDE any breakout or reveal on precious metals derivatives holdings. Take note how – at the Holding Company Level, Morgan Stanley’s Derivatives book swells to over 51 TRILLION – vaulting them from a rather insignificant 8th place on the Commercial Bank list into 4th place on the Holding Company list below. :

TABLE 2 excerpted from: OCC Quarterly Derivatives Report Q1/11

Historically it is VERY WELL DOCUMENTED that Central Banks the world over have illustrated a large propensity to hide / veil / obfuscate all their activities relating to precious metals and specifically gold. Note the disparity between the transparency offered by the OCC with their Commercial Bank reportage versus the Holding Company data with falls under the purview of the Federal Reserve. This amounts to 80 Trillion worth of derivatives that the public knows “sweet nothing” about.

Remember folks, it was none other than former Federal Reserve Vice Chairman Alan Blinder – while appearing on the Nightly Business Report back in 1994 – issued these prescient words,

“the last duty of a central banker is to tell the public the truth”

By comparing Total Derivatives in TABLE 1 [Commercial] versus TABLE 2 [Holding Co.] we can identify that Morgan Stanley’s derivatives book stands as a 50 TRILLION BLACK HOLE where reporting of precious metals are concerned; Goldman’s 5+ TRILLION, B of A’s 20 TRILLION, J.P. Morgue’s about 1 TRILLION.

Now everyone should appreciate the fact that Morgan Stanley’s “book” grew from 42.1 Trillion at Dec. 31/10 to 51.2 Trillion at Mar. 31/11 – THAT’S an increase of 9.1 TRILLION in three months at an institution with a market capitalization of 35 billion. Even if you’re asleep and have your head buried in the sand, you’ve got to admit that 9.1 TRILLION ramp in business in 3 months for a company with a 35 billion market cap is quite a feat, eh? Remember folks, interest rate derivates – BY THEIR VERY NATURE, DO HAVE 2-WAY CREDIT / COUNTERPARTY RISK.

The feat performed by Morgan Stanley, outlined above, becomes even more unbelievable when you stop and consider that – according to the OCC – there are virtually NO DECLARED or IDENTIFIABLE END USERS [counterparties] for these products:

excerpted from: OCC Quarterly Derivatives Report Q1/11

Now we must ask who Morgan Stanley did their impressive 9.1 TRILLION trade in 3 months with? Just because they remain anonymous doesn’t mean they don’t exist – but they are certainly known to the Federal Reserve because the Fed has purview, as regulator, over Bank Holding Companies. So, by extension – the Fed is comfortable [from a credit standpoint] with “whoever it is” that Morgan Stanley is doing this mind boggling business with. What we can say about the nature of this business is this: in the absence of identifiable end users [counterparties], this trade creates artificial demand for U.S. Government bonds.

So who would Morgan Stanley [and the Fed by extension] accept as a secretive counterparty on this scale - in credit sensitive transactions that serve to create artificial demand for U.S. government securities? Embodied in the answer to this question IS THE REASON why the world’s largest bond fund – Bill Gross/ PIMCO – got it ALL [counter-intuitively] WRONG on interest rates. It also happens to be the EXACT same reason why Amaranth got it ALL [counter-intuitively] WRONG with Natural Gas back in 2006.

How many ways can you say Exchange Stabilization Fund? [edit by BB, see next post below on the ESF] It’s the Exchange Stabilization Fund acting through the New York Fed – utilizing agents J.P. Morgan, Citibank, B of A, Goldman Sachs and Morgan Stanley as proxies to implement imperialist U.S. monetary policy.

Let us forget for a moment that natural gas trades in Europe for 2 – 3 times what it trades for in North America – with the reasoning most often given by mainstream pundits that “natural gas is a local market” and let’s move on to crude oil and specifically let’s take a closer look at the price spread between North Sea [Brent] Crude @ 108.30 and West Texas Intermediate [WTI] @ 91.72:

Crude Truth

Historically and until VERY recently, WTI has traded at a premium to North Sea Brent Crude. This historic relationship has now “flipped” and grown to PERVERTED inverted-ness [today to the tune of 16.58 per barrel] and we have been fed a line by “officialdom” for the past couple of years that this is mainly due to storage constrains or “a glut of crude” centered on Cushing, Oklahoma.

Well guess what folks? The BIG LIE that the perversion of global crude oil prices were due to a “glut” at Cushing, Oklahoma were laid bare by a PANICKING U.S. administration last week when they announced that 60 million barrels of crude were to be released from the Strategic Petroleum Reserve. If there truly was a “glut” of any kind – which according to the lies told to the world by officialdom there must be with Brent trading at a 16.58 premium to WTI – there would be no release of crude from the Strategic Petroleum Reserve.

Many market pundits wrongly refer to or reference the derivatives complex as a “DEBT” that the world has been stuffed with. This is WRONG. What the derivatives complex really is – it’s a price control grid which enables its handlers to harvest the fruits of the world’s labor at arbitrary prices.

The reality – the U.S. Fed and Treasury have become increasingly desperate to make their lies about low inflation believable and provide cover for their increasing monetary debasement by attacking and rigging the most visible, go-to alternatives to failing fiat currency.

In doing so, global financial stewardship provided by America has turned our global capital markets into a sleazy GONG SHOW.
Original Article: Rob Kirby

Last edited by breakfastburrito; 17th Jul 2011 at 21:46.
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Old 17th Jul 2011, 21:20
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*****What I have been afraid to blog about: THE ESF AND ITS HISTORY (Part 1-5)*****

June 3, 2011 by Eric deCarbonnel

The video series about the ESF’s history is finally finished! I especially recommend watching the first (explains the basics about the ESF), fourth, and fifth videos (Part 4 and 5 really deal with the material that I have been “afraid to blog about”.)

Part 1

Part 2

Part 3

Part 4

Part 5

All the evidence is meticulously documented on Eric deCarbonnel's ESF page
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Old 22nd Jul 2011, 20:07
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The biggest threat to greenback hegemony took another leap forward in the past week as Iran commenced trading sweet crude oil priced in
Euros/Yuan/Rial/Roubles bit NOT in USD.

Cause for war? Of course not, but those fictitious nukes sure are. Standby for another manufactured rationale for western intervention and the subtle elevation of the SDR.
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Old 22nd Jul 2011, 21:31
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The biggest threat to greenback hegemony took another leap forward in the past week as Iran commenced trading sweet crude oil priced in
Euros/Yuan/Rial/Roubles bit NOT in USD.
Nice pickup. Give us your best links.
Oil, Currency,gold & Central banking are inextricably intertwined Gold, Oil and Money in the Free Market, with two followups, It's the Flow, Stupid & Flow Addendum.

Another interesting concept is the ‘The Central Bank of Benghazi’

War with Iran would appear to be a dead certainty

Last edited by breakfastburrito; 22nd Jul 2011 at 21:34. Reason: additional links added.
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Old 22nd Jul 2011, 23:45
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Iran Opens Oil Bourse - Harbinger of Trouble for New York and London? | Oil

Interesting article about Iran above.

Libya - nothing to do with protecting civilians and everything to do with slowing the push by oil producing nations to introduce a new global currency on their terms. Also, a money grab. Several hundred billion dollars of Libyan wealth fund "seized" by a broke west.
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Old 23rd Jul 2011, 01:38
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You guys need to take a chill pill.

Maybe Wall Street is more to your liking.

Conspiracy theorists maybe?

Last edited by Normasars; 23rd Jul 2011 at 10:44.
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Old 23rd Jul 2011, 04:52
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Perhaps Troopy we could counteract with a philosphy on Socialism. "Socialism is a philosphy of failure, the creed of ignorance and the gospel of envy. Its inherit virtue is the equal sharing of misery". Does not give us much to pick from does it?
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Old 23rd Jul 2011, 11:37
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You guys need to take a chill pill.
Maybe Wall Street is more to your liking.
Conspiracy theorists maybe?
Wall Street - No chance. They are a major part of the current problem, the sooner the whole system collapses in some ways the better, most of those grubby bankers will become part of history.

Chill pill - Very chilled actually. No large wads of worthless bank notes sitting in my vault. When cash is dead I will be doing just fine.

Conspiracy theorist - No chance. Conspiracies like Roswell, 911 blah blah are not my poison. Conspiracies are normally either unproven, or have no proof/real evidence attached.
Was GFC 2008 a conspiracy ? Impossible.
Look at the current economic woes globally, countries are going bankrupt. By August 2 the USA will either default on its debt immediately or raise their debt ceiling which will only delay the inevitable bankrupcy by a couple of years. As was stated earlier they are raiding foreign countries and seizing billions to prop up their own problems back at home. NASA has come to a virtual stop and troops are being recalled from war. Why ? Simple, the USA cant afford it any more. THEY ARE BROKE. This is hard evidence, not a conspiracy. Read/watch the news every day. Even Obama was on the box tonight pleading with Congress to come to the table. Desperate times and desperate measures.

I still cannot believe that people have their heads in the sand and actually believe that everything is ok ?? Now that is scary.
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Old 23rd Jul 2011, 11:57
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most of those grubby bankers will become part of history.
Reminds me of what a friend of mine once said "Bankers: when armageddon comes, they'll be the first to be killed and eaten". Makes me laugh whenever I think of it.
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Old 23rd Jul 2011, 14:32
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Yep it's all coming to a grinding halt the FAA is being shutdown if they don't get this through congress. I certainly would not want to be be holding shares or currency if the USA defaults.

FAA shutdown would cost government $200 million a week

The government will lose about $200 million a week in airline-ticket taxes and $2.5 billion in airport-construction projects will halt if the Federal Aviation Administration is forced to shut down, Transportation Secretary Ray LaHood said Thursday.


The Associated Press

WASHINGTON — The government will lose about $200 million a week in airline-ticket taxes and $2.5 billion in airport-construction projects will halt if the Federal Aviation Administration (FAA) is forced to shut down, Transportation Secretary Ray LaHood said Thursday.

A partial shutdown looks increasingly likely because Congress hasn't been able to come to an agreement on legislation to extend the FAA's operating authority, which expires at midnight Friday.

The main obstacle is a provision sought by House Republicans and the airline industry that would make it more difficult for airline and railroad workers to unionize. The provision was added to a long-term FAA funding bill this year, but negotiations on that bill have stalled. Without long-term legislation, an extension bill is necessary to keep the agency operating.

If FAA authority were to expire, airlines would no longer have authority to collect federal ticket taxes. About 4,000 FAA workers whose jobs are funded with ticket-tax revenues will also be furloughed, LaHood said at a news conference.

Air traffic controllers, however, would remain on the job and safety would be maintained, he said. Overall, the FAA has more than 47,000 workers.

"This is no way to run the best aviation system in the world," LaHood said. "Congress needs to do its work."

He declined to answer questions about the possible consequences of a prolonged shutdown. But Sen. Jay Rockefeller, D-W.Va., chairman of the Senate committee that oversees the FAA, said the agency "estimates that it could only operate air traffic and support services through mid-August."

The situation could be a financial boon for airline passengers. Barring an agreement, the taxes will disappear from airline and ticket-selling websites at midnight Friday.

The federal tax on a $300 round-trip airfare is about $61, according to the Air Transport Association. Airlines would still collect airport fees.

"The airlines have been alerted to the potential to need to make this change, and are working on it," Jean Medina, a spokeswoman for the association, said in an email.

Long-term authority for the FAA expired in 2007. Unable to agree on long-term funding legislation for the agency, Congress has kept the FAA operating through a series of 20 short-term extension bills.

Previous extensions have been routine. But this time House Republicans added a provision to what would be the 21st extension bill that eliminates government subsidies for airline service to 13 rural communities. Senate Democrats say the provision, which would save about $16 million, is unacceptable.
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Old 25th Jul 2011, 10:22
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Excellent thread.

A year or two back, mentioning this would have raised the term "conspiracy nut", but alas, economic pain has opened up peoples eyes to the baseless and corrupt Fiat paradigm.

In fact, three things rule the world: G.O.D: Gold, Oil, Drugs.
All controlled by governments / Banks for the most part.
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Don't be put off by the tittle, he covers all the geopolitical and connections that will blow your mind:
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Did anyone watch the George Negus 6pm show, on the 15th July where Negus raises the claim of a heroin resurgence in Australia? Negus stated that it was because Afghanistan was "free"! LOL, CNN and other news sources ran news clips many months ago showing the soldiers (U.S troops and other countries ) "protecting" the POPPY FIELDS. Hearts and minds missions...... on the surface yes, effective ...Hmmm???? Ask why these U.S "Drones" that can bomb and spy on everything cant seemingly destroy any drug traffic leaving Afghanistan??? very interesting concept.

Without harping on to much, there is a massive corrupt system of governance and banking that is ruling our lives, and as long as we choose to be reactive and non-critical we are basically no better than the perpetrators. We ALL have to take action.

For all that are truly interested in this thread I recommend a few sites:

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What Is The Plan
For all that want to take action. Listen to the pod casts/live radio. Very interesting highly qualified guests regularly talk on the show. Recommended.


The Obama Deception:

Terror Storm:

Plenty of other vids to shake your reality (Webster Tarpley,Max keiser), don't just blindly go through life believing the TV, always ask questions and DONT give up your rights!
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Old 26th Jul 2011, 11:10
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WTF does all this mean?

Well I'll tell you.
If you are a sheep, keep your head in the trough.
Some time soon you're going to take it.
It's going to hurt and it's going to be hard.
However, with some preparation and clear thinking, you could be a shepherd.
Beware of the wolves though.
This is the only positive piece of news I can give.
You are a group of highly trained professionals, you are all quite capable of adapting to the tough challenges that lie ahead.

A few years ago this whole financial mess could have been dealt with in a more closed yet painful way. Sure the "D" word, would have been an inevitability.
(I have previously been censored for using this word.)
Anyway, it's akin to putting off the inevitable visit to the dentist, due to the fear of pain.
Unfortunately, with the passage of time, the situation has got terribly worse.
Countries instead of banks are now bankrupt!
(and your tooth has to come out!)
Reference to history suggests that situations like this, generally result in war.
Honestly I don't know what's going to happen, who does?
Just try and get your mind around it, for your own sakes.
Old 3rd Aug 2011, 09:19
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Old 3rd Aug 2011, 22:12
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Stockman is 100% correct. Bernanke is done for.
Besides, Bernanke was just another pawn in the Federal Reserve Cartel's game of global dominance. And we know that the Federal Reserve exists only for the benefit of a handful of the the worlds richest families.
Time for Bernanke to pack his tennis shoes and head to Jekyll Island for a well earned break !
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Old 3rd Aug 2011, 22:52
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But alas, its the plan to hyper-inflate the currency, although its better for them if its slower so they can reduce your purchasing power, while incrementally printing there own money to buy up the resources/gold/land etc for pennies on the pound!

We bail-out the banks who lend it back with interest! Don't fool yourselves, Australia is part of that too! Its global hegemony by the private/central banks.

We all need to stand together, and thats where we fall apart as modern humans. Distracted by TV/phones/booze/sex (yes they are good in small doses) we compete amongst ourselves so we dont pay attention to what the big boys are doing. Its meant for us to dust our hands off and relinquish responsibility for our future. "Oh the government said that its ok", so if someone challenges that they are a conspiracy guy?.... sounds like 1984 is here!
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Old 3rd Aug 2011, 23:28
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The Elephant In The Room
More Pieces of the Puzzle

by Rob Kirby | August 4, 2009

This following article was an address by Rob Kirby at the Gold Anti-Trust Action Committee Inc., GATA Goes to Washington -- "Anybody Seen Our Gold?", at the Hyatt Regency Crystal City Hotel, Arlington, Virginia, Saturday, April 19, 2008. The original address has been updated and added to since new information has come to light.

My name is Rob Kirby – proprietor of, proud GATA supporter and frequent contributor to Bill Murphy’s I would like to extend a warm welcome to GATA delegates from all over the world to Washington, D.C.

I’d like to delve into the numbers, or math, showing how J.P. Morgan’s derivatives book cannot be ‘hedged’.

As per their call reports filed with the Comptroller of the Currency’s Office, we know J.P. Morgan’s derivatives book grew by a cancerous 12 Trillion from June 07 to Sept. 07. The OCC’s Quarterly Derivatives Report serves as the public’s only peek into the opaque and murky world of derivatives-flim-flammery.

Flim Flammery is the understatement of the century. In fact, dealer notionals have EXPLODED parabolic-ally in recent years while END USER demand has been static and virtually non-existent.

J.P. Morgan’s derivatives book is epitomized by the chart above; it clearly serves no observable or commercially productive purpose, it’s pyramidal in structure and its elephant-sized interest rates derivative composition exerts pressure on the global interest rate complex.

Let’s look at the composition of their book:

We’re shown that 65 %, or, 61.5 Trillion of the total is IRS [on page 22 of 32].

Hedging Mechanics of Interest Rate Swaps > 3 yrs. Duration

Interest rate swaps > 3 yrs. in duration customarily trade as a "spread" - expressed in basis points - over the current yield of a corresponding benchmark government bond. That is to say, for example, 5 year interest rate swaps [IRS] might be quoted in the market place as 80 - 85 over. This means that the 5 yr. swap is "bid" at 80 basis points over the 5 yr. government bond yield and it is "offered" at 85 basis points over the 5 year government bond yield. Let's assume that 5 year government bonds are yielding 1.90 % and the two counterparties in question consummate a trade for 25 million notional at a spread of 84 basis points over. Here are the mechanics of what happens: The payer of fixed rate pays [1.90 % + 84 basis points =] 2.74 % annually on 25 million for 5 years. The other side of the trade - the floating rate payer - pays 3 month Libor on 25 million notional, reset quarterly - typically compounding successive floating rate payments at successive 3 month Libor rates so that actual cash exchanges are settled "net" annually. To ensure that the trade remains a "true spread trade" [and not a naked spec. on rates] and to confirm that 1.90 % is a true measure of where current 5 year government bond yields really are - the payer of the fixed rate actually buys 25 million worth of physical 5 year government bonds - at a price exactly equal to 1.90 % - from the receiver of the fixed rate at the front end of the trade. So, in this regard, we can say that 25 million IRS traded on a spread basis creates a "need" for 25 million worth of 5 year government bonds - because it has a 5 year bond trade of 25 million embedded in it.
  • Interest rate swaps of duration < 3 years are typically hedged with strips of 3 month Eurodollar futures instead of government bonds.

In recent years the Chicago Mercantile Exchange [or CME] has developed an interest rate swap - futures based hedging product for the 5 and 10 year terms. I acknowledge the existence of these products but due to their 200k contract size and amounts traded, as reported in archived CME volume data, they do not materially impact the numbers in this presentation.

As demonstrated, Interest Rate Swaps create demand for bonds because bond trades are implicitly embedded in these transactions. Without end user demand for the product – trading for “trading sake” creates ARTIFICIAL demand for bonds. This manipulates rates lower than they otherwise would be.

I learned these basics – first hand - over 15 years as a broker in Capital Markets. My largest client at that time was Citibank Canada – who pioneered these instruments for Citibank worldwide. For the bulk of the 1980’s, Citibank Canada was the largest interest rate derivatives player in the world.

Here’s the breakdown of 12 Trillion in derivatives growth in 3 months:

65 % of 12 Trillion, or, 7.8 Trillion of it is Interest Rate Swaps

35 % of 7.8 Trillion, or, 2.73 Trillion requires bond hedges

2.73 Trillion / 66 days per quarter = 41.4 billion in bonds per day

Here’s the math showing that 35 % of interest rate swaps require bond hedges:

Assume a conservative average maturity of 18 months [6 quarters] then one sixth of 33.8 Trillion, or 5.63 Trillion worth of Swaps roll off and need to be replaced every 3 months.

35 % of 5.63 Trillion, or 2 Trillion, required bond hedges to keep the book static.

2 Trillion / 66 days = another 30.3 billion bonds required per day.

So, In Aggregate: J.P. Morgan required more than 71.7 billion worth of bonds each business day – from Jun. 30 to Sept. 30 / 07 - JUST FOR THEIR SWAP BOOK – if it is hedged.

Some, like the OCC themselves, might argue that ‘netting’ – or balancing short against long internally within J.P. Morgan’s book – reduces the amount of bonds required to hedge. Over time netting would have some effect – but “netting” generally occurs at day’s end. This math does not even work intra-day:

According to the U.S. Treasury:
“During the July – September 2007 quarter, Treasury borrowed $105 billion of net marketable debt….”
J.P. Morgan is but one of 20 primary dealers of U.S. treasury securities.

50 % of all Treasury Securities auctioned over this period were 2 yr., 20 yr, or 30 yr. – so they were not used to hedge swaps. This leaves a balance of around 50 billion bonds suitable for hedges.

Treasury also tells us foreign participation in U.S. bond auctions typically tops 20 %. So you’re now left with 40 Billion in “net new” U.S. Treasury Securities – suitable for hedges - to distribute among all domestic players for an entire quarter. The growth component of J.P. Morgan’s book alone, if it’s hedged, requires more than 1.4 billion more than this amount every day!

Bonds required to hedge the growth in Morgan’s Swap book are 1.4 billion more in one day than what is mathematically available to the entire domestic bond market for a whole quarter?

This interest rate swap book is not hedged. J.P. Morgan is the FED.

If you believe the yeomen’s work of John Williams of Shadow Gov’t Stats – this helps explain how we get bogus inflation reports from officialdom in the 2 % range when in reality it is running “double-digits”.

Historically, bond vigilantes would have spotted the ruse and sold bonds raising rates of interest to levels commensurate with real inflation rates at 10 % plus the historic premium of 250 points or 12 – 14 % nominal market rates.

If you’re wondering where the bond vigilantes have gone:

They have all lost their jobs. Long ago, the last of the true bond vigilantes sold bonds – intuitively correct I would argue – not realizing that J.P. Morgan’s Swap Book was a “black hole” of stealth artificial demand. They lost their shirts along with their jobs.

Nowadays – bond traders who have chosen to remain employed – resemble trained monkeys and play the game the way their masters intend them to:

Monetary authorities have long been pursuing expansionary monetary policies while attempting to cloak their actions by suppressing rising interest rates and other natural market reactions.

This has completely perverted our whole banking and monetary system.

This is why false values have been assigned to a host of financial instruments.

This explains why the gold price has been suppressed. It’s another canary in the coal mine that was vigorously and nefariously silenced.

If you’re wondering why J.P. Morgan never seems to get caught up in any sort of hideous mark-to-market losses concerning their derivatives or hedge book – consider that back in the spring of 2006, Business Week’s Dawn Kopecki reported,
“President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye.”
So do any of you think that J.P. Morgan gets a pass? I would suggest to you that if they had not – our whole financial system would already have collapsed in a heap.
You see folks; hubris has been cast upon us in an attempt to have us believe that wealth is really created on a printing press and on trading desks in N.Y. at J.P. Morgan or Goldman Sachs.

Remember, real wealth really comes from the earth – like gold – just as it always has.

Original: Financialsense:The Elephant In The Room
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Old 4th Aug 2011, 22:22
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Original article

U.S. Faces a Depression-Level Unemployment Crisis


The awful truth about deficits and this week's "solution" to the debt limit crisis in the United States is that government debt isn't actually the core problem, but rather represents the costly cover-up of the bigger problem, that of a depression-level unemployment crisis.

The private sector in the United States fell into a depression in 2008 and has not emerged since then. Absent an extraordinary level of government intervention in the economy – which cannot possibly be paid for by taxes or ordinary revenues – the depression in the private economy and a level of unemployment that rivals that of the Great Depression become impossible to hide.

When we talk about the "debt limit crisis", what we're really talking about is the price of the cover-up. The debt limit crisis and the associated Federal Reserve monetary creation fiasco represent the costs of essentially blasting the economy with massive fire hoses full of both created and borrowed money on a non-stop basis, in the (unsuccessful) attempt to make the economy look and feel normal. We can stop the debt crisis at any time by turning off the fire hoses of money that have been flowing since late 2008, but then the depression in the private sector - and the full depression-level rate of unemployment - become plainly visible for everyone to see coming into a presidential election year.

So when we look at the recent so-called disastrous employment "surprises" on the very same financial pages where the debt limit "crisis" with its vague and inadequate "solution" is being covered, we're not really seeing two separate crises, but rather two aspects of the same crisis.

Pierce through the cover-up, look at what the extraordinary level of deficit spending is hiding, and the "surprises" stop. It is then and only then, once we've seen the true nature of the problem, that we can begin to take effective action as individuals to protect ourselves.

The Source Of The Deficit

The United States federal budget deficit is currently at an almost surreal level that is so large that it becomes difficult to comprehend. But let's try. The official budget deficit is currently running about $1.5 trillion dollars per year, or about 10% of the US economy. Now this is not to say that only 10% of the US economy is going through the government (that number is 41% for all levels of government as discussed below), but rather 10% of the current US economy is created by way of - and is reliant upon - the government spending money which it doesn't have. (The vague and toothless "solution" just signed into law hardly puts a dent in this situation, even in the unlikely event that future Congresses and Presidents actually make the hard choices that proved to be politically impossible in 2011.)

Where did this explosive growth in deficits come from? How did things get so out of control, and so quickly?

To understand why this is happening, we need to go back to the financial crisis of 2008. During the end of that year and the beginning of 2009, the US private economy imploded. At high speed, it plummeted from an annual level of approximately $9.4 trillion to a level of $8.1 trillion - a loss of $1.3 trillion dollars, or about 14%. In ordinary circumstances a drop this fast and sharp would throw a nation straight into a Depression with a capital "D".

Yet when one looks at GDP, the total economy only shrank by about $300 billion, or less than a quarter of the fall in the private economy. How could that be? The answer - which lies at the very heart of the current crisis - is that the economy is usually displayed as one number, which is the sum of private and federal spending. When we stick to this one number only and call it reality, it means that a decrease in one side of the economy can be seemingly made to go away by increasing the other side of the economy. As shown in the graph below, what happened was the federal government started spending an extra trillion dollars per year to cover up and smooth over the economic damage from this fundamental, fantastic blow to the private economy, the wealth-producing core of the entire economy.

The graph below shows that the total government (federal, state and local) share of the US economy went from 35% at the end of 2007, to 43% by the end of 2009. Outside of a major war, this is unprecedented growth in government spending, and it occurred almost instantaneously. For 2011 - after three years of the federal government blasting the economy with created money - some current estimates are that GDP will be $15.1 trillion (assuming a 2.7% nominal growth rate), and that total federal, state and local government spending will be about $6.2 trillion, meaning the government sector share may be little changed at roughly 41% of the overall economy. This appears to be the new, albeit unsustainable, "normal" (estimate source:

In other words, the fire hoses aren't working.

To better understand just how dramatic this change was, let's look at the relationship between private and government economies in another way. In 2007 (as the result of decades of government growth), there was $9.4 trillion in the private economy, compared to $5.1 trillion in total spending by the federal , state and local governments. What that means is that for every $1.00 in government spending, there was only $1.86 in the private economy. This was already quite questionable territory in terms of a private sector supporting a public sector, at least outside of an explicitly state-directed economy.

Two years later, by the end of 2009, the private economy was $8.1 trillion, the total government economy was $6.1 trillion, and there is only $1.34 in private economy total wealth generated (GDP) that is available for every $1.00 in government spending. As noted above, estimates for 2011 are that the total GDP will be $15.1 trillion, that total federal, state and local government spending will be $6.2 trillion, and therefore the private economy will be $8.9 trillion (not adjusting for inflation since 2007). If these estimates for 2011 hold up, then there will be a mere $1.44 in private economic output for each $1 in government spending.

If you were born in the United States after the end of the Depression of the 1930s, then what is shown in the graph above represents what is arguably the single most important economic event of your lifetime.

(These are the optimistic numbers, by the way, because they're based only on official US government spending and not the far larger annual growth in unfunded government obligations. These official deficit totals do implicitly include the money created out of thin air by the Federal Reserve when used to purchase Treasury bonds, but are deceivingly incomplete as they don't include the Fed's trillions in (effective) bank bailouts nor the previous creation of an artificial mortgage market, each of which relied upon using manufactured cash for politically motivated spending that was outside of the official deficits.)

So, we've had arguably the biggest economic change in most of our lifetimes, it's still going on all around us - but there is comparatively little discussion about it. Not directly. Instead, the symptoms of the central problem (unemployment) fill the headlines, as does the cover-up (the deficits) - but not the heart of the problem itself (the grievously wounded private economy).

We see headlines about the deficit, the debt limit, and even more seriously, the projections showing how the deficit grows without end into the future, at least under any major proposal from either party that details actual cuts. But, the supposedly impossible-to-control deficit that seemingly came out of nowhere to overwhelm the nation isn't some random fluke - the graphs above show exactly where it came from. The government needed an extra trillion a year in spending to fund the cover-up, on top of the massive annual deficits that were already in existence. So using the justification of temporary fiscal emergency, the federal government nearly entirely separated federal spending from federal revenues, which quickly became an integral part of how the government operates.

And that is the real story behind how in a very short period of time the United States jumped from large deficits to almost unimaginably huge deficits.

The Reason For The Cover-Up

There is a reason for this fantastic government intervention. Recessions or depressions with growing job losses are usually the number one reason why large numbers of incumbent politicians lose all personal power. And if there had not been a massive government intervention, that was sustained by both parties, there would have been a fall in the total economy that was a minimum of six times as great as the fall we actually experienced (before multiplier effects). This would have translated to a frightening drop in employment, far larger than what has been seen so far.

To illustrate how bad the economic carnage would have been, absent intervention, let's begin by taking the $1.3 trillion fall in the private economy into account. Next we say that if the private economy is shrinking, and if the government sector is to maintain its size relative to the private sector, then government expenditures must shrink to go along with the new smaller size of the private economy. With a roughly 14% reduction in the private economy leading to a roughly $700 billion (14%) reduction in the previous $5.1 trillion annual level of government expenditures (2007), this means almost $2 trillion dollars of the US economy would have disappeared – along with the associated jobs – in a period of months after the implosion of September 2008 (before any multiplier effects).

This $2 trillion plunge in GDP ($1.3 trillion private plus $.7 trillion government) would have been more than six times the reduction in total GDP that resulted from the "fire hose" cover up approach that is currently bankrupting the nation. Of course, this scenario was not allowed to happen.

To expand on the metaphor, the United States Treasury and the Federal Reserve effectively created a series of fire hoses, stuffed them full of money, pointed them directly at the ailing US economy and the bank system, turned them on full pressure, and these monetary "fire hoses" have been running day and night ever since. The fire hoses create the fantastic level of government deficit spending, they are the source of the debt limit crisis, and they are also precisely why we do not openly see the far greater unemployment that would otherwise be expected to accompany a financial earthquake of this magnitude.

What the deficit constitutes is a denial of reality. It is a cover-up that has been going on for what will soon be three years now – without having made any significant progress in healing the badly wounded private economy that is the true crisis. As with any cover-up that doesn't fix the underlying problem, it is ultimately doomed to failure, and its failure will likely destroy the value of the dollar and most private savings and investments in the United States.

The Problem With Balancing The Budget

On a stand-alone, fundamental basis, there never was a debt limit crisis. Stepping away from politics and returning to the fundamentals, let's keep in mind that what we are talking about is the President of the United States, the United States Senate, and the United States House of Representatives. They are the government and they are the source of the law. There are constitutional issues involved, but given the magnitude of the danger, and the previous flexibility of the Supreme Court when it comes to "interpreting" the U.S. Constitution, there is little from a legal perspective that prevents the United States government from rolling the clock back four years and doing it in a single weekend.

So why didn't they, and why won't they?

The issue, of course, is what happens next. Let's hypothesize and say that the budget is balanced in a weekend, and the economy takes that $1.5 trillion hit.

Because we are now looking at the real state of the US economy– with no cover-up in place – the true employment numbers appear in a matter of weeks or months, as the public workers and government contractors whose employment can no longer be funded, all lose their jobs. As do all the people whose jobs rely on income from those government workers and contracts. And then add in the third round of this jobs-multiplier effect as the impoverishment of the first two rounds of laid-off workers further reduces sales and economic activity. With little of the unemployment benefits to smooth things over either, as the money never really existed for that in recent years.

This wouldn't take long. The implosion of 2008-2009 only took a matter of months. What would likely happen on a quite rapid basis is that the US unemployment rate would go straight to a level of 25 to 30% (and that's a bit on the optimistic side) which means that it would exceed the greatest level of unemployment seen at the very height of the United States depression of the 1930s.

These are not arbitrary numbers or guesses.

Instead they represent the current state of US unemployment when we break it out into all three boxes, as I've previously explained in my article "Hiding A Depression: How The US Government Does It" (linked below). As documented in that article and shown in the graph below, what the government has essentially done is to take a 26%+ rate of unemployment and segment into 3 boxes.

Hiding a Depression How The US Government Does It By Daniel Amerman

The first "box" is the official U3 rate of unemployment which is currently about 9.2%. The second box is based on the equally official but less often discussed U6 rate of unemployment, which adds in the discouraged, long-term unemployed as well as involuntary part-time workers, taking total unemployment to 16.2%.

The third box is the public and private workers who are effectively finding employment solely by way of the government's "fire hose" of money that is being pumped into the economy, money the government does not have and cannot be reasonably expected to repay (at least at the current value of a dollar, which is another topic altogether). If we remove the deficit, then about 10% of the economy disappears, with a corresponding reduction in job losses and at the very least (without factoring in the likely multiplier effect on job losses), the country goes to a combined unemployment rate in the 25 to 30% range.

The peak US unemployment rate of the 1930s was "only" about 25%. We are already there and worse - if the fire hoses of deficit money stop blasting.

"Then keep on blasting away and turn on some more fire hoses!" one might think, and some commentators are advocating this very approach. Unfortunately, things aren't quite that simple, and there are extraordinary dangers for this approach. For if the monetary fire hoses keep on blasting, then the dollar eventually collapses, the value of savings and most investments are wiped out, and the unemployment levels go to 25-30%+ anyway.

So the destination is the same, and the reality of depression-level unemployment hits anyway, with the difference being that the savings and the retirement accounts have been wiped out in the process of delaying its arrival. The future then is that more than a quarter of the country is unemployed, and the price of delaying the recognition of reality, is that almost everyone is broke as the value of their life savings has been destroyed by the endless, reckless monetary creation and spending without resources that is at the heart of the "fire hoses".

Seeking Societal Solutions

The United States is truly between a rock and a hard place, and the only way out is not to smooth things over, but to face - and fix - reality. The deficit is a catastrophe, but it is of secondary importance compared to the devastation that has been wreaked upon the private economy. Money is ultimately just a symbol, the scorekeeping system that we use for distributing reality, with reality itself being jobs, goods, services and resources. If a country doesn't produce the economic output that is necessary to support the national standard of living, then the real national standard of living eventually falls, regardless of how many clever boys and girls are manipulating the symbol.

In the immediate aftermath of the votes, President Obama immediately shifted the focus to jobs, which is a most welcome shift from the cover-up to the crisis itself. Unfortunately, as an administration source put it, the President doesn't have any "magic beans", in apparent reference to the need to grow a massive beanstalk of an economy.

This gets to the heart of the dilemma, because the "magic beans" are there, as they always have been, but they can't even be seen through the current political filters. The "magic beans" can be found by rewriting the laws to favor the true source of job creation and economic growth in the US. Which is simply to let a million small businesses flourish by stripping away onerous and anti-competitive government regulations. Strip away the corporate welfare that lets mega-corporations (who destroy domestic jobs) dodge taxes altogether while entrepreneurs (who create domestic jobs) pay the highest marginal all-in tax rates in the country. That needs to be turned upside down.

After decades of neglect, the anti-trust laws again need to be vigorously enforced, as we cannot afford to continue the current anti-competitive economy of oligarchies and corporate fiefdoms, locked in their deadly, economy-destroying symbiotic relationship with the political powers-that-be. Keep in mind that when a major corporation splits into four - the jobs effect is the reverse of what happens with mergers. It doesn't mean the corporate employees lose their jobs (or that the shareholders lose their investments), but rather there is a major increase in jobs, on average, instead of the layoffs on a massive scale that are the usual immediate or eventual result of corporate consolidation. (With a good number of those job increases occurring not with cashiers and cooks, but in desirable and well-paying upper and middle management positions, as well as skilled technical support positions.)

Let the free market decide where the resulting resurgent new growth occurs, instead of government micro-management on a partisan basis that is all too often effectively controlled by campaign contributions.

As this approach would involve turning the current political paradigm upside down, negating the influence of wealthy special interests even while removing the partisan and congressional district components of government-directed "stimulus" spending, it is no surprise that the "magic beans" in question remain invisible to policy-makers. Indeed, the "magic beans" are a double negative from a political perspective, as incumbent politicians lose much of the financial power coming from special interest campaign contributions, even as they lose the raw political power to reward friends and punish enemies through controlling the spending of the "stimulus". Meaning such a solution is still likely out of reach at this time, politically speaking.

Individual Implications

Because the politicians fear the personal consequences, it is unlikely that the fire hoses will be turned off. A moderate reduction in the flow seems to be the most aggressive option on the table, and if that occurs (which is far from assured) it still is simply not enough to change the outcome.

Run the fire hoses indefinitely, blasting artificial money into the economy even while politics as usual determines how the money is spent - and the value of the currency is all too likely to collapse.

Historically, a collapse in the value of a currency necessarily forces a major redistribution of wealth, and the segment of the population that is most devastated by this seems to always be the same. It’s the retirees, and the people close to retirement. When we look to Germany, when we look to Argentina, when we look to Russia – it is the pensioners who are impoverished more than any other group. Unfortunately, it appears that history could be in the process of repeating itself.

Of at least equal importance, stocks are profoundly overvalued when compared to a private economy in depression, where the semblance of earnings is likely to collapse when the output of the fire hoses can no longer be sustained.

When we look at the headlines about the destruction of retiree investment values, pension assets and so forth, we're really just seeing the beginning - because most assets are overvalued for a nation whose private economy remains in depression even while the government takes on new debt at a ludicrously unsustainable rate.

When the value of money and the value of assets are falling together, then we have simultaneous price inflation and asset deflation (in inflation-adjusted terms). It is a one-two combination that the conventional financial wisdom is simply incapable of dealing with.

The intertwined results of the crisis and its "solution" may represent the annihilation of most of the retirement dreams of the baby boom generation, even if that is not yet recognized. There is not an even cost that is being born by society as a whole, rather some segments are bearing much more of the burden than others. If your peer group (particularly Boomers and older) is headed for disproportionate financial devastation, then happenstance is unlikely to offer a personal way out. Instead, you must take quite deliberate actions to change your personal financial position so that wealth is redistributed to you, rather than away from you.

To get out of step with your generation, and have wealth redistributed to you even as your peer group is being devastated by this extraordinary destruction of wealth, you need to start with an essential and irreplaceable step: education. You need to gain the knowledge you will need to turn adversity into opportunity.

Contact Information:
Daniel R. Amerman, CFA
Website: Daniel Amerman and the Turning Inflation Into Wealth MiniCourse
E-mail: [email protected]

breakfastburrito is offline  
Old 5th Aug 2011, 01:00
  #58 (permalink)  
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nice articles breakfastburrito. it really does some up alot of issue with our Fiat credit unlimited growth thinking. All Fiat currencies have failed in history, and likewise we may be at that exciting time in history when it does it again.

The funny thing is, I get alot of degrading looks when I talk about this stuff and the people behind it all. Conspiracy guy is the usual attitude, but its funny when the pain starts hitting they will be the ones scratching there heads asking for a broke government for money :-) suckers.

The U.S should come out with a better non-farm-payroll figures today so that may see a further drop in gold/silver, if its worse then QE 3 comes in and the ECB start "intervening with monetary stimulation" then its inflation time. You know what happens then :-)
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Old 5th Aug 2011, 09:14
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"You guys need to take a chill pill / Maybe Wall Street is more to your liking /
Conspiracy theorists maybe?"

I hope current events turn out to be nothing more than theory.

I hope Celente/Schiff/Rogers/Rickards/Keiser/Engdahl and the rest are wrong because if they are right, we are in a pickle.

A big pickle.
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Old 6th Aug 2011, 01:37
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Have a look at the volume of trading recently on the ASX.Options CFD's
and equities.There must be a lot of mugs having to SELL SELL as their
idiotic gambling options blow up in their faces.
Most of this correction is caused by idiots having to sell as the
markets slides, its not panic into cash or bonds, its lenders making
calls on greedy idiots. Between these calls and computer auto trading
the whole mess unravels further and faster than ever.
I had buy orders thru comsec which went thru friday 2-3% lower
at settlement due to the system working too slowly. The prices were
going down faster than the trades could be executed, so cheaper
than instructed-never seen that before.
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