by Alasdair Macleod, Schiff Gold:
This article looks at the collateral side of financial transactions and some significant problems that are already emerging.
At a time when there is a veritable tsunami of dollar credit in foreign hands overhanging markets, it is obvious that continually falling bond prices will ensure bear markets in all financial asset values leading to dollar liquidation. This unwinding corrects an accumulation of foreign-owned dollars and dollar-denominated assets since the Second World War both in and outside the US financial system.
TRUTH LIVES on at https://sgtreport.tv/
Furthermore, collapsing collateral values, which are increasingly required backing for changing values in over $400 trillion nominal in interest rate swaps are a new driver for the crisis, forcing bond liquidation, driving prices down and yields higher: we are in a doom-loop.
What action can the authorities take to ensure that counterparty risk from widespread failures won’t take out inadequately capitalised regulated exchanges?
It seems that they acted some time ago by giving central security depositories (The Depository Trust and Clearing Corporation, Euroclear, and Clearstream) the right to pool securities on their registers and lend them out as collateral. Your investments, which you think you may own can be absorbed into the failing financial system without your knowledge.
This seems particularly relevant, given the appointment of JPMorgan Chase as custodian of the large gold ETF, SPDR Trust (ticker GLD). In a test case in the New York courts concerning Lehman’s failure, JPMC was given legal protection should it seize its customer’s assets.
This important erosion of property rights is poorly understood. But as the financial distortions are unwound, leading to unintended consequences such as bank failures and ultimately the collapse of the dollar-based fiat currency regime, the implication is that holders of physical gold ETFs will be left owning an empty shell at a time when they might have expected some protection from the collapse of the value of credit.
Introduction
In today’s complex markets it is difficult for the layman to understand their workings. It has always been about the expansion and limitation of bank credit, which must never be confused with money, and which from the dawn of history has been physical metal, particularly gold. But that is the medium of exchange of last resort, hoarded by individuals, and in recent centuries by central banks. And the layman’s understanding is further undermined by state propaganda which has dominated markets particularly since the suspension of the gold standard in America in 1933, which had lasted a century. Subsequent events have intensified monetary disinformation, leading to a global fiat money system based on the US dollar.
In order to give us all the illusion of price stability the Breton Woods Agreement was designed to promote the dollar as a gold substitute for all other currencies. That aspect of the illusion ended in 1971. Since then, to maintain the dollar’s credibility the US Government increasingly resorted to market manipulation. First, they tried selling gold into the market in the early seventies, which was readily bought and failed to stop the gold price from continuing to rise. The next wheeze was to create artificial demand for dollars in an attempt to support its purchasing power, measured against commodities and other currencies. This led to the expansion of derivative markets, which diverted speculative demand for commodities thereby suppressing their prices below where they would otherwise be. The expansion of the London bullion market which created paper gold, and the general adoption of the dollar not just to settle cross-border trade and commodity pricing but to replace gold in central banks’ reserves was all part of the deception.
Over the fifty-two years since Bretton Woods was suspended, huge imbalances accumulated. In last week’s article I showed a table of bank and shadow bank dollar balances, onshore and offshore, which I repeat below.
The offshore element is considerably larger than that registered in the US Treasury’s TIC numbers, which in itself tells us that foreign interest in onshore dollar investments and bank balances exceeds US GDP by a fair margin on its own. The offshore element is based on the Bank for International Settlements analysis of dollar deposits and obligations outside the US financial system which we can equate with the eurodollar market. In the main, they are currency forwards and swaps where one leg is in US dollars.
