Reading time: 1,220 words, 3 to 5 minutes.
As usual, crusty veteran Jim Sinclair nails it in the article below. I’ve been harping on ‘Derivatives’ since September, 2007. I can’t believe I’ve been doing this for five years now. For those of you new to this, I refer you to the article which is as relevant today as it was five years ago, perhaps even more so. It’s also a crash course on Economics – REAL economics based on the Austrian School VS the crap Keynesianism taught in universities and mishandled by incompetent government leaders. The link is here Crash of 2007 – Economics 101.
About the only thing Jim Sinclair doesn’t mention is the reason Federal Reserve Chairman Ben Bernanke announced an UNLIMITED duration (sign of desperation) of this last injection of Quantitative Easing (QE # 3) is to avoid the embarrassment of QE4, QE5, QE6, etc. etc. None of the previous QEs, whether American, European or Japan’s (seven so far and they’ve just announced their eighth) have worked to resurrect deteriorating global economies because all they do is inject liquidity (availability of cash) into a banking system that’s afraid to lend. Liquidity injections don’t work because the problem isn’t liquidity. The problem is too much debt. However, I’ve said all this before so without further ranting, here’s Jim Sinclair.
QE3 To Infinity – The Final End Game
September 21, 2012
The final end game of QE3 to infinity, with a month or two off from time to time, will be a product of the long term viability of the Federal Reserve Balance sheet and the impact on the dollar there from.
Let’s review what has transpired and begin to look at what will happen:
1. OTC derivative manufacturers and distributors sold fraudulent paper to almost every entity as clients of the Western world financial system. Inherently the OTC derivatives manufacturers and distributors had part of the transaction on their books. No problem as long as the entire scam was a “Daisy Chain,” a connected set of transactions that has the appearance of risk but when all netted out equals almost zero.
2. Until Lehman was flushed, and flushed it was, most all OTC derivatives could have been netted to zero in a derivative resurrection bank. Losers would have rejoiced and winners would have declared war. However when Lehman was forced into bankruptcy it broke the “Daisy Chain” (a chain of near risk-less transactions when netted) of the OTC derivatives scam. At this point winners had won huge and loser had lost huge and there was no longer a means of repair to the quadrillion dollar scam. The problem has no practical solution other than transferring all losing paper to the balance sheet of the Federal Reserve where then it was anticipated no non-government “mark to market” audit would ever occur. It was the perfect hole to stick the junk into.
3. The size of the OTC derivative market stood at one quadrillion one hundred and forty four trillion as reported by the Bank of International Settlement, the counter internationally.
4. The Bank of international Settlements, seeing this outrageous number, changed their computer method of valuation to maturity assuming no failures and reduced the size of OTC derivatives of all kinds to a more acceptable but still huge number of $700 trillion notional value.
5. In the first and second round of QE the Federal reserve purchased OTC derivatives including the variety called securitized mortgage debt to remove them from the balance sheets of the Western world financial system, thereby improving the Western world’s financial institutions balance sheet and preventing an international industry wide bankruptcy. That means the Federal Reserve has impaired its balance sheet in order to repair some of the balance sheet integrity of the Western world financial system. The amount they have purchased is significant, but not compared to total outstanding above more than one quadrillion dollars.
6. The reason for QE to infinity, QE3, is the failure of business activity in the Western world to pick up with early huge monetary stimulation so as to repair the balance sheet of the Western financial world financial system. The unseen crisis is the hidden weakness of the Western world financial system thanks to FASB (The gatekeepers of world accounting) which allows financial institutions internationally to hide their losses by valuing their paper at whatever the bank wants it to be with no reference to seek a market value, primarily because there is none to seek.
7. The crisis not seen by Fed observers is the true balance sheet condition of the loses on the trillions of dollar of worth-less paper fraudulent paper because numbers are given but no independent mark to market audit has been or is likely performed.
8. As QE3 to infinity moves ahead, the balance sheet of the Federal Reserve continues to acquire worthless paper in exchange for dollars. Junk moved onto the balance sheet of the US Federal Reserve as the common share of the USA, the US dollar, continues to expand exponentially.
9. The end game problem is an extended recessionary business conditions going into 2015 to 2017 wherein the supply of dollars continually expands, the US Federal Deficit grows, US state deficit spending continues to grow and the quality of the Federal Reserve balance sheet proceeds to deteriorate further.
Therefore the end game is the perception of the weakness of the lender of last resort, the Federal Reserve’s Balance sheet, as it impacts confidence the US dollar and US interest rates.
Now you know what brings about the end game.
In the future I will do small simple articles dealing with the impact on markets of a to be Bankrupt Central Bank, the US Federal Reserve. The end game could come sooner, but only if there was an independent “mark to market” audit of the Federal Reserve inventory of worthless paper which remains unlikely no matter who wins the election in November.
Those of you invested in gold and silver vehicles of all kinds (with the exception of ETFs and futures) rest well this weekend. $3500 will easily be a place gold trades. The Canadian dollar and blasphemy to the euro snobs, the Swiss franc, remain go to vehicles for cash positions. Yes cash because you to not have to pay to own them as you do with a sovereign paper with negative interest.
To put derivatives into perspective, $1.144 quadrillion in worthless derivatives is about 20 times the entire global GDP. To cleanse the banking system of this toxic crap, everyone on earth would need to donate 100% of our income for TWENTY years to the banksters without spending a cent of that income AND still somehow keep the global economy going by selling everything we have and living off savings for that same twenty years. That gives new meaning to the word “impossible” because no one has twenty years of savings. THAT’S why the entire global economy is slowly collapsing.
By the way, he mentions the Canadian dollar and Swiss franc as safe havens. They are for now, but they too are ‘fiat’ currencies based on the full faith and credit of politicians and like all ‘fiat’ currencies in history, they too will eventually collapse. It’s only a matter of time.
Are you prepared? Read my ‘Collapse’ articles for what you can do to prepare and stop believing anything the government tells you.
September 21, 2012
P.S. I highly recommend
Jim Sinclair’s free website.
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