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The Eurodollars estimate in the chart below is based on the BIS
Banking Statistics from Commercial Banks and may not include official
reserves held by Central Banks.
As you know the Federal Reserve stopped reporting Eurodollars some years ago,
with the consequence that it also stopped reporting M3 money supply.
I like to think of Eurodollars and banking system derivatives as the Fed's off-balance-sheet method of
monetization and policy implementation, with plausible deniability.
Swap lines are provided to other Central Banks, and they in turn make the
loans to their member banks, and from there to their
customers. So this eurodollar creation is made outside
the real domestic economy, and therefore has no immediate effect on
domestic money supply and prices at the end of the money chain. But the
effect is there, and the smart money closer to the financial system sees it
coming.
I do not know if the Fed's swap line activity actually shows up immediately
in their Balance Sheet and therefore the Adjusted Monetary Base. But I think
it is fairly obvious that if swaps are used to create dollars by foreign
central banks, who in turn loan those dollas to
their own members, the impact of that broader dollar creation will only be
felt with a significant lag in the domestic US economy. But it will be felt
at some point.
When the Fed was tracking Eurodollars, I believe that they were not counting
certain assets, or liabilities from the banks point of view, as money. What exactly those
assets might be and how liquid they are is a open question. How much of them were held in
Agency debt, and how much in Treasury debt? Is a liquid obligation held by a
foreign source part of the broad money supply, or not? Since it can be
quickly converted into dollars, and then into another currency, leaves little
question that it is potential money at least.
At least part of the problem being faced by Europe in this crisis is the
sharp point of the deleveraging of US assets underlying dollar denominated
debt. And if foreign confidence in the US dollar debt breaks, the losses
would be daunting for the holders of that debt, so there will first be a rush
into Treasuries and away from Agency debt and CDOs. This will be like the
ocean retracting, causing people to flock to the shore in wonder at the
cheapness of the debt. But eventually the returning tsunami of US dollars may
very well swamp the Fed's Balance Sheet and the domestic US economy and the
savings of many.
The hyper-inflation of financial paper is happening quietly and off the books.
The growth rate in derivatives held by the Banks is mind boggling. And how
this will manifest in the real world economy is not fully known. A good sized chunks of the financial system may simply
vaporize. And I suspect that the policy makers will heavily allocate the
damage to the least powerful members of the private sector. Ownership of the
real economy will continue to be concentrated in fewer and fewer hands.
As for the US Dollar, as I have said on numerous occasions, inflation and
deflation are at the end of the day a policy decision. Period. Those who see
a hyper-deflation or a hyper-inflation as inevitable elude my knowledge of
the facts as they are. The Fed owns a printing press, and it uses it
selectively.
Speaking of lags, I think the unusually long lag between the growth in
Eurodollars and the price of Gold can be attributed to the gold sales
programs by the Western Central Banks. Once those programs were suspended,
and the Banks turned again into net buyers, the gold price rose dramatically.
The most recent Eurodollar operation of the Central Banks in relieving the
Dollar short squeeze in euro is not yet in the totals.
It should also be noted that there are other correlations one can use in
determining the gold price, most notable 'real interest rates.' However,
there are linkages amongst all the variables, given a non-organic increase in
the money supply and artificially low interest rates for example being among
them.
So, when will the price of gold stop rising? Most likely when the Central
Banks stop printing money, and return to transparently set market based
interest rates and a productively reformed financial system.
'Not on the
horizon' does come to mind.
I do not know if it will happen in gold or silver first, but the price
management schemes that have been in place for a few decades now in the
metals markets are reaching a tipping point.
To paraphrase what Kyle Bass recently said, 'There is $80 billion in open
interest in gold futures and options, and there is $2.4 billion in
deliverable gold at the exchange. The exchange is a fractional reserve
system, and they plan for a one percent redemption.
In the event of a greater demand for redemption, they assume that price will
take care of it. The decision for a fiduciary is simple; take your billion in
gold out now.'
And the situation in the silver market is even worse. It is a disaster
waiting to happen.
At some point a 'black swan' event, or perhaps something the classical world
would have simply called
is going to knock the US futures market off its foundations. The government
and exchanges will seek to force a solution on market participants through
the de facto
seizure of positions and accounts, with a settlement dictated by the Banks.
MF Global looks like a dry run for that much larger default.
They will say once again that 'no one could see it coming.' And the truth
will fall into the same credibility
trap that has swallowed all the other financial scandals, cover
ups and bailouts since the S&L crisis.
"Why is surprise the permanent condition of the
U.S. political and economic elite? In 2007-8, when the global financial system imploded, the cry that no one could have
seen this coming was heard everywhere, despite the existence of numerous
analyses showing that a crisis was unavoidable.
It is no surprise that one hears precisely the same response today regarding
the current turmoil in the Middle East. The critical issue in both cases is
the artificial suppression of volatility -- the ups
and downs of life -- in the name of stability. It is both misguided and
dangerous to push unobserved risks further into the statistical tails of the
probability distribution of outcomes and allow these high-impact,
low-probability "tail risks" to disappear from policymakers' fields of observation...
Complex systems that have artificially suppressed volatility tend to become
extremely fragile, while at the same time exhibiting no visible risks. In
fact, they tend to be too calm and exhibit minimal variability as silent
risks accumulate beneath the surface.
Although the stated intention of political leaders and economic policymakers
is to stabilize the system by inhibiting fluctuations, the result tends to be
the opposite. These artificially constrained
systems become prone to “Black Swans” — that is, they
become extremely vulnerable to large-scale events that lie far from the
statistical norm and were largely unpredictable to a given set of observers.
Such environments eventually experience massive blowups, catching everyone
off-guard and undoing years of stability or, in some cases, ending up far
worse than they were in their initial volatile state. Indeed, the longer it
takes for the blowup to occur, the worse the resulting harm in both economic
and political systems."
Nassim Taleb, The Black Swan of Cairo, Foreign Affairs
It is not yet clear when, or exactly
how, but it seems inevitable that this scheme of the Anglo-American banking
cartel will founder on the hard rocks of gold, silver, and the will of the
people to be free, if they have but the mind to use it.
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