The Quadrillion Dollar Derivative Debt and the “Bail-in”: When you Deposit Funds in a Bank, it Becomes “Their Money”
Global Research, August 03, 2015
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http://www.globalresearch.ca/the-quadrillion-dollar-derivative-debt-and-the-bail-in-when-you-deposit-funds-in-a-bank-it-becomes-their-money/5466586
http://www.globalresearch.ca/the-quadrillion-dollar-derivative-debt-and-the-bail-in-when-you-deposit-funds-in-a-bank-it-becomes-their-money/5466586
The
world is awash with “promises”. Nearly everything we think of as having
“value” is because of a promise behind it. A few examples; your bank
accounts, retirement funds, bonds and even the dollar bills in your
pocket. Your bank account for example, once you deposit the money it is
no longer yours. You can argue this if you wish but we now know this is
true for sure after recent “bail in” legislations passed throughout the
west. When you deposit funds into a bank, it then becomes “their money”
held for you …they “owe” it to you.
Do
not take this lightly, lawmakers around the world have made this the
new reality. A little known fact, in 1845 Britain passed banking law
that made depositors (unsecured creditors), this is still precedent to
this day. When you deposit money you “accept a liability” from your bank
and are classified as an unsecured creditor. In other words, “get in
line with everyone else”!
Same
thing with many retirement accounts. Think about Social Security. When
you get your annual statement form, it comes with an asterisk. This is
to inform you they “might need to reduce benefits”. With any retirement
account you are relying on the custodian to make payments to you upon
retirement. Think about state and municipal retirement accounts
promising the good life, they are nearly ALL underfunded. Meaning there
is not enough money in there to make (promised) future payments unless
some sort of magically higher returns are realized. These are
underfunded by the TRILLIONS of dollars!
Bonds
are an obvious asset class where a “promise” is relied on. Dollars on
the other hand seem the most misunderstood by the public while being the
biggest leap of faith in all asset classes. Dollars rely on the “full
faith and credit” of the U.S. government (a bankrupt entity) yet the
populace sleeps through the night secure knowing they own dollars. ALL
non backed, fiat currencies in the past have failed. The dollar is the
widest spread and widely owned fiat the world has ever known, its
failure will be spectacular upon arrival!
I
wanted to point out the above “promises” as a basis to speak about
trust or confidence. The financial world turns on the axis of “trust”.
This trust was nearly broken in 2008 and is the reason the Federal
Reserve needed to secretly lend $16 trillion all over the world. If the
Fed had not come up with these funds, failures would have spread and
trust would have been broken amongst the banks/other financial
institutions and even between the central banks themselves! The Fed’s
largesse worked and trust was maintained.
Now,
I believe we are set for another “test” of trust. We have gone five+
years with QE this and QE that, the reality being outright monetization.
In fact, central banks today are buying more sovereign bonds than are
even being issued. The public and even the professional funds have
backed away from the debt markets, you can’t blame them because the
interest received does not even cover inflation not to mention a risk
premium. Globally the pace of trade and business activity is slowing or
even declining which will bring to a head the difficulties in meeting
debt service and other “promises”.
I
ask, what will happen when inevitably “trust” begins to wane? Or even
fully break? It is at this point the system goes into “The Great Call”.
Margin call? Of course, because nearly everything financial has leverage
behind it but there is more to it than this. The “call” I am speaking
of is for contracts of all sorts to “perform”. In particular I am
thinking “derivatives” contracts will be called on to perform their
contractual duties.
All in all, there are over $1 quadrillion
worth of derivatives outstanding. The problem with this is the “tail”
is bigger than the dog. In other words, the amount of derivatives
outstanding dwarfs the total amount of money outstanding and thus the
ability to “pay” and make good on the contracts. The other side of this
coin are contracts promising to deliver something. Here I am
thinking both gold and silver. There are far more (100-1 or more)
obligations outstanding than there are ounces or kilos available to
deliver. This is a default just waiting to happen.
If
you listen to the Harry Dents of the world, the dollar will be the safe
haven and where all fear capital will go. In a world based on nothing
but trust and promises, will fear capital really pile INTO a currency
based ONLY on trust and promises …when “trust” is exactly what is come
into question. Actually, it can be said the dollar was originally set up
in 1971 on a “never pay” model. The dollar (and bonds) only promise to
pay “more dollars” and nothing else. This game worked for many years,
now it looks like the Saudis after doing many deals with both Russia and
China may be set to transact in currency other than dollars. Are they
displaying confidence?
The
Chinese are now net sellers of U.S. Treasuries. Ask yourself this
question, if China could sell all of their Treasuries and turn it all
into gold, silver, oil, copper and other real tangible assets (without
destroying the Treasury market or making gold and silver go no offer),
would they? I say yes, they absolutely would love to be out from under
their Treasury position. Apologetic others might say China is
comfortable, we will soon see.
Because
confidence is the only thing at this point holding the game together
…and its fickle nature, it is important for you to think this through.
What will be standing when confidence breaks? Can banks globally survive
“runs” when depositors come calling? Can commodity exchanges deliver
all they promise? Can borrowers “borrow more” if they cannot redeem past
issues with new debt? This is where we are headed both systemically and
globally!
Before finishing I
want to tie two connected thoughts together. First, the great Paul
Craig Roberts said last week he feared precious metals could be
suppressed forever. I received MANY fearful e-mails regarding this
thought process. Mr. Roberts would be entirely correct if it were not
for one small detail, REAL gold and REAL silver must be available to
deliver. Otherwise the game comes to an end and the fraud is exposed. He
is entirely correct, “price” can be jammed or rammed with enough
“margin” posted. Dan Norcini once upon a time had it correct when he
said, nothing will unnerve the shorts more than the longs standing for
delivery …and making a call for the product. I would like to remind you,
COMEX currently has only 11.7 tons of gold for delivery. This is
roughly $400 million. If I were short, this paltry sum would not add to
my confidence.
Another
thought going hand in hand with this is where we are now versus 2008.
Back then we were within overnight hours of the entire system coming
down, this is fact. What has changed since then? “Nothing”, but in
reality quite a bit. Nothing has changed from the standpoint of “tools
used”. We have not altered or changed anything that “got us to the
brink”… only done more of it! We have far more debt and more derivatives
outstanding now. In fact, central banks and sovereign nations have even
sacrificed their balance sheets to prolong the game. It has worked …so
far. The only problem is the entire arsenal of the central banks have
already been tried and failed to provide the real economy with any
stimulus. The result has been capital pushed into financial markets and
blowing the bubble(s) far larger than they were. Now, we have far larger
markets with far more leverage than 2008. These will need to be met
with central banks and sovereign treasuries with weaker balance sheets
and almost no ability to borrow in an effort to reflate. It is a recipe
for disaster.
We already
know the sovereign debt markets are very thin on the bid side as
liquidity has dried up. We also know equity markets are displaying
horrible internal breadth. China is actually nearing a 1929 scenario and
will be there shortly if they cannot steady. Confidence is a fickle
girl, if it breaks, then we go back to the 2008 scenario and we’ll find
out just how powerful the central banks really are. I believe the coming
“Great Call” cannot nor will be met and only then will we see what is
left standing. It is imperative here and now to position yourself in
assets that do stand on their own, everything else will be a broken
promise!
Disclaimer: The
contents of this article are of sole responsibility of the author(s).
The Centre for Research on Globalization will not be responsible for any
inaccurate or incorrect statement in this article.
Copyright © Bill Holter, Global Research, 2015
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