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Everything You Need to Know About the Ongoing Crisis… And What It Means For Your Portfolio
There is a lot of misinformation about what caused the 2008 Crash and the 2011 EU Crisis.
Here is the very simplest outline of what you, as a saver and investor, really need to know.
Banks take your money in the form of deposits.
They use your money to backstop the loans they make. In most cases, every $1 you put in the bank can backstop $10 in loans. However, in some regions, particularly Wall Street and Europe in the last 20 years, it could be as much as $50.
Who do they lend to?
Consumers, students, homeowners (mortgages), other banks… and even entire countries such as the US or Germany.
Now historically, the banks made money by paying depositors like you lower interest rates than the ones they charged borrowers.
Let’s do a quick example.
You put $100 into the bank at a deposit rate of 1%.
The bank lends out $1000 (10* your $100) at a rate of 10%.
So by the end of the year, the bank owes you $1 (1% on your $100), but has made $100 in interest on its loan portfolio ($1000 *10%=$100).
The bank pays you $1 out of the $100 and pockets the $99 as profits.
Things got tricky in the lead up to the 2008 crisis.
Because of leverage rules, large banks that had trading departments could use the loans the bank makes as “assets” to backstop the trades their trading teams made.
And they can leverage up by 26 to 1, 30 to 1 or even higher.
So, let’s say the bank loaned $1,000 to the US Government by buying US Treasuries. The bank could then turn around and use that $1,000 as collateral on $26,000 or even $50,000 in derivatives trades.
Now you’re talking about leverage upon leverage. Forget about interest payments for a minute, here’s the basic layout.
· You deposit $100 into a savings account at the bank.
· The bank loans the US Government $1,000.
· The bank uses that $1,000 loan to backstop $26,000 of its trades with other banks.
The only major difference is that in reality we’re talking about a lot more money being used. As in TRILLIONs of US Dollars.
This is not an exaggeration. US banks alone have ~ $200 TRILLION in derivatives trades on their books.
THIS is why it’s such a big deal when you hear that Spanish bonds, or German bonds, or US Treasuries are losing value… because whenever a sovereign bond begins to collapse, the big banks start calling each other asking “the collateral backstopping your trade with us is worth less now…do you have any other collateral?”
THIS is why the European crisis was such a big deal… because those Greek, Spanish, and Italian bonds that were collapsing were backstopping tens of TRILLIONS of Euros’ worth of trades.
And this game continues to this day worldwide. Globally the derivatives market is north of $700 TRILLION. Only $70 trillion or so is backstopping this. And that $70 trillion is generally marked at a valuation that is nowhere near the real market value.
Imagine if you claimed your $100,000 home was in fact worth $500,000 so you could borrow $5 MILLION to trade the markets.
THAT’S what the big banks are doing.
The whole mess is a multi-trillion dollar ticking time bomb waiting to happen. Leverage levels are once again at record highs. Which means we’re set up for another 2008 all over again.
Be Prepared.
This concludes this article. If you’re looking for the means of protecting yourself from what’s coming, swing by www.gainspainscapital.com to pick up a FREE investment report titled Protect Your Portfolio. It outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.
Best Regards
Phoenix Capital Research
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The point of the article below is to call attention to the insanity of derivatives as an instrument or tool to add stability to our financial system. By stacking risk upon risk and transferring it off to another party who may not be able to preform or is over-leveraged you do not increase stability.
Derivatives do just that with the parties involved often not even understanding the terms and implications of what they have signed. To make things more complicated cross border agreements blur regulations, legal jurisdictions, and laws. A collapse or default often results in years of legal wrangling and finger pointing rather than a swift payout or settlement.
http://brucewilds.blogspot.com/2014/03/derivatives-house-of-cards.html
And to think these imbeciles want to RESCUE such a system just to save their own jobs / IMF etc.
They can't even run a business that "allows" you to fraudulently make easy money without even working ... and we are to let them carry on with a new scheme ?
I thought the banks were getting their money from the fed. Depositor money was just a front to make them look like a bank instead of a hedge fund.
Your analysis is on the right track but could be made simpler to enable the reader to understand modern banking by defining the following two terms; money and counterfeit.
Money is the measure of work a person does to produce their product which satisfys the demands of other producers.
Counterfeit is the impersonation of work done when actually none has been performed.
Money was invented as a means of equalizing the measure of disproportionate work.
For example, observe a transaction between a builder and a shoemaker. The builder needs shoes and the shoemaker needs a house but the builder wouldn't trade a house for a pair of shoes nor would he accept 1,000 pairs of shoes for a house. So, money was invented as a measure for the exchange. Say that one monetary unit will equal 1 pair of shoes. Now the builder can give the shoemaker a unit for a pair of shoes. The shoemaker can sell a thousand pairs of shoes and then give the builder 1,000 units for a house.
Now apply these definitions to your article. What you are calling the multiplier or leverage is not creating money but instead the creation of counterfeit. That is it is not the representation of the measure of work performed. Instead it is the impersonation of work performed; it took no labor to produce the measure of the multiplier and leverage, all it took was a pen stroke or digital blip. It represents no work and is therefore not money but instead it is counterfeit.
What is the purpose of counterfeit? It represents the illusion of trading something for something when in fact it is the trading of nothing for something. Whomever trades nothing for something is a thief. Such is the corrupt nature of modern economics and how thieves steal from producers; they give them nothing but take something.
The modern definition of money is wrong and modern thieves depend upon you not understanding the difference between money and counterfeit.
For the Classic definition of money and why it was introduced into commerce, I refer you to Aristotle's Nicomachean Ethics; Book V, section 5.
My portfolio. You open it up and there's a picture of my mother-in-law and an IOU from my 28-yr old son.
Reminds me of the three farmers that took pigs to the county fair. One of the farmers had a good idea and decided to put a cork up his pigs ass to get the pig real fat. An organ grinder was at the fair and his monkey was curious about the cork in the pigs as and next thing you know the cop was asking a recovering bystander what happened after the huge shit explosion. He said "I don't remember anything except that poor little monkey trying to stick the cork back into the pigs ass".
I hesitate to ask about the other two farmers...
I hope that little econ lesson was good....because I actually understood it......for once.
There is no Plan B
You will be placed under the heel
We will simply take your money
We will send someone to kill you
You must not tamper with our machine.
There is no other authority
Obey
But I only have a dollar, if they take my money so what.
They'd rather play a game pretending they have a trillion dollars, that is bound to get them at least two dollars from the Fed.