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If Gold Is Not Money… Why Do Clearinghouses and Former Fed Chairs Say It Is?
Everything that has happened since 2007, every Central Bank move, ever major political decision regarding the big banks, every trend, have all been focused solely on one issue.
That issue is collateral.
What is collateral?
Collateral is an underlying asset that is pledged when a party enters into a financial arrangement. It is essentially a promise that should things go awry, you have some “thing” that is of value, which the other party can get access to in order to compensate them for their losses.
You no doubt are familiar with this concept on a personal level: any time you take out a bank loan the bank wants something pledged as collateral should you fail to pay the money back. In the case of property, the property itself is usually the collateral posted on the mortgage. So if you fail to pay your mortage, the bank can seize the home and sell it to recoup the losses on the mortgage loan (at least in theory).
In this sense, collateral is a kind of “insurance” for any financial transaction; it is a way that the parties involved mitigate the risk of their deal not working out.
As many of you know, our entire global financial system is based on leverage or borrowed money. Collateral is what allows this to work. Without collateral, there is no trust between financial institutions. Without trust there is no borrowed money. And without borrowed money, money does not enter the financial system.
In this sense, collateral is the “reality” underlying the “imaginary” or “borrowed” component of leverage: the asset is real and can be used to back-stop a proposed deal/ trade that has yet to come to fruition.
For finacial firms, at the top of the corporate food chain, sovereign bonds are the senior-most form of collateral.
Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile). The reason for this is because it is far more likely for a company to go belly up than a country.
Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc.) as the senior most asset pledged as collateral for hundreds of trillions of Dollars worth of trades.
Indeed, the global derivatives market is roughly $700 trillion in size. That’s over TEN TIMES the world’s GDP. And sovereign bonds… including even bonds from bankrupt countries such as Spain… are one of, if not the primary collateral underlying all of these trades.
How did the world get this way?
Back in 2004, the large banks (think Goldman, JP Morgan, etc.) lobbied the SEC to allow them to increase their leverage levels. In very simple terms, the banks wanted to use the same collateral to backstop much larger trades. So whereas before a bank might have $1 worth of collateral for every $10 worth of trades, under the new regulation, banks would be able to have $1 worth of collateral for every $20, $30, even $50 worth of trades.
Another component of the ruling was that the banks could abandon “mark to market” valuations for their securities. What this means is that the banks no longer had to value what they owned accurately, or based on what the “market” would pay for them.
Instead, the banks could value everything they owned, including their massive derivatives portfolios worth tens of trillions of Dollars using in-house models… or basically make believe.
This is getting a bit technical so let’s use a real world example. Imagine if you had $100,000 in savings in the bank. Then imagine that the bank let you use this $100,000 to buy millions and millions of dollars worth of real estate. Then imagine that the bank told you, “we aren’t going to have our analysts independently value your real estate, you can simply tell us what you think it’s worth.”
In this set up, you would potentially buy $10 million worth of real estate or more… using just $100,000. But what if your newly purchased real estate drops in value to $5 million? No worries, you could simply tell the bank, “my analysis indicates that the properties are worth $20 million.” The bank believes you so you continue to buy more properties.
This sounds completely ludicrous, but that is precisely the environment that banks operated in post-2004. As a result, today US banks alone are sitting on over $200 TRILLION worth of derivates trades. These are trades that the banks can value at whatever valuation they want.
Now, every large bank/ broker dealer knows that the other banks/dealers are overstating the value of their securities. As a result, these derivatives trades, like all financial instruments, require collateral to be pledged to insure that if the trades blow up, the other party has access to some asset to compensate it for the loss.
As a result, the ultimate backstop for the $700+ trillion derivatives market today is sovereign bonds.
When you realize this, the entire picture for the Central Banks’ actions over the last five years becomes clear: every move has been about accomplishing one of two things:
1) Giving the over-leveraged banks access to cash for immediate funding needs (QE 1, QE 2, QE3 and QE 4 in the US… and LTRO 1, LTRO 2 in the EU.)
2) Giving the banks a chance to swap out low grade collateral (Mortgage Backed Securities and other garbage debts) for cash that they could use to purchase higher grade collateral (QE 1’s MBS component, Operation Twist 2 which lets bank their long-term Treasuries and buy short-term Treasuries, QE 3, etc).
All of this is a grand delusion meant to draw attention away from the fact that the financial system is on very, very thin ice due to the fact that there is very little high quality collateral backstopping the $700+ trillion derivatives market.
Indeed, if you want further evidence that the financial elites are already preparing for a default from Spain and a collateral crunch, you should consider that the large clearing houses (ICE, CEM and LCH which oversee the trading of the $700+ trillion derivatives market) have ALL begun accepting Gold as collateral.
Gold as Collateral Acceptable for Margin Cover Purposes
From 28 August 2012 unallocated Gold (Loco London) will be accepted by LCH.Clearnet Limited (LCH.Clearnet) as collateral for margin cover purposes.
This addition to acceptable margin collateral will be subject to the following criteria;
Available for members clearing OTC precious metals forwards (LCH EnClear Precious Metals division) or precious metals contracts on the Hong Kong Mercantile Exchange. Acceptable to cover margin requirements for all markets cleared on both House and ‘Segregated’ omnibus Client accounts.
http://www.lchclearnet.com/member_notices/circulars/2012-08-21.asp
CME Clearing Europe to Accept Gold as Collateral on Demand
CME Clearing Europe will accept physical gold as collateral, extending the list of assets it’s prepared to receive as regulators globally push more derivatives trading through clearing houses.
CME Group Inc. (CME)’s European clearing house, based in London, appointed Deutsche Bank AG (DBK), HSBC Holdings Plc and JPMorgan Chase & Co. as gold depositaries. There will be a 15 percent charge on the market value of gold deposits and a limit of $200 million or 20 percent of the overall initial margin requirement per clearing member based on whichever is lower, Andrew Lamb, chief executive officer of CME Clearing Europe, said today.
“We started with a narrow range of government securities and are now extending that,” Lamb said in an interview today. “We recognize there will be a massive demand for collateral as a result of the clearing mandate. This is part of our attempt to maintain the risk management standard and to offer greater flexibility to clearing members and end clients.”
It is no coincidence that this began only when the possibility of a sovereign default from Greece or Spain began. The large clearinghouses see the writing on the wall (that defaults are coming accompanied by a mad scramble for collateral) and so are moving away from paper (sovereign bonds) into hard money to attempt to stay afloat.
The most telling item is that clearinghouses now view Gold as money. Indeed, you can see this fact in other stories indicating that various entites are concerned about having their gold stored “inhouse” if the stuff ever hits the fan.
Heck, even the Alan Greenspan, the man most responsible for the 2008 financial crisis, has admitted that “gold is money.” Of course, he couldn’t admit this until he’d left the Fed. But this is a man who knows all too well just how the financial system works.
Take note, Gold is officially money for the most powerful entities in the world. They are not only accepting Gold as collateral but are openly trying to insure that they have their own Gold in safe custody.
If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits. Gold is just a part of this.
You can pick up a FREE copy at:
http://www.phoenixcapitalmarketing.com/roundtwo.html
Best Regards
Graham Summers
Phoenix Capital Research
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Gold is money for the owners of the human world. The rest of us get company chits to spend at the company store.
Ah, ha, ha... That is Funny! Elegantly Simply Stated Truth!
Now try telling that to all of those humans that truly believe that the "company chits" are the only way society can function. They also all seem to think that D's or R's have all the solutions... and still believe in Santa Claus!
You mean NON-GAAP backed bonds and other issues are not that good? But, golly, they have super ratings from trusted sources, no? NO!
Barter and the other forms of black market will dominate by 2020.
Usually something becomes money when it gets a stamp. This stamp implies legal and force means will be brought to bear in order to consummate contracts. Confusion of the legal nature of money with metal, or with debt is an ongoing hypnosis on man's mind. More confusion happens between tangible (coins/paper/metal) and intangible money (ledger/abstract). Swapping of unlike kinds of money or assets to settle debts is yet another confusion that allows man to be harvested. These swaps are almost always unequal and usually redound to benefit creditor, especially creditors who have money creation power.
Hudson finds the first money came out of Temples, which was used as an accounting method. Temples in turn had a labor force of people who didn’t fit neatly into society. This would be first instance of division of labor using Barley weight for accounting, which then morphed into silver by weight. Metal as money was probably used by the temples to allow goods exchange outside of their local law, meaning beyond the local temples control.
This real science should silence all of the a-priori theorists who imagine money’s origination, especially those theorists who claim money came into being due to barter’s inefficiency.
http://cas.umkc.edu/econ/economics/faculty/wray/papers/hudson.pdf
Before temple legal money came into being, people remembered their credits and debts with each other. A tally could be drawn up, or marked on a stick, which represents debt relations. A tally that the king issues takes on force and law, and general acceptance, as it is good for taxes; king’s tally then becomes money.
Debt and Credit relations can be canceled outside of money by an exchange of goods or services. Using money to discharge relations has confused man’s mind as well, as he then thinks money is equal to the goods and services discharged. I can buy a can of coke with this money, or settle a debt; therefore this money is equal to a good, or a debt. This is wrong thinking, money only settled the relation because it can divide down at moment of transaction, and is accepted as a legal means. Another confusion people engage in goes something like this: My saved money is a form of latent demand, therefore it is wealth. This type of thinking is emotional, and comes from the primitive areas of the brain. Smart people, then make up all kinds of a-priori excuses to compensate for what comes out of their primitive brain centers. Saved money is latent demand that may later demand goods and services, provided its attributes are held in control.
Bottom line: Money has three main attributes. Type, Volume, Channeling. The type of money can be related to debt (credit as money), or metal by weight. The highest form of money is law based, as all money settles contracts. The very highest form of money fluxes in volume relation to goods and service. Volume of money needs to be controlled to match goods and services, and this volume mechanism is required no matter the money type. Channeling is the path that money takes and how it interacts on said path. For example, money can be originated and spent into the commons, where it increases productivity of everybody, and then goes on to become savings. Savings are latent demand, which is a time dimension related to money type. Some money types can have time stamps, such as debt money, which recalls to ledger with accounting periods, to then be destroyed. Debt money is loaned into existence, not spent into existence.
The wrong type of money (bank credit/debt) may channel into fixed assets such as housing, causing asset bubbles and concurrent debts, e.g. housing bubble. Said debts will grow with usury making a mismatch with its credit.
This is yet more confusion, as loaned into existence “credit as money” cannot ever match its debt instrument, and hence the credit/debt relation cannot be canceled.
Humans invent great science, but if they cannot figure out money, they will cycle in and out of war and never evolve.
Money's attributes depend on the system it flows in. Law gives money its attributes. People that claim there is something magical about gold, and that markets are god, are spewing hypnotic confusion not related to actual history, or even good thinking.
Nice. Gold, as I see it, remains irrelevant and disinteresting. With 7 billion people on the planet, gold is so far down the list of those things that are important, only the wacky tackies tout it.
+1 for the Zionist jew Saul Alinsky Rules For Radicals 101 Lying AND Name Calling!!!! All in one post!
"There is nothing magical about gold".....please send this barbarous relic to me.
Truth is, gold and silver have been a store of value for 4000 years. Scarcity creates inherent value which fiat currency will never have as long as there are printing presses.
If scarcity does not factor in, please feel free to also send me a few McLarens, the Hope Diamond, and one or two Rembrandts.
Money:
Portable
Durable
Divisible
Fungible
Store of Value
http://hiddensecretsofmoney.com/videos/episode-1
"There will be a 15 percent charge on the market value of gold deposits..."
Since when does money transact at a discount?
F 'em.
Sell 85% of what would be required, and hold the rest.
If gold goes down you've lost nothing.
If gold makes a strong move, you'll never get it back from the CME.
At least you've retained 15%.
If you don't hold it, you don't own it.
People should be free to use anything decent as money but ONLY* for private debts; inexpensive fiat is the ONLY ethical money form for government debts else the taxation authority and power of government is misused to benefit private interests. But that's fascism, not free market capitalism.
*The exception is fiat, the only ethical money form for governments debts.
Bullshit. There's nothing ethical about FIAT. We only use it because we are *forced* to use it. Get the fuck out of here!
So long as we have government (and government IS force, I agree) then inexpensive fiat is the ONLY ethical money form it may use. Otherwise some private interest is profiting off the taxation authority and power of goverbnment.
Is that what you want? For some to profit off the rest of us via government? Isn't that cheating in a so-called free market economy?
"How did the world get this way?"
To answer this question by beginning in 2004 is misleading.
This rehypothecation of bonds which is well described comes to be because of the fractional reserve counterfeiting system. This itself is the rehypothecation of money as reconvened in the USA with the institution of the 3rd national bank, the Fed.
It is this excess leverage that makes the neverending purchases of direct-tax collateralized bonds possible.
This counterfeiting combined with the pledge by the government issuers of bonds that their citizens will be directly taxed to replenish what the plunderers steal is how the world got this way.
The why of the how can be sourced to the philosophy of Immanuel Kant whose disciples are simply implementing their belief that a collective group can create "their own" reality.
The implementation of Kant's false premise is exhibited in the fraud, this attempt to fake reality, identified by just about every article and commentary, financial or not, in "news" scrolls everywhere.
"unallocated Gold" as collateral... sounds like a sure plan for doom... That's paper gold, probably possessed and rehypothecated many times to make things worse.
If you go back to the dawn of history the truth is that money is whatever people agree it is. At one stage Cumals (yound girls) were the money the Irish used and it seems we have tried almost everything since. Gold has stood the test of time but so have a number of fiat currencies(China and England both operated for centuriess under a tally system that never collapsed). The uncomfortable truth is that anything can be money.
There's nothing uncomfortable about it at all. People can choose whatever they want as money, and let the free market decide. Historically the free market has selected gold as money, because of its many properties that make it useful as money.
Obama and his NAMBLA underwriters are proposing to use young boys as currency
How'd they make change with the young girl money system?
Puppies- Everyone loves a puppy.
"Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile). The reason for this is because it is far more likely for a company to go belly up than a country."
They can try, they can do as if. But they are not risk free. And that a country goes belly up has happned over and over and over again. But stil this countries are around. So well in the end it does not matter how often they go down. The area still will be and the people having something will be taken as hostages....
Yep, risk is relative and as Greece is demonstrating, sovereign bonds are merely a better class of toilet paper. The system has become based on "because we say so" and "we wouldn't lie to you". Trade and value relied on tangible assets for thousands of years and if you had no real assets, you had no money. Now of course it's all promises based on giant Ponzi schemes.....
"How did the world get this way?"
You have to go a lot further back than 2004. Debt based currency is the reason and that is back to 1913.
Gold is traded on the currency desk, not the commodity desk at big banks
Capice. Gold is money.
Seems like money more than infinitely printable fiat currency to me.
Gold and silver are more likely to replace bonds as the preferred safe assert rather than money (currency, dollar ect) explained here:
http://debtcrash.report/entry/look-forward-to-precious-metals-not-back