Paul Brodsky: The Seeds of Our Destruction Were - And Still Are - Sown in the Bond Markets

Tyler Durden's picture

Submitted by Chris Martenson

Paul Brodsky: The Seeds of Our Destruction Were - And Still Are - Sown In The Bond Markets

Paul Brodsky does not trust the bond markets. That position may seem strange coming from someone who has spent most of his professional career trading bonds, but it's precisely this insider knowledge that has led him to start directing investors to safer harbors.

In fact, he thinks our credit system is so far out of control that it will cause a massive - and largely unavoidable at this point - devaluation of the US dollar (and most other fiat currencies, as well).

In our interview with Paul, we asked him to explain the reasons for his concern and to detail how he sees a bond market breakdown unfolding. At the heart of the matter is the run-up in overnight systemic repurchase agreements among banks that started in 1994, which goosed the ensuing credit-driven buying orgy in our economy and has left the system much more vulnerable to exogenous shocks as a result:

All the way through 2006 a monetary aggregate called M-3, which was the only aggregate that included repurchase agreements (which is the process by which banks fund themselves with each other) grew almost 12% a year. It is an enormous amount and that basically tells you that this overnight lending among banks provided the fuel from which all of the term credit, the 30-year mortgages, auto loans, and revolving consumer credit came - which of course has never been paid down from whence it came. So in effect, we knew that the system became highly susceptible to any hiccup.

So the system is levered at least 20 to 1 and there is effectively 20 times more debt than money with which to repay it. And so that is a long-winded way of setting the table for where we come down in our macro views. Clearly, it has great ramifications, negative ramifications for the currency and given that the dollar is the world’s reserve currency, we think it has significant ramifications for the global monetary system in general.     

Add to this the lax oversight from the Fed at the time, which as Paul states seemed primarily focused on making sure "banks could expand their balance sheets". Along with the repurchase agreements, the practice of "sweep programs" helped the banks gain unfair advantage while technically not breaking the letter of the law. Chris summarizes this process as:

This is a story of leverage which really began in the mid-nineties. So this is not any particular policy disaster that went off the rails in 2000 or even more recently than that. Interestingly, I have never connected the stop before between the overnights, the repos, and something else that really caught my eye in the mid-nineties. Actually, it was ninety-four or ninety-five.

I don’t know if you know about the sweep programs - for the benefit of listeners who may not, what Greenspan did was he allowed banks to essentially dodge the reserve requirements by "sweeping" demand accounts. And what I mean by that is, if you have money in a checking account, that is yours to demand anytime you want: the banks have to hold a reserve against that, by law, of 10%. But banks were allowed through this policy tweak that the Fed had done, to effectively sweep that money out of that account just before the stroke of midnight.

So that at midnight when they take the snapshot and say, "How much money do you have to hold in reserve against?" they would sweep the money out of the way. The snapshot would be taken, and the bank would say "Look, there is no money, we get to hold very light reserves here." And then the money would get swept back in at let us say, 12:01. But during the snapshot period, oops, it would have disappeared.

That is where I had chased back where this credit bubble really got into high gear. And I thought it was due to the fact that banks were allowed to dodge these reserve requirements, effectively running leverage far, far higher.

At some point, the growing leverage in the system and the rising amount of new credit and money supply leads to ever larger distortions in market pricing. Paul sees this as leading to inflation:

So economics has kind of taken leave of the bond market. The Treasury bond market is no longer we think a true signal of interest rates, where they should be, or a true signal of inflation. It is an interest rate curve that has been distorted by terribly distorted incentives as we see it.

So we understand that. We do not think it is right. We would rather have markets be free to adjust to where they should be, but frankly, we do not see that happening. To your question specifically about will we have something similar to what happened in Greece here in the U.S., we do not think we are ever going to get to that point here. And it is not because we are proud Americans and we think that the U.S. is better in every way than every foreign land; that is not the case at all. We think it is not going to happen here because if anything dire happens in terms of interest rates, like the threat of rising interest rates, you would see the Fed's balance sheet come under severe stress.

I think the Fed is going to have to continue printing. They are going to go to a significant QE3 at some point. I do not know exactly what form it will take but they are going to have to monetize debt. The process of doing that is I am sure your listeners know, is when you buy debt, you print money with which to buy it. That moves new money out, ostensibly into the system but as we have seen it only goes into banks as excess reserves. This process is the exact process of inflation, so if you print a dollar, you are diminishing the purchasing power of that dollar through dilution. And it is a very easy thing to understand that more dollars chasing the same amount of goods and services and assets must drive the price level higher for those goods services and assets. And so what we see happening is, through this process of money printing, we will have rising prices that rise much faster than wage growth or income growth and it is going to make the ability to service debt that much harder.    

It's these growing inflationary pressures that Paul sees leading to an accelerating devaluation of paper currencies in the coming years. He sees a revaluation of the US dollar vs gold as a likely outcome at some future point (estimating gold could reach a price in the neighborhood of $10,000 per ounce if it is indeed re-monetized). 

Ultimately, he recommends investors concerned with protecting the purchasing power of their wealth today get exposure to hard assets that can't be so easily inflated away:

All of these currencies are baseless and are losing their purchasing power versus the goods and services with inelastic demand properties, such as natural resources and things of scarcity. 

Gold should be thought of as cash in the best currency. I would suggest anything scarce with inelastic demand properties, and that is of course how we get energy and how we get agriculture and various other things. They should be considered very strongly.



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Mr Lennon Hendrix's picture

The bonds of....bonds.

The bonds that bind us.....

Carlyle Groupie's picture

Just add water. It's called soup.

I love Chris Martenson! And this guy Kyle Bass from Texas too!

AldousHuxley's picture

bond index up nearly 6% when in include divds.


Bernanke about to buy up some more US bonds.

Justaman's picture

The strategy of buying debt by increasing the same underlying liabilities is akin to robbing Peter (base of the monetary system) to pay Paul (Treasury).  It should be obvious that it is a move of desperation and it ultimately leads toward a defunct system.  

The seeds were sown when citizens allowed the Administration to issue liabilities without assets to back them up.  I believe this was last commenced in 1971.

Quixotic_Not's picture

There is effectively 20 times more debt than money = Ponzi


Michael's picture

Has anyone ever lived through a complete and total worldwide bond market colapse? I hear it's a lot of fun.

Raging Debate's picture

Good man Quixnot. None of us are going to solve problems without facts, cause and effect. Not to say the carnage already here and growing is going to be fun. It is not that this time is different in cause and effect of the Central Bank model it is that the effects are going to be greatly amplified on the way up in the boom (happened) and the ongoing bust.

Some of the nuances from then and now are demographic imbalance and the rate of business. These nuances make adjusting more difficult. I know I am generalizing and this is a comment thread not a dissertion.

Sam Clemons's picture

Just posted this:

See the 2nd chart.  Are those spikes around 1930 the yield rate increasing as your bond price chart shows?   Looks like a rise to about 10% from 7.5%.  Seems like the magnitude would be more considering your chart.  But you are exactly right, rates did rise then and then fell for some time.  Is there a difference in the amount of margin used to buy bonds now?  I assume one big difference is outright monetization of central banks now.  I think we somewhat restricted ourselves then using common sense, a forgotten relic.



o2sd's picture

You made a call of total Armageddon for Oct 10/11th. I still have faith in you, have you set another date?

Quixotic_Not's picture

I assume you're talking to Michael (as I made no such prediction), but I will say this about that:

The 'MeriKan sheeple are heading towards their own, personal Minsky Moments, and by 2013 this will become an exponential phenom enmasse from sea-to-shining-sea.

Book It!

Been fun all, I can see that spending time here (and elsewhere on the net) serves -0- useful purpose for me and my preparations for the future.

Have a lot a things left still to accomplish, before it's time to dig in for the Kondratieff Winter and what that will inevitably mean...

QN Out!

Lord Welligton's picture

Been fun all, I can see that spending time here (and elsewhere on the net) serves -0- useful purpose for me and my preparations for the future.

Inclined to agree.

Seeing what's happening and being powerless to change it one can merely prepare.

I will keep informed but not with the fascination of the past.

They, the politicians, could have made different choices. They did not.

The cake is baked.

DaveyJones's picture

pride goeth before the fall - Herodotus

if you have a garden and a library, you have everything you need - Cicero

falak pema's picture

and an apple tree and a vineyard and an olive tree and pomegranate and apricot and figue trees; Thats good dietry right there.

DaveyJones's picture

having listened through Brodsky twice now, it's funny hearing someone say you are so fucked in a such a quiet, soft spoken manner 

Raging Debate's picture

It is useful stepping back for a few weeks to pause, have introspection and recharge. Your sense of community is part of your DNA and reflecting pyschology tells me you'll be back. Peace.

RafterManFMJ's picture



I'm pretty sure it get so bad, words begin losing 'l's!

youngman's picture

This time..I assume....some people will not live thru it..

Two Face's picture

"They're schemers trying to control their little worlds.  I'm not a schemer.  I try to show the schemers how pathetic their attempts to control things really are."

anonnn's picture

PBrodsky notes that only M3 includes repurchase agreements.

 I did not know that vital point, so mention it here for others to grasp it. No wonder "official" M3 disappeared.

 Thanks to PB and of course TD for this forum.


IrritableBowels's picture

M3: M2 plus large and long-term deposits. Since 2006, M3 is no longer tracked by the US central bank.[15] However, there are still estimates produced by various private institutions.


Bendromeda Strain's picture

The invaluable John Williams being one of them. Behold the crash of the Banking System and Dr. Bernanke's furious reflation effort:

Kinda reminds me of this:

Roscoe's picture

What is the significance of M3 crossing below M1 & M2 in 2009 on the shadowstats chart you link to above. Does it mean that long term deposits are shrinking, or is it the amount of printed money being put into the system, and is the difference between M3 and the others a simple measure of inflation?


Thanks. -Rosoce

earleflorida's picture

greenspan passed the torch to bernanke jan.31.2006 - thus feb.1.2006 the 'bb' is in complete control but waits ~ two months until mar.23.2006 to fulfill or for a better word implementing greenspan's final wish

ref:  *(click-on ; "oops, did you mean" - gets you there,...

**this only backs up the authors acknowledgement,... if link fails which it prbably will go to :  

note:   question we all should all be asking___ to [pdf] "occ's strategic plan: fiscal years 2012-2016" @ click - google search

Return2Sanity's picture

I believe that M3, because it includes banks repos (aka loans between banks), can be seen as a measure of credit expansion or contraction. From 2008 to 2010, the Fed was aggressively expanding money supply (M1 & M2) to offset the contraction of credit that shows up in M3. Because the chart shows year to year % change, rather than total amounts, it does not imply that the amount of M3 fell below the amount of M1 & M2.

Roscoe's picture

Thanks R2S, that's makes sense. -Roscoe

FinHits's picture

You seem to prefer light bondage over current heavy bondage? I am sure They can whip you back in to shape in no time.

You see, in the Western culture you can lose all the face you never had, as long as banks and funds don't lose even one percent of bond face value.

Greenspan Shrugged's picture

This guy is full of shit.  Look at the commitment of traders index on the usd below.  Everytime that indicator shows a fluctuation in large positions like that the usd spikes. He's just looking to take the suckers money.

sgt_doom's picture

Prof. E. Ray Canterbery said it much better in his book:

Wall Street Capitalism:  the theory of the bondholding class

(And quite some time back, I might add!)

But allow me to simplify it and cut through all the bulltwacky:

In the 1920s, the Wall Street banksters did an ultra-leveraged run, lasting for approximately 7 years, with the Great Crash of 1929.

In 2000, the Wall Street banksters did another ultra-leveraged run, lasting for approximately 7 years, culminating with the mid-2007 meltdown beginning.

I don't know why 7 years is the operative timeframe; perhaps their Ponzi-Tontine scam can only last that long before its collapse?

But that is it put clearly and simply --- regardless of the securitized financial constructs used either time, the scam and the results are always the same.


km4's picture

At some point, the growing leverage in the system and the rising amount of new credit and money supply leads to ever larger distortions in market pricing. Paul sees this as leading to inflation. It's these growing inflationary pressures that Paul sees leading to an accelerating devaluation of paper currencies in the coming years.


rocker's picture

 What does any of it matter. Let's see. The bond holders are the last to paid in a default.

 So they would like us to believe Lehman was not bailed out. Oh yeah, what because the stock holders got fucked. The people.

But wait, the bond holders were bailed out. The Banksters. Half a lie. But a lie is a lie. And we payed to bail the bondholders out.

Like when CNBC first reported on the Greek bailouts and complained that it was to bail out the people.

Oh yeah, bailing out the bond holders is what it is about. Nothing more and nothing less.

For the people it means they want to tax the people to bail out the bondholders again. To be precise, to bail out the Banksters.

And, in case anybody wants to know why the markets are going up. Because the HFTs believe Bernanke's Swap Lines will do just that.

Then there is the market manipulation, either by POMO, (the FED) or some other force with big bucks that can do the rigging of markets.

It does not make sense for markets to go up with all that short interest, (not a record level now), and the exiting of people leaving the markets.

It is rigged. Plain and simple. So the Bankster Cartel and CEO's can get their bonuses. We paid for Lloyd Blankfien's 100 million dollar bonus. Right.

America is a disgrace anymore, I have given up believing this is any thing less than a government for and by the CEO's and Corportations of America.

We the People just don't fucking matter anymore. We the people are fucked.  We are a Fucking Disgrace for taking it anymore.

Look at Italy, Greece, and even some of the Mid East nations. Those people are getting it done.

Americans are bullied by Fox, CNBC, CNN, NYPD and Bloomberg.  Looks like chicken littles to me. Tell me I am wrong and why. Please!!!

BigDuke6's picture

i read that to gain a 50% reduction in its debt greece would have to implement a 100% haircut for bond holders.

hahahaha - when you look at greece its a great story.

Greece has a long history of defaulting on its debts.its first default was in the 4th century BC, when 13 Greek city states borrowed money from the Temple of Delos. Most of them never paid the money back and the Temple took an 80% loss.
Modern Greece issued its first big loan in 1824, three years after the start of the War of Independence. It was for £472,000 so it could keep fighting the Turks, secured on London Stock Exchange. There was another loan for £1.1 million the following year. No interest payments were ever made on those two loans, after which Greece was locked out of the international financial markets for decades. The interest kept accruing and Greece eventually settled for £10 million in 1878, at which point it was allowed to borrow again.

Since then there have been five more defaults. right up there with Venezuela and Ecuador.

the modern Greek economy is built on three things: shipping, tourism and sucking up to rich countries.

most of its shipbuilding industry has long since left for China and Korea. Tourism is still viable, but no state can support itself with tourism alone.

After independence, Britain used Greece to leverage its position against the Ottoman Turks, and then later America played a similar role in supporting the Greeks against the Soviets.

In each case massive of amounts of cash were poured into the country that didn't have to be paid back. Turkey is now a member of NATO and the Cold War is over, so no one needs to pay Greece as part of their strategic interests in the region any more.
All of this means Greece is rooted. It has never been able to compete without a steady stream of capital from abroad that it didn't pay back, and that goes back to ancient times.

and its women are hairy.


rocker's picture

But if the bond holders of Greece are not paid off. Does it not mean the banks of France and Germany would be in trouble.

Hence, the banks of America because of contagion. Even JPMorgan said their risk is at a level they could manage.

Isn't what Jamie Diamon really saying if the Bernanke, (FED) steps in and bails them out too. Tell me I'm wrong.

Barton Biggs said they will have to do something about all the PIGS.  Who are they ???  The Fed ???

I agree with lots of what Reggie brings to the table.

I am just not sure that they won't bail the shit out of everybody to save their Banking Cartel.

If anybody remembers a little history. When Russia and Argentina defaulted and bond holders were not bailed out,

GDP went up every year after for many years.  If we do not allow our banks, Europe's Banks to default tell me why,

"We are Worse than Japan Now" does not apply. 

ISEEIT's picture

That actually makes sense. Now continue connecting the dots.

You are now at the whitehouse.

What you see is a disease, a serious cancerous, death sentence disease.

You want "class warfare"?

It is today as it has always been.

The political class VS. the people.

That is how it works. Like stealing wallets from corpses. These superhero satanist have their very own private little club.

Want in?

Ya gotta show-em first that you have what 'it' takes.

'It' takes an absence of humanity. 'it' takes a willingness to destroy other 'creatures' in order to prevail.

'It' above all else desires power.

Just choose your sides Ladies and Gentelmen, cause this shit will go down and affiliations will be the name of the game.

Quixotic_Not's picture

I come from a family (father's side) that was fuck-you wealthy for generations, and I've known some seriously wealthy folks in my time on this mudball.

Something that sheeple don't know about "rich" folks is that many crave power the way that the average wannabe bankster craves wealth.

And to tell you the truth, when I think of anrcho-commies like OWS that want to create a Free Shit Army Multiverse, sometimes I wonder if TPTB aren't doing a better job than I give them credit for...

Sometimes I wonder about this; but always I yearn for restoration of the AMERICAN experiment: A Democratic Republic founded on the RULE of LAW, INDIVIDUAL LIBERTY, and PRIVATE PROPERTY RIGHTS.

Perhaps ol' Ben was right after all...

 As Benjamin Franklin was leaving the building where, after four months of hard work, the Constitution had been completed and signed, a lady asked him what kind of government the convention had created. A very old, very tired, and very wise Benjamin Franklin replied; "A Republic, ma’am if you can keep it."

And dam all if we didn't go ahead and lose it...

93d Congress
Report No. 93-549
1st Session




Since March 9, 1933, the United States has been in a state of declared national emergency. In fact, there are now in effect four presidentially-proclaimed states of national emergency: In addition to the national emergency declared by President Roosevelt in 1933, there are also the national emergency proclaimed by President Truman on December 16, 1950, during the Korean conflict, and the states of national emergency declared by President Nixon on March 23, 1970, and August 15, 1971.

These proclamations give force to 470 provisions of Federal law. These hundreds of statutes delegate to the President extraordinary powers, ordinarily exercised by the Congress, which affect the lives of American citizens in a host of all-encompassing manners. This vast range of powers, taken together, confer enough authority to rule the country without reference to normal Constitutional processes.

Under the powers delegated by these statutes, the President may: seize property; organize and control the means of production; seize commodities; assign military forces abroad; institute martial law; seize and control all transportation and communication; regulate the operation of private enterprise; restrict travel; and, in a plethora of particular ways, control the lives of all American citizens.


Carlyle Groupie's picture

You Americans are truly flucked. At least China citizens are told the rulers are omni-potent and will do what they want.

Fools awakening. Old Mr. Franklin didn't see the Israeli's sneaking in the back door!

rocker's picture

Have not heard from you for a while now. Always enjoy your prognosis and insight. 

So would I not be correct that when Homeland Security and it's statues became relevant it included,

that no citizen may protest and have the right to assemble in public places as Bloomberg and the NYPD are doing right now.

There has been a couple who were arrested for assembly and sent to a off jurisdiction site to be arraigned at a precinct that

was not to the arresting officers. They were told that it was because of the threat to national security under homeland security.

Who started that homeland security thing???  Better yet, do we need more of this Bullshit from Bloomberg and his thugs, the NYPD.

Just to add, I had respect for the NYPD. They stole their own honor when they went against the people they are paid to protect.

But then again. Jamie Diamon and J.P. Morgan did donate, with our tax payer money, 4.6 Million to the NYPD to protect his street.

What do you say. Is it all about the money. Sure seems so.  Corporate Greed knows no limit. Eh.

AustriAnnie's picture

Lincoln started it with war powers during civil war.  And it led to where we are today, with the help of many.

Slippery slope.

jeff montanye's picture

reply all the way back to the big duke: greece clearly has major problems, and they're clearly not the only ones, but hairy women are not one of them, imo.

BigJim's picture

I've... 'known'... a few Greek women. None of them were particularly hairy.

In fact - the hairiest women in my experience have all been Anglos.

ISEEIT's picture

"Who started that homeland security thing???"

Why that would of course be the government son! Or as you might prefer, the massa (just so long as he be promisin' lots of free shit).

Quixotic_Not's picture

Is it all about the money.

No. "It's" all about power & control...

"The few who understand the system, will either be so interested from it's profits or so dependant on it's favors, that there will be no opposition from that class." — Rothschild Brothers of London, 1863

  "Give me control of a nation's money and I care not who makes it's laws" — Mayer Amschel Bauer Rothschild

Divide and conquer; same shit, different century...

Lech Walesa Not Attending #OccupyWallStreet in New York After Discovering Hard-Left Organizers

The Polish champion of freedom and liberty, founder of Solidarity, winner of the 1984 Nobel Peace Prize, and first President of modern Poland Lech Walesa had been rumored to possibly be traveling to New York to stand with Occupy Wall Street protesters.

Based on our discussion and intervention, President Walesa is not going to get involved with the OWS.  He is not comfortable with the “organizations” behind the movement.

This spring, when President Obama visited Poland, President Walesa refused to meet with him.

America is a center-right country politically.  The Occupy movement, at its core, is a hard-left movement. If successful, America would cease to be governed on our founding principles of freedom and liberty. Thus, we react to the news that Lech Walesa will not support the OWS movement with much thankfulness.

OWS: The Perestroika Deception Develops a Face

In recent weeks, every American has watched with morbid curiosity as swarms of hate-filled, sputtering communist loons and Hippie-wannabees have taken to the streets, shutting down cities and leaving a path of destruction wherever they go.  Although many Americans disagree with the stated agenda of these radicals, most think them harmless, dismissing their acts as pathetic attempts to resurrect the failed social movements of the sixties.

But this group of determined radicals is not to be laughed at.  Lisa Fithian, the primary OWS organizer, is an unrepentant communist and proponent of government and economic destabilization as a means of achieving totalitarian centralization along communist lines.  Writing for a socialist rag, Fithian once stated, “I have no issue with property destruction…We’re in a society where property is idolized, so a lot of people don’t get it yet that it doesn’t really matter.”

While this should shock Americans (and would, if the facts were being reported) this is nothing new.  This is just the latest tactic in a long-term strategy that has been quietly moving forward for decades.  I am speaking of a high-level strategy designed to thwart American resistance to communist infiltration known as “Perestroika.”

Nothing more to contribute, it's all been said 1,000,000^2+; As a man without a country, without children, without a culture with which to associate, I now longer care (much), so I am done trying & will prepare...

Either We The People elect Ron Paul in 2012, or You The Sheeple will surely lose (everything).

earleflorida's picture

pauls only chance is to get on the independent ticket or take a back seat to romney

what's even scarier is romney going with cain to get the black vote - why?

barry will get the entire black vote which will put him over the top for the very reason 'tptb' like certainty

i'd just like to reiterate that because were here on this fantasic zh blog, the rest of the dumbed-down public still watches nancy grace, and dancing with the stars

i agree with your thesis wholeheartedly but ron's getting tired from speaking to the deaf and dumb who just don't realize the severity of the immediate situation,... the dire situation,... the pathetically hopeless situation!

DosZap's picture


Something that sheeple don't know about "rich" folks is that many crave power the way that the average wannabe bankster craves wealth.

Truer words never spoken.

After you are so filthy rich you can have anything you want,the void is still there(just look at the politicians and seekers of the office of POTUS in 12).

Your bored to tears with materialism to a large degree, and the next rung up is POWER.

sgt_doom's picture

"But if the bond holders of Greece are not paid off. Does it not mean the banks of France and Germany would be in trouble."

But if the banks of Germand (principally) and France didn't flood Greece with their products in return for loans -- after Greece joined the EU, thus killing Greece's internal industries, then Greece would be in much better shape.  But the game is always the same, regardless of which side of the Atlantic or Pacific it's being played on.

falak pema's picture

gilette or oreal can cure that. Besides to some all cats are grey in the dark. I'm talking about those ruskos in Cyprus.

slewie the pi-rat's picture

hey, 6!  good literary "bookends" device there around the hair theme!