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 [5] 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