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grapejelly
01-19-08, 10:54 AM
I am fond of reading Anton Fekete even though I am not sure he makes sense sometimes. Or is he brilliant? I'm not sure...but today he is well worth reading and pondering.

I want to discuss Gold: How High is High (http://www.financialsense.com/editorials/fekete/2008/0118.html) and specifically this:




How can the Fed engineer a falling trend in interest rates? This is the point where my own analysis diverges from that of others. Interest rates will fall because bond speculation in which the banks engage is risk-free, on the strength of the open market operations of the Federal Reserve. The banks preempt the Fed in buying the bonds. The consensus is that the ailing dollar can be bailed out only through a regimen of rising interest rates. But the banks bet at the roulette table that interest rates will fall, against everybody else betting that they will rise. Why, the $500 trillion strong derivatives monster serves one purpose and one only, that the bull market in bonds may continue indefinitely. In other words, the infinitely elastic supply of interest rate derivatives is there to make sure that the shorts in the bond market will burn their fingers right to the armpit. Interest-rate derivatives did not come about by accident. Like the original Tower of Babel, the Tower of Derivatives is being built deliberately. It was conceived and nurtured by megalomaniacs, in this instance the managers of the global fiat money system. They understand that bank capital hangs precariously on the cliff of vanishing confidence. They are confident that they can patch up even the largest holes in the balance sheet of banks on capital account, provided that the derivatives monster will not unravel in the meantime.

The big unknown is whether the escalation of counterparty risk will trigger the self-destruction of derivatives before the managers are through.
Here is the strategy. The Fed will keep halving the rate interest as many times as necessary. Each halving nearly doubles bank capital. It worked in Japan where the authorities have kept the brain-dead banks in business through thick and thin. The Japanese merry-go-round has been supported by the yen-carry trade; the American merry-go-round will be supported by the derivatives farce.

----------------------

So what does Dr. Fekete mean here? I'd love some explanation if you have some.

--Richard

c1ue
01-19-08, 06:05 PM
From what I can tell from this latest missive from smart, but crazy Fekete:

Banks are using derivatives to punish bond bears.

Normally in inflationary times, interest rates should rise.

However, through collusion with the Fed, banks are ensuring that those who bet on the inflation-->higher interest rates get spanked via derivatives betting the opposite way.

Thus each reduction of actual interest rates causes those shorting bonds to lose lots of money to the banks - thus rebuilding the bank's capital base.

The derivatives furthermore are easier to hide from regulatory issues.

This won't work, however, if the counterparty guarantors to the derivatives go out of business first. Then there won't be anyone to pay the winning derivatives off.

---------------------

An interesting idea, but not very credible as usual.

Unless the banks are complete morons, they must realize that the counterparties to these transactions are much smaller in reserves; derivatives being zero sum equations then it is like elephants trying to cannibalize mice. There just ain't enough mice in the world.

Sapiens
01-19-08, 11:05 PM
I am fond of reading Anton Fekete even though I am not sure he makes sense sometimes. Or is he brilliant? I'm not sure...but today he is well worth reading and pondering.

I want to discuss Gold: How High is High (http://www.financialsense.com/editorials/fekete/2008/0118.html) and specifically this:




How can the Fed engineer a falling trend in interest rates? This is the point where my own analysis diverges from that of others. Interest rates will fall because bond speculation in which the banks engage is risk-free, on the strength of the open market operations of the Federal Reserve. The banks preempt the Fed in buying the bonds. The consensus is that the ailing dollar can be bailed out only through a regimen of rising interest rates. But the banks bet at the roulette table that interest rates will fall, against everybody else betting that they will rise. Why, the $500 trillion strong derivatives monster serves one purpose and one only, that the bull market in bonds may continue indefinitely. In other words, the infinitely elastic supply of interest rate derivatives is there to make sure that the shorts in the bond market will burn their fingers right to the armpit. Interest-rate derivatives did not come about by accident. Like the original Tower of Babel, the Tower of Derivatives is being built deliberately. It was conceived and nurtured by megalomaniacs, in this instance the managers of the global fiat money system. They understand that bank capital hangs precariously on the cliff of vanishing confidence. They are confident that they can patch up even the largest holes in the balance sheet of banks on capital account, provided that the derivatives monster will not unravel in the meantime.

The big unknown is whether the escalation of counterparty risk will trigger the self-destruction of derivatives before the managers are through.
Here is the strategy. The Fed will keep halving the rate interest as many times as necessary. Each halving nearly doubles bank capital. It worked in Japan where the authorities have kept the brain-dead banks in business through thick and thin. The Japanese merry-go-round has been supported by the yen-carry trade; the American merry-go-round will be supported by the derivatives farce.

----------------------

So what does Dr. Fekete mean here? I'd love some explanation if you have some.

--Richard



grapejelly,

Fekete is brilliant.


In order to understand what he is writing about in the above excerpt, you have to understand that commercial banks double-dip in charging interest.

For example, “currency” comes into existence when the Gov. tenders T-Bill or T-Bonds to the commercial banks and the sums of those bonds are entered into the Banking’s accounting and payment clearing system. Next, the sums of those T-Bills or T-Bonds are used as “reserves” for making “fractional reserve” loans out into the private sector, again charging interest for those loans. So in effect, banks earn interest on the T-Bills, Bonds and again on the loans made to the private sector.

Now take a look at the following:


Amount.................Rate....................... .......Yield
$1.25....................40%...................... ........0.5
$2.50....................20%...................... ........0.5
$5.00....................10%...................... ........0.5
$10.00...................05%...................... .......0.5
$20.00...................025%..................... .......0.5
$40.00...................0125%.................... ......0.5
$80.00...................00625%................... .....0.5
$160.00..................003125%.................. ....0.5
$320.00..................0015625%................. ...0.5
$640.00..................00078125%................ ...0.5
$1280.00.................000390625%............... ..0.5

You will notice that as the amount in the left column doubles, the rate in the middle column must be cut in half to maintain the same yield.

Now, substitute “Bank Capital or Reserves” for Yield on our little table above, “Fed Funds Rate” for the middle column labeled Rate, and “Loanable Amount” for the left column labeled Amount. e.g.:



Loanable Amount.................Fed Funds Rate..............Capital or Reserves
$1.25................................40%.......... ....................0.5
$2.50................................20%.......... ....................0.5
$5.00................................10%.......... ....................0.5
$10.00...............................05%.......... ...................0.5
$20.00...............................025%......... ...................0.5
$40.00...............................0125%........ ..................0.5
$80.00...............................00625%....... .................0.5
$160.00.............................003125%....... ................0.5
$320.00.............................0015625%...... ................0.5
$640.00.............................00078125%..... ................0.5
$1280.00...........................000390625%..... ..............0.5



You will now notice that, in theory on the above table, if you have fifty cents in Capital or Reserves and the Fed Funds Rate is .40% you can make loans up to $1.25, or consequently if the Fed Funds Rate is one and a quarter percent (0.0125%) you can make loans of up to $40.00.

Here is the kicker, if you are a bank, you could use your Loanable amount to purchase T-Bills, Bonds and by doing so you would increase your Capital or Reserves so you can make more loans.

The snag for the bank here is that, as the bank purchases the bonds someone must surrender wealth to the Gov., wealth as in “Goods and Services.”

Rajiv
01-19-08, 11:30 PM
Hypertiger's blog post (http://hypertiger.blogspot.com/2008/01/emergency-implosion-prevention-checks.html) was somewhat relevant here


From 1944 to 2000 or 56 years US consumers requested commercial banks to manufacture 25 Trillion dollars...from 2000 to 2008 or 8 years US consumers requested commercial banks to manufacture 25 Trillion dollars more.

To escape US consumers would need request commercial banks to manufacture 25 Trillion dollars in far less than 8 years...

At the average growth rate of the total money supply of the USA around 8% per year since 1944 US consumers would need to request another 25 Trillion dollars to be manufactured in the next 5 years. After that 2 to 3 years...Ultimately at some point nanoseconds...fractions of nanoseconds...

In 1944 the household debt to income ratio was below 50%...by the early 1970's it was around 55%...by 2000 it was 80%

Now it's around 120-130%.

Before 100% consumers are basically forced to request more and more money to be manufactured...Beyond 100% consumers are forced to request less and less money to be manufactured. So there really is no way for US consumers to request the required amount of new money needed to susatin the continued inflation greater than previous inflation of the USA and global system.

Sapiens
01-20-08, 08:47 AM
Hypertiger's blog post (http://hypertiger.blogspot.com/2008/01/emergency-implosion-prevention-checks.html) was somewhat relevant here

That's right Rajiv.

Now, once you understand the simple concept of the bank "double-dipping," you can then understand how the current proposed stimulus package works. i.e., If the package is for $150 Billion and the FFR (Fed Funds Rate) is four percent (.04%) the banks would be able to lend out up to about $3.75 Trillion to the private sector. e.g.,

$150,000,000,000.00 / (.04) = $3,750,000,000,000.00

Sapiens
01-20-08, 02:03 PM
your example does not explain the derivatives monster or why Dr. Fekete is brilliant. and can you explain how does buying a government bond is a transfer of wealth to the government?

Ok, in order to explain the Derivative Monster, we must understand the following:

First, we must understand that there are two (2) types of Government Bond investors; one the Private Sector, and the second, the Banks. Next, we must understand what the fundamental difference between the two investors is. In order to understand the difference, a simple example will help illustrate what I am writing about.

Say for example, you are an Oil Sheikh and you have lots of oil for sale. Now an agent for the Gov. comes to you and says: “Al salamu alaykum (Hello, peace upon you) great Sheikh, I am here to buy some of your oil.” You being the great merchant that you are silently express to yourself ‘And death upon you infidel capitalist pig’ and then reply: “Wa alaykum al salam (Hello, Peace upon you, too) My great and esteem friend.”

Now that we are done with the politically incorrect niceties and introductions, we can get down to business and the jist of the deal.

The Gov. Agent wants 1000 barrels of oil, he tell you that he is willing to pay .10 cents a barrel, you being old and wise tell him you are not willing to accept anything less than $150 a barrel. After much spirited haggling and over some fine goat cheese, the Gov. Agent agrees to pay $100.00 per barrel, however there is a snag. The Gov. Agent tells you that he didn’t bring that much cash with him, would you be willing to accept a Gov. Bond in the amount of $100K, he asks. You being a gracious and genteel host (and knowing that soon you will need to buy rifles, tanks, jet fighters and all hosts of nasty weapons) reply to the Gov. Agent: “Yes, your bond that is backed by the good faith and credit of your Gov. is welcomed here, but there is a snag, given that you did not bring any cash with you, we will need to agree on the premium your bond will pay, since I will not be able to secure cash until a later day.” Again, after some spirited haggling and over some fine dates and goat milk, the Gov. Agent agrees that the bond should pay a 10% premium. Once the details are hammered out, the Gov. Agent gets his oil and you get your $100K bond paying a 10% interest premium.

This is how wealth is transferred directly to the Gov. without cash, next I will explain how the Banks become Gov. investors and how their business end works.

Rajiv
01-21-08, 11:09 PM
Today's blog post by hypertiger

Poof! (http://hypertiger.blogspot.com/2008/01/poof.html)


How do you sustain growth of the economy if the money supply does not grow?

From 1944 to now the rate of growth of the total money supply has been about 7.5% per year...Meaning that you lend out 1 Dollar in 1944 at roughly 7.5% yield per year and 64 years later you would have $102.36

Or let's say the total money supply of 400 Billion US dollars in 1944 basically cycles through the same process and keeps getting acquired and then relent back into circulation every year at roughly 7.49% for 64 years...You will need a money supply of 41 Trillion dollars to support that.

So without a continually expanding money supply there is no way to sustain the top who live off the yield from the bottom...

So forget the FEDERAL RESERVE you have to eliminate the belief that attaching interest to the medium of exchange is good.

Attaching interest to the medium of exchange is the cause of the FEDERAL RESERVE...

The FEDERAL RESERVE did not create compounding interest.

Well then what created Interest attached to the medium of exchange?

RICH PEOPLE. You kinda have to be in a position where you have piles of money to lend back to the people that slaved their asses off supplying it to you to be able to attach interest to it...

So then as soon as you start going around telling RICH PEOPLE that what they are doing is wrong...you are DOA.

Under a static monetary system if it was implemented now...There could be no yields greater than mine output and the population would have to be drastically reduced back to pre commercial banking levels...But civilization as you comprehend it has been as dependant upon compound interest as you are on eating and breathing for over 1000+ years and while the FED is significant...it is only 1 Central bank of over 100 in the 314 year old Global branch network...The current Global economic system is as dependant upon the 314 year old global credit system to sustain it's continued existance as you are on eating and breathing...

Here is the key...IF YOU ALL DESIRE THE 314 YEAR OLD SYSTEM ABOLISHED THEN YOU BETTER BE PREPARED TO KISS CIVILIZATION AS YOU KNOW IT GOODBYE...

Because without a functional credit system the whole global system that you currently see in operation can not function at all...can not exist.

Can you imagine existing without the possibility of interest attached to the medium of exchange?

Well you all better...Because that is just one thing that currently exists that must be eliminated to avoid the implosion...

The implosion that is currently in progress can't be avoided...but the next one can...and to accomplish that simple feat...Interest attached to the medium of exchange is one of the things that human beings do that they have to stop doing.

And if you tell me that you can have your cake and eat it too and create a system that does not inflate to maximum potential and implode but allows interest attached to the medium of exchange...

You are either a liar or a moron...


Similar to Hudson's thesis I posted here (http://www.itulip.com/forums/showthread.php?p=24793#post24793)