The Shadowy Web of
Collateral and War
By Dr. Jeffrey Lewis
It seems that few people have yet realized
the possible scenario that a repo market failure will result in a liquidity
freeze that can then spark off a full scale financial collapse.
The financial and economic system seems so
vulnerable to just in time delivery on virtually everything that such a failure
will cause social chaos in the short term and severe damage to confidence in the
longer term.
Examples of delivery systems that will be
impacted include the transport of key commodities for everyday life like fuel
and food.
Also, as trading systems become more
automated, they are becoming more and more vulnerable to glitches that can even
cause flash crashes and market closures.
The Fed’s Need to Taper
The need to taper has nothing to do with
the economy, jobs or inflation.Basically, the Fed will need to taper off its
monthly bond purchases sooner rather than later because the repo market is
rapidly becoming starved for quality collateral.
Because the Fed is currently buying 85
billion in bonds each month, a lack of collateral is left over for these giant
day to day repo transactions, which no one seems to paying any significant
attention to.
Add to this interference due to regulation
changes, like bringing these repo transactions on to exchanges, for example.
The average turnover in the repo market
amounts to trillions of U.S. Dollars each day, and if market instability becomes
apparent or even a rumor that one of the primary dealers is in trouble, a Lehman
style credit freeze could happen all over again.
Fiat Debt and the Welfare State - the
Other Side of the Silver Coin
Asimilar issue is happening with gold that
is also used as collateral for these transactions.
A recent surge in physical demand is making
metallic investment grade gold increasingly scarce and in strong demand for
collateral purposes.
J.P. Morgan Chase is now rumored to be
attempting a long corner in gold and is scrambling to find gold to put into its
empty vaults.
More about Tapering
The U.S. budget deficit has fallen in
recent years, which raises the effective amount of budget the Fed is currently
monetizing. This in turn pushes on the confidence conundrum and the market has
seen international purchases of U.S. debt from China and Japan sink sharply last
month.
The tapering seems finally about to happen,
and so short term rates are rising to discount this change. Nevertheless,
because of the weak headline housing numbers, the market saw some buying ahead
of support.
The Syria Story
The above all fits in well with the
hyperinflation pathway, but this is where the recent threats of the United
States going to war against Syria fit in.
Defense spending is down, and another
foreign war would 'justify' increasing the defense budget. Of course, this would
thereby 'necessitate' even more Quantitative Easing, that will result in greater
money printing and hence money supply expansion that will dilute the paper U.S.
Dollar’s already tenuous value.
Perhaps the best thing to do to prepare for
this scenario is to continue accumulating hard monetary assets like silver and
gold with your paper currency while it is still possible.
For more articles like this, including
thoughtful precious metals analysis beyond the mainstream propaganda and
basically everything you need to know about silver short of outlandish price
predictions, check out
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