From the Silver Bear Cafe:
leased gold from central banks, paying the central banks a tiny annual
interest rate, usually well below 1 percent of the value of the gold
leased, and then sold the gold into the market and invested the proceeds
in government bonds, earning perhaps 5 percent annually. The huge
difference in interest rates meant a virtually free stream of income for
the investment houses, income paid by central banks as interest on the
government bonds purchased by the investment houses, secure as long as
the investment houses could be protected against sudden rises in the
price of gold."
The Federal Reserve has some gold. The gold sits in its vault. The gold has value but the problem is that the gold does not earn income. To gain some income, the Fed asks Morgan Stanley if they want to lease some of their gold. So the Fed and Morgan Stanley sign an agreement. The Fed agrees to lease the gold to Morgan Stanley. Let's say they agree to lease Morgan Stanley 1 ton of gold. Morgan Stanley takes in their possession one ton of gold. In return they pay the Fed 1% of the value of the gold leased out. So the Fed no longer has their gold, it is given to Morgan Stanley. In return the Fed gets a note saying that Morgan Stanley will pay 1% of the value of the gold on an annula basis. The Fed is happy because now they get a 1% return on the value of their gold. Plus techincally, they can call their gold back and cease getting the 1% return if they'd like. But they do not want to do that because they lose on the 1% income the get on an annual basis.
So how does Morgan Stanly benefit from this when they now have a liability in that they owe the Fed 1% a year. Morgan Stanley simply sells that is right sells the gold they got from the Fed to the open market. Let's say in this example the Chinese. The Chinese buys the physical gold from Morgan Stanley at market price. Morgan Stanley now has a bunch of cash. It takes that cash and invests it in such vehicles as government bonds that pay perhaps 5%. So the difference between what they pay 1% and what they get 5% is pure profit.
Posted below is a chart that shows the explosive growth of these excess reserves in recent years...more...
"Banks in the United States typically hold less than 10%, and even less than 5%, of their customers’ savings. This is particularly true among smaller regional banks.
As an example, BB&T bank is holding about $3.2 billion in cash equivalents on $131 billion in customer deposits. That’s a ratio of just 2.4%.
The rest of customer deposits are mostly invested in residential mortgage backed securities (similar to those which collapsed in 2008) and commercial loans. In fact, the bank’s loan portfolio exceeds total customer deposits. Not exactly the picture of financial health."
This means the money that you think is safe in the bank is not actually safe. See when you deposit money in the bank, they don't just hold it there and keep it in the vault. They do keep some of it (maybe less than 10%), but the rest the bank uses. They can use it to purchase something that will give them what they think is a safe return on money. Sovereign Man says they use it to buy things such as residential mortgage backed securities.
So an individual who puts money in the bank thinks they actually have that money in the bank. What they did was exchange their money for an IOU. They become a holder of an IPU as an unsecured creditor.
The Fed has manipulated interests rates so that it is artificially lower than the market should make it. This is called the Fed's Zero Interest Rate Policy or ZIRP. The thinking behind ZIRP is to make interest rates so low as to encourage people to go out of cash and into stocks, housing, car loans, credit cards, or anywhere else where they spend money. When they people put money into other assets, those assets go up in value. People's stock portfolio and houses go up in value. This gives people the perception that they are wealthier. When they feel that way, they tend to spend more money and this stimulates the economy. That is the theory anyways.
The problem is, is that real wealth is not created by manipulation. And this type of manipulation is highly flawed and eventually fails. We are already seeing signs of the bubble deflating. Mortgage applications have tumbled and today the stock market has crashed. Stocks and housing are the assets that most of the middle class holds. If those two asset classes crash in price, people will suddenly feel poorer and thus hold more of their money in cash nad not spend it.
Believe me the Fed is deathly afraid of this from happening. They call it the deflationary death spiral. Look for them to take countermesures such as pumping more money into the system, more masssive governemnet spending programs, more capital controls. Anything to prevent the deflationary death cycle.
But I'm not worried. Their attempts will fail again. Those who are smart enough to see this will educate themselves and take the necessary action to go out of this much better.
I read this great article by Paul Rosenberg from the Nestman Blog. Here's the gist of it.
"All governments – communist, capitalist, fascist, monarchy, theocracy, whatever – survive on the skim. They take money from productive people, by force or threat of force. However prettied-up or justified this fact may be, it remains the central fact of rulership.
It’s a simple but disturbing truth: A late-stage state’s modus operandi must always be “government against the people” "
Whatever form of government, including the government set up by the founders of the United States, it is always inherently against the people. Their sole purpose is to serve their people by taking their people's money. Think about that statement again. The government takes their own people's money then they give it back to them.
Thus, the government's purpose or reason for being is to give back or better said spend back the money it collects to it's citizens. Ideally, the government does this well and the citizens are satisfied. That is the premise. The citizens have an expectation that government as Rosenberg says Western government portray themselves as the "saviors of the weak, the healers of the sick, and the fixers of every problem."
Government make claims that they will do. Often times these claims are unrealistic or absolutely do not make long term sense. They make claims like if you expand government we will beat the war on poverty, end racism, make up for past injustices, give everyone the right to free healthcare, pay for everyone's retirement, or other often impossible to deliver claims. But they sound good and citizens as history have shown will often times vote and demand that type of government. It is often good strategy for a politician to run under those claims.
This is when the problems start to develop.
The people expect their government to be a Sugar Daddy. That is someone who lavishly spends on them. It's all great when the Sugar Daddy has money to spend. But what happens when the Sugar Daddy runs out of money? Or does not have enough money anymore to fulfill the lifestyle of their mistress. At that point, the mistress would begin to lose interest or even think of leaving.
The Sugar Daddy knows this, so in order to stay relavent in the life of their mistress, he has to keep pleasing her. Or else she may jump ship or lose interest.
That is why it is impossible for a government to cut spending. Because they know that once they do, they are done. So they keep spending and they keep growing to try to meet the insatiable appetites of their citizens.
So faced with this situation, government always tries to take more and more from its citizens. However, this can only go on for so long. The smart ones realize that they work and work yet they cannot keep the rewards of their work because it gets taken by the statist government. So what do they do. They either flee to another state or country which is less taxing. Or they adapt their ways to avoid excessive government confiscation of their money.
Like it or not, the governments of the United States, much of the Europe, Japan, and many other countries are at the stage where they are one big overextended Sugar Daddy. They have overextended themselves and have gotten in way too much debt to be able to meet the promises they made to their citizens.
The Sugar Daddy will now get desparate and try more confiscation. At some point its citizens will clearly see what is happening. Many of them will be angry at the results. If they take too much, the ones whose money are being stolen will either flee or take evasive actions. If they fail to deliver on promises, they will anger another group of citizens. In either case, there will be turmoil. The time to prepare for that turmoil is now.
I discovered the above new blog by Austrian economist Keith Weiner. If you want an indept and highly technical analysis of things like the current gold manipulation, gold leasing selling paper gold, gold futures, currency trading, and contemprary economic issues such as Cyprus and Quantitative Easing, then this website by an Austrian economist PHD may be the way to go.
"Decisions Made in Abundance are Generally Bad"
- Charles Hugh Smith
The worse decisions seem to occur when the times are best. Why? Because things go in cycles. Good times are always followed by bad times. Why? Because the decision one makes when the times are good are a great contributor to creating the bad situation.
People tend to overspend or overestend themselves during good times. This leads to a decline or a sharp collapse. Then they buckle down and are forced to make better decisions during the bad times - leading to more good times.
The crafty are aware of this devious cycle and make the prudent decisions when the times are the best.
Charles Hugh Smith comes up with the conclusion:
"In sum: there is no way the pensions and benefits promised in an era of financialized abundance can be paid once the wheels of financialization fall off."