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Micro-documentary: How Our Monetary System Works And Fails

Gold Carry Trade

From the Silver Bear Cafe:

"Investment houses 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.

The Federal Reserve Is Paying Banks NOT To Lend 1.8 Trillion Dollars To The American People

From Michael Snyder of The Economic Collapse blog,

Did you know that U.S. banks have more than 1.8 trillion dollars parked at the Federal Reserve and that the Fed is actually paying them not to lend that money to us?  We were always told that the goal of quantitative easing was to "help the economy", but the truth is that the vast majority of the money that the Fed has created through quantitative easing has not even gotten into the system.  Instead, most of it is sitting at the Fed slowly earning interest for the bankers.  Back in October 2008, just as the last financial crisis was starting, Federal Reserve Chairman Ben Bernanke announced that the Federal Reserve would start paying interest on the reserves that banks keep at the Fed.  This caused an absolute explosion in the size of these reserves.  Back in 2008, U.S. banks had less than 2 billion dollars of excess reserves parked at the Fed.  Today, they have more than 1.8 trillion.  In less than five years, the pile of excess reserves has gotten nearly 1,000 times larger.  This is utter insanity, and it will have very serious consequences down the road.

Posted below is a chart that shows the explosive growth of these excess reserves in recent years...more...