Chicago Gold and Silver Investing Fan Blog

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...

ZIRP Manipulation Failing

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.

Central Bank: 5th plank of Marx's Communist Manifesto

Karl Marx's Communist Manifesto is the doctrine for those seeking a socialist dictatorship.

The United States and much of the rest of the world have a central bank. The the 5th plank of the Communist Manifesto actually calls for the establishment of a central bank.

When we have a central bank as advocated by the Communist Manifesto, how much of the banking system is actually dictated by free market conditions and how much of it is centrally controlled?

So why do socialist like central banks? It is about a control. A central bank controls the moneytary system. So as John Butler says in his article, "Marx and Lenin actually encouraged inflation as a means to confiscate wealth from the capitalists and concentrate it in a central bank owned and run by the state. The establishment of a central bank was plank 5 of Marx’s Communist Manifesto."

Our Government Hates Savers

Our government in cohoots with the Federal Reserve have manipulated interest rtes to near zero. So, anyone who has any kind of dollars in the banks is receing nearly zero dollars. The bank then goes ahead and uses those dollars to profit. A few years ago interest rates were near 5%. Now that they are near zero, what the government has done is basically robbed savers of interest rates that they should have gotten had interest rates been determined by the market.

Interest rates are also artificially low in North America and in Europe. Canada has interest rates about 1%, the UK about 0.5%, Switzerland it's about 0.25%. Asia is another story. China is about 6%, Phillippines is about 3.5%, and India is about 8%.

There's been new recently about the Cyprian government getting  levy on it's citizen bank holdings and stealing their money. Well in America it is nothing new. The difference is that in Cyprus the stealing is overt. In America it is covert. The American government steals your money through denying interest rates that should have benn given to you by having manipulated near zero interest rates. Plus, they devalue the dollar by printing money.

 

 

Visual Guide to the Federal REserve by WallStats.com

The New Political Economy

" A politically-controlled economy, where there is a gradual impoverishment of both investors and entitlement beneficiaries, that is mainly achieved through deceptive measures that will never be understood by the average voter, and where the rules are quite deliberately changed over time to take ever more wealth from the private sector for redistribution. "

- Daniel Amerman

I'm not sure if Danier Amerman invented the phrase, but he was the first person I have ever heard of who has described this world as the politically controlled economy. The world prior to the financial meltdown of 2008 was the regualr reality where wealth grew as a a fairly regular and somewhat predictable rate. After 2008, with super low interest rates, the threat of hyperinflation, and overall global concern of financial systems, some have predicted a total collapse of the global economic system followed by a collapse of fiat currency and hyper inflation or at least high inflation.

Amerman brings up a third alternative to the world today and in the near future. He calls it the new political economy. A world where governments get eleected by overpromising entitlement and other public spending.  To pay for this spending they confiscate wealth from its citizens through purposely deceptive meaures that the investor will never understand or even try to comprehend.

Debunking the Deflationary Death Cycle Myth

The Fed feels that delation is the worst thing on the planet.

The article,  Some Questions About Deflation, is one of the better articles I're red refuting this claim.

Central Banks Benevelance Backfiring

The traditional way to make a business and an economy grow is to sell products or services that people demand at a price that people are willing to pay for it and then hopefully make enough to cover your expenses and have enough left over as profits. The profits are then used to reinvest in the business or for other means.

Then came the concept of central banks and all of their hideous ways to try to grow an economy. Instead of sticking to the basics of making products that people want, they feel they could grow an economy through stimulus, near zero interest rates, deficit spending, money printing, capital controls, governmentintervention, government nationalization of industries and other ways. All it has done is made the economy worse. Instead of letting the economy work on its own they are trying to manipulate the system.

In an economy unhampered by government intervention, money follows the good investments and good businesses and leaves the bad investments and bad businesses on its own. An entrepreneur puts money in a business. If the business is profitable, the money stays in the business. If however, the business flounders or fails, the money leaves the business.

Government, in attempt to be benevolent perhaps, intervenes in this normal course of economics. They give subisides to failing businesses. They hamper successfull businesses by taking their profits or burdening them with too much regulation. By doing so government makes things worse. Ultimately, all of this goverment intervention will at best case reduce business profits and efficiency. In worse case it could lead to complete economic collapse.

 

Inflation and Bonds

Bonds are a weird animal. Auctions, government bonds, corporate bonds, interest rates, are all terms associated with bonds and all quite an enigma to most people. Yet bonds due to the amount of volume and money associated with it play a huge role in the lives of all of us.

So when the Fed recently announced that they were going to do inflation targeting, I at first took it as a yawn. However, further analysis has opened up my eyes. See, the Fed has targeted a 2% inflation rate per year. The actual amount will probably be much higher. This means that the Fed is saying there will be inflation every year. There will be currency devaluation.

Inflation affects bonds. The purpose of this post will be to analyze how inflation affects bonds. To see how, you have to know what a bond is.

A bond generally pays a fixed amount of interest every year. Then, when the bond matures the face amount is paid off.  So in really simple terms if a bond payss off 3% interest very year and then pays the principle at maturity, the interest earned is not worth as much due to inflation. Yes, you get the interest payment, but the interest payment stays the same and yet the value of the interest payment gets reduced to inflation. Also, the holder of the bond gets the principal payment at bond maturity. But, the principal amount they get back is worth less than what it was when they originally got it.

Inflation also affects interest rates. Since investors know that inflation will happen, they expect a higher interest rate on their investment.