Wednesday, January 29, 2014

Jim Rickards - New OP-ED piece out today

Jim Rickards writes an Op-Ed article that appears today in the Darien Times of Connecticut. Rickards lives in Conneticut. This article is chock full of things that could end up causing major monetary system change. As usual, Jim does a good job of anlayzing what could go wrong with Central Planning. And why we have to keep an eye on it.

Some excerpts from the article:

" In order to make money under the Fed’s zero interest rate policy, banks are engaging in hidden off-balance sheet transactions, including asset swaps, which substantially increase systemic risk. In an asset swap, a bank with weak collateral will “swap” that for good collateral with an institutional investor in a transaction that will be reversed at some point. The bank then takes the good collateral and uses it for margin in another swap with another bank. In effect, a two-party deal has been turned into a three-party deal with greater risk and credit exposure all around."

"The Fed is now insolvent. By buying highly volatile long-term Treasury notes instead of safe short-term treasury bills, the Fed has wiped out its capital on a mark-to-market basis. Of course, the Fed carries these notes on its balance sheet “at cost” and does not mark to market, but if they did they would be broke. This fact will be more difficult to hide as interest rates are allowed to rise. The insolvency of the Fed will become a major political issue in the years ahead and may necessitate a financial bail-out of the Fed by taxpayers. Yellen is a leading advocate of the policies that have resulted in the Fed’s insolvency"

my comment: this last paragraph is something most people do not realize that Rickards has been explaining for years. If the FED is "successful" interest rates will have to rise. This will cause the FED itself to take a gigantic hit on all these long term US bonds they now hold (purchased in QE). The FED itself will be insolvent using normal accounting rules. Of course, they will not show the losses. They will carry these bonds as if they are still worth what the FED paid for them. Regardless, an unstable FED could surely lead to major global monetary system changes.

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