Tuesday, March 25, 2014

Rickard's Barber

Jim Rickards is out selling books again, and the family feels he needs some grooming to better present himself along the circuit.

Perhaps the sensationalism of his statements regarding FED liquidity swaps is in keeping with his unruly coiffure, which the Roacheforque family barber, Nicola, could easily dispatch merely through conversations gleaned in the estate's private salon on the east wing portico (which we traditionally open during the first mild days of Spring).

First and foremost, these liquidity swaps are in essence a 90 day FX swap "wash". There is no ongoing accumulation of currencies on either CB balance sheet, merely an exchange rate agreement on funding liabilities denominated in a counter parties currency. So it is a bit melodramatic to refer to this arrangement as "a massive $60-$100 trillion bailout, not the $4 trillion you were told."

From the Fed's own spreadsheet data (if it can be trusted), between December of 2007 and July of 2010 for example, the sum of $10,057,401,900,000.00 dollars was swapped for equivalent Euro, Pound, Yen, Franc, Krona (etc.) at agreed upon exchange rates. Considerably more than 4 trillion to be sure, but to date, all of these transactions have been unwound at those rates. We doubt that 6 to 10 times that amount has again been swapped in the ensuing 3 years and 8 months or so, but even if it had, those swap lines will similarly unwind, other than those less than 90 days from maturity.

A simple call to Basel would verify the amounts, but why bother? You see, it is the exchange rate that matters after all in a swap line, and in a currency war it is only the exchange rate that matters, period. Rickards should be reminded that:

The major problem today, is that digital currencies have erased the currency denominations of all government/nation debt holdings! Even thou a debt is marked as DM, USA, YEN, they are in "real time" / "marked to the market" and cross valued in all currencies! No currency asset, held by CBs today are valued in the light of a single issuing country, rather "all currencies are locked together". To lose one large national currency, is to lose the entire structure as we know it!

We do not know for certain what portion of these currencies was used to "bail-out" certain dollar denominated debts, only that 10's of trillions of dollar guarantees were made, and currency swaps at negotiated exchange rates were transacted to fund those guarantees.

Naturally, trillions were used to offset the losses on fraudulent US Mortgage backed securities sold abroad, and many of these dollars are still parked on balance sheets merely to support the nominal solvency of systemically favoured institutions. But fees and exchange profits and payouts made based on such feats of "nominal debt performance" are real, and serve to give much satisfaction to the Narrators.

If and when dollar confidence is lost, it is the relative exchange rate differential that would cause the Fed's balance sheet to swell with hundreds of trillions of (worthless) dollar denominated assets, and relative exchange rates will dictate that differential. If dollars somehow became worthless relative to other currencies, then the FED would have a massive liability of worthless paper. But worthless compared to what? We cannot visualize this scenario without the entire structure being lost. Again, all things are relative in an FX war, with all currencies "locked together" by their relative exchange rates

It is the intent of the Narrators to gradually devalue ALL paper currencies relative to one another so that no massive imbalance swells any CB balance sheet. This strategy will keep confidence afloat for as long as possible in the fiat system.

To say that the dollar will collapse, is to say that ALL paper currencies will collapse, and at that time, the sovereign holdings of all non-paper reserves will then revalue all paper currencies relative to their free-market denominated non-paper-reserve holdings. Then you may have your hyperinflation, if it is found that no accepted reserve backs the spur or brake of a nation's paper inflow / outflow.

As we all know, the only non-paper reserve holding of the CBs is gold. So for Rickards to say that "the system" collapsed in 1914, 1939 and 1971 and that the next collapse will be relative to those is a mistake. In none of those prior collapses did a free market in gold re-denominate all currencies.

There has never truly been a free market in gold, functioning as a monetized wealth reserve asset, in modern times. It has always been artificially fixed to currencies, or manipulated by a fractional paper proxy to simulate that fix, ever since fiat currencies began their rise to prominence, centuries ago.

Yet clearly we can see by the intent of nations with aspirations to dethrone the current dollar-centric fiat system, that gold will be the new global reserve asset, not fiat denominated debt. And currencies will resume their role as a means of exchange and a unit of account, even a temporary store of value when well managed, relative to that asset, and the ability to exchange that asset freely in an unhindered, unadulterated global marketplace of international trade, settlement and exchange.

It is more than just the intent of certain nations that assures this. It is the timeless resurgence of the will of the collective to restore equity to a broken and mismanaged system, as defined by a collapse of confidence in the verity of the current system. But the little people will not like the pain required to reach that point of "no confidence, no return." Many will risk all to save a system they came to despise, when the total burden of its collapse rests upon their shoulders.

If Rickards walks his book as he talks it, he will be able to keep his hair in this new system (should he live so long to see it). Many are betting their all that none of us will. Those who hold gold hope to see it some day improve their lot in life, and those who sell it are betting they will not live so long, so therefore "live for today".

A country should think of the future, not the "here and now" timeline of its little people, saddled as they are with the paper debts they live by. At least one country looks to the future for its people. But even they learn the hard lesson of debt in a world where debt still reigns supreme.

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