If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations which grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. – Thomas Jefferson
My Lenovo laptop died a few weeks ago. First, the camera broke. Then the fingerprint sensor stopped working. Gradually, it started slowing down and locking up, until I’d have to push the button several times for it to boot. On Christmas Day, it wouldn’t boot at all. I ran the checks and determined that the motherboard had been fried around the same time as my morning eggs were crackling and popping. Fortunately, I was expecting this to happen at some point, so I had proactively bought another and moved all my data over while still using the old laptop for my everyday computing needs. When it finally croaked, I pulled out my new one and continued working.
It’s nice to be prepared for emergencies, to save yourself the misery of unneeded stress and lost time. I think it would be remiss to assume the heaviest stakeholders in this monetary system don’t see its impending death. What I mean is there’s a highway of stupidity, but how can the Central Intelligence Agency not be prepared and have a plan for what they absolutely must know is ahead? When it comes to survival, people protect their own, and Jonas Salk’s Survival of the Wisest is a conceivable strategy. In fact, the only way for stakeholders to come out of a collapse with similar wealth and power is to shrewdly bag others who aren’t as vigilant, while casting blame.
Last week I wrote about two different monetary systems: credit-backed and gold-backed, as diametric opposites. Today, I’m writing about the repo market and the repo crisis of 2019, since it’s once again showing signs of trouble. Like a motherboard is to a computer, the repo market is to our credit-backed monetary system. It is the main circuit board which supports all the principal components. It’s used by primary dealers, banks, insurance companies, mutual funds, pension funds, and hedge funds.
According to The REPO Handbook by Moorad Choudhry, the repo market was introduced by the Federal Reserve just five years after its creation, as the main tool of the Fed’s open market operations. It’s been a central part of the system since 1918. At first, it was used to trade bank bills, and subsequently to trade Treasury securities. Like a conductor leads an orchestra, the Fed needs this market to drain liquidity (when there’s a surplus of cash) and add liquidity (when there’s a shortage of cash) to the banking system. The U.S. Treasuries repo market, and the U.S. government bond market are the largest debt capital markets in the world, and both are faltering.
Repo is a repurchase agreement. It occurs when one party sells short-term securities (collateral) for cash and agrees to repurchase the collateral later at a higher price. The International Capital Market Association (ICMA) defines ideal collateral as (1) free of credit and liquidity risks and (2) saleable for a predictable value in the event of a default. In this way, if a borrower doesn’t pay on its loan, the lender can seize the collateral and sell it to recoup his losses. But what if there’s nothing to recoup? Almost all collateral in the market is another form of debt, backed by liability that nobody questions.
If not a form of debt, then securities are contracts for something physical like gold that’s been dolled up by fractional reserve banking, derivatives, and leverage. Let me be clear, real collateral is not digital or paper gold that has no real backing behind it. In the theory of safe lending, one mortgage should be backed by one house, but somewhere in the evolution of our system, collateral became the debt that it was supposed to back. In other words, the market got cancer and its “cells” went rogue. They mutated and started growing uncontrollably, spreading to other parts of the body.
Our medical system fights cancer with bombs of radiation. This kills your good bacteria and pretty much destroys your immune system in the process. There’s really no other way to wipe out the dysfunctional cells and process, so the hope is that radiation (a) will stop and reverse the cancer, and (b) your body will regenerate itself and rebuild immunity. It doesn’t always work, though, and if cancer continues progressing to stage four or five, you know what happens. The monetary system has stage-four or five cancer. Ordinary people now hinder the system’s functioning much like ordinary cells become cancerous and no longer respond to natural signals of cellular growth and death.
In 2019, something happened to the repo market, before the Covid19 pandemic ripped through and locked down the world. On September 17, repo rates spiked hugely intraday, and the Fed turned on the dollar printer like never before, and they haven’t stopped. What’s interesting about the day the repo market spiked was that it happened to be the day after JPMorgan’s metals desk was accused of being a criminal enterprise. Three JPMorgan Chase traders in gold and other precious metals were charged by the US Department of Justice for manipulating markets. Liquidity in the banking system dried up and repo rates jumped to 10% from about 2% the week before.
Perhaps things aren’t as they seem and the stakeholders in this credit system are in the process of transferring all their financialized wealth from the old broken credit system to something new, like I did with my laptop. It’s easy to do with gobs of fiat being printed for war. Only when the transfer is complete, might they engineer a rug pull under the U.S. stock market, causing investors to run into bonds. This might stabilize the dollar for a while, but eventually bond holders would be bagged by either default or dollar devaluation. Out of this, banks would fail; many people would lose their jobs, pensions, and benefits; and the new monetary system would kick in.
I encourage you to watch this short animated story called I Want The Earth (plus 5%). It explains the current credit-backed banking system in layman’s terms. One hundred plus NOTHING does NOT equal 105. Charging interest on nothing—fractional reserve banking—makes it impossible to repay, giving great power to those who create fiat out of thin air. If nothing else, it serves to transfer wealth. This story was written by Larry Hannigan the year I was born in 1971, and the year that Nixon abandoned the gold exchange standard. Banks create credit, not money. Fiat is NOT a store of savings or wealth. If you store your savings in fiat, you lose in a system of debit-credit bookkeeping.