How to Shoot Yourself in the Foot: Central Banks Begin Buying Derivatives

central bankersBy Bill Holter:

The Bank of Japan announced over the weekend that they are considering buying derivatives to jump start their economy.  Oh yes, that will do it!  Print money (currency) lots and lots of it, purchase derivatives that are worthless and have zero chance of performing and book them on your balance sheet.
Yes I know, taking dead derivatives off of bank balance sheets and replacing them with Yen, Dollars or what have you will “strengthen” the selling banks balance sheet by removing the Albatross but….what about the central bank’s balance sheet?
This cannot work because all they are doing is destroying themselves!

 

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Does this make any sense at all?  Do the central banks believe that they are immune from the stench of derivatives?  Do they believe that if THEY hold the derivatives, these “magical pieces of crap” will no longer smell bad?  As I wrote months ago, “broke is broke” and hiding non performing assets “in the corner” doesn’t change anything, only “who” is holding the bag.  The problem with this (and it’s already beeg done by purchasing non performing real estate loans) is that the central banks are the ISSUERS of the currencies themselves.  These currencies (Dollars, Euros, Yen, Pounds etc.) live and breath ONLY by the good graces of confidence and nothing more. The “nothing more” part being the fact that there is nothing real behind them.
By going into the derivatives market they are “betting” that the leverage of 100-1 will be enable them to “pump” air into their economic balloon faster than it’s already leaving (deflating).  This cannot work because all they are doing is destroying themselves.  This is like an anorexic being told that they have to eat otherwise they will die…so they start gnawing on their own arm or leg.  The central banks have obviously forgotten what their “product” is in their efforts to save their banking systems.  Make no mistake, this is NOT about the economy it is about the banking systems.  But what good is a “pristine” (no such thing in today’s world) bank or banking system if the issuer of the currency (the central bank) itself is a brain dead insolvent?  What good is a healthy banking system if they “trade” in insolvent units?
This latest central bank lunacy is merely an example of how far down the rabbit hole we have gone.  We are headed into a currency crisis of historical proportions that will be set off in an “over night” fashion This will not be so much a “currency crisis” where one nation’s currency collapses or one zone’s versus another.  This will be a currency crisis where “the money doesn’t spend” anymoreIf I had to guess, I would say that the teeny tiny Silver market (or lack of) will be the catalyst.  As you know, I am convinced that Silver is already in shortage.  Once a “delivery” is not made the jig will be up.  Follow this through, if you can’t buy an item with your “money” then confidence in that “money” will be broken.  You’ll try to “spend” your currency on something else that is available provided the seller is willing to accept your currency.  This way maybe you CAN trade your newly acquired item for what you were trying to buy in the first place.  It doesn’t matter whether there is a huge surge of currency “owners” dumping their currency to buy or whether “holders” of Silver refuse to sell, it is the same result either way.  Once a currency “doesn’t spend” for something…anything at all, once this starts it will grow and spread until it WON’T spend…period!  This is the natural progression of hyperinflation and how it starts and moves.  And this is where we are headed in my opinion as sure as the Sun will come up tomorrow.
I know that I’ve covered two different subjects here but they are not separate, they are mutually inclusive.  Central banks acting to bankrupt and make themselves “insolvent” is the same thing (result) as owners of an asset (in this case and in my opinion Silver…and then Gold) not accepting currency in exchange for money.  Think of what is happening now as two of the largest freight trains in history running full bore at each other on a collision course.  The central banks are destroying themselves and thus their “product” at a quicker and quicker pace at the same time “available” Silver (and then Gold) is getting more and more scarce.  The music will completely stop once one single delivery of Silver fails.  ALL confidence will break and within 1 to 2 weeks (especially in today’s computerized instant information world) “the money won’t spend” …for ANYTHING!
You may say that this is overly dramatic, I don’t think so.  You may say that Gold and Silver are not used anymore so whether any is available or not, it doesn’t matter.  I would say that if the government passed a law that said it is midnight when the Sun is straight up in the sky without a cloud to be seen, it is high noon no matter what is legislated.  In other words, Gold and Silver are money, “natural money” that no matter how “demonetized” central banks want them to be they will ALWAYS “spend”.  …Even and ESPECIALLY when fiat no longer has the power to purchase them!  This is exactly where we are headed and have been for years, only now are central banks speeding up the arrival.  Regards,  Bill H.

Comments

  1. Fine by me. The sooner the sh!t hits the fan the better as far as I’m concerned.

  2. This is a sensible post given that the evidence is in.  Argentina has seen 25% inflation for few years.  Their currency spends at about 20% of its recent value.  Black market rates are very high for USD Argentine Peso.  Venezuela just saw a nearly 50% cut in value with an inflation rate of 30% or more. Both countries have food shortages and bank runs.  V will probably see another devaluation shortly.  This will spread  elsewhere, probably to Europe, when one or more countries make devaluation policies official. 
     



  3.  
    This video pretty much sums it up. We are in currency wars. Continuously Devaluating the currencies..

    • @NetRanger808:  Great video.  Thanks for posting.  It covers his war game scenario well.  What sets him appart from most gold analysts is his rock solid understanding of geopolitics. 

  4. Are they planning to buy up all the derivatives and value them to zero and get them off the market? Ban new derivatives?

  5. Bankers playing with derivatives is roughly equivalent to a gang of chimps playing with an atomic bomb.  Yes, the case broke open when it accidentally fell off the airplane carrying it and they are all so fascinated by the pretty twinkling colored lights inside it that they cannot resist poking their fingers into it here and there.  Unfortunately for them (and us!), one of the possible buttons is marked “DETONATE”.  But since they cannot read or speak English, they are absolutely unaware of any danger whatsoever.  This does NOT mean that there IS no danger, however.
     
    As others here have stated, I sincerely believe that it will be a collapse of either the derivatives market or the sovereign debt market that destroys the great world-wide fiat experiment.  Not that this is a bad thing in and of itself but… a LOT of bad s**t will happen if we all go down this particular rabbit hole.
     
    The Chinese have thoroughly studied and dissected the Western finance model and are buying gold and silver as fast as they can.  The term “hand over fist” falls WAY short of their frenetic PM buying binge.  They are absolutely convinced that fiat is dying and that it officially will be pronounced dead quite soon.  When, not if, that happens, they do not want to be standing there holding a bag of it.  Holding the world’s largest gold and silver cache, however, DOES appeal to them and is the basis for their mad scramble out of fiat and into ANYTHING with intrinsic value.
     

  6. Ed B  Japan started buying derivatives  I am guessing they need the yield boost for their pension plans and B o J   That is going to end badly IMO.  The Japanese are desperate. The power companies just raised power prices to commercial accounts by 15-20% plus   Their  petro bills are running $250 billion a year since the nuke plants shut down.  That is some really serious s*** since their exports are less than imports.  Deval of the yen is a real hail mary.  Soros made $1 billion shorting the yen just recently.

  7. Central banks buying derivatives is not exactly new.  What’s new is the scale at which it will be happening. 
     
    Remember the good old President’s Working Group on Financial Markets (aka “plunge protection team”) set-up by Executive Order 12631?  It set-up a structure through which the Treasury and the Fed could work together to stabilize (manipulate) markets and they use derivatives to do it.   Another example?  Currency swaps and currency management efforts in general have made extensive use of derivatives over the years. 
     

  8. If the system breaks, we might be among the first people to notice that and get rid of as much cash as we can by buying real tangible assets. Perhaps maybe the reason why the central banks are buying the derivatives is because they have no other choice but to stimulate the economy with growing inflation which will in reality, scare away the investors.

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