June 20, 2005
It was quite surprising that so many of you responded to my derivatives msg. In the 1st quarter of 2005 derivatives of the top 25 banks was $91 Trillion...see table following beneath graph.
Adam Hamilton of Zeal first awakened me in 2001 to the magnitude of risk to us in the world of derivatives. What appears below are just two of many charts and tables appearing in the Treasury's report on banking risk & derivatives. The full PDF link is just below.
If gold is not money nor a currency why do these banks hold derivatives in gold? Are they trading for their own accounts or those for others? Who? This is the seed of the big KA-BOOM when these contracts cannot be matched-up with opposites. The ignition does not have to initiate with the precious metals, any derivative cluster can light the fuse. Most likely though it will come under the interest rates. Your home mortgage is in there somewhere. Derivatives are "insured" and then "re-insured" by other entities. There's no end to the creativity of today's financial snake oil concoctions. But, hey, the make billions on commissions and underwriting.
You probably ask how can a bank expose themselves to such great risk? Fair and reasonable question. The answer being they know the US Government (you) will bail them out. Ultimately, you are the 'lender of last resort'. Confident in that, they can speculate with wild abandon while the Bankruptcy Act just passed in Congress further burdens all of us. You'll recall earlier the inability of the Confederacy to finance its part of the war. Why was that, you ask? Why didn't foreigners warm-up to buying Confederate debt bonds? Forget the Confederacy not having any gold; they promptly spent that on war necessities. The overriding impediment was that the Confederacy had no in-place infrastructure to tax its people. That, of course, changed for all of us, first in the North with Lincoln's income tax, and finalized in 1913 with the 16th Amendment. Introduced by the Republican Party, I might add. Besides it was to progressively go only after the 'rich'. You and I are the 'rich' today.
Why was an amendment needed? Because the direct taxation of citizens was prohibited by our Constitution. It was not one of those powers delegated by the states to a central government. That, my friend, is the primary reason foreigners will hold our bonds and currency which is also debt. We have a highly efficient wealth gathering system.
The rub comes though when we guarantee payment. Payment in what? Well, dollars of course. Legal tender laws preclude anything else, like gold or cotton, for instance. But, aren't we safe knowing the Federal Reserve System is the "lender of last resort"? Sure, if you're comfortable in getting dollars in payment which no longer will buy what they did when you bought the bond. You'll be just fine.
And you thought they bought our bonds because of the pretty engraved pictures and old people nobody knows anymore! They're backed by the "productivity of Americans" alright - - shackled and on bent knees.
Just as Governor Blanco's first reflex for Louisiana's rescue was to the federal government and FEMA, so will Americans turn to the same architects for rescue who created the financial monster in the beginning. The result, shown by history, is for us to suffer even more oppression and larger government. Governor Blanco can't be blamed for that, for hers is the philosophy we all share. And that is the tragedy of America.
OCC BANK DERIVATIVES REPORT
FIRST QUARTER 2005 (pdf)
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