by Jim Willie
Market
Oracle

Many are the
events, signals, and telltale clues of a real live actual systemic
failure in progress. Until the last several months, such banter
was dismissed by the soldiers in the financial arena. But lately,
they cannot dismiss the onslaught of evidence, a veritable plethora
of ugly symptoms of conditions gone terribly wrong and solutions
at best gone awry and at worst never intended in the first place.
My theory has been steady from the TARP Fund scandal and the Too
Big To Fail mantra of deceit. The plan all along since the breakdown
began in September 2008 has been to preserve power, to maintain
intact the insolvent banks an operational crew of zombies, to aid
the financial sector bound in Wall Street, to pay benign neglect
to Main Street and businesses (expect for symbols like General Motors),
to expand the propaganda of a fictional recovery, and to maintain
the endless wars. The wars serve two purposes, to enable significant
fraud from overcharged services, and to hold open the gateways for
sizeable money laundering flows into the Wall Street banks, those
hollow structures that closely resemble a coke addict with dark
teeth, wretched bones, wasted organs, lost attention, and a listless
gait. The Greek showcase is coming to a neighborhood near you in
Western Europe and Great Britain, soon to feature debuts across
North America. No, the United States is not immune from the horrors
of ruin since its marquee billboards read Zero Percent. It only
means the wrecking ball works from the inside out, serving as the
central needle in the Black Hole. An outline of the End Game can
be written. This article is not comprehensive by any means. But
it serves as a decent posting on an outhouse wall. Consider the
following as musings in observation of Uncle Sam on death row. They
bear no logical flow, just random concepts.

OPERATION
TWIST IS Q.E.

Operation Twist
cements ZIRP and closes the door on any Exit Strategy. Nothing exists
in the twist of substance, a mere shift of the shell game movement.
The most powerful effect of a maintained Zero Percent Interest
Policy is that it ensures a systemic failure with capital destruction,
rising costs, falling profit margins, and deterioration in the USEconomy.
It guarantees growing federal deficits without any potential of
resolution, and finally a USGovt debt default. Just one year ago,
the travesty of political failure was in full view with the Super
Committee charged with spending reduction. It folded like a cheap
tent. Deficits have been written in stone. The nation has moved
from a permanent housing decline and lost legitimate income (factory
exodus to China) as principal cause for systemic failure, to a failure
based upon capital decay and absent profitability. Absent legitimate
income fostered rot from within. The USFed in its growing
desperation (hardly infinite wisdom) has been attempting to control
the rising cost structure by means of a steady concerted effort
to render deep harm to final demand through economic damage.
They will succeed, but cause a downward spiral that cannot escape
the powerful clutches of capitalism gone into reverse. The central
bank clowns will win a USTreasury Bond rally to bring about the
final collapse all in a Black Hole. As the 10-year TNX yield zips
below 1.5% and heads toward 1.0% in the future months, as the recession
gallops along and enjoys recognition, the systemic failure will
be more evident.

TRILLION$
AS POCKET CHANGE

From December
2011 to April 2012, the Dollar Swap Facility released $3.2 trillion
for European bank aid. It accomplished nothing, since their banks
are a field of Greek-like ruins still. The money went into the LTRO
funds, the ill-planned knucklehead Draghi plan. The banks bought
overpriced government bonds, lifted in value by the Euro Central
Bank itself. The same banks are worse off than before the application
of LTRO funds. What irony! Draghi has no credibility left. Harken
back to 2009 when a similar Dollar Swap Facility released over $1
trillion to the same European banks. It solved nothing either. The
tragedy is accentuated by the realization that central bank clowns
learn nothing, attempt the same vacant solutions, only to repeat
their errors at a later date. The public seems incapable to recall
the past failures, holding out hope. Now we hear of a possible
$2 trillion plan to recapitalize the European banking system. In
Weimar terms, this is pocket change. Counting the US fixes,
the London fixes, and the previous DSFacility, the total is closer
to $6 trillion already wasted in a massive debasement series of
whiffs. So another $2 trillion is pissing in the wind of Weimar
flatulence, the stench to be noted by next year.

When the paper
mache artisans start talking about a total of $10 to $12 trillion
for Western Europe, the United Kingdom, and the United States combined,
then they will be seriously planning a banking system recapitalization.
They prefer the futile incremental approach, with the proviso of
not liquidating the big banks. The hilarious factor is that
even $10 trillion would not work, but it would indeed buy another
couple years, maybe three years. So  if an alcoholic
has the Delirious Tremens, the consensus stupidity calls for feeding
him a higher proof Jack Daniels whisky and from a vat for intravenous
application, which will revive him, when a mere few liters would
not. It is utterly amazing that Bernanke and Draghi are given any
respect at all. This is utterly absurd, since the wrong-footed solution
is going to be simply higher volume of what does not succeed in
reviving the system. WHEN THEY START TALKING ABOUT BIG BANK LIQUIDATION
AND A NEW GOLD-BACKED MONETARY SYSTEM, THEN EXPECT SOME TRACTION.
But such a plan would involve plowing the system under and removing
the bankers from power. Until then, plan for a bigger killing field.
The great tragedy is that the killing field is the entire Western
monetary system, attached at the hip to the Western Economic system.
Witness the gradual collapse.

BASEL
RULES LOOKS TO GOLD

If the Basel
castle dwellers decide to make Gold a Tier-1 asset, banking capital
adequacy ratios would be adjusted by a dictated order. In response
to the global banking crisis, based upon paper foundation turned
toxic, the Basel rule changes have aggravated the banking woes.
As rules are tightened according to assets held and their type,
the move could potentially be favorable toward Gold. New encouraging
rules that declare Gold to be a reserve asset could result in between
1700 and 2000 tons in purchase. Think of it as bank ballast in a
storm of toxic seas. The issue is the so-called Basel III rules.
The ultimate central bank is on the verge of declaring Gold
to be a Tier-1 asset for commercial banks with 100% weighting.
Curiously, it is currently a Tier-3 category with just a 50% risk
weighting. Like gold is only half money, how absurd!! It took a
50% downgrade of sovereign bonds to bring about such progress. They
are set to increase the amount of capital banks also must set aside,
a double win potentially. The incentive away from Gold toward risky
assets such as stock, currency, and debt-related assets resulted
in disasters. A category upgrade in Gold would effectively
drive up its value relative to other competitive qualifying assets.
By elevating Gold to a bank reserve asset, stability would enter
the equation, since the yellow stable metal moves inversely to the
risky paper assets that have crumbled. Gold is ideal as it bears
no credit risk, and has no counter-party risk, only theft risk (due
to desirability) and shell game risk (from certificate games).

An upgrade
to Tier-1 asset would make a triple win: 1) An endorsement of wealth
preservation and store of value from the syndicate penthouse, 2)
inducement for significant gold purchases by major financial institutions,
and 3) reappraisal of gold’s value with respect to other Tier-1
capital such as quality sovereign debt. Under the new rules,
Gold could find a significantly larger proportion of a reserve pool
pushed into sudden growth. The Bank For Intl Settlements
might turn chicken, as time will tell. The calculus is appealing.
If 2% of total current Tier-1 capital held by commercial banks globally
were to be converted into gold, a suggested 2% of the $4,276
billion would amount to $85 billion in gold purchases.
That comes to the neighborhood of 1700 tons of gold bullion. Hence
banks would be encouraged to hold gold with similar motives to central
banks, which hold 16% of reserves in gold. One might wonder if the
BIS is tightening slowly in order to swing the wrecking ball left
and right, with more technocrats in wait to fill prime minister
posts like Monti in Italy. But politics is not an area for the Jackass
to wander.

EFFECT
OF ABSENT GOLD ON BIG U.S. BANKS

A hidden massive
sinkhole effect like seen many times in Florida could be close at
hand. The financial press reports absolutely nothing on the tremendous
loss of gold bullion in Western banks since February. Heck, the
gold community seems largely unaware also that around 6000 metric
tons of gold bullion have departed Western banks (mostly London)
in recent months. The effect will be felt somewhere and soon, by
sheer laws of nature. The big US banks might have only one asset
of undeniable value, Gold. As they lose that asset during the process
by which Eastern entities strip gold via forced demands during margin
calls in off-exchange transactions with extreme pressure applied,
some big US banks are being pushed closer to a death event.
A string of bank failures could be nearby. These banks are far more
hollow as structures than perceived. Continued television
advertisements, sports sponsorship, and billboard lights do not
demonstrate solvency, only zombie activity that lacks vigor. Begin
the death watch for Morgan Stanley, which has endured the debt downward.
As is the usual mantra by shamans, it was not as bad as expected.
All hail.

To prevent
the sinkholes from causing the next damage, in a hidden desperate
maneuver, many cartel banks will attempt to move gold bullion from
private executive accounts to save themselves. They will surely
continue the illicit practice of raiding allocated accounts, replacing
them with gold paper certificates. They will complete the trifecta
by draining the SPDR Gold Trust, removing inventory by privileged
shorting practices. The entire migration of gold creates
an extreme risk for the Western banks, the true asset evacuated.
They have many assets on their balance sheets, mostly toxic paper
from USTreasury Bonds, Euro sovereign bonds, mortgage bonds, mortgage
loan assets, corporate bonds, commercial paper, and commitments
tied to derivatives. The great majority of such assets on balance
sheets is toxic paper, in a fast-paced process of imploding in value.
Those balance sheets also used to contain gold bullion in high volume.
That is no longer the case, the bullion having been leased
sold in past years and raided in a massive systematic scale
in recent months. The bank balance sheets have been thus
hollowed out, leaving their structures to stand on toxic paper,
and much less on sturdy inert gold metal. Recall that insolvency
plus illiquidity forces bank failure. The many bank runs are like
a grand final hollowing process that affects the entire banking
sector in lost reserves, large and medium sized banks alike. The
absent reserves remove liquidity, amplified by the fractional system.

The big US
banks are left vulnerable to failures. The event is coming. Continue
the death watch on Morgan Stanley despite their continued walking
status. Zombies walk too, but they look funny and have ugly skin
with many ghastly blemishes. The extreme risk for Morgan Stanley
is two-fold, never having gone away. 1) They
are a primary executor of the high-risk Interest Rate Swaps that
defend the USTBond artificially low yields. 2) They have significant
European sovereign bond exposure. They extended a huge
private USDollar swap to big European banks until the USFed stepped
in a few months ago.

STRANGE
EXTREME STORIES AS WARNING WIND

Numerous stories
are circulating of vast cyber bank thefts. The locations appear
initially to be European. The volume is reported as EUR 2 billion
so far. The authorities will not discuss it in the open. The bank
glitches might be more about kiting of funds at best, or cover for
internal raids of accounts at worst. The much juicier story
pertains to 600 highly paid accountants on a Wall Street assignment.
It is too large to be kept a secret, since it is draining the sector
of its accounting staff for hire. The rumors are as thick as black
clouds. They are busily attempting to determine the financial
status of a large Wall Street bank loaded with a mountain of complex
derivative contracts. The toxicity is openly mentioned.
No secrets can be maintained. It is surely Morgan Stanley. The next
Lehman Brothers event is just around the corner. One is reminded
of an incident several years ago, where Ashanti Gold had to hire
a battalion of financial accountant experts in order to assess the
value of their crippled balance sheet overloaded by complex gold
forward sale derivatives. In other words, they needed to conduct
a formal study to determine if they were indeed dead. The same is
happening with Morgan Stanley, dragged down by a mountain of financial
derivatives. The better question is who ordered the accounting to
be done, to determine if a Wall Street firm was dead? And why?

CHINA
RECASTS GOLD BARS

China is well
along an ambitious plan to recast large gold bars into smaller 1-kg
bars on a massive scale. A major event is brewing that will disrupt
global trade and assuredly the global banking system. The big gold
recast project points to the Chinese preparing for a new system
of trade settlement. In the process they must be constructing
a foundation for a possible new monetary system based in gold that
supports the trade payments. Initally used for trade, it
will later be used in banking. The USTBond will be shucked aside.
Regard the Chinese project as preliminary to a collapse in the debt-based
USDollar system. The Chinese are removing thousands of metric tons
of gold bars from London, New York, and Switzerland. They
are recasting the bars, no longer to bear weights in ounces, but
rather kilograms. The larger Good Delivery bars are being reduced
into 1-kg bars and stored in China. It is not clear whether
the recast project is being done entirely in China, as some indication
has come that Swiss foundries might be involved, since they have
so much experience and capacity.

The story of
recasting in London is confirmed by my best source. It seems
patently clear that the Chinese are preparing for a new system for
trade settlement system, to coincide with a new banking reserve
system. They might make a sizeable portion of the new 1-kg
bars available for retail investors and wealthy individuals in China.
They will discard the toxic USTreasury Bond basis for banking. Two
messages are unmistakable. A grand flipped bird (aka FU) is being
given to the Western and British system of pounds and ounces and
other queer ton measures. But perhaps something bigger is involved.
Maybe a formal investigation of tungsten laced bars is being conducted
in hidden manner. In early 2010, the issue of tungsten salted bars
became a big story, obviously kept hush hush. The trails emanated
from Fort Knox, as in pilferage of its inventory. The pathways extended
through Panama in other routes known to the contraband crowd, that
perverse trade of white powder known on the street as Horse
Blow, or Boy Girl.

MONEY
DEBT ARE FAILING

The rabid rapid
creation of new money and new debt are failing in the system finally.
The perpetual Quantitative Easing has arrived, with failed traction.
It is failing just like perpetual 0% and the slipped stimulus, which
has no traction since the USEconomy lacks a critical mass
of industry and factories, those value added centers forfeited
eagerly to Asia for three decades. Diminishing returns on bond yield
support dictates that bond monetization must accelerate more quickly.
The effects are turning nil on short maturity bonds, but still minor
on effect with long maturity bonds. The concept perversely
goes parallel to negative returns on Gross Domestic Product from
new debt application to the system. Not only is debt failing,
but debt monetization is failing. Slippage is broad and becoming
worse. Quantitative Easing like the ZIRP are tools to apply sparingly
since they are toxic tools. The 0% policy wrecks capital broadly
and alters all pricing models. The bond monetization discourages
creditors, inducing them to leave the room. As both are needed in
increasing exponential quantities, the paper shamans cannot keep
pace. They lose the battle from inability to apply ever growing
magnitude, while attempting to conceal their high volume activity.
In time, like now, traction is lost and benefits vanish. The USFed
is stuck, and cannot stop expanding the money supply to cover bond
sales. The USFed intervention in the form of bond monetization
can never stop, period. Arguments on the other side as
illusory, meaningless, and distracting. To claim that the size of
their balance sheet is irrelevant, whether 10 billion or $10 trillion,
is truly contaminated thinking. However, almost all teachings and
dogma from the central bank has been toxic since 2007, founded in
pure heresy, acclaimed by all authorities.

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the rest of the article

July
5, 2012

Copyright
© 2012 Market Oracle