Thursday, May 18, 2023

How to Blow and then Pop an Everything Bubble for Dummies

This post was published at the Speakeasy on 3/31/23, a little over a month and a half ago. Some of the rates mentioned in the post are higher now. $IRX, or the 3-month T-Bill, was yielding 4.57%, and is now up to 5.1%. The IORB, which was 4.9%, is now 5.15%. The ON-RRP was 4.8%, and is now 5.05%. And the ECB's DFR was 3%, and is now 3.25%. Also, don't miss the bonus comments at the bottom, about how the gold market actually works. πŸ˜‰

In my New Year's post, I wrote:

Basically, the Fed controls interest rates by controlling the supply and demand of bank reserves (i.e., Fed liabilities). Before 2008, there was a naturally-low demand for reserves, and the Fed adjusted that low demand in two ways, by capping the rate banks paid for extra reserves when needed, and by adjusting reserve requirements. It controlled the supply of reserves in the system through open market operations, where it could increase supply by buying securities, or decrease supply by selling securities (buying back its own liabilities). But it was limited in how much it could increase supply by the naturally-low demand. If it raised supply above demand, it would lose control of monetary policy. Demand would turn negative. Interest rates would turn negative. Banks would shun depositors and start charging them interest on their deposits. Cash withdrawals would skyrocket, the dollar would plummet, and the dollar system would collapse.

The point is, the scarce reserves system before 2008 naturally constrained the Fed’s ability to print.

After 2008, it switched to an “ample reserves” system, where it controls interest rates by the rate of interest it pays on reserves parked at the Fed. This created a new demand for reserves.

You might remember this graph from Hyperinflation Update Update:
It shows that up until 2008, most of the money in the commercial banking system was backed by (and created by) loans. Since then, loans have held steady while total deposits kept rising.

What happened was, by creating a new demand for bank reserves, the Fed eliminated the constraint, was suddenly able to create an unlimited supply of bank reserves, buy an unlimited amount of securities, and indirectly finance the United States government, the housing market, and virtually any market it desired. In other words, QE became possible.

Anyone remember OBA/Topaz and his theory that the $IRX zero boundary was the Fiat System's Rubicon? Basically, he predicted that when the $IRX (3-month T-bill yield) turned definitively negative, it would be game over for the $IMFS. Here are a handful of his comments I picked at random to refresh your memory. You can find all of his 625 comments from 2009 to 2015 here and here. I don't know what happened to him, I haven't heard from him, and he never joined the Speakeasy:

Of course, it never happened. We never breached the zero bound, even as we bounced off it for almost nine years (2008-2015 and 2020-2021). Here's the $IRX chart:
And here's the FFR chart:
And now we know why rates didn't go negative. It's because at the height of the GFC in 2008, the Fed switched from a scarce reserves regime to an ample reserves regime, and ran what is called a "floor system" monetary policy. From Just Another Hyperinflation Update #4:

The Floor with High Balances approach is essentially how the Fed ended up conducting monetary policy starting in October 2008… The Fed continued to conduct policy using a floor system as successive rounds of QE increased the quantity of reserve balances further. It then officially adopted the floor system implementation approach in January 2019 (see “Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization”).

When the staff evaluated a floor system in 2008, they envisioned a much more modest floor system than what transpired. The approach was expected to require about $35 billion in reserve balances, and the interest rate on reserve balances was expected to be 10 to 15 basis points below the fed funds rate. The Fed currently estimates that $2.3 trillion in reserve balances are necessary to implement a floor system. […]

The Fed’s estimate of the quantity of reserve balances required to implement a floor system has increased dramatically over time. In March 2016, the New York Fed raised its assumption about the level of reserve balances needed in equilibrium to $100 billion.[4] In 2017, it raised it to $500 billion.[5] The FOMC did not specify the quantity of reserves it thought would be necessary when it made its decision to use a floor system in January 2019, but in March 2018, the New York Fed put its estimate of that level at $600 billion; by September 2019, it had more than doubled its estimate to $1.3 trillion.[6]


In September 2019, a mismatch in the supply of and demand for repo financing led to a sharp spike in repo rates and unsettled repo markets for a week. In “Reserves were not so Ample After All,” Copeland, Duffie, and Yang (2021) attribute the dislocation in part to an insufficient supply of reserve balances, then $1.45 trillion.[8] The New York Fed has estimated that a buffer of at least $350 billion above the structural demand for reserves is needed to account for variation in reserve balances, which would put the amount needed to conduct a floor system at $1.8 trillion.[9]

That estimate has not been tested. In response to the September 2019 turmoil the Federal Reserve expanded the supply of reserve balances, and the Fed’s massive purchases of government securities in response to the COVID-19 pandemic increased the supply further. […]

Reserves balances a year ago were $3.96T. Today they are $3T, down $960B year over year (YoY), but still well above the Fed's current estimate of $2.3T needed to implement a floor system. That means that reserves (aka base money, or Fed liabilities) make up about 12.7% of the total assets held by the US banking system right now, down from 17.4% a year ago, a 27% decrease.

Today, the Fed controls the amount of reserves in the system through QE and QT. QE adds reserves, and QT removes them or extinguishes them. QE also tends to lower interest rates because the Fed is buying debt securities, which adds demand to the market for debt securities, which tends to raise the price of those securities, and a higher price equates to a lower interest rate (this is an important point to keep in mind, that price and interest rate have an inverse correlation). But the main way the Fed controls interest rates is the floor system. It sets a floor under interest rates by paying interest on the reserves it added through QE.

The Fed created a new kind of demand for reserves in 2008 with IOER, Interest on Excess Reserves (now, as of July 2021, changed to IORB, or Interest on [all] Reserve Balances). The amount of reserves demanded by the banking system has been growing ever since, and the Fed has been miscalculating that demand ever since.

So, QE pushes prices up, rates down and adds reserves, and the interest rate the Fed pays banks on those reserves sets the interest rate floor. Here is IOER from 10/9/08 through 2021 (discontinued on 7/28/21):
And here's IORB from 7/29/21 through present:
In Europe, the ECB didn't adopt the floor system until mid-2014, the same time it started QE. But with rates already at the zero bound in 2013, EuroQE pushed them definitively negative, and the ECB set a negative floor. Here's the ECB’s deposit facility rate, or DFR. It's basically like the Fed's IORB, and it was negative from June of 2014 until 7/30/22, when the ECB raised it back to zero, and then hiked it from there. It currently sits at 3% while the Fed's IORB is at a whopping 4.9%:
Again, that's the same timeframe as the ECB's own QE program, called the "Expanded Asset Purchase Programme" which ran from mid-2014 until March of 2022, when it began tapering its purchases through June before raising rates in July.
Click twice to view a readable image:(Source - dated Sept. 2021)

Did you notice in that ECB excerpt from 2021 that even short-term government bond yields went negative? It seems to defy logic, doesn't it? Who would ever buy a bond with a negative yield? Why didn't we cross OBA's Rubicon? And why wasn't it the end of fiat currency?

The answer is simple. It was a bubble. And in a bubble, yields don't matter, only rising asset prices matter.

Think about rental properties. Why would anyone buy a rental property at a price where they could never make a profit, or even break even, renting it? It's the same as a negative-yielding bond. They buy it to flip it, not to hold an income-producing asset.

Think of all these tech companies with billion dollar valuations that do nothing but lose money. It's all a bubble. Everything is a bubble, and the Fed just popped it.

It's been this way since at least 2015, when I wrote:

What the world needs now is a grand liquidation of overinvested, overvalued, unprofitable economic assets. It needs a grand reboot! But that's not going to happen through the nominal deflation the deflationists hope for. That would be like unwinding a Ponzi scheme. Sure, markets will collapse, and that's what I'm waiting for, but the Fed will respond. Do you think the Fed will raise rates next week? I really hope they do, but they probably won't. Eventually, however, they will be printing and buying everything in sight, because, in the real world, in extremis, that is their only mandate.

FOA: Many of you have read countless opinions as to why our credit markets would implode into deflation as a "Mises" style economic theory surfaced to control the controllers. Truly, these people confuse theory with human action as much as they do not understand real physics! Indeed, strings that cannot be pushed are either thrown or cast aside in the real world.

What the world needs now is a good, old-fashioned hyperinflation! That'll fix shit. And you better get ready, because it's coming! πŸ˜€

Ever since 2008, the Fed has been stuffing the banking system with reserves, and the money supply with deposits. I'm going to go over the mechanism one more time, because I know there are still some out there claiming that QE never left the banking system due to our two-tiered money, at least not until the Fed started purchasing securities directly from non-banks.

It is true that our money system is based on two tiers of money, one for banks which we'll call reserves for the purpose of this post, and one for you, me, non-banks and everyone else, which we'll call deposits for the purpose of this post. It is also true that when the Fed buys securities directly from non-banks, deposits and reserves rise simultaneously. But the same happens when the Fed buys securities from banks, whether it be Treasuries or MBS or some other kind of debt security. It just doesn't happen simultaneously. Reserves go up at the point that the Fed buys the security from a bank, and deposits go up at the point that the debtor who the security funded either spends or deposits the borrowed funds.

As I have said before, this chart alone proves that deposits increased in line with QE in the early years:
But this one from John Hussman is even better, as it overlays Fed balance sheet growth and commercial bank deposits:
The increase is not exactly 1 for 1 from 2008 to 2019, but it is almost exactly 1 for 1 from 2019 to the peak in 2022. Of course, 2020 was the big $3T pandemic emergency liquidity injection, but it is noteworthy that from the REPO crisis in 2019 until the peak of both the Fed's balance sheet and commercial deposits in April of last year, almost exactly a year ago, both increased by almost exactly the same amount ($5.1T on the Fed's BS, and $5.2T in deposits).

This is noteworthy because it means that there's likely a 1 to 1 correlation as the Fed is now shrinking its balance sheet, and indeed there is. For every reserve dollar that the Fed retires, a deposit dollar disappears as well.

The point of all this is that the Fed's response to the GFC was to flood the system with money, both reserves and deposits, essentially cash which is normally a non-interest-bearing asset. And indeed, it drove interest rates to zero for most of a decade. Also, remember that as interest rates fall, the prices of debt securities rise, so as the Fed put a floor under interest rates (at zero), it was also essentially putting a ceiling on the price of the securities.

This is relevant because it forced all that money to go in search of a yield elsewhere, which inflated the everything bubble. As debt was capped at no yield, the great asset inflation was underway.

Another important concept you need to understand is that all those deposit dollars, those normally-non-interest-bearing assets, don't flow into other assets. You know this, but it needs to be said. They flow through assets, and end up as deposits in the sellers' accounts. There are only a few ways deposits can actually leave the banking system, and that’s when they are borrowed by someone with a reserve account at the Fed, like the US Treasury or the FHLB, when they are withdrawn as physical cash like you would do at an ATM, when loans are repaid and the banks shrink their balance sheets, or when the Fed sells an asset or lets one mature without reinvesting the proceeds. Theoretically, deposits can also disappear if a bank fails and the government decides not to make large depositors whole, but that's probably not going to happen.

Other than that, all that money is basically trapped in the system. It circulates, but someone, somewhere, is always holding it.

Here's how Hussman puts it:

By early-2022, the Fed was forcing the public to choke down a breathtaking 36% of GDP in zero-interest money, passing like stale, re-gifted fruit cakes from one holder to another (how’s that one Dave?), fueling yield-seeking speculation in every security that might offer the hope of something more than “zero.”


Given that the Fed has created $8 trillion in liabilities, someone has to hold them either: 1) indirectly as bank deposits, where your bank earns 4.65% interest from the Fed on the reserves that back your deposit, and thanks you for being part of its profitable “zero-interest deposit franchise”; 2) indirectly in a money market fund, where the money market fund receives “interest” on ON-RRP transactions with the Fed, or; 3) directly as currency you just pulled out of the ATM.

That’s it. The Fed created a mountain of liabilities, and someone has to hold them. Whenever someone waxes rhapsodic about all the “cash on the sidelines” waiting to “go into” some other market, they’re basically telling you they haven’t learned how equilibrium works. Every security that’s issued, even base money, must be held by someone until it is retired.

And The Economist:

But money does not actually flow into these [money-market] funds, for they are unable to take deposits. Instead, cash leaving a bank for a money-market fund is credited to the fund’s bank account, from which it is used to purchase the commercial paper or short-term debt in which the fund wants to invest. When the fund uses the cash in this way, it then flows into the bank account of whichever institution sells the asset. Inflows to money-market funds should thus shuffle deposits around the banking system, not force them out.

The point is, when you hear that total deposits are shrinking, which they are, it's not as simple as them running to Treasuries, or MMFs, or stocks or bonds or real estate, or any asset for that matter. For the most part, that money is captive in the system, so for deposits to be shrinking, something systemic is happening, and it's probably being driven by the Fed.

Now, let's look back to 2008 – 2022 and the great (asset) inflation. During that time, deposits grew by more than $11T. Total deposits reached $18T in 2022, up from less than $7T in 2008. That's a lot of new money, but it's really not that much when compared to the great asset inflation, which encompasses stocks, bonds, real estate, private equity, VC, art, you-name-it. All that went up by a lot more than $11T total, and that’s because money doesn't go into assets, it circulates. It flows through them.

Think of all those zero-interest reserves and zero-interest deposits as hot potatoes, or re-gifted fruit cakes. They circulated with a certain velocity driven by zero interest rates as depositors became buyers of assets, and sellers of assets became buyers of different assets, and so on and so forth, in both tiers of our money system, the banks and the rest of us. This is what drove the great asset inflation from 2008 until 2022: Lots of new zero-interest hot potato money printed by the Fed.

The “excess deposits” are there because the Fed put them there. According to the most recent FDIC quarterly banking profile, the U.S. banking system had $17.9 trillion of deposits as of the third quarter of 2022, with estimated insured deposits of $9.9 trillion, leaving $8 trillion of deposits that exceed the FDIC insurance limit. It is not a coincidence that the U.S. banking system also has nearly $8 trillion of bank deposits in excess of bank loans. They are there because more than a decade of “quantitative easing” took bonds out of the hands of the public and replaced those bonds with zero-interest bank deposits.

Meanwhile, overvalued long-term securities dominate portfolios because yield-starved investors and banks couldn’t tolerate the perpetual zero-interest rate world created by the Fed, and felt forced to reach for yield. All of those holders – investors, banks, pension funds, everybody – reached for yield, driving the equity market to valuations beyond their 1929 and 2000 extremes; driving interest rates to historic lows; driving the risk-premiums on low-grade debt to levels that still provide little margin of safety; encouraging speculative new issues of stock and covenant-lite debt; encouraging Silicon Valley Bank and others to invest their excess deposits in securities that might offer them something more than zero. (Hussman)

Then, about a year ago, the Fed started paying real interest on reserves, and everything changed.

That new demand for reserves which the Fed created through the floor system was sent into overdrive. But even before that, the Fed raised the overnight reverse repo rate (ON-RRP, or just RRP, same thing). ON-RRP is like IORB, only for non-banks, mostly money market funds (MMFs). MMFs used to invest mostly in commercial paper and Treasuries, but now about 40% is in ON-RRPs.

Here's the timeline:

2015-2017: The Fed slowly begins raising rates.
2018: The Fed slowly begins contracting its balance sheet, which removes reserves from the system.
9/17/19: REPO market crisis. REPO rate spikes to 10%, so the Fed pivots and starts cutting rates and adding reserves.
March 2020: Pandemic financial crisis. Stock market crashes. ON-RRP jumps from $1B to $285B in about 2 weeks. The Fed quickly takes FFR and ON-RRP back to zero and floods the system with $3T in newly-printed reserves and deposits over the next 3 months. ON-RRP drops back down to about $1B and the stock market recovers all March losses by August.
June 2021: The Fed raises the ON-RRP rate from zero to 0.05% (5bp), and total RRPs jump from $450B to $1T. The Dow plateaus at 35K (it's currently under 33K).
3/17/22: The Fed starts raising rates and slowly contracting its balance sheet. It raises the FFR from 25bp to 50bp, and the RRP from 5bp to 30bp. RRPs jump from $1.5T to $2.3T in 3 months. The Fed continues hiking rates for the entire year. FFR went from 0.25% (25bp) on 3/16/22 to 5% today (500bp). And the RRP rate went from 0.05% (5bp) on 3/16/22 to 4.8% (480bp) today.

Let's talk about ON-RRPs. Fed liabilities come in three forms: Federal Reserve notes, aka FRNs or physical cash (26%), Reserves (44%), and RRPs (30%). This is all base money. The Fed doesn't count RRPs as base money, but I do, because they make up almost a third of the Fed's current total liabilities. RRPs currently sit at $2.6T on the Fed's balance sheet:
The Fed created its ON-RRP facility in 2013, in preparation for eventually raising rates off the zero floor. It's a way to pay non-bank depositories like money market funds an interest rate similar to, but slightly less than, the IORB rate it pays banks. Use of the facility went from $0 on 3/17/21 to $2.4T on 3/31/23:
Let's go back to The Economist:

Inflows to money-market funds should thus shuffle deposits around the banking system, not force them out.

And that is what used to happen. Yet there is one new way in which money-market funds may suck deposits from the banking system: the Federal Reserve’s reverse-repo facility, which was introduced in 2013. The scheme was a seemingly innocuous change to the financial system’s plumbing that may, just under a decade later, be having a profoundly destabilising impact on banks.

In a usual repo transaction a bank borrows from competitors or the central bank and deposits collateral in exchange. A reverse repo does the opposite. A shadow bank, such as a money-market fund, instructs its custodian bank to deposit reserves at the Fed in return for securities. The scheme was meant to aid the Fed’s exit from ultra-low rates by putting a floor on the cost of borrowing in the interbank market. After all, why would a bank or shadow bank ever lend to its peers at a lower rate than is available from the Fed?

But use of the facility has jumped in recent years, owing to vast quantitative easing (qe) during covid-19 and regulatory tweaks which left banks laden with cash. qe creates deposits: when the Fed buys a bond from an investment fund, a bank must intermediate the transaction. The fund’s bank account swells; so does the bank’s reserve account at the Fed. From the start of qe in 2020 to its end two years later, deposits in commercial banks rose by $4.5trn, roughly equal to the growth in the Fed’s own balance-sheet.

For a while the banks could cope with the inflows because the Fed eased a rule known as the “Supplementary Leverage Ratio” (slr) at the start of covid. This stopped the growth in commercial banks’ balance-sheets from forcing them to raise more capital, allowing them to safely use the inflow of deposits to increase holdings of Treasury bonds and cash. Banks duly did so, buying $1.5trn of Treasury and agency bonds. Then in March 2021 the Fed let the exemption from the slr lapse. Banks found themselves swimming in unwanted cash. They shrank by cutting their borrowing from money-market funds, which instead parked cash at the Fed. By 2022 the funds had $1.7trn deposited overnight in the Fed’s reverse-repo facility, compared with a few billion a year earlier.

After SVB’s fall, America’s smaller banks fear deposit losses. Monetary tightening has made them even more likely. Use of money-market funds rises along with rates, as Gara Afonso and colleagues at the Federal Reserve Bank of New York find, since returns adjust faster than bank deposits. Indeed, the Fed has raised the rate on overnight-reverse-repo transactions from 0.05% in February 2022 to 4.55%, making it far more alluring than the going rate on bank deposits of 0.4%. The amount money-market funds parked at the Fed in the reverse-repo facility—and thus outside the banks—jumped by half a trillion dollars in the same period.

For those lacking a banking licence, leaving money at the repo facility is a better bet than leaving it in a bank. Not only is the yield higher, but there is no reason to worry about the Fed going bust. Money-market funds could in effect become “narrow banks”: institutions that back consumer deposits with central-bank reserves, rather than higher-return but riskier assets. A narrow bank cannot make loans to firms or write mortgages. Nor can it go bust.

As I said earlier, deposits and the Fed's balance sheet are down almost exactly the same amount from a year ago (down $620B on the Fed's BS prior to SVB, and down $602B in deposits). That's more than $600B disappeared from both tiers of our money system, reserves and deposits, in just the past year.

RRPs have a similar effect. As the total amount of RRPs rises, it doesn't show up as disappearing deposits, but it has the same effect, at least temporarily. It also converts liquid bank reserves, one form of Fed liability, into illiquid (to banks) RRPs, another form of Fed liability. So, as RRPs rise, they pull deposits out of the great asset inflation circulation game, and they change bank reserves into RRPs, which can't be used for clearing or redemptions, and which don't earn the bank any interest. So we can add the $2.4T that went into RRPs over the past two years, to the $600B in reserves and deposits that disappeared over the past year, and that's $3T gone from the $11T in deposits and $8T in reserves that the Fed created since 2008, and which has been inflating the everything bubble.

So, the Fed created a new kind of demand for reserves in 2008, and then sent it into overdrive this past year by cranking the IORB up from 0.15% to 4.9%:
This while more than a third of all reserves either disappeared or were converted to illiquid, interest-free (for the banks) RRPs.

Meanwhile, we saw a spike in "advances" (reserves being borrowed) from the FHLB. The FHLB annual report for last year came out a week ago, on 3/24, and Andrewe1 noted this:

"Sorry, one more comment on the FHLB report. The increase in advances of $470 billion from 2021 occurred mostly in the last three quarters of 2022 (I took a quick look at the 2022 quarterly reports), $146B in Q2, $140B in Q3 and $164B in Q4. So the $470B net increase of mostly less than 1-year terms could just be a ramping up to higher level of activity before reaching steady state or not. Will need more information. But it’s interesting that the activity really began after the Fed launched its rate hiking."

In a report dated 2/23/23, Bill Nelson of the Bank Policy Institute writes:

In a 2013 New York Fed blog post “Who is Lending in the Fed Funds Market?”, Afonso and colleagues report that fed funds lending (and therefore borrowing) fell after the GFC to one-fourth of its pre-GFC level. They attribute the decline to the expansion of the Federal Reserve’s balance sheet and to the payment of interest by the Fed on reserve balances. Banks now hold such large amounts of extra reserves that there is no need to redistribute liquidity at the end of the day. Currently, the federal funds market consists almost entirely of loans from FHLBs (which have extra funds to invest and have accounts at the Fed but do not earn interest) to the U.S. branches of foreign banking organizations, who borrow the funds and deposit them at the Fed, earning the spread. FBOs are the main participants in these transactions, because it is slightly cheaper for them to do so than domestic commercial banks, owing to how deposit insurance premiums are calculated.

This may be another drain on deposits, because if banks are borrowing reserves from the FHLB simply to park them at the Fed and earn the IORB spread, rather than lending them to borrowers which creates deposits, then the FHLB may be facilitating a net drain on deposits in the banking system. The FHLB gets those reserves by borrowing from the bond market. This drains deposits from the banking system until the funds are relent to someone else. But if they're simply being hoarded for free money from the Fed, then it's the same effect as net-borrowing by the FHLB, which I mentioned in my last post:

"That’s a $300B to $400B increase in FHLB net-borrowing over the past year, which could possibly account for the $361B YoY decline in deposits."

This may all sound deflationary, and it is. It's how you pop an everything bubble that you spent the last 13 years inflating. You remove a good portion of the money that was circulating through any and all assets to inflate it, and you suck the rest into interest-bearing "facilities".

Investment losses have emerged since early 2022, both because inflation pressures forced the Fed to normalize rates after 13 years of zero-rate financial repression, and because extreme valuations are never sustained indefinitely. Sudden banking strains in the U.S. and Europe, the British pension crisis last year, all of these are just symptoms of an unwinding bubble. The same process is underway in the equity market, and the downside risk remains absurdly high. (Hussman)

In the area where I now live, housing prices are even higher than they were last year, and last year they were higher than the year before, which was when I bought. But nothing is selling, because the monthly cost of a mortgage has gone up 60%, which should equate to about a 38% drop in prices.

Debt markets are quick to respond to a liquidity contraction like this. Real estate, not so quick. Stock market, also not so quick, but it's coming.
By now we all know how these rate hikes have impaired debt securities on bank balance sheets. But there's so much more damage that's already baked into the cake that we haven't even seen yet. I think what we're going to see over the coming weeks and months are a series of seemingly-unconnected crises, as various sectors of the everything bubble are forced to acknowledge what has already happened.

I don't want to get into any specific predictions, because this encompasses everything. But just to give you an idea, I think that a lot of projects that were started a year ago or more are no longer viable, for a whole list of reasons, so I think we could see a great abandoning of projects, accompanied by some unexpected and surprising unemployment it will create. I think that credit which was plentiful is about to become scarce, which will cramp a lot of lifestyles. And as these things start to cascade, watch what happens to the big funds. You know, the ones that manage all the pension funds. If you thought the banking system's balance sheet was impaired, wait until the non-banks are forced to acknowledge what has already happened.

Oh, and guess who was just given the Paul A. Volcker award yesterday, by the National Association for Business Economics… yup, good ol' Janet "There will never be another financial crisis in our lifetime" Yellen:

You can't make this stuff up.

Things are getting spicy, so you need to stay frosty, and keep an eye out for this guy:
My current window for DEFCON 3 is between now and Juneteenth, with a special focus on May, just FYI. πŸ˜‰

Happy April Fools Eve, and watch out for fools this weekend! 🀑


A Banking System Running a Currency of its Own

The following is a series of comments from the Speakeasy back in January. The POG had just spiked up hard, and MDV asked:

FOFOA What do you suppose is going through the minds of the bullion bankers and those who control the ETFs?

I responded:

Due to what? The POG? or am I missing something that happened?

And he said:

Yes…I’d think if they were quitin the biz that 1650 was a better place.

Here was my reply:

Hello MdV,

OK, yeah, the POG hit a high of $1,923 today. That may seem unexpectedly high to someone who understands my reasoning that the price will collapse in the end, and that the end is near. If the end is so near, why isn't it collapsing? Why is it going up? Why is it so high?

First, here are some first principles to keep in mind when thinking about this:

1. The LBMA bullion banks dominate the paper gold (spot unallocated) market.

More than a quarter of a trillion dollars-worth of spot unallocated transactions occur daily with LBMA members on one or both sides of the transaction. There's no double counting in that number, and it's probably way low, but it dwarfs any other segment of the "gold" market, and therefore drives the POG.

2. The largest LBMA bullion banks can control the POG by expanding or contracting their bullion-denominated books.

This is not unlike how FTX and Alameda Research pumped the price of FTT to make themselves look like billionaires, or with BTC and Tether, how a few whales can control the price of BTC, holding it above $16K, but not letting it rise so fast that the bag hodlers decide to cash out. It's all about controlling the supply. And in the case of the POG, we're talking about the supply of LBMA bullion bank bullion-denominated liabilities.

Now, with these principles in mind, let's think about Bitcoin first. It dropped to around $16K and then just stuck there, as if someone was propping it up. If bag hodlers were still selling at $16K, then the whales had to buy BTC to prop it up. That costs real dollars. So the whales were expanding their BTC hodlings in the face of low demand to control the price, to keep it from falling below $16K.

Over time, demand would come back as people got used to the $16K price, and it would fluctuate between the whales buying or selling BTC to hold it steady. Right now, it's up to $20K. If my hypothesis is correct, then something spiked demand, and it's not necessarily millions of little people rushing into BTC. But whatever it is, the whales who've been controlling the price are probably not the ones pumping it up. Rather, I would think they are selling some of their supply into the spiking demand, to keep it from rising too fast, and perhaps to also bring their BTC hodlings back down to where they were a year ago.

Now think about the bullion banks managing the supply of their own bullion-denominated liabilities. And don't think about physical gold. This is only a matter of supply and demand in paper gold. The supply and demand dynamics in physical gold are disconnected from the POG due to the banking nature of the dominant "gold" market, and in extremis will have the opposite of the expected effect (the price of paper gold will collapse when physical supply can't be found).

When I see the price at $1,923, I'm thinking that the bullion banks are seeing a high demand for their bullion-denominated liabilities right now, and they are probably taking advantage of that to expand the size of their balance sheets, which brings in precious dollars, similar to how the BTC whales reducing their hodlings during high demand brings in dollars. That would, in turn, keep the price from rising so fast as to draw a lot of unwanted attention to gold.

So, what's driving that demand for paper gold? I don't think it's gold bugs, and I don't think it's central banks or sovereigns. I don't know what it is, but there are some things happening right now in the "gold" space.

JPMorgan, who just last month became a GLD custodian with talk about expanding GLD custodianship to Zurich, and possibly even New York, now wants to move into precious metals clearing in Zurich:

The Saudis suddenly want "to invest in mining assets globally," and have "inked another partnership agreement with Barrick Gold Limited, a subsidiary of Barrick Gold Corp."

On the physical side, London vault holdings are down 116.5 tonnes in December:

And the GLD inventory has hardly budged. It currently sits at 912 tonnes. It was at 906 tonnes at the beginning of December, and 918 tonnes when I wrote my New Year's post on 12/29. So it's up 6 tonnes from the beginning of December, and down 6 tonnes from about a week ago. And just for the record, JPMorgan's share hasn't changed since my post, so the 6 tonnes came out of HSBC.

As for the 116.5 tonnes that left London in December, I don't think any of that was LBMA reserves. I think it was all allocated, and, for whatever reason, the owners moved it out of London. My reasoning is based in part on the fact that I don't think the LBMA has any reserves other than GLD. Also, the LBMA vault holdings data includes the BOE vault which is all allocated, the data doesn't differentiate between allocated and LBMA reserves (or even mention reserves), and if it had been an allocation and delivery request (which would come out of reserves), I think we would have seen a drop in GLD. Instead, we saw GLD inventory go up in December while someone (could have been CBs, sovereigns or individuals) moved 116 tonnes out of London.

So, we have this apparent movement away from physical centrality (in London), and at the same time we are seeing a spike in demand for LBMA bullion-denominated liabilities (spot unallocated). Simultaneously, we have the Saudis and Barrick talking about a joint mining venture, and JPMorgan expanding its gold-supply-chain-financing business into Switzerland.

Here's another principle to keep in mind:

3. Whenever I hear about ventures or developments in gold mining, paper gold, bullion banking, GLD, or any other pseudo-gold-type stuff, my first thought is that it's more about finance and making dollars than about anything to do with the real stuff.

So, perhaps these various stories have some connection to the spike in demand for paper gold. It trades as a currency, so a spike in demand might come from hedging related to a flurry of pseudo-gold-type stuff happening all at once. I don't think it has anything to do with a spike in demand for physical. Not saying there is or isn't a spiking demand for physical, just that it doesn't affect the price, so it's not driving this POG spike we saw this week.

The apparent diversification out of London is consistent with a "quitin the biz" mindset. The high POG is merely a high currency price (exchange rate) on their own BB liabilities, which can be brought down to near zero on a moment's notice with a simple announcement. They could announce that there are no more reserves, or that they are quitting the biz, halting trading and redemptions, and cashing everyone out. Anything that destroys the perception of a connection between XAU and physical would work.

So I'm gonna just go with Mobgrazer's answer. I doubt they even noticed that the POG is back up to where it was a few years ago. In fact, I didn't notice until you commented on in! πŸ˜‰


Then, Jman hit me with this:

Can you elaborate a little more on the bullion banks ability to cap paper gold price rises? Is their balance sheet expansion capability big enough to offset a significant, fear driven, worldwide move away from the equity and bond markets? I have it in my head that the daily notional values traded in the world bond and equity markets would dwarf the $250 billion a day in paper gold, but am I off base here? I mean, if the BBs have unlimited balance sheet expansion, why would paper gold ever go up at all? Not questioning the end game when paper eventually fails, but just want to better understand the odds of what can happen in the meantime, prior to the demise of paper gold. Thanks man, always appreciate the BB education.

And here was my reply:

Hello Jman,

It's a simple matter of supply and demand. The bullion banks can increase supply, or decrease supply, because the supply we're talking about are their own liabilities.

If your mythical shift from stocks and bonds into gold that overwhelms the trading volume of the LBMA ever happens, then the LBMA will probably be halting trading at that time. Not because it is overwhelmed with demand, but because the $IMFS is collapsing. But, to be clear, I don't see that shift happening during the collapse. Freegold is a revaluation after the collapse, not a run up in the price during the collapse.

It is not my position that the bullion banks are actively capping the price of gold. The price of gold is naturally suppressed because of the nature of its dominant market, which is run by a structured system of banks, and exists as mere notations on their balance sheets.

They are not actively capping it, but they may be passively damping it. Volatility attracts unwanted attention to gold. Plus, passive damping may yield a marginal profit for the banks.

These banks are market makers in almost all of the various "gold" markets, futures, ETFs, and even other exchanges. So they have feelers in more than just the dominant, price-setting market, which is spot unallocated (their own liabilities). This means that they can sense demand differentials between markets.

If I see the POG is rising, I assume that there is strong demand for LBMA "currency gold," because that's the price-setter due to its overwhelming mass (think bowling ball vs. billiard ball). Let's say XAU (currency gold) demand is outstripping demand for futures, ETFs, or even correlated assets. That creates an arbitrage opportunity that the BB can sense before anyone else.

So, rather than match buyers with sellers and just let the price rise and let someone else take the arb, they simply expand their balance sheet, print new XAU, take the dollars, and then go buy the assets to back those new liabilities with the dollars. The demand differential will quickly disappear because the banks are adding supply to the market segment where demand is spiking, and adding to demand to other segments.

Thus, the price rise is relatively suppressed by the banks simply taking the marginal profit from the arb. That doesn't mean the price doesn't rise, just that it doesn't rise as much or as quickly as it would in a real market.

The gold market is different from any other markets because of the LBMA. There are other segments to the market, but they take the price that spot unallocated gives them, and if there's any price differential between market segments, someone arbs it away almost seamlessly.

As a gold bug, you have been trained to think of the gold market in a certain way, similar to other markets. You have been conditioned to think that physical demand feeds back into price through the futures market, and that when the price goes down it's because banks and CBs pounded it down. But there's a better way to understand the gold market that helps make the price movements make more sense.

Let's think about it very generally going back to the 1960s. The gold market in the 60s was basically the dollar, because the dollar was pegged to gold. So there was no gold market per se, other than the CBs managing the peg. That of course failed in 1971, and for the next decade the gold market was more or less a physical market trying to come to terms with the failure of the dollar peg.

The price was set by large London dealers who dealt in large wholesale quantities, and the US even auctioned off some of its gold in an effort to slow the rise which was making the dollar look bad. But volatility attracts the trader mindset, and ultimately, those who were most excited about gold were really just in it to get dollars. And that's when bullion banking came into its own.

The late 70s and early 80s were the beginning of bullion banking, which was a way of making dollars by putting gold back into that fractional reserve cage it escaped in 1971. They could print "currency gold" out of thin air, and they used it to finance Barrick, which turned out to be more of a dollar mining operation than anything else.

Of course, you know the story; one of the bullion banks collapsed in 1984 and had to be bailed out by the Bank of England, who subsequently formed the LBMA in 1987. And as you know, under this new fractional reserve system, the POG declined for the next 20½ years, from 1980 to 2001. Another warned that the physical reserves would run out if the price got below the cost of mining, which it did, and that's when we got Brown's bottom, where the BoE sold half of its gold to the bullion banks.

After that, they let the price rise. But, again, this is a market unlike anything else, because it's a banking system running a currency of its own. LBMA volume was huge from 1997-1999, but not quite as large in the early 2000s. But it was still big enough to dominate, and to therefore be the price-setter.

So, the price rise from 2001-2011 represents a rise in demand for paper gold. GLD is one of the outcomes of that demand. Paper gold was so popular that the bullion banks were able to create a new kind of paper gold that let gold bugs carry the cost of their physical inventory. I don't necessarily think this was how it was discussed in the beginning, but that's essentially what it is, and was, from the beginning.

Note that when the price drops in 2013, GLD is drained. When the price drops, that means a lower demand for paper gold. It doesn't mean anything for physical gold demand, because physical demand doesn't affect the price. In fact, Another told us that Asian buyers like to buy physical when the price goes down. So low demand for paper gold drops the price, and then the relative demand for physical from the East rises, thus we see physical leaving the paper gold vehicle of GLD during low paper gold demand.

This is key to adjusting your thinking: Changes in the POG give us information about the supply and demand dynamics of paper gold only. And since the BBs can control the supply, I'd just say that changes in the POG give us information about the demand for paper gold. Not physical, just paper.

As I showed above with the Asian preference for physical when the price drops, per Another, there may be an inverse correlation between the POG and physical demand. I'm not making that case, just pointing out the possibility. But here's a possible example:

Someone created a chart not too long ago that showed an apparent correlation between the POG and the net gold flow in and out of London, as seen in import/export data. It seemed to show that physical gold flowed into London when the POG was high or rising, and out of London when the POG was low or falling.

His explanation for this correlation was that high physical demand was not only driving up the POG, but drawing physical gold into London. And then when the price was falling, he said there was low demand for physical, so the gold was being sold to someone else, somewhere else. In other words, he says that physical supply and demand dynamics drive the price, and the chart he made proves it.

But the LBMA is not like other markets. The LBMA is a banking system that finances a large part of the global gold supply chain flow, and the LBMA’s physical reserves are the slack in that flow. Think of it as a rope. If it’s tight, i.e., there’s no slack, or any slack is being taken up, that would present as gold flowing OUT of London when physical demand was high (or higher than supply). Likewise, gold would be flowing INTO London when physical demand was low, or supply was higher than demand. London is like the reservoir in a river of physical gold flow.

That’s the opposite of what he was saying.

He was saying: high price = high physical demand = gold flowing into London.

But perhaps it should be: high price = high paper gold demand = low physical gold demand = gold flowing into London.

Take my coat-check analogy and pair it with the slack in the flow rope analogy, and think about GLD as the reservoir, or coat-check. Same idea.

In that case, you’d expect to see GLD inventory rising when gold is flowing into London, and declining when gold is flowing out of London. And that’s exactly what we see!

Again, I'm not trying to make a case for an inverse correlation between physical and paper gold demand. They can both be high, but it's the paper gold demand that drives the price. The apparent inversion may just be from one being marginally higher than the other at a given time.

The bottom line of this whole discussion is that the POG is pretty meaningless, unless you're buying or selling right now. In my opinion, it could potentially double before the LBMA goes kaput, but that's probably unlikely. I don't really give it that much thought. And for people who like to throw around prices like $10K or $20K because they think they're more reasonable than Freegold, they just don't get it.

When the LBMA is gone, it's going to be a whole different gold market. Perceptions of gold will be completely reset. Gold will be used differently. It will regain an ancient value it hasn't had in thousands of years, and things are so different today that you can't really draw a comparison between the two, at least not one that most people will understand.

Nor can you draw a connection between the current POG and one without the LBMA, because they are pricing two different things. You can't come up with a reasonable multiple, because they are two different things. When the LBMA goes away, gold will be set free from fractional reserve banking. It will be set free from use as a currency. It will be restored to pure wealth.

I'll leave it at that for now. πŸ˜€


I wanted to add a note about the LBMA trading volume mentioned in my comments. Back in 2015, the LBMA said it would start releasing volume or turnover data on a regular basis, just like it releases clearing data, which it has been doing since 1997. It essentially said, what we did with the 2011 liquidity survey, we’ll start doing on a regular basis “in the name of transparency.”

Clearing data is released monthly, and the data goes back to 1996, which they first released in 1997. What they publish is the average daily clearing volume for each month, and you can find it here. Daily trading volume is roughly ten times the clearing volume.

The 10:1 multiple comes from the 2011 gold liquidity survey, which revealed a 9.2:1 ratio of turnover to clearing volume. But that included data from only 36 of the 56 full members, or 64% of the LBMA members who might have turnover to report, versus 100% of the clearing members. So, it's probably at least 10:1, and maybe higher. Even the LBMA itself has said that turnover is ten times clearing.

But if you search for LBMA trade volume, you'll find something called LBMA Trade Data, which from what I can tell is garbage data that, beginning in 2020, the LBMA outsourced to NASDAQ, who publishes the data through Bloomberg Terminals and Refinitiv Eikon, both expensive subscriptions. If you have an expensive Bloomberg Terminal (which costs about $25K per year), you have access to the weekly volume, but if you want to see the daily volume, you have to pay an additional subscription fee. Not so transparent, huh?

And not only that, but from what I can tell, the data is complete garbage. For example, the LBMA page quotes average weekly turnover for the 12 weeks from October through December, 2022, at $228.82B, which would be $45.8B per day. The source of this quote is data that is "reported electronically (to NASDAQ) by LBMA members," which "makes it possible for market participants to gauge the size and shape of the London OTC precious metals market, the oldest and biggest financial market for gold in the world."

The problem is that the daily clearing volume for that same period was $31.2B, which would mean that the average daily turnover ($45.8B) was only a multiple of about 1.5x to clearing volume. That makes no sense, and we can have confidence in the clearing data, because it comes directly from the LPMCL, and includes data from 100% of the clearers.

Furthermore, the NASDAQ page boasts $174.33B as the "Record Single Days Volume". But how can the record single-day volume be $174.33B, when the 2011 survey said that the average daily volume for an entire quarter was $240.8B? Note also that clearing volume today is 20% higher than it was during the 2011 survey period.
The daily clearing volumes for the past two years have ranged from $25B to $38B. Applying the 10:1 ratio, we get a daily trading volume range of $250B to $380B, and the average is $324B. Compare that to the NASDAQ data which says the daily average trading volume is only $45.8B, and the all-time high was only $174.33B.

I should note that the WGC is using this LBMA garbage data too. But even so, it created this nice chart which answer's Jman's question: "I have it in my head that the daily notional values traded in the world bond and equity markets would dwarf the $250 billion a day in paper gold, but am I off base here?" This chart would say yes, if it could talk:
I don't know why the LBMA is putting out junk data, laundering it through NASDAQ, Bloomberg and Refinitiv, and then charging an arm and a leg to see it, but I can guess. No one ever said that the LBMA would operate in a fishbowl for all to see. ANOTHER said the opposite:

If you are searching for facts you will find them, but the items you find will not be true! Did you think that the high powered world of the LBMA would operate in a fishbowl for all to see? We cannot take what is on the outside as evidence for what is on the inside. To find the answer work with inside assumptions and extrapolate them to the outside!

Yup, that's what I do! πŸ˜‰

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Sunday, January 1, 2023

Happy New Year!

Year of the Perfect Storm

The Perfect Storm tells the story of the crew of the Andrea Gail, whose worst fears are realized at sea on Halloween of 1991, when they are confronted by three raging weather fronts which unexpectedly collide to produce the greatest, fiercest storm in modern history. There are no survivors.

A perfect storm is an unusual combination of events or things that produce an unusually bad or powerful result.

a critical or disastrous situation created by a powerful concurrence of factors. -Merriam-Webster

an extremely bad situation in which many bad things happen at the same time. -Cambridge

a very unpleasant situation involving several bad things.

a chance or rare combination of individual elements, circumstances, or events that together form a disastrous, catastrophic, or extremely unpleasant problem or difficulty.
-The Free Dictionary

In the movie, the doomed vessel faces a confluence of two powerful weather fronts and a hurricane, which the crew underestimates as it races to bring the damaged boat back to port. Then, just as they think there might be hope of making it out alive, a giant rogue wave appears, which overturns the boat and sends it to the bottom of the ocean.
According to Wikipedia, rogue waves (also known as freak waves, monster waves, killer waves, extreme waves, and abnormal waves) are unusually large, unpredictable, and suddenly appearing surface waves, which are caused by multiple waves merging to create a single exceptionally large wave. So the Andrea Gail was sunk in 1991 by a confluence of waves inside a confluence of storms, and in a metaphorical sense, I think we're in the same boat in 2023.

There's a lot happening in the world right now, and it's quite chaotic, so, to keep it organized, I'm going to focus on three storm fronts that I think are converging into the perfect storm, and three waves that I think will converge into a killer wave. They are the dollar storm, the geopolitical storm front, and the domestic political storm front, and then the financial, economic and monetary waves they will create. It's a perfect storm, and it has arrived.

You can read the rest of the post at the Speakeasy, and it's a long one! (See the side bar to subscribe.)

Here I'm giving you two posts from the past six months at the Speakeasy. The first is the fifth installment in my Debtors and Savers series. And the second one is the part of Fourteen which I left out back in August. This first one was posted at the Speakeasy back in July, so enjoy, and have a Happy New Year!

The Debtors and the Savers 2022

"I want to be clear, though, about one important thing. I’m not an activist. As bad as things may seem, I never advocate activism. I’m an observer and a realist, not a reformer and a dreamer. I advocate preparation for that which is coming. Being aware is being prepared. We don’t win by changing the people on the other side. We aren’t going to change their darkest values. We win because they have gone insane."

-The Debtors and the Savers 2020

The Debtors and the Savers is a conceptual corrective lens for the Marxist view that "the history of all hitherto existing society is the history of class struggle," between the rich capitalists and the poor laborers. The correction goes something like this: The history of all hitherto existing society is the history of monetary struggle, between the easy money camp, those who by nature prefer money to come easy, through printing, borrowing or simply taking it from others, living the easy life off the labor of others, dependent on a system that enables them to disengage from reality, those who I colloquially call the Debtors; and the hard money camp, those who by nature prefer to be independent, self-sufficient, to work hard and earn what they have, take care of their own, and to be left alone, those who I respectfully call the Savers.

The "struggle" is fortunately coming to a head right now. I say "fortunately" simply because the sooner the better. The longer this sucker drags out, the worse the transition will be, and it's already dragged out so long that we're facing a pretty rough transition as it is. I know that some of you don't like it when I say to lie low and sit this one out. I will deal with that issue directly in this post. I will explain why the choice is to sit it out, or be destroyed. But first, let's talk about REPOs, Eurodollars, shadow banking, stablecoins, Tether and system-busting bank runs!

Lev Interview

I listened to a good podcast the other day with a guy named Lev Menand. Lev graduated from college in 2009, and went to work at the Fed. While there, he worked with groups that were tasked with figuring out what happened in 2008, and how to keep it from happening again. Today he is an Associate Professor of Law at Columbia Law School, and he recently wrote a book titled, "The Fed Unbound – Central Banking in a Time of Crisis".
Lev does a good job of simplifying complex topics like REPOs, Eurodollars and shadow banking, and tying them all together in an understandable way. He draws comparisons with things like cryptocurrency stablecoins and Tether, which aid in understanding for those who know a little about these things. So I thought it was worth sharing some of his simplifications here.

The podcast is 2 hours long, and you can only listen to the first hour at the link. The second hour costs money, and it's in the second hour that he discusses these topics. The first hour is mostly a history of money, central banking and the Fed. So, I'm just going to paraphrase some of his explanations, from memory, and add a few of my own thoughts. I give him full credit, but I may adopt some of these simplified explanations going forward.

First of all, shadow banking is simply nonbanks (1. the REPO market, 2. money market funds) and non-US-banks (3. Eurodollars) that carry dollar-denominated "deposits" for customers (which are generally big companies; the little guy deposits his money in real banks, big players deposit big money in shadow banks). REPOs, Eurodollars and money market funds are all part of the shadow banking system. Tether is a shadow bank. Tether is a stablecoin. The Eurodollar is also a stablecoin (a non-dollar that is pegged to the dollar, and managed to mimic the value of dollar). The financial crisis in 2008 was a bank run on the shadow banking system (a run from non-dollar "dollars" into real dollars). Lehman Brothers was a shadow bank that failed before the Fed and the USG backstopped the whole shadow banking system.

There was another financial crisis in March of 2020 that was also a bank run on the shadow banking system. There was a massive bailout, and no "banks" failed. There was also a pandemic underway, so most people didn't notice the financial crisis, even though the bailout was nominally larger than 2008. In both cases, the nonbank non-dollar "dollars" of the shadow banking system were backstopped with real dollars, but nothing was fixed. There was some reform of money market funds in 2008, but other than that, the shadow banking system still exists as it did before, only now it has the confidence (some would call it the moral hazard) of knowing it's too big to fail.

But is it (too big to fail)? One of the points Lev makes is that no one knows how big it actually is. Not even the Fed knows how many non-dollar "dollars" are out there. He says that's part of the reason they stopped reporting M3, because in reality, they have no idea how much "broad money" exists. In reality, the shadow banking system is likely too big to bail, not too big to fail. And what the Fed is doing now (hiking rates) shows that it is focused more on its own credibility and high inflation than on financial stability right now. Lev thinks that another "quiet" bank run on the shadow banking system, especially outside of the US (i.e., Eurodollars), could be in the works. Remember, it's a bank run from non-dollar "dollars" into real dollars, which is why the dollar spikes during a run. His simple explanation of REPOs helps explain how this "bank run" actually happens. The Fed runs its own REPO and RRP markets with the banks, big broker-dealers and money funds, but the shadow banking REPO market is between nonbank broker-dealers and companies with lots of cash to stash. As he puts it, if you're a company with $50 million in cash, you don't go to Bank of America and open an account, you go to a nonbank broker-dealer and put it in the REPO market.

The technicalities of how it works are just that, technicalities. How it works in practice is like making a deposit at a bank, one where you earn a little interest. Only, you can earn more interest depositing at a nonbank than at bank, because a bank has to follow banking regulations, which cost money and eat away at your interest.

Now, as you know, when you deposit your money, even at a real bank, you are essentially loaning your money to the bank. The bank doesn't put your money in a safe, it uses it for other purposes. The same goes for a company depositing $50 million into the REPO market through a nonbank broker-dealer. It is essentially loaning that $50 million to the broker-dealer. But it's not structured as a loan. It's structured as a purchase of a security with an agreement that the security will be repurchased by the broker-dealer the next day (what are called overnight, or O/N REPOs). The security you purchased for a night yields some rate of interest, but you don't get the interest directly from the security. Instead, your share of the interest is worked into the repurchase price of the security. You buy it today at $X, and we'll buy it back from you tomorrow at $X+Y, with Y being your interest rate on the deposit.

Because it's an overnight process, it has to be rolled over each day, and most of the time it is. If you want to withdraw some or all of your money, you simply don't roll it over that day. But remember, just like the bank doesn't keep your dollars in the safe, the REPO broker-dealer doesn't keep your $50 million in cash either. So, if you don't roll it over, the broker-dealer has to sell securities to raise the cash, and not all securities are created equal. Some are harder to sell than others, and if you can't sell enough to raise the cash during a bank run, you go broke. That's what happened to Lehman Brothers.

So, in REPOs, a bank run happens when the "depositors" stop rolling them over en masse. Today, however, the nonbank broker-dealers are probably just Reverse REPOing (RRPing) the cash at the Fed. But not all of it. They will make a bigger spread buying riskier securities with a higher yield than the Fed's RRP rate, which is currently at 1.55% (which is the annualized rate).

That's 155bp (basis points). If you remember, when I wrote about this in July of last year, the Fed had just raised its RRP rate from 0% to 5bp, or 0.05% annualized, on June 21st, 2021. As soon as they did, RRPs almost doubled, jumping from $520B to almost $1T on June 30th, 2021. And that was for a mere 0.05%. Today the Fed's RRPs are at $2.27T (from 101 counterparties, i.e., real banks and shadow banks), earning 1.55%.

Money market funds are a significant contributor to that $2.27T in RRPs as well. In fact, I would guess that it's mostly shadow banks and not real banks in the RRPs at this point. Real banks can't do what shadow banks do due to banking regulations, and they are earning more than the RRP rate on their reserves anyway. The IORB or Interest Rate on Reserve Balances is currently 1.65%, 10bps higher than the RRP rate. I assume that some banks, like the Prime Dealer banks, are required to participate in RRPs to some extent for market making purposes, but with so much shadow bank money in there at this point, that's probably not necessary.

Money market funds are like the REPO market for the little guy. While the REPO market is only available to big money, money market funds give the little guy a way to hold nonbank deposits too, which earn a little more interest than real bank deposits. They do so by creating a mutual fund that buys higher-yielding securities, and the little guy can buy shares in that fund and get a piece of that yield. When he cashes out, he sells his share of the fund. The fund is pegged to the dollar, so it's like Tether, but if too many people cash out at once, it's going to have a hard time raising enough real dollars and holding its peg. That's called "breaking the buck". Money Market Mutual Funds (or MMMFs) are shadow banks for the little guy.

Whether we're talking about the REPO market or money market funds, we're talking about nonbank institutions taking in "deposits" and using them to buy interest-bearing securities, paying a little higher interest than real banks to the depositors, and pocketing the spread between the two interest rates. So, all this shadow bank money that is now going into the Fed's RRPs is pulling that money away from other interest-bearing securities, driving down their prices, and driving up their effective yields. And that puts upward pressure on interest rates across the board (and downward pressure on asset prices).

When I bought my home last November, a 30-year fixed rate mortgage was below 3%, the RRP rate was still 0.05%, and the IORB was 0.15%. 8 months later and the RRP rate is 1.55%, the IORB is 1.65%, a 30-year mortgage is now 6.5%, and it looks like the Fed is going to hike its Fed Funds rate another 75 basis points this week. If so, we could see the RRP rate hiked to 2.3% or higher, and the IORB to 2.4% or so. Just imagine what that's going to do to mortgage rates.

And here's where the "quiet" bank run on the shadow banking system, especially outside the US, might have already begun. No one knows how big the non-US shadow banking system, aka the Eurodollar system, is. And as the value of the securities it holds to back its non-dollar "dollars" gets pushed down, the credibility of its "stablecoin-like peg" to the dollar gets drawn into question. As foreign entities holding large balances of Eurodollars try to move those funds into real dollars, or even just into something else or some other currency, the Eurodollar system is forced to sell securities and buy dollars on the open market, because it doesn't have access to the Fed's discount window or RRPs.

This puts further downward pressure on security prices, upward pressure on interest rates, and keeps driving the dollar higher and higher, making it more and more costly to obtain. And if the Eurodollar's peg was already in question, this makes it worse, in a vicious circle that may be difficult to stop, due to the unknown size of the Eurodollar system, if it really gets going.

Fed swap lines with foreign CBs backstop the Eurodollar shadow banking system to some extent, but Lev makes the point that the Fed is apparently more concerned with domestic inflation and its own credibility right now than with what's happening abroad. Fed swap lines, which jumped to $583B during the 2008 shadow bank run/financial crisis, held the dollar under 90 at the time. During the March of 2020 financial crisis, they jumped to $447B and held the dollar under 100. Today, they are still at the baseline of $195M with the dollar soaring as high as 108. If there's a financial crisis brewing in the Eurodollar shadow banking system, the Fed is either thus far unaware of it, or doesn't care.

I don't want to put too much emphasis on the Fed and its choices and actions, however, because I don't think they matter that much in the big scheme of things. It's not like if the Fed does one thing, the system will collapse, and if it does another, it won't. When the system is ready to collapse, it will collapse. But understanding what's going on will make it less mysterious when it happens, and then you can explain to all of your friends what just happened, and why you have been buying so much you-know-what for so long. :D

In the end, it will be the USG, not the Fed, that drives the final nail into that coffin. The Fed, as Lev points out, is just a very blunt tool, working with limited information. It just turns on the spigot, and turns it off, then turns it on extra hard when things get bad. Tightening is another story. It's something the Fed is not very good at, though it thinks it should be. It's how the Fed typically fights inflation, however I suspect this inflation, this time, is not about loose monetary policy. It's more about the USG abusing the system.

The $IMFS is quite literally the USG's engine, its power plant. It is what fuels its many branches and bureaus and agencies and departments, and feeds its millions of stooges. And as with any engine, if you abuse it enough, and push it too far, eventually you'll throw a rod, or fuse a piston to the block, or blow it up, or whatever engines do when they die.

Lev understands money and how it works, and so does the Fed for the most part. But the USG most definitely does not. The USG, in case you haven't noticed lately, believes in the Magic Money Tree.

SDR Letter

I want to switch gears here and talk about something a little different, SDRs, and how the Democrats in Congress want the IMF to issue as many as 3 trillion of them, worth nearly $4T in US dollars, and use them to save the poor of the world from debt and COVID. They also want to figure out a way to "recycle" SDRs, circumventing the need for IMF approval, new issuances, and creating what they think will be a "cost-free" Magic Money Tree. This is really just a stunning example of how little the USG understands money, and how it thinks it works. This by itself is not going to end the $IMFS, but the more you know about how things work, and how they were abused in the final stretch, the more you'll be able to impress your friends and neighbors when it all blows up.

The following letter is dated July 12, 2022, less than two weeks ago, and was sent to Joe Biden and Janet Yellen by the Dems in Congress, signed by (among others) deep monetary thinkers like Elizabeth Warren, Corey Booker, Sheila Jackson Lee, Bernie Sanders, Rashida Talib, Ilhan Omar and, of course, AOC. Here's a link to the PDF on the congressional website, but I'm just going to reprint it here for convenience. It's only about 2½ pages:

Congress of the United States Washington, DC 20515

July 12, 2022

Joseph R. Biden, Jr.
President of the United States of America
The White House
1600 Pennsylvania Avenue NW
Washington, D.C. 20502

The Honorable Janet Yellen
Secretary of the Treasury
U.S. Department of the Treasury
1500 Pennsylvania Avenue NW
Washington, D.C. 20220

Dear Mr. President and Secretary Yellen:

We write to you amid deteriorating economic and humanitarian conditions around the world to request your support, and U.S. leadership, to help developing countries respond to the ongoing fallout of the COVID-19 pandemic, the resulting global economic downturn, and now, the devastating war in Ukraine. We in Congress must quickly approve essential funding toward global vaccination efforts as the Administration has requested in order to address the rise of variants across the world and fight the virus here in the United States. In addition, we urge you to immediately support a new issuance of at least $650 billion in Special Drawing Rights (SDRs) at the International Monetary Fund (IMF) — a simple, rapid, and cost-free way to enable Ukraine, its neighboring allies, and developing countries to respond to, and build back better from, these combined international crises.

The global reverberations of Russia’s illegal invasion of Ukraine are exacerbating an already dire situation for the poorest countries in the world, with global economic growth projected to slow from 6.1 percent to 3.6 percent for this year and 2023.1 As a result of what World Food Programme Executive Director David Beasley called a “perfect storm” of COVID-19, climate disruption, and war, 2 wheat prices have recently hit record highs. 3 Energy and fertilizer prices have also soared, imperiling food production and distribution. 4 The number of people facing acute food insecurity worldwide has already doubled since 2019, 5 and is expected to increase by 8-13 million people this year due to the crisis in Ukraine. 6 As Beasley said in no uncertain terms: “If you think we’ve got hell on earth now, you just get ready,” 7 adding, “Ukraine has only compounded a catastrophe on top of a catastrophe. There is no precedent even close to this since World War II.”8

Developing countries are bearing the brunt of these worsening conditions. Roughly 2.8 billion people — and nearly 85 percent of people in low-income countries — have yet to receive a single dose of a COVID-19 vaccine. 9 Estimated COVID-19 mortality borne by low- and middle-income countries represents 63 percent of COVID-related deaths10 and as much as 86 percent of all excess deaths. 11 UN analysis estimates that if low-income countries’ vaccination rate had been equal to that of high-income countries, their GDP would have increased by $16.27 billion, or 5.16 percentage points in 2021. 12

Furthermore, as a result of the disruption caused by the pandemic and long-existing structural deficiencies in the global financial market, over half of all low-income countries are now in or at high risk of debt distress. 13 In 2020, 62 countries spent more on servicing external debt than on health care; 14 growing indebtedness will likely lead to further reductions in spending on critical needs like health at a time when they are needed the most. Experts warn that, without action, the developing world may soon be plunged into a destabilizing debt crisis. 15 As many as 1.7 billion people in 107 economies may be exposed to this three-dimensional crisis of food, energy and finance. 16

The IMF’s issuance of $650 billion SDRs on August 23, 2021, proved to be a lifeline for low- and middle-income countries. In the six months since, at least 99 developing countries have made use of their allocation — many within weeks of the issuance — to stabilize their currencies, shore up reserves, pay off debts, and finance health care, such as vaccinations, and other urgent needs. 17 IMF Managing Director Kristalina Georgieva estimates that “low income countries are using up to 40 percent of their SDRs on Covid-related priorities, like vaccines and other essential spending.” 18 Nepal, for example, has used the entirety of its allocation, including for financing the purchase of vaccines and other pandemic needs. 19 Ukraine, which was already under severe financial strain prior to the invasion, used the majority of its 2021 allocation, reducing its onerous debt burden. 20 Many more developing countries—including Albania, 21 Benin, 22 The Gambia, 23 Guinea-Bissau, 24 Guyana, 25 Madagascar, 26 North Macedonia, 27 Paraguay, 28 SΓ£o TomΓ© and PrΓ­ncipe, 29 and Uganda30— have all used or committed to using their SDRs to support public health and combat the spread of COVID-19, with Liberia, 31 Pakistan, 32 Senegal, 33 and Sierra Leone34 using SDRs specifically for vaccine imports, production, and distribution.

While vital, this issuance was still insufficient to meet the scale of the crisis. Of the $650 billion that the IMF issued in 2021, roughly $209 billion went to developing countries (excluding China) 35—far short of the $2.5 trillion in emerging market financing needs estimated by the IMF at the beginning of the pandemic. 36 This is why Members of Congress, 37 hundreds of global lawmakers, 38 and development, humanitarian and faithbased organizations from around the world39 have called for an allocation of 2-3 trillion SDRs, and why the House of Representatives approved an allocation of 1.5 trillion SDRs as part of the 2022 State, Foreign Operations, and Related Programs (SFOPs) Appropriations Act. 40

While we strongly support the Administration’s efforts to recycle SDRs held by advanced economies for lower-income countries’ use through Congressional authorization, a new IMF issuance of $650 billion in SDRs is something the Administration can advance right now, under existing authorities. Such an issuance will immediately provide fresh financial resources to help developing economies to meet their critical public health needs, mitigate the humanitarian impact of skyrocketing global food and energy prices, reduce their debt burdens, and respond to and recover from the combined, ongoing crises. It would also be of particular value to the United States and some of its key allies. By boosting demand for U.S. exports, a new allocation has the possibility of creating hundreds of thousands of new American jobs. 41 The Ukrainian government, which called the August 2021 SDR allocation a “great gift for our country,” 42 has used the entirety of its SDR holdings, and Ukrainian Finance Minister Sergii Marchenko has specifically requested access to more SDRs as “a question of the survival of our country.” 43 A new allocation would provide the Ukrainian government with an immediate and vital $2.75 billion boost in its reserves—roughly 2.5 percent of GDP, following an estimated decline by 45 percent this year. 44

Developing countries, and the billions of people who inhabit them, are facing unprecedented challenges and need financial support now. We appreciate Secretary Yellen’s recognition that “we were less successful in supporting poorer countries” during this crisis and “the response to date is not to the scale needed.” 45 As COVID-19 continues to rage, as the reverberations of the war in Ukraine are felt around the world, and as the prospects of an equitable global economic recovery move further out of reach, we applaud her appeal to “ensure the IMF has the tools to fulfill its role of financial firefighter in the face of modern, potentially more frequent, global crises.” 46 In that spirit, we urge the United States to pursue this opportunity to provide cost-free relief worldwide. The United States has demonstrated its leadership and the value of the existing multilateral financial system and we ask that it do so once again. It is currently in the power of the administration to immediately act in support of a new $650 billion new SDR issuance for global relief. We urge you to do so. We thank you for your attention on this important matter.

Elizabeth Warren et. al.

You can see the rest of the signatures and footnotes on the PDF.

OK, first I want to do a little refresher on what SDRs actually are. SDRs are not a currency. They are not a claim against the IMF as an institution. In fact, the IMF itself holds some SDRs. They are not a loan from the IMF. They are a POTENTIAL claim on any foreign currency, which usually means the US dollar. SDR stands for Special Drawing Rights, so if you have SDRs, you can use them to draw some foreign currency, usually the dollar, which the Fed will print from thin air.

Think of them as kind of like a credit line. As a little guy, say you’ve got a credit card with a limit of $10K that's maxed out. Then your bank raises your limit to $100K. You now have a POTENTIAL claim on an additional $90K, but you don't actually have that $90K in your bank account. SDRs are like that credit line you haven't used yet in that you don't actually have that money in the bank, yet. But they are different in that, once you use them and get the money, you don't have to pay it back.

They are also the unit of account used by the IMF. The value of an SDR is calculated by a basket of foreign currencies: the US dollar, the euro, the yuan, the yen and the UK pound. But there aren't any of those currencies set aside in an IMF "basket" to back the SDR. There is no offsetting purchase of any of those currencies when an SDR is created. And when you use an SDR to draw some foreign currency, you don't get that basket of currencies, you get all one currency, whatever currency you want, which usually means dollars.

SDRs were first introduced in 1969 (and distributed in 1970) as a last-ditch effort to save the Bretton Woods system. The idea was that they would be given free to all members equally, according to their quotas (so not in equal amounts, but proportionally, relative to their size), and they could be used in lieu of dollars or gold in maintaining each currency's fixed exchange rate with the dollar. In essence, they were welfare for weak currencies that were low on reserves.

Since we don't fix exchange rates anymore, today's SDRs are being used as a "cost-free" form of welfare to "low income, emerging market and developing countries," to buy things like vaccines, food and energy, and to pay down their debt. The IMF creates the "cost-free" SDRs out of thin air, hands them out according to quotas, then the poor countries exchange them for dollars from the Fed, which the Fed prints out of thin air, circumventing all other checks on monetary handouts, like monetary policy (QE), budgets, congressional approval, or increasing the national debt. It's voluntary, so the Fed isn't forced to take SDRs from anyone it doesn't like, for example Russia, who is also a member of the IMF and gets its own allocation of SDRs.

I used the term "cost-free" in quotes because it appears in both that letter from Congress, and on the IMF website. Here's what the IMF website says:

An SDR allocation is cost free. Allocating SDRs does not require contributions from donor countries’ budgets. SDRs are a reserve asset, not foreign aid. Most importantly, an SDR allocation does not add to any country’s public debt burden.

Notice the line where they say that SDRs are a reserve asset, not foreign aid. This is entirely untrue today. SDR allocations (to everybody) have only been given out a handful of times. There was the initial allocation of SDR9.3B in 1970, and a second allocation of SDR12.1B in 1979. The next one wasn't until 2009, in response to the GFC in 2008. The 2009 allocation in total was SDR182.9B. And the one after that was the most recent, SDR456.5B, worth $650B in US dollars, given out less than a year ago, on August 23, 2021.

Somewhat ironically, due to the quota system, the countries that receive the most SDRs can't do anything with them, and the poorest countries get the fewest. For example, out of last year's allocation, Germany received 25.5B SDRs, nominally worth US$33.6B, but it can't do anything with them. The US received 79.5B SDRs worth US$105B, and again, there's nothing we can do with them. (They're trying to change that, btw, to make it so we can give them out as foreign aid without the need for a new general allocation from the IMF to everybody. That's what they're talking about in the letter when they say, "we strongly support the Administration’s efforts to recycle SDRs held by advanced Economies…")

Meanwhile, Nepal received 150M SDRs, worth US$197M, the entirety of which was spent on COVID vaccines. And Ukraine received 1.9B SDRs worth US$2.7B, which it had already spent before the war with Russia even began. Reserve asset my ass. As the letter from Congress states, and footnotes, "at least 99 developing countries" cashed in their SDRs within 6 months of receiving them, "many within weeks". That's called foreign aid.

Now, like REPOs, the technicalities of how SDRs work are just that, technicalities. How they work in practice is the unfunded, raw printing of welfare money for poor countries. This money is not borrowed or taxed, it is simply printed by the Fed. That said, I will show you some of the technicalities, so that you can snoop around if you want to, and see what's going on.

The IMF has two departments which keep separate books. One is the General Department, and the other is the SDR Department. The General Department represents the IMF as a distinct entity, while the SDR Department is more like a consolidation of the members. It's similar to the distinction between the ECB and the Eurosystem. The General Department actually holds some SDRs as assets on its balance sheet, currently 22.2B of them worth US$29B, which show up as liabilities on the SDR Department's balance sheet.

When new SDRs are created, everyone receives an asset and a corresponding liability. The asset is called the "holding" or "SDR holding", and the liability is called the "allocation" or "SDR allocation".

So your liability is to the SDR Department, and on the SDR Department's balance sheet it shows up as an asset. Likewise, SDR holdings by members show up as liabilities on that same balance sheet:

Here's Ukraine's financial position in the IMF as of 2/28/22. The link is in footnote 20 on the letter from Congress. Notice that its cumulative allocation (since 1992 when it joined the IMF) is 3.237B SDRs. Those are Ukraine's liabilities to the IMF SDR Department. Its holdings as of 2/28/22 were down to only 13M SDRs:

Here's the breakdown of the 2021 allocation. You can see that Ukraine received 1.928B SDRs worth $2.7B on 8/23/21, and it was down to 13M SDRs worth $17M by 2/28/22. So, Ukraine cashed in $2.687B worth of SDRs in just the last year, and that was before any money it received after the war began.

You might be wondering, why not cash it all in? Why leave $17M on the table? Well, there is an interest rate you pay, in SDRs, when you cash them in:

The SDR interest rate on the date of last year's allocation was 0.05% (incidentally the same as the RRP and 3-month Treasury rates at that time), and 13M SDRs was about 0.5% of Ukraine's allocation, so it was holding back 10 years' worth of interest payments.

As you can see, the interest rate is based on a weighted average of the exchange rates and interest rates of the currencies in the SDR basket, and, of course, both the dollar's exchange rate and interest rates have gone up since then. So if we check the current SDR interest rate, we see that it's now 1.373%:

At that rate, Ukraine's 13M SDRs would only cover about 4½ months of interest rather than 10 years! See how brutal the "strong dollar" can be?

But wait, here's something interesting. Remember that the link to Ukraine's SDR position in the letter from Congress was for 2/28/22? Well, let's see what it is now…

Well, look at that! Somehow Ukraine got another 2.14B SDRs, worth another US$2.8B. That's more than they got last year in the 8/23/21 allocation, and somehow they got it without a new allocation. Notice their liabilities haven't changed. Also notice that they had these new SDRs as of June 30, 2022, and the congressional letter asking for a new allocation was dated almost two weeks later, on July 12, 2022.

Just for fun, I went back and checked Ukraine's position in March, April and May, to see when they got the additional SDRs, and it really jumps around. March 31 – 1,014B SDRs; April 30 – 953.47M SDRs; May 31 – 902.89M SDRs; and now June 30 – 2.153.93 SDRs. It looks to me like someone is giving them mucho SDR-ohs each month and they're cashing them in as they go. So, isn't it interesting that the letter from Congress used the 2/28/22 snapshot in its footnotes, when Ukraine's position was at its lowest, since it was using Ukraine's need for more money as a primary reason for the letter? (Ukraine is mentioned 7 times in the letter.)

This is where you can snoop around if you want to, and try to find more SDR shenanigans. Just use the dropdown menu, and check different countries on different dates:

You'll find that Russia hasn't cashed in any holdings in the past year. Neither has Iran. Here's the current US position:

Notice that we have 4.28B more SDRs/assets (worth $5.63B but valued at $5.2B on the Fed's balance sheet) than our cumulative allocations/liabilities. That's from raw printing when others redeem their SDRs for cash. It may not seem like much, but it has tripled since last year's allocation. That's 2.833B SDRs we've taken in in the past year, for which we printed about $3.75B, most of which went to Ukraine.

For comparison, the next two in line behind us are China and Japan. Since last year's general allocation, China has taken in 1.9B SDRs (compared to our 2.833B), which means China printed US$2.5B-worth of yuan (compared to our $3.72B). Number three, Japan, took in 742M SDRs, printing about US$975M-worth of yen.

That's a total of about 5.5B SDRs which we know were cashed in for dollars, yuan and yen following last year's allocation. The 15 countries mentioned in the letter from Congress as having cashed in some or all of their SDRs had a combined allocation of 6.07B SDRs. So 5.5B is right in the ballpark. That's a nominal value in dollars of about $7.25B that was printed out of thin air, 52% of which was US dollars, 34.5% Chinese yuan, and 13.5% Japanese yen. Of the roughly $3.75B US dollars we printed, at least 70% went to Ukraine.

Again, I realize that this doesn't sound like a very large number in today's world, but this use of SDRs as a form of raw printing for foreign aid is a fairly new thing. And this gives us a glimpse at the scope of it. From a US$650B allocation of new SDRs (more than twice the number of all previously-issued SDRs combined), about US$7.25B-worth of new cash gets printed out of thin air, with no debt, asset purchases or taxation backing it up. Pure global MMT.

That's a printing rate of about 1.1%, and the Dems would like the IMF to issue another $4T-worth of SDRs, according to that letter, to help the entire world get vaxxed and out of debt. At 1.1%, that would mean about US$44B printed. But that's not enough. That's not what they want. They want US$2.5T-US$3T printed for global welfare, which translates to about 273T SDRs. See how math can be fun? :D

And to the former gold writer who wishes not to be named, who brought this to my attention, I finally solved the mystery of the missing SDRs. It's so simple it's almost embarrassing.

He asked me if central banks carry SDRs as assets in a greater quantity than the IMF carries them as liabilities. He wrote: I don't see the 650 bil or so SDR liabilities in their BS:

The answer is in the date of the snapshot taken on that statement. It's dated April 30, 2021, and the last allocation didn't happen until August 23, 2021.

So we take the 660.7B total SDRs as of today, subtract the 8/23/21 allocation of 456.5B, and we get 204.2B total SDRs as of 4/30/21. And if we add up the total allocations from the SDR Dept. BS…
111.895B + 92.302B, we get 204.197. It's a match!

For clarity, 111.895B was the total allocation to all countries who had cashed in some SDRs as of 4/30/21, and therefore had fewer SDR holdings than their allocation. And 92.302B was the total allocation to all countries who had bought SDRs from other countries, and therefore held more SDRs than their allocation.

These numbers show that of all SDRs used, i.e., actually exchanged for foreign currency, in its entire 52-year history, 15% happened in the last 11 months. Like I said, this idea of issuing new SDRs as "cost-free" foreign aid is a fairly new thing, and the Dems in Congress just got wind of it.


I wrote the first Debtors and Savers post in July of 2010, twelve years ago this month. The second one was two years later, in 2012. Then it was four years until the third one in 2016, and another four years until the fourth one in 2020. This is the fifth in the series, and I'll note that it is coming only two years after the fourth. It kind of feels like I have come full circle: 2-4-4-2. Things slowed down for a while, now they are moving fast.

In hindsight, things are much clearer than through a crystal ball. The first Debtors and Savers featured Karl Marx and his prediction of the breakdown of capitalism as a result of class struggle, basically between the owners and the workers. Turns out it's just the Marxists, undermining society to destroy it.

The second one featured a self-described Marixst named Ash, who liked to attack me on another blog, writing a series of five or six posts purporting to debunk Freegold using Marxist concepts. He also wrote a post called The Orkin Man, which I characterized in 2012 as a "batshit-crazy worldview." The idea in The Orkin Man was that people like "Uncle Joe" Stalin, Mao and Pol Pot were the Orkin Man of their time, purging (by killing) their "class enemies" from society, and that we need to find an Orkin Man for today. "Who gets to be the Orkin man?", he wrote. "What is rotten must be removed." At the time, I thought it was a fringe, extremist view. I have since learned that it is more common than you can imagine. If you ever wondered how leftists can look back fondly on the French and Communist Revolutions, this is how.

The third D&S was inspired by Trump winning the Republican primaries, which I saw as a repudiation of Progressivism, or Cultural Marxism, which I thought had peaked with absurdities such as Bruce Jenner, dressed as a woman, gracing the cover of Vanity Fair, and laws allowing men dressed as women to use women's public restrooms and locker rooms. Trump won alright, but things just kept getting more and more insane.

The fourth one was in July of 2020, almost two months into the George Floyd riots, and 3½ months out from the election. I didn't pretend to know who was going to win, but I knew that whichever way it went, things were going to get ugly. I wrote in my New Years post that year, "Something big is going to happen this year. I know this for a fact, because, at the very least we have another presidential election this year, on Nov. 3rd. And either Trump will be reelected, or someone else will be elected, and either way, half of the country will be very unhappy with the result."

Even though I didn't know who was going to win (because I knew the other side was going to cheat), there was one thing I was pretty sure about. I was pretty sure that Joe Biden wouldn't be the candidate. He was the presumptive nominee at that point, but I was pretty sure they were going to nominate someone else at their upcoming convention. I did get one thing right, though. In D&S2020 I wrote, "If Biden (or whoever the Democrat candidate is on Nov. 3rd) wins, then the revolution is on and it’s open season on the Right."

I was wrong about Biden, though, because I was missing a crucial piece of information that I would only learn after the election. They never wavered on pushing Biden through because they had a secret weapon, a failsafe, an ace in the hole. It's like a turbo booster on their election machine. I don't think they wanted to use it, because they didn't use it until something like 4AM, the morning after the election, but they knew they had it in their back pocket if they needed it. It's what looks like this when graphed:
Most of you probably know that I did a livestream the night of the election, which ran all night long, from 8PM Pacific until 7:30AM Eastern. That's 8½ hours. What you may not remember is that I didn't announce the livestream ahead of time. I usually announce them at least a day ahead of time, but I didn't announce this one until 7:15PM, only 45 minutes before it began. The reason was, I wasn't going to do it unless Trump was winning, so I waited until enough results had come in that it looked like a sure win for Trump.

By 7:15PM (10:15PM Eastern), Florida had been called for Trump, British betting markets had flipped to Trump winning, and Trump was leading the popular vote by 1.7M, which was significant that early. It wasn't going to be the landslide that some had hoped for, but it was a good bet at that point that Trump was the winner, so I decided to do the livestream. In terms of that graph, we were livestreaming this whole time, so we were awake all night, and some of us watched them push that turbo button in real time:
We don't know exactly how it works, but I have seen enough pieces of it, some clearly seeded with enough disinformation to throw the whole discussion in doubt, but I've seen enough to have a good idea of the scope of it. And what I've been able to put together since 2020 is that this is something that has been in the works for a long time, and it's still far from perfected. It probably began shortly after this. And it's not just in the US. It has probably been tested all over the world for almost 20 years now.

The turbo button probably wasn't available in 2016, at least not at the scale of a national US election, or they probably would have used it then. I think it's something new, at least at this scale, and that's why they didn't really want to use it. It was risky to use at this scale, because it risked exposing the whole project. And it did expose it, because we're talking about it now. So far they've skated, but the truth is out there and they know it. So I don't think they dare use it as boldly this year as they did in 2020. They can't risk it this soon. Their secret weapon is no longer a secret, so too many people will be watching too closely. The risk is too high right now, so they won't have their ace in the hole this time.

Probably the most important takeaway from what I've learned since the 2020 election is that elections are their Achilles' heel, and they know it. And, because they know it, they will always protect it at all costs. But they also have a second Achilles' heel which they don't know about, and that's what will bring them down. More on that in a moment, but first let's talk about elections.

Did they cheat in 2008 and 2012? Well, let's just say that earlier versions of their election machine were in operation at those times. 2016, however, caught them off guard. They thought they had 2016 all sewn up. Remember all the polls giving Hillary a 99% chance of winning, right up to election day? That's because they thought the fix was in. But Trump simply got too many votes, so they had to give up the White House for a while. Luckily (for them) they had enough allies (and corrupt or compromised opponents) inside the government to prevent a full transfer of power, and they set out to take it all back in the next presidential election.

Then, again in 2020, they thought they had it all sewn up, but once again, Trump got too many votes, and they had to use the failsafe turbo booster button. The extra vote injection took them over the top, but at the cost of exposing the machine they’d spent two decades refining. Granted, it’s still operational (it hasn’t been dismantled, yet), but it has been exposed.

So, elections are now their biggest problem. They won the last one, barely. They didn't win fairly, but they did win, and they now control the US federal government, and all of its departments, agencies and bureaus. That's a whole lot of power that they control, and they know it. And they are currently using it and abusing it, no holds barred. As ByiamBYoung noted, it's depressing to watch.

But elections are now their biggest problem, their weakest link in the chain of time, and there's another one coming up in a little more than 3 months. They can’t win this November in a fair election, and they can’t rig it either, at least not to the extent that the outcome is certain. Same goes for 2024.

From their perspective (put yourself in their shoes), they need certainty for the 2024 election. They’re not going to just lose in 2024 and hand the power back, they’re in too deep. It’s existential for them now. There are too many skeletons in too many closets that they can’t let anyone anywhere near the closets. It’s all or nothing for them now. But if they lose ground this year, it will make securing the outcome in 2024 much less certain, and riskier for each of them individually.

That’s why I think they want to make a move this year, before November.

That's why I named it YOTC. If it doesn't happen before the election, then something is likely to happen right after, likely before the end of the year. I can't say specifically what that thing is, but it has to do with nullifying the MAGA vote. There's no North and South like there was in 1861, so it's not like that.

They don't need an all-out conflict with the right. They couldn't win that anyway. They just need to crush anyone who gets out of line, and declare anyone who doesn't support the outcome of the 2020 election a domestic terrorist. The game is to suppress the MAGA vote in that way, but it will fail in the end because their power plant (the $IMFS) will fail in the process.

That's their other Achilles' heel, the one they don't understand. The one they won't protect, but will instead abuse to the nth degree (which they already are), eventually throwing a rod, fusing a piston, or simply blowing it up.

Even with all that they control in the federal government, they don't have enough forces to come after everybody. So they'll only come after those who aren't lying low. Those who stick their necks out will get their heads chopped off. Those who make a stand will be crushed. They simply have too much power right now. We can't win this one by fighting back. But when they can't pay their forces anymore, it'll end.

Sitting this one out simply means staying on defense while they have all the power, because sooner or later they are going to shoot themselves in the foot, the one with the other Achilles' heel. :D

They are going above and beyond full retard right now, not just because they actually are above and beyond, but also to delegitimize the USG in the eyes of millions on the right, in hopes that there will be some civil disobedience, or worse. Then they will come in and crush those who disobeyed. That's the game right now, and it could easily escalate. Activist disobedience is foolish right now, but defensive disobedience is necessary. Don't be the fool. Make it to the other side.

COVID, The Jab, Monkeypox, J6 Hearings, Ukraine, and Everything Else

I know that there have been lots of twists and turns over the past few years, so many that it can feel overwhelming. But just because you didn't see them coming, doesn't mean they changed where the river ends. It ends with the brutal transition to a new monetary system, one not based on the US dollar.

"Because we are speaking of currencies here, the transition will be brutal!" -ANOTHER

That hasn't changed. The European central bankers knew it in Belgrade in 1979, they knew it in 1988, it's what ANOTHER wrote about in 1997, it's what I've been writing about since 2008, and it's still true today.

Also, gold will not be part of the new monetary system like it is today, trading as just another currency on the FOREX. It will be set free (i.e., Freegold), because bullion banking will not survive the transition. Bullion banking is like a shadow banking system for physical gold, and like the dollar shadow banking system, it will experience a run. But unlike the dollar shadow banks, there will be no one to bail it out. It's like a stablecoin, pegged to the physical market, and like Tether, sooner or later it will end.

ByiamBYoung's comment really drove home how overwhelming all of these other things can seem, but don't let them distract you from what you have always known, at least since you've been here. It hasn't changed. Subjectively, perhaps you had some unrealistic (in hindsight) expectations, or biased perceptions, but objectively it hasn't changed.

FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma.

The debtors are in charge. They won the election. They have all the power right now, and lots of it. Arguably (of course), they can be blamed for all of those depressing distractions. The savers, meanwhile, are hunkering down, falling back, and preparing for what is coming, knowing that the debtors' engine, their power source, cannot run without fuel, oil and upkeep. They watch, as the debtors rev that engine like it's a Tesla running on magic electrons that come from magic electron trees. They lie low and wait, knowing that soon it will catch fire, and being so disengaged from reality, they won't have a clue what to do about it. We wait.


Back in August, I posted the beginning and the end of my 14th anniversary post from the Speakeasy, but I left out the middle portion which was about 80% of the post. I'm not posting the beginning again here because it is unnecessary, but you may want to go read it again. Here's the link:

And here, we pick it up where I left off:

Let's start by clarifying the DEFCON analogy, since DEFCON 4 might not seem very serious when DEFCON 1 is the highest. First, we have never been at DEFCON 1. The military term for DEFCON 1 is "Cocked Pistol." It's the "This is it, it is now" moment, to quote someone named Jim. On a global basis, in fact, the US military has never been higher than DEFCON 3.

The most famous example of a DEFCON 3 is immediately following the 9/11 attacks, then it was lowered back to DEFCON 4 three days later. The most famous example of a DEFCON 2 is the Cuban Missile Crisis in 1962, when the Strategic Air Command was raised to DEFCON 2 for 22 days, while the rest of the military remained at DEFCON 3. Again, the US military as a whole has never been above DEFCON 3.

So, the jump from DEFCON 4 to DEFCON 3 is a really big deal. The Danger Zone is DEFCON 4. In my terms, we are now at DEFCON 4, with a good chance of moving to DEFCON 3 before the end of the year. If not by the end of the year, then before 2025 for sure, with the probability rising with each day that passes. And in any case, we don't return to DEFCON 5 until it's over. That's what's different about this year from past years.

(I should note that the US military is currently at DEFCON 3 due to the war in Ukraine, and will not return to 5 until it's over. It was at DEFCON 5 during most of the Trump administration, occasionally moving to 4 when there was a terrorist threat. It was at DEFCON 4 through most of 2021, and has been at DEFCON 3 through all of 2022. It's possible that the DEFCON system is now under political control, so I just want to clarify that my use of the analogy as it relates to the $IMFS and the brewing internal conflict is totally separate from the current military use of the DEFCON system.)

I called a Danger Zone on 9/17/19, the day the overnight REPO rate spiked to 10%. That post ended with the line (from Nosh), "The smell of Lehman is in the air." Then on 10/9/19, I wrote, "The danger zone continues." And on 1/22/20, I wrote, "Hang on tight, because we’re still very much there. We’re still very much stuck in the danger zone, as far as the eye can see."

Less than two months later, we had a financial crisis, a run on the shadow banking system that was nominally larger than 2008, but hardly anyone noticed, because A) there was no Lehman moment, and B) COVID. That was followed by bailouts, lockdowns, riots, massive cash giveaways and the 2020 election, and somehow the $IMFS survived.

2020 was full of surprises that no one saw coming. It was the epitome of the Danger Zone, and yet we seemingly returned to DEFCON 5. It's certainly debatable whether we ever actually returned to DEFCON 5 or not, and I did say that we were stuck in the Danger Zone "as far as the eye can see," but I think we have crossed that horizon, and can now see the end.

So, while we may very well have been stuck at DEFCON 4 since 9/17/19, there are two main differences between then and now. In 2019, nobody could have seen what 2020 would bring, at least not all of it, but now I can see what's coming. Also, while the Danger Zone was an easy call that day in Sept. of 2019, no one could have taken it as far as I can today, and make the call that we'll be at DEFCON 4 until we move to DEFCON 3, without ever returning to DEFCON 5 before the end.

The basis for my call is that the $IMFS can't survive the conflict, and the conflict is simply unavoidable. I don't say that as an advocate for conflict, but as a passive observer who has run countless scenarios in my mind, calling it as I see it, and preparing for the worst while hoping for the best. The best and worst, however, are merely different possible variations of the $IMFS-ending conflict.

If you don't get the concept of the conflict that I outlined in my New Year's post, and I know some of you don't (especially those outside of the US), then I'm afraid I can't explain it to you. You'll just have to write this one off under #KFW, and if you don't know what that means, just ask. I'm sure someone will tell you.

And that doesn't mean that I know what the proximate cause of the collapse of the $IMFS will be. There are plenty of wildcards out there that could pop this sucker even before the conflict finishes it off. Russia and China are openly talking about their desire and plans to break the dollar system and the LBMA. Our own government is openly abusing its own currency. The Fed is (wittingly or unwittingly, doesn't really matter) playing with fire, and there's something going on with Eurodollar liquidity right now which I haven't quite figured out.

The point is, there are plenty of technical hurdles the dollar must navigate just to keep moving, as there usually are. And there's always some probability or likelihood that one or more of them will take it out, although so far it has proven to be more robust than expected. But now we have this internal conflict brewing inside the US, concurrent with and inextricably linked to a supply/demand-driven inflation/deflation conflagration that will, in the end, destroy the $IMFS.

I have long discussed US dollar hyperinflation in simplistic and theoretical terms. But now that I see it unfolding in the real world, it's a bit more complicated, as you'd expect.

First, we already have serious price inflation in necessities like food, shelter and energy, and for most people, that means a shortage of money to spend on anything else. In the case of food and energy, it is supply-driven inflation, meaning it's not people consuming more food and energy that's driving up prices, it's that there's not enough food and energy to supply what people are used to consuming.

For shelter, the housing market, it's demand-driven inflation, meaning too much easy money and easy credit chasing real estate for profit rather than shelter. It is a bubble, and it is currently slowing down. The higher end of the market has more staying power than the lower end, but the higher end pulls the lower end up in price even as sales drop off a cliff. The real pain, however, is felt by the renters, as rents rise to match the bubble prices.

In the US, 1 in 3 households rent their home. That's 44 million households out of a total of 123 million households. If you want to see some real anger, go find a local Facebook marketplace group, where people occasionally advertise their investment homes for rent. Find one that allows comments under each listing, and read the comments complaining about rental prices now versus even just a year ago. Renters are mad as hell right now, and don't forget these landlord memes from D&S2020:
Meanwhile, Target stores' profits collapsed 90% in the second quarter of this year compared to last year, from $1.82B last year, to $183M this year. People are simply not buying the things that Target sells, which are non-essentials such as home goods, clothing and electronics. All of their money is going to necessities like food, rent and gas.

Target is just one example, but it's a good one because, like the price inflation in necessities, it happened this year. This past quarter, Target "was forced to slash prices to clear unwanted inventories of clothing, home goods and electronics… warned that it was canceling orders from suppliers and aggressively cutting prices because of a pronounced spending shift by Americans as inflation cuts into spending on non-essential items."

So, right now we have price inflation in essential goods, and price deflation in non-essentials. Something that goes hand-in-hand with price inflation and deflation is shortages and gluts. Shortages in essential items, and gluts of non-essential items. This is an expected step on the run-up to full-blown hyperinflation, which I wrote about as early as 2009, in a post called The Waterfall Effect:

"There is a quote I like that comes from Le Metropole Cafe. It goes, "we will have deflation in everything we own, and inflation in everything we use." This is partly true. It is true during the run up to the rubber band snapping. It is true until we hit the waterfall."

Meanwhile, the Fed is purportedly trying to fight supply-driven price inflation in essentials by killing demand. It is pulling money (i.e., "demand") out of the money supply by shrinking its balance sheet and raising interest rates. This is monetary deflation, and it is more likely to cause asset deflation in things like the stock, bond and housing markets than to help those who can barely afford the essentials. In fact, it will make things like food shortages even worse, by killing the economy that keeps store shelves stocked. Some even think that's the goal, an "active measure" in the brewing conflict, or at least that the Fed is doing the bidding of the administration.

The Fed may also decide to reverse course from monetary deflation to monetary inflation, due in part to the price deflation in non-essential items that we just discussed. But that will not stop the price inflation in things like food, shelter and energy. And when that gets bad enough, we're likely to see price controls on essentials. Price controls lead to empty shelves and hyperinflation.

In any case, there are multiple vicious circles at work right now, so it's going to get much worse before it gets better. The administration is working overtime to conceal inflation in ways that will only make it worse. So don't think that anything is being fixed. It's going to break before it gets fixed. You can't fix it, all you can do is prepare.

These two videos are kind of a side bar. They were something I just stumbled across while doing an image search for "empty shelves hyperinflation", and I thought they were worth sharing (even though they have few views and come from a small account with only 572 subscribers which hasn't made a video since January). I thought they might spark a useful discussion in the comments, and I pretty much agree with all of the points he makes in this next one.

I know they are not all practical for most people, like paying off all debt, or moving out to the country and raising chickens. But I think it's at least worth thinking about why they might be good ideas for some people, even if they don't work for you. The idea with debt is that, as the prices of essentials keep rising and eventually skyrocket, debt service may become a stressful burden, and the stress may cause some people to make mistakes at exactly the wrong time. What I did with some debt, personally, was I took advantage of my recent move to consolidate what little debt I had into a 30-year fixed rate loan with a small local bank, which I hope to pay off with revalued gold.

It's a small percentage of my overall position, which I could pay off if I sold some gold, but the consolidation brought a meaningful reduction to my monthly expenses, as did the move itself. Even so, I am still starting to feel the pinch of inflation at this point.

Regarding the video, I should mention that I know some of you are making the hyperinflation debt play. And while I hope it works out, I have never advocated it as a play because I don't think it's a sure thing. As long as you have enough income to comfortably carry the debt, it's a fair gamble. Theoretically, your nominal debt will get hyperinflated away and you'll be able to pay it off with a few small coins. I get that as well as anyone, but I'm not making that play. I'm fine with just the coins, and as little debt as possible, for convenience. I'm trying to keep it as simple as possible.

OK, so, getting back to why we're not returning to normal (DEFCON 5) before the end (the transition we've all been waiting and preparing for), what guarantees this outcome is the US system of national elections. We have regularly-scheduled national elections every two years, and a presidential election every fourth year. You could do a countdown timer, because they're hard and fast dates. I'd do one, but they changed a few things on WP and it's not as simple as it used to be. Anyway, there are now 77 days left until the midterm elections, and 805 days until the presidential election in 2024.

There are two bitterly-divided sides in the US today, and neither one is backing down. There is no middle ground. It's a different situation than in other places around the world, for many reasons. And the divide is more complicated than you think. If you think you understand it completely, then I guarantee that you don't.

This next presidential election, in 805 days from now, is not just another election. The last two presidential elections, in 2016 and 2020, were extraordinary events, each in their own right. And together they set the stage for this next one, which is going to be ultra-extraordinary. There really aren't words to describe the magnitude of what I'm trying to say, so I'll just leave it at that.

One side has all the power right now, and the other side has more than enough people to win even a moderately-fair election. By the way, the two sides are not the Republicans and the Democrats, or the conservatives and the liberals, or even the Left and the Right. It's a little more complicated than that. More on that in a moment.

Now, I know what some of you are thinking (hi BF and Matrix! :D). You're thinking that the sheep are never going to wake up and take back their country. You're frustrated at how passive the Right, or MAGA, or whatever we want to call them for convenience, are. And I agree! We (I'll include myself in this group) are not activists. The other side are the activists. Always have been. They want to cause change, we want to preserve, or conserve. We are passive or reactionary, but one thing we are good at is getting out the vote (without the need for get-out-the-vote ad campaigns).

This is a problem for the other side, the side that has all the power right now. It's a problem because of the US system of regularly-scheduled national elections. The last two elections were so extraordinary because the first one shocked the hell out of the other side (they DID NOT see THAT coming), and the second one shocked the hell out of our side (I say "our side" because I think most here are on the same side, while acknowledging that I know a few of you are not).

As the midterms approach, the side with all the power is showing its hand. While our side is showing strength at the polls, which is what we do, the other side has made it clear that they will use and abuse the massive power that they control to crush and delegitimize the other side.

That's what the tweet above is about. Michael Hayden was a four-star general in the Air Force, and he was director of the NSA, the DNI and the CIA, all under a Republican administration during the first eight years of the War on Terror. And he's saying, quite clearly, that MAGA is more dangerous than ISIS.

Here is Dick Cheney, the (Republican) VP during that same time period, saying that in our nation's 246-year history, there has never been an individual who is a greater threat to the country than Donald Trump:

Oops, wrong one. Here you go:

These are two people who held office at the highest levels of government during the War on Terror, now saying that Trump and the 70 million Americans who voted for him are a greater threat. But it's not just them. There are plenty more of lesser stature and on the Dem side of the aisle saying worse things about their political opponents. This is political warfare. We're showing up to vote, and they're waging political warfare.

Someone sent me a Doug Casey interview the other day, and there was a piece I wanted to quote from it:

Doug Casey: Every country across space and time has the same assortment of people, by character anyway. We have the same kind of people in the US as did the French in 1789 or the Russians in 1917. Our own versions of Robespierre, Napoleon, Lenin, and Trotsky are coming out of the woodwork, and they can see that this is the moment to act. They’re much more interested in power than anything else.

Our own versions of those types are coming to the fore. The average American is confused and rolling over—he doesn’t have any philosophy or ideology to counter them. So, we could have a variation of what happened in France or Russia.

There is a new term I've come across recently (at least new to me). It's stochastic violence. It's the idea that if you inflame enough people with inflammatory rhetoric, there is a statistical probability that someone will eventually snap and resort to violence. If you look it up on Twitter, it's almost entirely people on the left using the term against the right as a means of silencing, for example, criticism of sex-change medical procedures on kids. Here's an example:

But to me this looks like projection, because the inflammatory rhetoric seems to be coming mostly from the left, directed at Trump supporters in particular, calling them domestic terrorists. Stochastically, it serves to incite leftist mob violence (riots) against those being labeled as domestic terrorists, it may push some Trump supporter(s) into doing something really stupid, and it also gins up public support for more mass prosecutions and gulag-like imprisonment like we saw with J6.

This Trump-supporters-as-domestic-terrorists narrative is being amplified at scale right now, if you know where to look. So, statistically there is a good chance of someone snapping, or something happening. And whatever it is, to make sure it gets blamed on Trump supporters, there are thousands of people right now, Feds, other law enforcement, the Lincoln Project and other leftist busybodies, documenting everything everyone says.

If you're on the right, and you simply say "look at what they're saying and doing, this isn't going to end well," that right there is inciting violence. It's what they are calling stochastic violence. It's how they equate words with violence, and even just pointing out the obvious, or in some cases simply making a joke, is now stochastic violence, and must therefore be silenced. I know it sounds crazy if you haven't seen it for yourself, so here's another example:

To be fair, I don't know for sure that this person is referring to Tucker Carlson's report itself as stochastic violence, because it's possible he's referring to the violence in Tucker's report. So here's one more example:

Now that's some funny stuff, but it's certainly not inciting violence. [Unfortunately, the ad is gone. He was holding a rifle saying he was going RINO hunting or something like that.] He's talking about voting RINOs (Republicans In Name Only) out of office. It's what's happening right now in the primaries, and no one is going to mistake that ad as a call for violence. Even stochastically it's nil, unlike labeling half the country as domestic terrorists, and threatening to come at them with the full force of the federal government, the DOJ, IRS and FBI. If anything is stochastic violence, it's that.

So, who are all these potential domestic terrorists? Well, let's just call them the Country Class.

Three weeks ago, Lisa posted a good article by Michael Anton, titled They Can't Let Him Back In. In it, he referenced an article by Angelo Codevilla, titled America's Ruling Class (And the perils of revolution), writing: "Anti-Trump hysteria is in the final analysis not about Trump. The regime can’t allow Trump to be president not because of who he is (although that grates), but because of who his followers are. That class—Angelo Codevilla’s “country class”—must not be allowed representation by candidates who might implement their preferences, which also, and above all, must not be allowed."

In The Debtors and the Savers, I did not dispute Marx's assertion that history is the story of class struggle between two classes. What I disputed was his delineation of the two classes. Marx says it's basically the rich and the poor, while I said it was the "easy money camp" (the "Debtors") and the "hard money camp" (the "Savers"). Angelo Codevilla calls the two classes the "Ruling Class" and the "Country Class." I really liked his description of the Country Class, and I think his delineation of the classes is completely compatible with mine. It's a long article, so here are a few snippets. BTW, this was written in 2010!

The two classes have less in common culturally, dislike each other more, and embody ways of life more different from one another than did the 19th century’s Northerners and Southerners — nearly all of whom, as Lincoln reminded them, “prayed to the same God.” By contrast, while most Americans pray to the God “who created and doth sustain us,” our ruling class prays to itself as “saviors of the planet” and improvers of humanity. Our classes’ clash is over “whose country” America is, over what way of life will prevail, over who is to defer to whom about what. The gravity of such divisions points us, as it did Lincoln, to Mark’s Gospel: “if a house be divided against itself, that house cannot stand.”

The Political Divide

Important as they are, our political divisions are the iceberg’s tip. When pollsters ask the American people whether they are likely to vote Republican or Democrat in the next presidential election, Republicans win growing pluralities. But whenever pollsters add the preferences “undecided,” “none of the above,” or “tea party,” these win handily, the Democrats come in second, and the Republicans trail far behind.


In short, the ruling class has a party, the Democrats. But some two-thirds of Americans — a few Democratic voters, most Republican voters, and all independents — lack a vehicle in electoral politics.

Sooner or later, well or badly, that majority’s demand for representation will be filled.


Far from speculating how the political confrontation might develop between America’s regime class — relatively few people supported by no more than one-third of Americans — and a country class comprising two-thirds of the country, our task here is to understand the divisions that underlie that confrontation’s unpredictable future.


What sets our ruling class apart from the rest of us?


Wealth? The heads of the class do live in our big cities’ priciest enclaves and suburbs, from Montgomery County, Maryland, to Palo Alto, California, to Boston’s Beacon Hill as well as in opulent university towns from Princeton to Boulder. But they are no wealthier than many Texas oilmen or California farmers, or than neighbors with whom they do not associate — just as the social science and humanities class that rules universities seldom associates with physicians and physicists. Rather, regardless of where they live, their social-intellectual circle includes people in the lucrative “nonprofit” and “philanthropic” sectors and public policy. What really distinguishes these privileged people demographically is that, whether in government power directly or as officers in companies, their careers and fortunes depend on government. They vote Democrat more consistently than those who live on any of America’s Dr. Martin Luther King Jr. Streets. These socioeconomic opposites draw their money and orientation from the same sources as the millions of teachers, consultants, and government employees in the middle ranks who aspire to be the former and identify morally with what they suppose to be the latter’s grievances.

Professional prominence or position will not secure a place in the class any more than mere money. In fact, it is possible to be an official of a major corporation or a member of the U.S. Supreme Court (just ask Justice Clarence Thomas), or even president (Ronald Reagan), and not be taken seriously by the ruling class.


Since the 1970s, it has been virtually impossible to flunk out of American colleges. And it is an open secret that “the best” colleges require the least work and give out the highest grade point averages. No, our ruling class recruits and renews itself not through meritocracy but rather by taking into itself people whose most prominent feature is their commitment to fit in. The most successful neither write books and papers that stand up to criticism nor release their academic records. Thus does our ruling class stunt itself through negative selection. But the more it has dumbed itself down, the more it has defined itself by the presumption of intellectual superiority.


Its first tenet is that “we” are the best and brightest while the rest of Americans are retrograde, racist, and dysfunctional unless properly constrained.


The cultural divide between the “educated class” and the rest of the country opened in the interwar years. Some Progressives joined the “vanguard of the proletariat,” the Communist Party. Many more were deeply sympathetic to Soviet Russia, as they were to Fascist Italy and Nazi Germany. Not just the Nation, but also the New York Times and National Geographic found much to be imitated in these regimes because they promised energetically to transcend their peoples’ ways and to build “the new man.” Above all, our educated class was bitter about America.


…the notion that the common people’s words are, like grunts, mere signs of pain, pleasure, and frustration, is now axiomatic among our ruling class. They absorbed it osmotically, second — or thirdhand, from their education and from companions.


…left to themselves, Americans use land inefficiently in suburbs and exurbs, making it necessary to use energy to transport them to jobs and shopping. Americans drive big cars, eat lots of meat as well as other unhealthy things, and go to the doctor whenever they feel like it. Americans think it justice to spend the money they earn to satisfy their private desires even though the ruling class knows that justice lies in improving the community and the planet. The ruling class knows that Americans must learn to live more densely and close to work, that they must drive smaller cars and change their lives to use less energy, that their dietary habits must improve, that they must accept limits in how much medical care they get, that they must divert more of their money to support people, cultural enterprises, and plans for the planet that the ruling class deems worthier. So, ever-greater taxes and intrusive regulations are the main wrenches by which the American people can be improved (and, yes, by which the ruling class feeds and grows).


At stake are the most important questions: What is the right way for human beings to live? By what standard is anything true or good? Who gets to decide what? Implicit in Wilson’s words and explicit in our ruling class’s actions is the dismissal, as the ways of outdated “fathers,” of the answers that most Americans would give to these questions. This dismissal of the American people’s intellectual, spiritual, and moral substance is the very heart of what our ruling class is about. Its principal article of faith, its claim to the right to decide for others, is precisely that it knows things and operates by standards beyond others’ comprehension.


While the un-enlightened are stuck with the antiquated notion that ordinary human minds can reach objective judgments about good and evil, better and worse through reason, the enlightened ones know that all such judgments are subjective and that ordinary people can no more be trusted with reason than they can with guns. Because ordinary people will pervert reason with ideology, religion, or interest, science is “science” only in the “right” hands. Consensus among the right people is the only standard of truth. Facts and logic matter only insofar as proper authority acknowledges them.


…even as our ruling class has lectured, cajoled, and sometimes intruded violently to reform foreign countries in its own image, it has apologized to them for America not having matched that image — their private image.


President Obama apologized to Europe because “the United States has fallen short of meeting its responsibilities” to reduce carbon emissions by taxation. But the American people never assumed such responsibility, and oppose doing so. Hence President Obama was not apologizing for anything that he or anyone he respected had done, but rather blaming his fellow Americans for not doing what he thinks they should do…


President Clinton apologized to Africans because some Americans held African slaves until 1865 and others were mean to Negroes thereafter — not himself and his friends, of course.


Republicans engage in that sort of thing as well: former Soviet dictator Mikhail Gorbachev tells us that in 1987 then vice president George H. W. Bush distanced himself from his own administration by telling him, “Reagan is a conservative, an extreme conservative. All the dummies and blockheads are with him…” This is all about a class of Americans distinguishing itself from its inferiors.


In sum, our ruling class does not like the rest of America. Most of all does it dislike that so many Americans think America is substantially different from the rest of the world and like it that way. For our ruling class, however, America is a work in progress, just like the rest the world, and they are the engineers.

The Country Class

Describing America’s country class is problematic because it is so heterogeneous. It has no privileged podiums, and speaks with many voices, often inharmonious. It shares above all the desire to be rid of rulers it regards inept and haughty. It defines itself practically in terms of reflexive reaction against the rulers’ defining ideas and proclivities — e.g., ever higher taxes and expanding government, subsidizing political favorites, social engineering, approval of abortion, etc. Many want to restore a way of life largely superseded. Demographically, the country class is the other side of the ruling class’s coin: its most distinguishing characteristics are marriage, children, and religious practice. While the country class, like the ruling class, includes the professionally accomplished and the mediocre, geniuses and dolts, it is different because of its non-orientation to government and its members’ yearning to rule themselves rather than be ruled by others.

Even when members of the country class happen to be government officials or officers of major corporations, their concerns are essentially private; in their view, government owes to its people equal treatment rather than action to correct what anyone perceives as imbalance or grievance. Hence they tend to oppose special treatment, whether for corporations or for social categories. Rather than gaming government regulations, they try to stay as far from them as possible. Thus the Supreme Court’s 2005 decision in Kelo, which allows the private property of some to be taken by others with better connections to government, reminded the country class that government is not its friend.

Negative orientation to privilege distinguishes the corporate officer who tries to keep his company from joining the Business Council of large corporations who have close ties with government from the fellow in the next office. The first wants the company to grow by producing. The second wants it to grow by moving to the trough.


In general, the country class includes all those in stations high and low who are aghast at how relatively little honest work yields, by comparison with what just a little connection with the right bureaucracy can get you. It includes those who take the side of outsiders against insiders, of small institutions against large ones, of local government against the state or federal. The country class is convinced that big business, big government, and big finance are linked as never before and that ordinary people are more unequal than ever.


Nothing has set the country class apart, defined it, made it conscious of itself, given it whatever coherence it has, so much as the ruling class’s insistence that people other than themselves are intellectually and hence otherwise humanly inferior. Persons who were brought up to believe themselves as worthy as anyone, who manage their own lives to their own satisfaction, naturally resent politicians of both parties who say that the issues of modern life are too complex for any but themselves. Most are insulted by the ruling class’s dismissal of opposition as mere “anger and frustration” — an imputation of stupidity — while others just scoff at the claim that the ruling class’s bureaucratic language demonstrates superior intelligence.


You do not doubt that you are amidst the country class rather than with the ruling class when the American flag passes by or “God Bless America” is sung after seven innings of baseball, and most people show reverence.


The ruling class’s appetite for deference, power, and perks grows. The country class disrespects its rulers, wants to curtail their power and reduce their perks. The ruling class wears on its sleeve the view that the rest of Americans are racist, greedy, and above all stupid. The country class is ever more convinced that our rulers are corrupt, malevolent, and inept. The rulers want the ruled to shut up and obey. The ruled want self-governance. The clash between the two is about which side’s vision of itself and of the other is right and which is wrong. Because each side — especially the ruling class — embodies its views on the issues, concessions by one side to another on any issue tend to discredit that side’s view of itself. One side or the other will prevail. The clash is as sure and momentous as its outcome is unpredictable.

In this clash, the ruling class holds most of the cards: because it has established itself as the fount of authority, its primacy is based on habits of deference. Breaking them, establishing other founts of authority, other ways of doing things, would involve far more than electoral politics. Though the country class had long argued along with Edmund Burke against making revolutionary changes, it faces the uncomfortable question common to all who have had revolutionary changes imposed on them: are we now to accept what was done to us just because it was done? Sweeping away a half century’s accretions of bad habits — taking care to preserve the good among them — is hard enough. Establishing, even reestablishing, a set of better institutions and habits is much harder, especially as the country class wholly lacks organization.


…in the long run, the country class will not support a party as conflicted as today’s Republicans, those Republican politicians who really want to represent it will either reform the party in an unmistakable manner, or start a new one as Whigs like Abraham Lincoln started the Republican Party in the 1850s.

The name of the party that will represent America’s country class is far less important than what, precisely, it represents and how it goes about representing it because, for the foreseeable future, American politics will consist of confrontation between what we might call the Country Party and the ruling class.


The ruling class denies its opponents’ legitimacy. Seldom does a Democratic official or member of the ruling class speak on public affairs without reiterating the litany of his class’s claim to authority, contrasting it with opponents who are either uninformed, stupid, racist, shills for business, violent, fundamentalist, or all of the above. They do this in the hope that opponents, hearing no other characterizations of themselves and no authoritative voice discrediting the ruling class, will be dispirited.


How the country class and ruling class might clash on each item of their contrasting agendas is beyond my scope. Suffice it to say that the ruling class’s greatest difficulty — aside from being outnumbered — will be to argue, against the grain of reality, that the revolution it continues to press upon America is sustainable. For its part, the country class’s greatest difficulty will be to enable a revolution to take place without imposing it. America has been imposed on enough.

Again, this was written back in 2010. It was published on 7/16/10, 9 days after I published the first Debtors and Savers. Interesting coincidence, isn't it?

What this article demonstrates, in my view, is that it was clear at least 12 years ago the trajectory that we were on. He could see that we were destined for a "clash" as he put it.

Sooner or later, well or badly, that majority’s demand for representation will be filled.

It was filled by Donald Trump!

The clash is as sure and momentous as its outcome is unpredictable.

Joe Biden's surprise middle-of-the-night surge to 80 million votes in 2020 was unpredictable.

for the foreseeable future, American politics will consist of confrontation between what we might call the Country Party and the ruling class.

And it continues. It's not over yet.

In this clash, the ruling class holds most of the cards

That's what I've been saying. But they are overplaying their cards, and will break the system that allows them to pay their people. They don't have enough people to come after everybody, so they'll only come after those who aren't lying low. Those who stick their necks out will get them chopped off. But when they can't pay their people anymore, it'll end.

The cultural divide between the “educated class” and the rest of the country opened in the interwar years.

That's when the $IMFS started as well (1922). Funny how they parallel. Where have I heard that before?

Am I doing timing?

I was discussing this topic with someone recently, making my case for the ruling class making its move before the midterms, which pushes us to DEFCON 3 and sets in motion a chain of events that ultimately ends the $IMFS. He said, "You are doing timing."

I replied that I do think the coming election is a key point in time, but I wouldn't bet on how long the conflict will last before it ends. And if not before the elections, then the midterms themselves could spark a conflict before the end of the year. I don't think they think they can afford to just let a red wave sweep the midterms. And I don't think they think they can pull off a guaranteed win like last time. So I think they think they need an edge (the conflict), and from what I'm seeing, it looks like they are trying to make it happen now.

Understand, nothing is set in stone. There's no one out there who knows exactly how it's going to play out. But there are lots of small moves being made to push things in a particular direction. There may be big moves that are planned, but even with those, no one knows exactly how they will play out. It's all probabilistic, and while the probability of DEFCON 3 beginning this year is good, it's a certainty before 2025 due to the presidential election in 2024.

That gives us the outside window for the start of the next stage of the transition. Since we're not going back to DEFCON 5 before it's all over, we are already in the transition. We are in stage 1, permanent Danger Zone, DEFCON 4. The next stage is DEFCON 3, which will be hyperinflation, conflict, or more likely both. Hopefully we don't go to DEFCON 2.

BIS Gold Swaps and Eurodollar Liquidity

I thought I'd include something gold-related, since I made you suffer through all that conflict stuff. πŸ˜‰

Two of you sent me this GATA dispatch dated 8/9/22, titled Robert Lambourne: BIS has nearly ended its gold swap business. The gist of the article is that, as of July 29, 2022, BIS gold swaps are down 89% on the year, from 502 tonnes a year ago, down to 56 tonnes now, and down 72% in just the last month, from 202 tonnes on June 30.

The article goes on to discuss the history of BIS gold swaps, and to speculate about the reasons behind them. Here's a short snippet:

The reasons for this activity have never been fully explained by the BIS and various conjectures have been made as to why the BIS is facilitating it. One conjecture is that the swaps are a mechanism for the return to central banks of the gold they have secretly supplied to cover shortages in the gold markets.

The use of the BIS to facilitate this trade would suggest a desire to conceal the rationale for the transactions.

As can be seen in Table A below, the BIS has used gold swaps extensively since its financial year 2009-10. No use of swaps is reported in the bank's annual reports for at least 10 years prior to the year ended March 2010.

The February 2021 estimate of the bank's gold swaps (552 tonnes) is higher than any level of swaps reported by the BIS at its March year-end since March 2010. The swaps reported at March 2021 are at the highest year-end level reported.


Table A ... Swaps reported in BIS annual reports

March 2010: 346 tonnes.
March 2011: 409 tonnes.
March 2012: 355 tonnes.
March 2013: 404 tonnes.
March 2014: 236 tonnes.
March 2015: 47 tonnes.
March 2016: 0 tonnes.
March 2017: 438 tonnes.
March 2018: 361 tonnes.
March 2019: 175 tonnes.
March 2020: 326 tonnes.
March 2021: 490 tonnes.
March 2022: 358 tonnes.

I have a different view of these "gold swaps" than the article presents, and I want to touch on a few points, so if you want to, now would be a good time to go read the full article.

First, this is not the first time it has dropped. You'll notice in the table above, BIS gold swaps were at 0 in 2016. And the reason the table begins in 2010 is that these "gold swaps" began in late 2009.

I studied and wrote about these BIS gold swaps back in 2010 and took a fresh look at my notes now, and my conclusion is that they really have almost nothing to do with gold.

These “gold” swaps began in 2009 following the GFC, which was a run on the shadow banking system, including the Eurodollar system. And the gold swaps were used to provide cheap dollar liquidity to the Eurodollar system.

First, we know it was only European commercial banks involved in these swaps (at least as of 2010), and while one European commercial banker said the BIS approached his bank with the scheme, the head of the BIS at the time said the European banks needed the dollars, and that’s why the BIS did it. The BIS was providing dollar liquidity to the Eurodollar system by swapping gold for US dollars. We also know that at least some (and I would guess probably all) of the gold that was swapped was borrowed from other central banks.

So, here’s how I think it worked. Eurodollar banks didn’t have access to the Fed, so they got dollar liquidity from the BIS instead. It was basically like a REPO operation. They borrowed “gold” from a CB, then swapped or REPO’d it with the BIS for dollars.

No physical gold ever moved an inch. Think of it as ANOTHER’s CB gold certificates. They’re basically fully-backed unallocated CB gold, which is what BIS sight accounts are. And no one was exposed to gold price fluctuations, because the gold certificate was the same as borrowing the physical itself. As long as you don’t sell what you borrowed, you don’t have to buy it back. You just return the borrowed certificate to the CB, and it doesn’t matter what the gold price does in the meantime. You borrowed and returned the same amount of gold, and the physical gold never moved an inch.

Meanwhile, you “swapped” that CB gold certificate with the BIS for dollar reserves. The BIS was apparently using dollars from its member CBs’ reserves, which they had deposited at the BIS following the GFC. The CBs reportedly moved their dollar reserves from commercial banks to the BIS out of concern about dollar liquidity following the GFC.

This is interesting, because apparently foreign CB dollar reserves that weren't converted to Treasuries were being kept in the commercial banking system! But the CBs apparently pulled them out during the GFC and gave them to the BIS, which lent them back to the Eurodollar commercial banking system via gold swaps for gold borrowed from the foreign CBs.

I'm not sure why it would be ending now, or why it was zero in 2016, but that's the Eurodollar liquidity puzzle I mentioned earlier.

Fourteen Years

Looking back over the past 14 years, I'm amazed at how well this Freegold lens has worked! I know you're probably thinking, "But it's been 14 years, and still no Freegold." You're right, but it was never about timing. It's about seeing and understanding what's happening, the best and most useful way possible.

The lens is backward-looking. It explains what happened, correctly. It's not a crystal ball. My future calls are my own. They come from properly understanding what has transpired.

I think I have a pretty unique perspective on the last 14 years. Being a blogger, I have a time-stamped log of my daily thoughts on current events, from posts, comments and email. It's kind of like an electronic journal, but I'm constantly refreshing my memory by going back to search for where I've written about this or that in the past.

Every year on this day, I do some sort of a retrospective in the post. At the end of every year, I look back on the past year. And as you've probably noticed, I quote myself a lot, and link to posts and comments from the past.

There's a lot of searching involved in doing that. Something will cross my radar which harks back to something in the past, but with 700 posts under my belt and 140,000 comments on my blogs, it can sometimes take a minute to find what I'm looking for. And through this process of repetitively refreshing my memory of my past takes, I have built a kind of 3D model of the past 14 years in my mind. I don't have that kind of clarity for other periods of time, so I don't think it's too common.

It's my lens, and I formed it through the process of deconstructing Freegold.

And as I now look back over the past 14 years, it all makes sense. It works. This lens works!

Someone who shares this lens, although he doesn't comment very often anymore, is Aquilus. Knowing I was working on Fourteen, he sent me his own pithy summation of today, which was so good I thought I'd share with you:

14! Quite a difference from a few years ago. Recession to borderline depression all but guaranteed in Europe and China, while the US is talking soft landing, LOL. Re-onshoring and near-shoring in full swing with just-in-case more important than just-in-time, super-high dollar probably doing enormous damage to all emerging markets and then some with eurodollar debt, a US that is so split that the other side is considered sub-human as a rule, great local powers re-emerging and the Pax Americana retreating to around US interests only.

And we can't forget the willing separation of the $IMFS from a huge chunk of the planet's real assets like energy, food, metals, etc. with these sanctions in place. Then there's the EU 15% reduction and re-distribution of energy, which will go over like a lead balloon when countries that are somewhat ok energy-wise have to freeze their population out of "solidarity" with Germany, France, etc's poor planning.

On the Asian side, let's not forget Japan rearming for real for the first time since WW2, same thing with South Korea. Taiwan itself is in mass production with Mach 3 or 4 rockets that can hit the 3 Gorges Dam and Beijing, and that China cannot stop in bulk. See this video for what a 3 Gorges Dam burst would do and what the Taiwanese rockets are all about:

Yeah, quite a year!

Gold is still the only pure, no counterparty wealth item left, everything else is mired in debt and related to existing credit flows (see crypto busts). So, from that standpoint, 14 is a good number. πŸ˜‰

I also heard from DI today. He says hi. He wrote:

A lot has been happening this year! Thanks to your lens, I can take it all in stride. No worries. :-) The freight train seems to have some real speed wobbles now!

Funny, "speed wobbles" is a reference to a comment I wrote way back in 2008. I was discussing positive feedback loops with a commenter who was some kind of an engineer. In positive feedback loops (sometimes called vicious circles), any disturbance in the force, or perturbation in a system, will result in an increase in the magnitude of the perturbation as the system overcorrects one way, then overcorrects back again. It can quickly get out of control:

Imagine a child on a skate board being pulled faster and faster behind a small motor cycle. And then down a small hill. The skateboard's sensitive turning mechanism and small wheels cannot handle the speed, and even the smallest tilt in one direction causes an overcorrection in the other, and an even bigger correction back again. This happens 3 or 4 times almost instantaneously and totally unexpectedly and results in what we used to call a "face plant".

That same month, in 2008, Ender wrote:

Keep in mind that large changes happen at a snail's pace.

He was right, but eventually things must speed up. Has there been any perturbation in the system lately? Any disturbance in the force? I love this video. It's how I visualize the end of the system. I have it cued up to where we are now:

We're in the final stretch. The transition has begun. No more DEFCON 5 until Freegold. It might get brutal for a while, but hopefully you're prepared, and you know what to do.

Because we are speaking of currencies here,
the transition will be brutal! -ANOTHER

However, everyone that is positioned in physical gold
will carry this storm in fantastic shape. -FOA

Thank you all for sticking around! I wouldn't have kept doing this for this long if it weren't for all of you! :D


Lastly, here's a bonus excerpt from my current New Year's post. It's a short section on a recent development at GLD:

The LBMA is a critical piece of the $IMFS, and when one goes, the other will follow. I used to think that the LBMA might collapse by running out of reserves, but I now think that it can operate with zero, or even negative, reserves. The key to doing that is GLD.

That said, there have been some GLD developments in just the past month. Here's the timeline:

Dec. 1 – GLD announces that, starting on Dec. 6, it is adding a 2nd custodian: JPMorgan. I wrote a post about it, titled GLD Adds a 2nd Custodian. GLD has 906 tonnes on Dec. 1.

Dec. 6 – JPMorgan becomes the second GLD custodian. GLD has 906 tonnes on Dec. 6.

Dec. 16 – This news prompts Ronan Manly to look back at recent SEC filings to see if GLD has been borrowing gold from the BOE again, like it did in 2016 and 2020. He discovers some other strange developments which he explains in Has GLD been failing to disclose gold held at the Bank of England during 2022?

The big development is that, starting this year, Q1 2022, GLD changed the wording on its 10-Q so that it no longer discloses whether any gold was held by a subcustodian. It now says, "A current list of all gold held by the Custodian, including any held with a subcustodian is available on the sponsor’s website at"

So Ronan went to the GLD bar list on the website to see if it referenced any subcustodians. He noticed that the last column on the list was titled VAULT NAME, and that every bar on the list said HSBC VAULT. So, he contacted Warren James, who has a computer program that downloads the bar list every day, and adds it to a database, so Warren can go back and see if there were ever any other vaults listed under VAULT NAME.

What Warren found was that there was never any other vault name in that column other than HSBC VAULT, but he also found that the column was added in Sept. of 2020, shortly after the last time we know that GLD had some of the BOE's gold on its bar list.

I should note that the bar list URL doesn't change. It's been the same URL since at least 2009, they simply update the PDF every business day. That's how Warren has been able to build an automated database of the bars in GLD. The URL is:

Dec. 23 – Nosh lets us know that GLD has separated the bar list into two PDFs, one for HSBC, and one for JPMorgan. Here's the new URL for JPMorgan: SPDR_GOLD_TRUST_JPM_BARLIST.pdf

Notice that it's not even on the spdrgoldshares website. It's on JPMorgan's website. And they didn't change the other URL. It's still the same. So, any computer programs that are building a database (like Warren's) won't even notice the change. They'll just see the total start to diverge from the NAV on the spreadsheet. I should also note that the bar lists are three days behind the spreadsheet, so they don't always match on the same day anyway.

So, the latest bar lists, dated 12/30, compare to 12/27 on the spreadsheet. And they match! If you add up total fine ounces at JPMorgan and HSBC on 12/30, it comes out to 29,531,526.87 ounces, which is 918.55 tonnes. On the spreadsheet for 12/27, it says 29,530,952.08, or 918.51 tonnes. I'm not sure how to account for the slight discrepancy, but it amounts to about $1M, or 0.002% of the total NAV.

I don't know what day they started releasing the JPMorgan bar list, but it must have been during the week of 12/19-12/23.

On 12/1 and 12/6, GLD contained 906 tonnes. On 12/27, it had 918 tonnes. On 12/6, HSBC had 906.64 tonnes allocated to GLD. On 12/27, it had 894.81 tonnes allocated to GLD. So, GLD lost 11.83 tonnes from the HSBC vault, but it gained 11.87 tonnes over the same time period.

Here's where it gets a little coincidental. On 12/27, JPMorgan's vault held 763,302.40 ounces, or 23.74 tonnes. 23.74 divided by 2 is 11.87, the same amount as GLD's net gain from 12/6 to 12/27.

To put it another way, JPMorgan allocated almost exactly twice the amount that HSBC deallocated from GLD. So half of JPMorgan's current allocation could have come from HSBC (through either a physical transfer or a bar number swap), and the other half came from somewhere else. In any case, JPMorgan got twice as much as HSBC lost.

I don't know what this means, but it reminds me of another coincidence about seven years ago. From Eight: "The straw that apparently broke the camel’s back was a massive 38.66 tonne share creation request on Friday, Feb. 19, which had to be split in two over a weekend. 19.33 tonnes-worth of bar numbers were allocated to GLD on Friday, probably from somewhere within HSBC’s own vault, and then another 19.33 tonnes-worth of bar numbers were provided by the BOE on Monday."

I'm not going to speculate on this right now. I just wanted to point out that something's going on with GLD. If you haven't read it already, you can read my post GLD Adds a 2nd Custodian for more on this topic.

Happy New Year!