[seahorse2]

I've tried for awhile now to understand all these various loans etc that the Federal Reserve Bank (FSB) and the US Treasury are implementing to stave off a financial collapse. In that process, I have exchanged many emails with a retired accountant, who, in his day, used to work in Chicago with the big boys. He can read and understand the Federal Reserves balance sheet.

In short, he has convinced me that the US States government, via the US Treasury, is borrowing money from various central banks throughout the world and pumping that money into the banking system via the Federal Reserve Bank in New York. This money is apparently then being lent out by the FRB in NY to various entities in NY, suspects are Goldman Sachs, who, he suspects, are then lending the money out in the "shadow banking" system to keep various hedge funds etc afloat.

He hasn't answered my questions yet about how long he believes this can go on, although he agrees that the risk of failure means financial collapse as Bush and them have argued. He suspects that these short term loans will somehow have to become permanent. How? He hasn't responded yet. Further, I've asked if in fact the US treasury is borrowing from various world CBs, are they borrowing treasuries possibly from China and Japan? Is this allowing China and Japan to offload their trillion each in dollar reserves? He hasn't answered that either. But this seems to provide a way for China and Japan to offload their treasuries and dollar reserves without crashing the dollar. That's just speculation on my part. I will post some of his emails for you are to review and consider. As more become available, I will post them as well.

Ok, that trillion dollars they lent out since January 1, 2008 has absolutely nothing to do with issuing Federal Reserve Notes! FRN's are close to maxed out. The FRB of New York is the major culprit here. They have borrowed as of a week ago $558. 864 bn that the lent to banks and investment houses in just the NY District. ALL of that money came from the United States Treasury . The account is titled U.S. Treasury, supplemental financing account. This is almost all overnight money from the Treasury. Why would the Treasury keep an extra half trillion around on which THEY pay interest. This is way beyond the daily needs of the USG and you know, they do have daily needs !!! How much is needed to cushion checks written against daily tax receipts? Certainly, $20-$30 bn but not much more. So where did that money come from ? That extra, say $525 billion Dollars! It is not provable but obvious to anyone understanding money cash flows. The Treasury is borrowing money overnight ALL over the world to lend to the FRB NY overnight. The FRB lends overnight so thar the big banks can lend overnight to someone? Who? For starters how about money fleeing brokers like Goldman Sachs? But overnight multiple kiting has limits on any one block of exiting money. They must find other ways to cover. The answer is Reverse Repurchase Agreements at the FRB NY of $821.463 bn as of last week. As of last December , the FRB NY had just $7.559 bn outstanding. THe increment in ten months of $813.904 bn is collateralized by US Treasuries!!! These Treasuries also collateralize Federal Reserve Notes officially! Hence, why I use the term kiting in my posts. The FRBNY is kiting collateral to more than one lender in theory. In point of fact, they are not because the outstanding Federal Reserve Note liability is really a preferred capital position in real life. Shit, they cannot pull the FRN's even if they wanted to and especially if they surrendered all their treasuries at the FRBNY to the people they borrowed from. That is kiting and certainly outside the intent of the Federal Reserve Act if not legally so! It is an emergency and they are doing what was done in the movie " The Producers".

The end result is an unbacked currency , in part, if this backfires. It hardly matters because if it did backfire the world monetary system would actually collapse as I see it.

But they are not printing money because they have no authority. Is Obama aware of this? You bet! He knows just how desperate things are.

http://www.federalreserve.gov/releases/ ... t/20081030

Keep it coming. I would love to knock all this fantasy Libertarian drivel out so people can understand the reality. Just how desperate things are.

Part of my previous two posts are incorrect. I missed a line in the detail. The actual line is not reverse repos but the increase in deposits from " Depositary Institutions". More later. The effect is the same .

OK , back at it. The $558.864 bn I discuss is spot on. The next biigest layer of NEW borrowings in 2008 is Demand Deposits owed to Depositary Institutions of $425.972 bn. As of last December that number was only $11.439 BN !!! This increase of $414.533 bn , when added to the $558.864 bn accounts for $973.397 bn of the total 2008 increase in assets of the FRB's of $1,076.724 bn.

Obviously, world banks lent the Federal Reserve Banks money!!! And near a half trillion of it, at that. AND apparently unsecured! But which banks? You can guess that this was the Middle East and Japan. All that Yen Trade money coming back relent to the FRB NY? Must be. But how much and who?

Back to my bad eyes faux pau! There was a sizeable increase in Reverse Repo lending too ! The total more than doubled increasing $54.113 bn. Here we have the double hocking of Treasuries I made my total value mistake on in my prior posts.

This tells though , by making a mistake, that Geithner and Bernanke will only operate within the law.

I should put all of this on a spread sheet with no subtotals to mess up old eyes.


But maybe my mistake will help in the understanding.

These people have floated over $1 trillion dollars from every source on the planet to lend to essentially, the big Wall Street banks or brokers.

Where did the money go after it went to Wall Street? THey cannot be sitting on this money but I have some very sour ideas! Are they floating Hedge Funds they sponsor?

Good, maybe my faux pau helped a little. The best I can figure is that most of that $559 bn gets wired to the Treasury account at banks all over the world. The Treasury wires all these funds from their accounts to the FRB NY. Thus the FRB has increased funds of $559 bn and it credits the special account of the Treasury. Now, the Treasury wires the funds to the banks where Goldman Sachs has accounts. Those banks now have funds of $559 bn and owe the FRB NY the $559 bn. These banks credit the accounts of Goldman Sachs and record the loan to GS of $559 bn. The banks themselves still have the $559 bn in live funds. They have an Account Receivable from GS of $559 bn. The next step is GS wiring the money to people where they want to place the funds. Thus the bank has $ 559 bn less live funds and the demand deposit liability owed GS is reduced by the $559 bn. At this point the banks have a Loan Receivable of $559 bn and owe the FRB NY $559 bn. Similarly, GS has funds of $559 bn and owes the bank $559 bn.


The next morning, this all reverses at the opening of business all the way down the line where it repeats itself at the close of business. Time zones to the rescue and very very good software. Good clerks too !

At the end of the day each organization has a Loan Receivable for $559 bn and a loan payable for $559 bn. There it stays still for a few hours.

Money moves and all banking is constant movement. Thus Balance Sheets are just a photo at one millisecond of time. Just like a photo finish at the race track. Bankers gotta understand movement or get out of banking.

This is not about bookkeeping losses but quite a few trillion dollars of value has been lost and much of it has fled. The Fed itself can be demonstrated as having loaned out $1.077 trillion dollars to someone. They lent most of it to banks. But who did the banks lend it to. Bank lending is actually way up.

Look at these graphs.
http://www.minneapolisfed.org/research/WP/WP666.pdf


The Banks are loaning . It is just that they are not loaning to the real economy outside the financial system. The answer is obvious and multifaceted. I got out of CD's and into energy producers. Millions have done what I have done. Huge mid level balance business demand deposits that are not FDIC insured have fled to Treasuries. Think the Indymac scare. In the meantime, huge values have left the shadow banking system like money market funds and insurance company CD's. All these people lent the money very long into things like CDO's that they thought they could sell if money left them. Now they cannot sell the CDO and have the money available when people cash out to go elsewhere. The banks are lending to prevent shadow money system collapse. So far, those investments have forced Fed to lend back the money that left the system to cover the illiquidity of not being able to sell assets they counted on. One huge round robin is going on. If not, using overnight money would not work for as long as it has.

They will need permanent money now because money has been permanently lost by the big sources of funds for the shadow system.

This is exactly what happened , in principle, during the Trust Company panic of 1907. The banks were forced to cover for the hated Trust Companies by the hard nosed intervention of JP Morgan. We have no J P Morgan just greedy yuppies from the lower classes with an attitude. There is no financial Don. A guy like JPM could have nipped this in late June 2007 when managers tried to dump those Bear Stearns SIV assets. One phone call could have don it. In the case of JPM a refusal meant ostrasized from big deals for life. Everyone knew he was to accomodated at the end of the arguement.

I see the kiting as being made semi permanent or it all caves in and soon.

[topcat]

My thanks to you and your friend for all the hard work!

Great reading.

Looking forward to more, although 'It Don't Look Pretty!'

[mattduke]

Libertarian drivel?

[mefistofeles]

I think its pretty obvious that the US is bankrupt. The only question is when everyone is going to find and out and that's going be .....interesting....to say the least.

The only important question to answer isn't if but when, when does the US implode?

Is there some sort of useful clock or metric we could examine that would say, when this happens bye,bye USA?

[seahorse2]

I asked this man if the US is borrowing dollars from other CBs, most likely, China, Japan, and the ME, wouldn't this allow those CBs to offload their dollar assets without crashing the dollar and further, would this explain why US treasury yields are falling (bc the US is buying like mad) and why there are more and more reports that treasuries purchased are not being delivered.

Here is his response:

YUP ! By now every major central bank must have loaned their dollar balances to the FED. Similarly, for the big banks, hence that $400 bn depositor institution liability the FRB's carry. From a pittance to more than $503 bn in yesterdays Balance sheet release.

Finally, they put it all in boxes. I bitched to Bernanke about it in my sleep apparently.

http://www.federalreserve.gov/releases/h41/current/

So, it seems the rise in the dollar and the crash in treasury yields are explained by the fact that the US gov't is borrowing dollar reserves held by the various central banks and in turn loaning them to the hedge funds (shadow banking system). The US could care less about what the yields are, it simply needs the assets to push through this shadow banking system to try and bring it back to life.

I assume then, that once there are no more treasuries to loan, it all stops, unless of course, the US gov't does another massive bailout and issues more treasuries, which will be worthless, bc no one will want them and further, the US couldn't pay the payments on them anyway.

[seahorse2]

Interestingly, the conclusion that various central banks are loaning their reserves to the US treasury is supported by this article, which just appeared today. The article ask why, after years of exploding growth in foreign reserves, are those reserve amounts suddenly crashing.

During the past 10 years, at least, I have been following the growth of International Reserves. The first graph I elaborated to show their growth was back in 1999 and it was based on IMF data up to 1997. Recently, I have been updating the graph using Alex Tanzi´s numbers. Alex works at Bloomberg and from time to time, Doug Noland at www.prudentbear.com quotes his numbers regarding International Reserves, excluding gold.

As of August 2008, as you can see from the graph, according to Alex Tanzi International Reserves were growing at the explosive annual rate of 26.5%. Suddenly, since August, Reserves have stopped growing.

In August, they were just under $7 trillion expressed in dollars, though “paper” Reserves are made up not only of dollars, but also euros, British pounds, Japanese Yen and a smaller quantity of some other currencies.

It seems to me that when a huge number such as $7 trillion suddenly stops growing, it must indicate that something very serious is going on. The growth of Reserves was so severe it was really an explosion; quite abruptly, it has stalled and has actually turned negative.

One explanation might be that since the figure is given in dollars, and the values of the other currencies which make up Reserves have been falling with regard to the dollar (except for the yen), that the contraction in the value of euro and pound Reserves caused the amount of Reserves to begin contracting.

Still, the huge rate of growth of Reserves, year-on-year, was up to 26.5%, and it seems to me that this previous explanation is not sufficient to account for a sudden halt in growth and the onset of a decrease in Reserves.

I have not seen a single article dealing with this important change; I comb the Internet daily and I have found not one comment on this development.

The International Reserves were growing by leaps and bounds, as a consequence of the “Imbalances in International Trade”, where the countries which were issuing currencies accepted as Reserves were exporting huge amounts of their currencies in “payment” of their trade deficits. These currencies were then re-invested by the exporting countries in bonds and agency debt. The main actor was the US, which was able to fund its enormous fiscal deficits through the sale of these bonds and agency debts. It was a nice deal while it lasted for the US and, I suppose, for the Brits as well as the Europeans.

Now, if the Reserves are no longer growing but diminishing, this might indicate that the exporting countries are no longer buying and accumulating more US, British and European debt. If they are not accumulating more foreign currency bonds and debt, then the fiscal deficits of the US, the Brits and the European Union countries are no longer being funded – especially important to the US, which is running an immense fiscal deficit, what with the US Treasury going into debt like a drunken sailor on account of the need to bail-out all and sundry debtors.

Now if the US deficit is not being funded, then that means that the fiscal deficit is simply being monetized by the Fed. Or what else can it mean?

The US is on track to incur a fiscal deficit of $1 Trillion, perhaps much more, in this fiscal year. If the International Reserves are not growing, that means it will be impossible to fund that deficit. That would mean: monetary inflation in spades, in the US.

I’ll leave you with this question: what is the significance of the drastic change in the growth-trend of International Reserves, from explosive growth, to the sudden beginning of a contraction?

I hope others, more competent than myself, address this question. I believe it is quite important that we have an authoritative answer to it.

Financial Sense

[Falconoffury]

This is the inevitable conclusion of a money system that does not work. The problem all boils down to the fact that there is always more money owed than money in existence in the system as a whole. Over time the gap between the money owed and money in existence only widens. There is no way to pay off the debt because attempting so only creates more debt. Anyone who has not seen the "Money as Debt" documentary needs to do so.

[patience]

There's a current thread on Tickerforum talking about this,

Falling International Reserves, the "no mas moment"?

Maybe I missed something here, and it is a different topic. I don't know squat on this sort of thing, but it quoted the same FS article.
WTF is going on here? Is the US ready to implode?

[seahorse]

Patience,

I saw that thread on TF too. The connection they are not making is this: foreign reserves are dropping rapidly bc those reserves are being borrowed by the US gov't, who in turn is loaning it to the FRB NY, who in turn overnights it out via TAF or any of the other funding mechanisms to private entities like Goldman Sachs etc.

As said before, I assuming this kiting scheme can go on so long as foreign central banks have dollar reserves to lend. China and Japan combined have approximately $2 trillion and, if correct, the US has burned through half of that thus far. I don't know how much the ME CBs may have to lend. So, this can't go on for long. Max, another year? I suspect not near that long.

For awhile now everyone has had the mistaken belief that private entities were buying treasuries. This of course was speculation too, as far as I can tell, that information is not specifically known. People assumed private entities were fleeing to treasuries as a safe haven, even though they provided a negative return. That made some sense, and it is partially true I suspect, but what makes even more sense in light of the above posts and article is that it is the US gov't borrowing back dollar reserves from CBs abroad and circulating them, kiting them, back into the system. Thus, treasury yields drop and there are reports of failing to deliver the actual securities.

[patience]

seahorse,

Thanks a lot! Much appreciated info. I thought this thread made more sense, and couldn't make head nor tail of the one on TF.

I'm with you. This sounds like desperation at the max level. Next is Zimbabwe? Gottat dump those T's my wife has, and fast.

Many thanks, seahorse! You have been invaluable to our family.

[threadbear]

Seahorse, Private entities were/are buying treasuries too. Everyone piled on, as international central bank purchase provided the initial strong impetus required, to create a "safe haven" buy signal, for the average investor. What I want to know, is, implied in this action wouldn't there be a concurrent suppression or manipulation of gold price, by central bankers? But wait....those same hedge funds who benefit from treasury money are also reducing their gold positions, driving the price of gold down, which drives more money into treasuries. Seems like a good circular system to me! But...is it self sustaining?

Tell me--What is the Goldman Sach's projection for gold price?

[patience]

Okay, this scares the pink essence out of me. Time to lighten up a bit. The situation looks very much like------

This guy is in heavy traffic, and at every stop light, the truck driver in front of him gets out and bangs all over the side of his truck with a stick, then jumps back in when the light turns green and zooms off. After seeing this a few times, the guy behind yells at the truck driver, asking what is it all about?

Truck driver says, "The truck will haul 12 tons. I got 24 tons of canaries in there, so I gotta keep half of them FLYING!"

Maybe he learned that from a banker?

[VMarcHart]

I think it's pretty obvious the US is bankrupt. The only question is when everyone is going to find and out and that's going be ... interesting ... to say the least.

Do you mean like Enron and Lehman, by the time it became somewhat public it was too late to walk out of it? But then, devil's advocate here, wouldn't the US assume the position of "too big to fail" and become somewhat permanently bailed out by other CBs and countries?

[threadbear]

If I can interject here, VMarc. The US may be too big to fail, but the problem for the US ultimately could become a national security issue. The Chinese aren't going to continue to bail the US, without some major concessions, the first of which involves energy policy, and their own foreign policy (repatriating Taiwan). Also, the continuing drain on the Chinese , funding the US treasury, is eventually going to override other considerations.

These issues usually resolve or attempt to resolve themselves militarily, but we are living in a post modern world now.

[seahorse]

Others join the chorus that the Federal gov't is "kiting" its own treasuries. Read this from tickerforum:

The Fed is running what amounts to a gigantic kiting scheme where it borrows $500 billion (the "supplemental Treasury program") from various foreign and domestic sources then loans that money out to the same domestic and foreign sources who settle those trades!

As further evidence of this game we have an enormous number of "fails to deliver" in Treasuries. Why would there be a fail to deliver unless the person who sold it doesn't have it? That's the essence of a kiting scheme - you're effectively counterfeiting, because you're writing a draft that you can't settle. This is showing up in the Treasury market, where "fails" reached an aggregate five trillion dollars in October.

Tickerforum

[patience]

How long can it last? (He asks, while listening to the screams inside his own head.)

[Revi]

The question is, when is the whole thing going to fail? When does hyperinflation kick in?

The value of dollars is going to go down soon, isn't it?

Is there any way of keeping this game going?

There is no way that they can keep this up much longer, is there?

[ReverseEngineer]

The question is, when is the whole thing going to fail? When does hyperinflation kick in?

The value of dollars is going to go down soon, isn't it?

Is there any way of keeping this game going?

There is no way that they can keep this up much longer, is there?

Setting a real Timeline that fingers just when the system breaks down is like the Holy Grail here on Peak Oil. Nobody seems to be able to do that.

Every time you figure some cockamamie new scheme is the Death Knell for the system, the system keeps on chugging along. Food still on the shelves. Gas still avaialble at the pumps, at a price we can afford. Plastic still working regardless of the fact banks are dropping off the map faster than lemmings at the edge of a cliff.

HUGE systemic inertia here. It doesn't all shut down in the blink of an eye, and fact is the system was always built on Smoke and Mirrors anyhow. So now just more smoke, more mirrors.

I'm still holding to the April 15th Tax Filing date as a watershed event, but even that won't necessarily grind the gears to a complete halt. I think at this point we could keep operating for another couple of years, though since I have been wrong on timeline setting so many times before if I think this now it probably means the system goes Blooey by the end of the year.

Anyhow, as long as it still goes on, it sure gives plenty of fodder for discussion. The aftermath won't be so enlightening, because I seriously doubt the Internet stays running very long after a complete meltdown.

Reverse Engineer

[EnergyUnlimited]

I think it's pretty obvious the US is bankrupt. The only question is when everyone is going to find and out and that's going be ... interesting ... to say the least.

Do you mean like Enron and Lehman, by the time it became somewhat public it was too late to walk out of it? But then, devil's advocate here, wouldn't the US assume the position of "too big to fail" and become somewhat permanently bailed out by other CBs and countries?

US may be to big to fail, but Chinese (and rest of world) are too small and weak to keep it standing.

US is much heavier than Iceland or Hungary for sure.

My suggested outcome is disorderly collapse of all modern world economies.

I expect that to happen pretty soon.
The only question is exact timing.

I have seen and remember well collapse of Soviet block.
Everything was looking working (with many difficulties, but still) until the very end.
And then in matter of months it all collapsed.

Crisis preceding collapse was about 8-10 years long and it was denied until final ~5 years.
Onset of crisis was also preceded by decade long huge investment bubble (courtesy of credit from the West...) and during this time it seemed that communism is a successful system.

About 5 years before collapse government admitted difficulties and introduced economic reform.
There was first stage of economic reform lasting about 3 years but it didn't work.
Then there was more desperate second stage of economic reform (about 1 year long) and that didn't work either.
Finally collapse came.
Within following year it was all over.

In Eastern Europe recovery have taken about 10 years because we could convert to capitalism which was still working.

Now it is all different.
Alternative working system allowing modern societies to function no longer exist.

So we will collapse to much more primitive setups long forgotten here but still prevalent in Third World.
And these will disintegrate too as time pass...

It is very interesting to discuss and observe.

[ReverseEngineer]

In Eastern Europe recovery have taken about 10 years because we could convert to capitalism which was still working.

Now it is all different.
Alternative working system allowing modern societies to function no longer exist.

Herein lies the significant difference of this collapse from all the others we have talked about as analogies, save perhaps the collapse of the Roman Empire.

When we talk about the rise of Fascism and the Nazi state, behind the scenes there still was a functioning capitalist system willing to float loans to the Germans to build a war machine. When we discuss Argentina, even though broke it can continue to function because the rest of the world continues to function. When we talk about Iceland, we talk about a tiny island of a few hundred thousand people you can send some food aid to as a humanitarian gesture to keep starving Aryan children alive.

When Communism fell in the Soviet Union, a still functioning Western Capitalist economy could jump in with Investors eager to jump on the bandwagon of a new "emerging" economy.

In every case, with the failure of one system and society, there was another still functioning one ready to jump in, a Deep Pocket that could buy up the scraps of the failed country or system for pennies on the dollar.

The world has not existed without a monetary system of general acceptance for trade since before the Rothschilds, really if you include the acceptance of Gold as a universal currency since Biblical times. Every single country on earth is now hooked in through computer systems to the digital system of currency we currently use, Yen, Euro or Dollar its all basically the same. Quite clearly, on a worldwide level there is a greater obligation of debt than exists wealth to cover the debt. Creditor nations aren't solvent because they won't be paid back by their debtors. At some point here that NOBODY on this board or anywhere else can put a finger on the computers will no longer compute. Like the original Star Trek episode with the computer that ran the civilization which Kirk fried by telling it "Everything I say is a Lie. Now compute this: I am lying.", the supercomputers are going to fry themselves in the Greatest Bonfire of DIGITAL Wealth in all of Recorded History. LOL.

In any event, what comes in the aftermath of that, with no Deep Pocket around to buy up the World? Is it a world of all Slaves with no Master, all Masters with no Slaves or all Zombies, the Walking Dead who don't realize they are dead yet?

A while back I created a thread for suggestions of alternative replacement systems which might be implemented. I think it might be time to bump that thread back up. I do not think SOMETHING won't be tried to reorganize here, so we can bet on the possibilities we can generate up In a sense, this is a great OPPORTUNITY! A chance for everyone to Start Over from scratch with a clean slate. There IS wealth left in the world, its just a question of how to distribute out what is left?

How long though before the shell game stops working? A week, a month, another quarter, a year, a decade, what? I sure wish somebody could answer that question.

Reverse Engineer