Saturday, January 18, 2014

Rehypothecation and The Shadow Banking System

To hypothecate an asset is to pledge it against a loan or liability without turning it over to the lender.  If we borrow against a property in the game of Monopoly, we don’t deliver the property to the bank, we simply turn over the deed as a symbol of our hypothecation.  Pawn shops don’t accept hypothecation, they want the watch or the ring or the gun.  They want real collateral in their possession.  Quality collateral is that which more than covers the extent of the liability.  When a loan is “under water,” or “upside down,” it is no longer backed by quality collateral.

If the bank holding such a pledge uses it to secure another transaction by pledging (rehypothecating) it to another bank and that bank uses that pledge to pledge it to another, we call this a collateral chain and at some point it becomes difficult to determine who really owns what.  Quality collateral ceases to exist.  The word chain can be likened to a pyramid or Ponzi scheme as the links between the owner and the property become ever fainter.  This daisy chain of rehypothecation has the effect of creating new assets out of thin air.  The wealth effect of money creation by The Federal Reserve has for all practical purposes been extended beyond money to other asset classes such as land, houses, precious metals, etc. Let freedom to create bubbles ring.

The Federal Reserve was established to create money backed by debt.  Loaning money at interest and then reloaning it as it is repaid and reloaning it again, has the effect of creating new money.  The more times it turns over in a year the more the money supply expands.  We call this the velocity of money.  For about 60 years the money supply was allowed to grow at a moderate rate, allowing the 1% to get rich but not too rich.  Then in 1971 Nixon took the dollar off the gold standard and in the following years the link between the dollar and quality collateral grew ever fainter.

To compound the matter, while the money supply started to grow at a much faster pace (1971 – 2008), The Shadow Banking System was given more and more freedom to set up elaborate collateral chains which in turn generated obscene bonuses for the bankers who racked up enormous paper profits out of thin air.  This out of control banking system crashed in 2008 and in an effort to prop up the corpse The Federal Reserve began to pump enormous amounts of money/debt into the market.  They didn’t call it printing money out of thin air, they instead called it Quantitative Easing.  So we went from dollars backed by gold, to dollars backed only by Treasury Notes purchased by banks all over the world, to dollars backed by … nothing.
The money supply grew from near zero to $100 billion from 1913 to 1971.  It increased eight fold to $800 billion by 2008, a dangerous pattern.  The system crashed as junk collateral was pawned off as quality collateral. The criminals who perpetrated this hoax have been deemed too big to jail by the Attorney General of the United States of America.  In the next five years the money supply passed $3,700 billion, a curve so steep it looks like a wall.  Meanwhile the income differential between CEO’s of large corporations and the average worker under them went from 10 times to 400 times.  Billionaires on Wall Street proliferated at an alarming rate.

Why did the world financial system continue to buy into this thing called Reserve Currency, defined by Bretton Woods and denominated in US dollars?  Why was it possible to establish Petro-dollars as the only way to buy oil even after the gold standard was dismantled?  The answer is complex and involves complicity of the Banksters who manage The Shadow Banking System all over the western world.  In the final analysis it hinges on the web of rehypothecation underlying the paper empires created by banks.  The disintegration of collateral.  And one big lie.

The lie was that we still have the gold.  In fact the whole system depended on keeping the price of gold from going through the roof.  The dollar cannot have value if it is too weak to buy gold.  So for decades the Banksters manipulated gold in the market - leasing it, hypothecating it, rehypothecating it, shorting it, leveraging it, burying it in paper contracts and yes even selling it outright to flood the market.  Until there is no gold left in the vaults.  The stash of thousands of tons belonging to the citizens of America and to other countries who gave it to us for safe keeping, is gone.
Today for every ounce of real gold, there are 100 ounces of paper gold.  And the real gold now lives in India and China.  China will call the shots at the next Bretton Woods conference and it will not be held in New Hampshire.
Let us be clear about two things.  Quantitative Easing is nothing more than printing money out of thin air.  And rehypothecation is nothing more than confiscating an asset and throwing it into a bottomless abyss, a mire known as the shadow banking system.  It is an elaborate scheme to transfer wealth to a few, the few that I am calling MiLords (the .1% or mil or one in a thousand). Quality collateral is nowhere to be found and this elaborate paper scheme to defraud the masses is about to unravel.  Beware.

Do not let fancy words invented to disguise crime fool you.  Do not let the rule of law be subverted by companies too big to fail led by executives too big to jail.  Do not let the Banksters point the finger at gold hoarders, or whistle blowers, or food stamp recipients.  Do not let the false battle between Republicans and Democrats pull attention away from the real issue.
The Federal Reserve and its minions are perpetrating a giant fraud, selling the American people down the Yellow River for 30 pieces of gold.  Bad analogy.  They have sold all the gold in Fort Knox for 30 years of unbridled wealth accretion and if the truth be told they are guilty of treason. 

Rehypothecation indeed!

1 comment:

GoodPeopleJapan said...

Good summary.

My comment?

After every "Don't..." you write, I suspect 80% (80/20 rule) of Critical Thinkers (not randim readers like me!) would silently ask themselves or not even consider... "How, do I 'Don't'..?"