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SULTANS OF SWAP: Gold Swaps Signal the Roadmap Ahead

SLIDE REFERENCE PAGE: Shadow Banking

The news rocked the global gold market when an almost obscure line item in the back of a 216 page document released by an equally obscure organization was recently unearthed. Thrust into the unwanted glare of the spotlight, the little publicized Bank of International Settlements (BIS) is discovered to have accepted 349 metric tons of gold in a $14B swap. Why? With whom? For what duration? How long has this been going on? This raises many questions and as usual with all $617T of murky unregulated swaps, we are given zero answers. It is none of our business!

Considering the US taxpayer is bearing the burden of $13T in lending, spending and guarantees for the financial crisis, and an additional $600B of swaps from the US Federal Reserve to stem the European Sovereign Debt crisis, some feel that more transparency is merited. It is particularly disconcerting, since the crisis was a direct result of unsound banking practices and possibly even felonious behavior. The arrogance and lack of public accountability of the entire banking industry blatantly demonstrates why gold manipulation, which came to the fore in recent CFTC hearings, has been able to operate so effectively for so long. It operates above the law or more specifically above sovereign law in the un-policed off-shore, off-balance sheet zone of international waters.

Since President Richard Nixon took the US off the Gold standard in 1971, transparency regarding anything to do with gold sales, leasing, storage or swaps is as tightly guarded by governments as the unaudited gold holdings of Fort Knox. Before we delve into answering what this swap may be all about and what it possibly means to gold investors, we need to start with the most obvious question and one that few seem to ask. Who is this Bank of International Settlements and who controls it?

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EXTEND & PRETEND: Stage I Comes

to an End!

Both came to an end at the same time: the administration’s policy to Extend & Pretend has run out of time as has the patience of the US electorate with the government’s Keynesian economic policy responses. Desperate last gasp attempts are to be fully expected, but any chance of success is rapidly diminishing.

Before we can identify what needs to be done, what the administration is likely to do and how we can preserve and protect our wealth through it, we need to first determine where we are going wrong. Surprisingly, no one has assessed the results of the American Recovery & Reinvestment Act 2009 (ARRA) which was this administration’s cornerstone program to place the US back on the post financial crisis road to recovery.

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SOVEREIGN DEBT & CREDIT CRISIS

Reading the annual Long Term Budget Outlook by the Congressional Budget Office (CBO) has become an increasingly depressing experience in recent years. This year seems even more so than ever.

The latest projection puts the federal debt rising to 62% of the nation’s Gross Domestic Product (GDP) by the end of the year (from 40% pre-crisis), the highest percentage since just after World War. (See Graph)

Despite the gloomy projections, many economists seem to agree that a Greek style debt crisis is unlikely to take place in the U.S. due to the size of the economy, the single currency structure and dollar prestige.  After all, Greek debt totals 120% of GDP--twice the US figure--plus a comparison of the long-term bond yield, seem to suggest that the U.S. is in much better fiscal shape.  Or do they?

In a Financial Times op-ed dated July 25, Laurence Kotlikoff, economics professor at Boston University, contends due to the “labeling problem”--governments can describe receipts and payments in any way they like--we are essentially “in a fiscal wonderland of measurement without meaning.”

Kotlikoff believes a better benchmark of fiscal fitness is the fiscal gap, or the present value difference between all future expenditures and receipts. His calculations reveal Greece future expenditure at 11.5% of the value of future GDP, after incorporating the new austerity measures.

The US figure, based on the CBO projections--12.2%--is worse than that of Greece, but not by too much.

However, Kotlikoff says the U.S. is in much worse shape than the 12.2% figure suggests, because the CBO’s projections assume “a 7.2% of GDP belt-tightening by 2020,” with "highly speculative” assumptions, such as a substantial rise in tax receipts and wage growth.

A separate analysis by the New York Times also put the U.S. debt--measured by medium term deficit as a percentage of GDP--higher than that of Greece. (See chart)  Furthermore, in a roundabout way, Kotlikoff and Da Gong, the largest credit rating agency in China, seem to be in agreement as to the fiscal position of the United States; although many have dismissed Da Gong’s objectivity when it downgraded the U.S. from AAA to AA.

Will America have a Greek style debt crisis? Probably not, given the country’s resources and resilience.
However, it is a matter of political will to make tough choices between strategic vs. tactical spending and taking necessary measures to put the fiscal house in order.

With the current bond market willing to overlook debt for an economic recovery, tactical spending should take priority in order to give more immediate boost to jobs and to sustain a tepid recovery. Cramming strategic spending during a recession, as with the first stimulus, most likely will only saddle the nation with more debt while impeding growth and recovery.

Meanwhile, the current trajectory would suggest a different kind of debt crisis could manifest sooner or later, and over-confidence, a "Too-Big-To-Fail” mentality some of the nation's leaders seem to have adopted, will only lead to a dangerous path of no return.

Dian L. Chu, July 26, 2021

EU BANKING CRISIS

BOND BUBBLE