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the size of the Pacific Ocean through the fragile, global fabric of asset prices? When the shadow banking system collapses, The FED must print money on the other side in order to avert a asset price collapse. Unfortunately, the EU crisis and derivatives make this an incredibly dangerous proposition. Counter parties must remain perfectly matched, and this means currency swaps. When the European Union implodes, the counterparties are mismatched in ways only described as grotesque. Leverage at the major banks across Europe remains a frothy 40:1 and it is sheer fiction to believe that there isn't a minimum of 2% "counterparty" spread which will occur under such a scenario simply due to event risk. Demonstrate this clearly present counterparty risk which alone would cause systemic failure, and add the significant fiction of all of the EU sovereign bonds currently sitting as holdings on bank balance sheets........currently held at PAR value, despite what we know is true today! .......and the gaping hole caused by a final, massive derivative collapse isn't just un-pretty...... It is a monstrosity, and without significant near term pain felt in unwinding this monstrosity, the future pain felt through an unplanned collapse will be epic by comparison. Short History Lesson: Derivatives have been used for over 100 years. First in the form of insurance for good and services and then later for commodity delivery to protect buyer and seller for a fixed contract on a specific commodity, at a specific price, and for a specific date. Now you can buy derivatives on the weather. Today's derivatives market has become exaggerated with currency derivatives, interest rate derivatives and leverage against those derivatives which now create a daisy chain of event risks than are no longer specific, and now functionally uncontrollable. A farmer used to sell wheat and somewhere in China the wheat was delivered, contract was closed. Under the European Union and the coming breakup, the farmer sold wheat, the Chinese are owed wheat and have contracts on wheat, but they are going to receive potatoes instead since the wheat contract went bust due to a side arrangement called the European Union which in aggregate, rehypothecated all of those assets under a single commodity/currency without a single nor a diverse form of repayment options legally available. Like a marriage that you desperately want to leave but are forced to remain.....so many countries want to go back to their roots and retain their sovereignty while returning to their own currency.....and they cannot. Why? Because in the $200 trillion derivatives market of today. If just one player exits the contract which is currently the EMU, everyone in the world will get potatoes instead of wheat, in
which case everyone sells potatoes to get their wheat back. Worse yet, once a single player leaves, the daisy chain means that everyone gets potatoes at the same time......today, since once contract broken will necessarily lead to another. Under such a scenario, member states are not and have not been ALLOWED to leave, in which case they are instead being jawboned into austerity that while perhaps necessary, is fundamentally impossible when doing business in SOMEONE ELSES CURRENCY. Like going on vacation with Donald Trump, it is impossible to keep up with the rate of spending if your choices are pegged to his choices. Greeksmcant live like Germans. History shows that this is simply not possible. French like Italians? Fuggetaboutit! Like all currency pegs, they do not and cannot last. Years ago, everyone tried USD pegs in order to somehow be as trustworthy as the US dollar at the time, when America was fundamentally solvent. Those pegs went away andmthe countries went toward inflation to unwind the damage of forcing those pegs to remain. The more leverage applied to those currency peg,s the stronger and more dramatic the breakage. The EMU as it has been constructed is very simply put, one giant, forced, closeted currency peg waiting to be broken; and sadly.....the United States is trying to fix it with.....you guessed it.... By printing more money. Cushioning itself with fiat money as the shadow banking systemic America implodes.....a system which is desperate to eliminate its exposure to the EMU. That means that the United States will print real money outside of the shadow bank system in order to keep asset prices propped up, and this creates a huge future inflationary certainty. This is a fact, not fiction. How is Europe fixing it? Lending money to banks at zero percent while forcing private losses on bank creditors. Print, default, print, default. Lest a sovereign (EU Member) was ever to be allowed to go bankrupt, the daisy chain of credit default swaps would wipe out the world. The European taxpayer is eviscerated through private loss sharing and the govrnment saved through all of the sovereign debt issued to "save" the flawed EMU system, all while losses are socialized, only to reappear as sovereign debt later. This means the taxpayer has an ever larger burden to repay to the government who wouldn't allow it's neighbors to leave the party. Think of the shadow bank in the European Union as corporate and bank debt defaults while the FED starts to look like the EU Member countries who continue to issue and leverage and create more SPV's (special purpouse vehivles) to prop up the system and soak up all of the debt that no one wants to buy... Very Much Intended Consequences: This socialization process leaves government as owner of any private enterprise who cannot survive during a time where all corporate debts are let go driven to bankruptcy while all government debts are paid for through "austerity" and related fiat money printing, in which case perhaps citizens should simply hand their
respective governments the keys to everything. In the very real scenario laid out before the reader, the government will own all private assets anyway, given the government debt levels post-restructuring. Perhaps citizens will be left some time in the near future living in government apartments, having more children solely as part of perhaps another centrally planned stimulus program through which the government hopes to create more taxpayers to fund the interest on its growing debt?!? Derivatives and Default Swaps: Saving Face at the Government Level at the Demise of Citizens The problem with these credit default swaps? The counter parties aren't being allowed to go broke, lest the government lose control of its ponzificaton of Europe, held "arm in arm" with their brothers at the Federal Reserve Bank and the Treasury of the United States where they learned how to do it all over again. The collapse will come when common citizens fail to agree to these government inspired solutions. With history as our guide, we possess uncommon certainty that Europe cannot, will not, and has never agreed on anything with respect to release of intergovernmental sovereignty to another regional member. As has been historical fact for several hundred years stretching to perhaps more than a century, one may count on the unraveling, and the swiftness of the collapse will be awe inspiring. Consider the recent Olympic Games, and go for Gold. What will Happen? Due to the huge intergovernmental leverage, debts and counterparty liabilities ensnared with the derivatives time bomb, the first phase of the great unwind will be swift and come as a result of events we will not predict. The first phase must be the opposite of what people expect. It comes necessarily on the form of HyperDeflation as assets are liquidated around the world. Interestingly enough, currencies like the USD and the JPY and the SWZ may in fact do quite well, relatively speaking..... When one if forced to liquidate assets, one must "buy" something else, and the normal asset people buy first is the asset called "cash" so the USD or Yen or Swiss Franc or perhaps the Canadian Dollar are short term positions to consider. In a HyperDeflation, we will also see gold and silver perform exceptionally well, and equities will have a huge volatility, but a portfolio of very large company stocks, (banks excluded) will still be also better than cash in the long run because of what happens in "Phase II" of the great unwind. After the HyperDeflation, we would expect the incredible printing of money due to the immediate need for cash at the government level worldwide. At this juncture, liquidation of metals may be seen as ideal, since the yields available for so many other assets may be too good to otherwise pass up. In this case a gradual rotation out of gold, silver, and other hard assets may be of consideration in order to pick up on the inflation which would necessary follow a HyperDeflation. These are not person feelings, these are scenarios of certainty under the current system of EU and
American monetary policy. We have long since decided that we are not in favorable position to change current government policy, so we exercise free will instead, and work to maximize as individuals, making rational preparations for our good friends and associates, investing for preservation of capital and with the clear, unemotional understanding of what lies ahead, just single digit years away from today, in our analysis.
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