Economics is alleged to be a “science,” but if it is, it’s a very obscure science. Much of whatever knowledge economics provides is almost incomprehensible. Much of what can be understood is government propaganda (lies).
Nevertheless, if we can’t learn “the truth, the whole truth and nothing but the truth” from economics, we can still learn some truth.
One means of discerning truth is by observing “coincidences”. Some people deny the existence of innocent “coincidences”. I don’t. Sometimes one person or group just happens to do something that another group or person also does at virtually the same time. There might seem to be a correlation or even a conspiracy between the two groups–but, in fact, there’s merely an innocent “coincidence”.
However, I also don’t deny that sometimes two seemingly disparate persons or groups perform virtually identical acts at virtually the same time based on a mutual agreement to do so. Their similar acts might seem “coincidental,” but they are actually evidence of the two persons/groups working in concert.
When we see two powerful but seemingly separate groups or entities performing the same act simultaneously, we can suspect that something major is about to happen.
• For example, on Monday, June 18th, week, Jim Willie wrote:
“The Basel Committee for Bank Supervision, a group within the BIS, defines capital requirements through the so-called Basel III rules. The ultimate central bank is on the verge of declaring Gold to be a Tier-1 asset for commercial banks with 100% weighting.”
Mr. Willie described the “BIS” (Bank of International Settlements) as the “ultimate central bank”. Thus, the BIS “is on the verge of declaring gold to be a Tier-1 asset for commercial [private rather than “central”] banks.”
Mr. Willie continued:
“Curiously, [gold] is currently a Tier-3 category with just a 50% risk weighting. . . . The [private banks’ former] incentive away from Gold toward risky assets such as stock, currency, and debt-related assets has turned disastrous. A category upgrade in gold would effectively drive up its value. . . . Gold is ideal [collateral] as it bears no credit risk, and has no counter-party risk, [and has] only theft risk (due to desirability) and shell game risk (from certificate games).”
Mr. Willie didn’t say so, but I inferred from his text that the “BIS” (located at Basel, Switzerland) was recently setting new banking rules concerning the holding of gold for private European banks.
• While Mr. Willie apparently described an announcement by the BIS that gold had been resurrected as banking collateral in Europe—here in the US—the Federal Depository Insurance Corporation (FDIC) acting in concert with the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency, posted a “Financial Institution Letter” (FIL-27-2012). That Letter also proposed changes in US banking regulations that would allow and encourage private US banks to include gold bullion as a “Tier-1 asset” in their bank collateral.
Gee, whatta coincidence, hmm?
I’ve read the FDIC’s 33-page Letter and most of it is so technical and convoluted that I doubt that anyone other than a bank attorney-cum-CPA could easily decipher that Letter and quickly grasp all of its implications.
Nevertheless—like the proverbial blind pig who can still find the occasional acorn—I can also glean a few implications from the FDIC’s technical jargon. For example,
• First, the FDIC’s entire Letter concerns US bank collateral. By redefining what constitutes bank collateral, the FDIC implies that current bank collateral is insufficient to weather foreseeable economic storms. The gov-co thereby admits that American banking may be systemically vulnerable.
• Second, the Tier-1 collateral in the US will include six classes. Three of these classes emanate from Washington DC—one from the Federal Reserve; two more from the federal government:
a) “Cash” (fiat dollars issued by the Federal Reserve);
b) “Direct and unconditional claims on the U.S. government, its central bank, or a U.S. government agency”.
Mere “claims” against the US will not be Tier-1 collateral. Only those claims that are “unconditional” will be Tier-1 collateral. In theory, this designation should increase the value of unconditional debt instruments to private banks but also diminish the value of all “conditional” debt instruments; and,
c) “Exposures unconditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency.”
I don’t understand how an “exposure” differs from a “claim”. Perhaps an “exposure” is like an insurance policy that creates the possibility that someone might later make an actual “claim” against that “exposure”.
In any case, of the six kinds of “zero-percentage-risk” assets to be recognized as “Tier-1” collateral for private, US banks, one (“Cash”) is issued by the Federal Reserve and is not guaranteed and two are issued by the federal government and must be “unconditional” or “unconditionally guaranteed”. Insofar as the government’s “unconditionally guaranteed” debt instruments are deemed to be Tier-1 assets, the demand and price for “unconditionally guaranteed” government debt instruments should rise.
On the other hand, the perceived value and price of US debt instruments that are not “unconditionally guaranteed” are likely to fall.
If only “unconditionally guaranteed” US debt instruments carry a zero-interest-risk weight, does the FDIC anticipate an “emergency” default by the US government wherein the only debts that will be honored will be those that are “unconditionally guaranteed”? Are those other US debt instruments that are “promised” but not “unconditionally guaranteed” already expected to be dishonored in a coming default?
Third, Tier-1 collateral for private banks will now include, “Claims on certain supranational entities (such as the International Monetary Fund) and certain multilateral development banking organizations.”
These “supranational entities” will be agencies of the New World Order and global government. Thus, the FDIC appears to be creating demand (and rising prices) for “globalist” monetary devices. If so, US private bank collateral—and US private banks, themselves—will become increasingly “internationalized”.
Note that unlike the two US-issued debt instruments that must be “unconditionally guaranteed,” claims on “supranational entities” need not be unconditional or guaranteed. This implies that the “claims on supranational entities” are deemed to be equivalent to “cash” (fiat dollars) that can be spun out of thin air based on mere public confidence (read, “gullibility” or “naiveté’”) rather than “unconditional guarantees”. Such “supranational” confidence might be grounds for creating a new global, fiat currency to compete with and/or replace the fiat dollar.
Fourth, Tier-1 collateral for US private banks will now include, “Claims on and exposures unconditionally guaranteed by sovereign entities that meet certain criteria, as listed in the notice.”
These “sovereign entities” will include some foreign governments. Again, we see evidence that the collateral for private banks in the US is moving away from US government debt instruments and toward “foreign” or “supranational” debt instruments. Are the FDIC’s new rules intended to “internationalize” US private bank?
Note that the debt instruments against “sovereign entities” (foreign governments) must (like US gov-cp debt instruments) also be “unconditionally guaranteed”. Again, we see a faint suggestion that the FDIC anticipates an “emergency” default by not only by the US government, but also by many or most foreign governments. In the midst of such default, only those governmental debt instruments that are “unconditionally guaranteed” will retain their value. The value of debt instruments that are not “unconditionally guaranteed” will presumably disappear in a default.
The FDIC implies that world can have confidence in all the debt instruments issued by “supranational entities”—even if they carry no more guarantee than a fiat dollar—but not have confidence in any government’s debt instruments that are not “unconditionally guaranteed”. This is a huge shift.
Fifth, Tier-1, zero-percent-risk collateral for private banks will not include: “General obligation claims on, and claims guaranteed by the full faith and credit of state and local governments (and any other public sector entity, as defined in the proposal) in the United States.”
Instead, debts owed by state and local government and public sector entities will carry a 50% risk weight and be deemed significantly less valuable than the Tier-1 collateral.
This increased risk weight should predispose private banks to prefer debt instruments issued by the feds and supranational entities rather than debt instruments issued by state and local governments. If so, this bias should diminish the private bank’s appetite for state and local bonds and thereby decrease their availability and value.
Less able to borrow from private banks, state and local governments will be forced to reduce their size and/or services—or increase taxes on local inhabitants. Thus, the FDIC Letter indicates that long term prospects for state/local governments aren’t rosy.
Again, we see evidence that the proposed FDIC rules may shift power from state and local governments towards the supranational.
Sixth, There’ll be no mortgages in the private banks’, Tier-1, zero-percentage risk collateral. While supranational and unconditionally-guaranteed US debt instruments hold aTier-1, zero-percent risk weight, the risk weight for mortgages will vary between 35% and 200%.
The increased risk weights attached to mortgages implies that: 1) banks will have less incentive to acquire mortgages; 2) the availability of mortgages will decline; 3) the cost/interest rates on mortgages will rise; 4) with less mortgages available, the price of homes should fall; 5) more home sales will be owner-financed; 6) more homes will be sold only for full payment in cash; 7) new home construction should decline; and 8) renting should rise.
More importantly, if the FDIC is subtly encouraging private banks to distance themselves from mortgages, the FDIC is signaling that home construction is being abandoned as one of our economy’s primary economic engines.
If we’re not going to rely on home construction to sustain our economy, what will take its place?
Seventh, and most importantly, the FDIC Letter proposes that private banks should soon be able acquire “Gold bullion” as a Tier-1, zero-percentage-risk collateral.
This is the big news. Formerly, gold bullion carried a 50% risk weight and private banks had a disincentive to buy and hold gold as collateral. Now, by adding gold to the list of “zero percent risk weighted” collateral, the new FDIC rules will not only allow, but encourage local, private banks to buy and hold gold. That should significantly increase the demand and price of gold.
More, by elevating gold to the stature of the Federal Reserve’s “cash” and the IMF’s supranational debt instruments, the FDIC implicitly admits that the system is no longer fighting gold, and will now embrace gold as an “asset” that’s at least as good as “cash” and perhaps superior.
Note that the FDIC Letter expressly declares that only “gold bullion” can be a zero percent risk asset. Thus, there’ll be no such “zero percent risk weight” assigned to any paper gold assets. This distinction should begin to open a serious wedge between the prices of physical and “paper” gold.
Insofar as both the BIS in Europe and the FDIC (Federal Reserve and Comptrollers’ Office) of the US all agree that gold should be elevated to the status of a Tier-1, zero-percent-risk collateral, I believe that FDIC proposal is a done deal. I don’t know if Congress will enact laws to support this proposal in six weeks or six months, but given that the BIS, FDIC et al are in agreement, these proposed collateral laws seem virtually certain to be passed.
Insofar as gold is equated to “cash,” we may be close to declaring gold to be “money” and/or to declaring a new international currency based in whole or in part on gold.
Insofar as the FDIC and BIS have both declared that gold is a zero-percent risk asset, should private investors be apprehensive about buying gold? Nope.
All of this suggests that the demand for, and price of, physical gold should jump significantly whenever the laws proposed in the FDIC Letter are enacted. Conversely, the price for paper gold may fall.
Unlike US and foreign sovereign debt-instruments that require an “unconditional guarantee” to be listed at Tier-1 collateral, gold, of course, requires no such guarantee. If the bullion is in the bank’s vault, no further guarantee is required. All the banks need is actual possession. The same principle should apply for most individuals who invest in gold. If you can hold your own, your gold carries a “zero-percent risk weight”. If you hold a paper receipt for gold that’s being held by someone else, you have greater risk.
Eighth, the gold bull market is far from over. If anyone in the BIS or FDIC thought the price of gold was likely to suffer further, permanent declines, they’d never have elevated gold the “zero-percent-risk-weighted” collateral. The major banking institution of the EU, the US and the world have recognized gold as a “zero percent risk” “Tier-1” asset at least as good as “cash” and IMF/supranational securities. Can you name any stocks, or corporate or municipal bonds that are also held in such high “official” esteem?
• Gold has fought its way back into the Tier-1 assets “club”.
According to the FDIC et al., only “cash” (fiat dollars), supranational (New World Order) debt instruments and gold need not be backed by unconditional guarantees. This implies that these three forms of collateral are already viewed as more valuable than the “unconditionally guaranteed” debt instruments issued by the US gov-co and “foreign sovereigns”. As such, gold is already one of the “last three men standing”.
Any fool can see that gold will ultimately defeat fiat dollars as a risk-free collateral. That would leave “two men standing”: “supranational” (unguaranteed) debt instruments and physical gold.
A struggle for dominance between “supranational” debt instruments and gold could be titanic and long-lived. But if I had to guess, there won’t be a struggle. The powers behind any supranational currency should be smart enough to see that in a real, head-on struggle, gold will win. I’d bet the supranational entities are already saying “if you can’t beat ‘em, join ‘em.” Therefore, if the fiat dollar fails, the “supranational” currency that replaces it should be backed by gold. Insofar as that’s true, gold will once again be recognized as the #1 collateral in the world.
• Forces favoring fiat currencies launched a war against gold in A.D. 1933 when gold was removed from domestic circulation in the US. The “tide” of that war favored fiat currencies for almost 70 years.
That war between physical gold and fiat currencies continues. But I’m reminded of Winston Churchill’s remark in A.D. 1942 when he realized that the war against the Nazis had finally begun to turn in favor of the Allies:
“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
The BIS and FDIC elevation of gold to a Tier-1 collateral will not cause the price of gold to instantly skyrocket. Nevertheless, that proposed elevation signals that the initial war against gold has been lost by the forces of fiat currency.
The former tide against gold has “officially” turned.