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Hidden Dollar Swap Hammer

By Jim Willie CB      Printer Friendly Version Bookmark and Share
May 28 2010 11:58AM

Let me start the article with a personal note. For the last six years, my pen has put forth a public article almost every week. Since the end of 2009, a change has come from that pattern, for four reasons. First, articles take time and serve as free volleys sent into cyberspace. They are attempts to raise awareness of a broken corrupt system, to encourage increased investment protection by the investment community, and to make repetitive messages that can sink in. Second, many of the warnings have come true of a monetary system in tatters, an insolvent banking system, a failed central bank franchise system, and a discredited amalgam of sovereign bond markets. There is no need to repeat warnings of further events toward breakdown when the forecasted breakdown has arrived in full glory. Third, I wanted to both digest the crisis myself, to discuss and ruminate over the disaster with my trusted colleagues, and to permit folks to digest the disaster, ruin, and continued breakdown themselves. Fourth, more time has been devoted to Hat Trick Letter subscribers, and less to the public. Events never occur according to a script, or forecast, or plan. Too many unintended consequences come. Too many complex elements take a toll within the system. Too many corrupt players defect or are badly weakened. This is history in the making, a highly important chapter of history being written before our eyes. This is World War in Finance with the AngloSphere under great pressure of losing its hegemony in the control of global financial structures. Entire national economies are at high risk. These are historic times.


USDollar swap lines have been revived, rejuvenated, and applied. They are critical in sharing the workload in monetary expansion, the inflation machinery. The US Federal Reserve issued the following press release on May 9th, heralding the facility. It enabled the printing of money for immediate usage by foreign nations, as they essentially print their own money but use the USDollar wellspring as conduit. See the USFed press story (CLICK HERE). This announcement should be viewed as a response to debt abuse, and an open license to continue the great game of Inflation. The public balance sheets have systematically built up greater debt in order to rescue private banks from ruin. The government leverage upward has enabled a private bank leverage downward, with little success however, as perception of wreckage is pervasive and turning universal. The bond market recognizes the ruinous situation and has shifted attacks from banks to sovereign accounts, the government debt arena. So the USFed will produce mountains of new money. Gold noticed the debasement process and reacted strongly, in almost all currencies. So an ambush was planned. The USFed press release read as follows.

"In response to the reemergence of strains in US dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary US dollar liquidity swap facilities. These facilities are designed to help improve liquidity conditions in US dollar funding markets and to prevent the spread of strains to other markets and financial centers. The Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets.

The Federal Open Market Committee has authorized temporary reciprocal currency arrangements (swap lines) with the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank. The arrangements with the Bank of England, the ECB, and the Swiss National Bank will provide these central banks with the capacity to conduct tenders of US dollars in their local markets at fixed rates for full allotment, similar to arrangements that had been in place previously. The arrangement with the Bank of Canada would support drawings of up to $30 billion, as was the case previously. These swap arrangements have been authorized through January 2011. Further details on these arrangements will be available shortly."

This spigot is precisely what lifts the gold price along the powerful long-term trend. It is the great monetary inflation lever. However, in the last two weeks, the accommodative official credit lines have been taken advantage of to supply funds to central bank partners who have a constant habit of selling huge contracts of gold futures, all out of proportion to economic need, and in concentrated fashion. It should come as no surprise that the gold price was pushed down $60 and the silver price pushed down $2.20 after the Dollar Swap Facility kicked in, yet the gold community seems unaware. Harken back to the autumn 2008, to the crisis acceleration events and banking system demise. Recall the $132 billion payment made to JPMorgan on a Saturday morning before dawn before a bankruptcy court judge in Manhattan. The official story was one of the private Lehman accounts compensated for. In the following two weeks, the gold price and silver price plummeted amidst claims of a grand liquidity drain. Last week was a sort of replay with ample funds similarly reloaded with Dollar Swap Facility funds, courtesy of the USFed.


If the Commodity Trading Futures Commission truly wished to observe the details of highly suspicious anomalies in the precious metals market, they need only monitor large trades in this current week when futures options expired for gold. Many gold futures options expired worthless. Notice the gold price stayed below the critical $1200 waterline until Tuesday afternoon. A heap of options went worthless, and the gold price moved over $1200 in the wake of the strained event. Huge paper gold sales were recorded. Positions by gold traders who expected mammoth monetary inflation to push gold toward $1300 per ounce were laid to waste. Referring to options expiration day of Tuesday May 25th, Jesse of the Cafe Americain said "Gold traded all day below 1200, at times rising to within fifty cents of the key strike price of 1200 where a large concentration of call options were clustered. Well, since the call options at 1200 have expired worthless, why bother using the energy to continue to suppress the price?" The tactics used to prevent the gold price from advancing are more easily seen in the open. One must wonder if the CFTC officials are actively doing their jobs.


The USTreasury Bond functions with two roles. It competes as safe haven with gold during crises and sudden asset price stormy declines. But it also serves as funding agent for the powerful monetary inflation. Confidence in the USTreasury market was at high risk. Notice the IEF bond index fund of long-term 7-10 year USTreasurys, lifted at a critical juncture. It was at the point of decision, breakdown or rally. The Dollar Swap Facility was used to bail out big banks with a heavy inventory of Greek and other PIGS nation sovereign debt. The banks turned around with their impaired bonds redeemed for cash, and placed a great deal of the resulting funds in USTreasurys. The Dollar Swap Facility was critical. So the Bond Vigilantes were scattered by a flurry of inflation machinery in an indirect glancing blow after the USFed gave strong aid to European banks which relieved pressure on the USTreasurys at the precipice.


Whenever talk turns to gold being a bubble, regard the message as flirting with desperation. The true bubble is USTreasurys, if not all government debt including UKGilts, the PIGS national debt, and much more. The AngloSphere is replete with asset bubbles in the last 20 years, from tech stocks to housing & mortgage bonds to USTreasurys in a march over the cliff on the path of fiat folly. The phenomenon most striking in the last two to three years has been the transfer of wrecked assets from private banker balance sheets to the government balance sheets, themselves now under siege. The tragedy is that the private banks remain deeply mired in insolvency, while the debt ratios and extreme leverage of the sovereign debt is coming to light. Thus gold has begun to be openly recognized as a legitimate safe haven in full competition with the USTreasurys and the major currencies. The rout of the Euro currency has opened the floodgate of criticism against ruinous governmental policies centered upon bailouts for banks and futile stimulus plans. Grand errors by policy makers regarding indefensible fiat paper monetary systems might be working toward a climax. They appear stuck without alternatives.

The untold story of the gold correction in the last two weeks has been that it was funded by the Dollar Swap Facility, but the good news is that its price movement abides by the parameters of a breakout correction. The 1180 level has been honored, not broken. The moving averages are still in uptrend. The powerful reversal since the Dubai and Greek crises were unleashed has resulted in a breakout, a correction that typically revisits the point of breakout, and a continuation. The monetary system fights to avoid ruins. The central bank franchise model struggles to avoid wreckage. The sovereign debt is in danger of discredit. The entire globe seeks a solution, but the banking leaders and political leaders in charge can only reach for the same debt based elixir that renders great damage to the body economic. They have ordered $1 trillion more from the same tainted fountain for distribution, seemingly oblivious to its ineffectiveness. Worse, they are unaware how the continued monetary excess kills capital formation and leads to enduring recessions that morph to depression.

Each new round of Quantitative Easing and gold price suppression assures an even higher potential gold price as long-term forecast target. The official policies are ruinous, and even destroy capital, eroding capital formation, and circumvent job creation. The eventual gold target in my view has moved from $5000 to $7000 in the last few months. No remedy is in the works. No solution is even pursued. No liquidation of toxic assets is underway. More stimulus is planned for the USEconomy, as home foreclosures continue and bankruptcies continue and bank closures continue and lending is obstructed. The more money the syndicates and governments in partnership create in futility, the higher the gold target becomes. The golden crafts are true lifeboats for the great ship listing badly.


The Wall Street financial barons deserve credit. The well timed 1000-point stock market descent occurred on the very day (May 6th) the Financial Regulatory bill had a key provision being scripted for auditing the US Federal Reserve. The US Senators blinked, and stern provisions were changed. They will force an audit but only for certain TARP-related events. At least it is a foot in the door to its august halls. The Flash Crash, as it is known, has turned the US stock market even more into a round robin competitive backyard for Wall Street firms, where 73% of the NYSE trading volume used to be derived from their computer program trades. Figure even more now. The US stock market has become the scene of added scrutiny if not derision. Miraculous recoveries after 3:30pm are standard these days, like Tuesday. Even the NASDAQ was 3.3% down late in the day, only to stage a recovery. The Plunge Protection Team is operating much more in the open. As they ply their trade, they have rendered the US stock market into something far from an equilibrium based system seeking proper valuation. Recall its foundation for recovery one year ago was relaxation of the financial accounting rules, thus converting equity valuation into over $1 trillion in added value supposedly. The most striking and predictable aspects of the Fin-Reg Bill are how the USFed has even more power than before. The original plan was to limit its power. The banking elite took the honorable motive to limit syndicate powers and to audit the USFed, and turned it into even more USFed powers, like the rod to dissolve any financial firm that endangers the US financial system. This power is ripe for potential abuse.


Word has come to the Jackass desk from a very different location, two of whose university chums serve on an elite commission in Central Europe. Recall the stories of a mid-December landing of a planeload of Interpol agents. Recall the announcement by President Obama in January of strong subpoena power granted to Interpol operating in the United States, a story that should have sent shivers through the financial sector. Instead, it was duly reported with no followup. The subpoena power is not to be dismissed. It enables Interpol agents to obtain documents, to force testimony, and to investigate with some teeth. My source tells of how the Interpol has been ON THE GROUND IN THE UNITED STATES FOR MONTHS doing their work in banker investigations. The same source told of how last August 2009, at least thirty former USDept Treasury officials and Wall Street executives together appealed to Interpol, turned state's evidence, and were granted asylum. They arrived with much crucial evidence in the form of documents, emails, CDs, trading logs, and personal testimony. The information gained has been used for several months in criminal investigations of very high order. Much progress has come, but it is not shared publicly. Finally, lists are being compiled for Arrest Warrants of US & UK & West Europe bankers and politicians complicit with banking center corruption. The story mentioned London bankers working for Goldman Sachs as having their passports lifted. More to come on this showdown. It begs the question who delivers the warrants and what happens if they are rebuffed in defiance, especially if armed bodyguards are present. The list reportedly reads like a Who's Who, not yet seen by Jackass eyes though. A climax is coming, but unclear when.


The public is told that each Quantitative Easing round is the last, the one and only. Just as my forecast was for absolute bond contagion two years ago, and my forecast was for frequent unending AIG & Fannie Mae bailouts, and my forecast was for no Exit Strategy with a steady unerring path of 0% policy, next my forecast recently has been for numerous announced formal QE rounds. In fact, they will become a global round robin, as each continent announces theirs, which opens the door politically for a redux on ours. Then ours invites another of theirs like a merry-go-round with exposed heightened risk. Great Britain is on course for a powerful second QE round. The US by virtue of the revived Dollar Swap Facility has its second QE round, although hidden, the first being in the autumn months of 2008. This month we see the first big QE round in Europe. Combine these QE rounds with government stimulus designed to resuscitate the many moribund economies that stand unresponsive, and surely monetary debasement is on a clear path.


Meet Lawrence Summers, head of the White House Council of Economic Advisors. His reputation is of brilliance, but laden with obnoxious and arrogant behavior. He tends to become bored at policy meetings. He is reported to be pushing for another USGovt stimulus package. He must not be reading about the nascent economic recovery that blesses the US nation, endorsed and promoted by USGovt agencies and the President himself, echoed by his Cabinet of ministers lacking in business experience. Perhaps Summers read the recovery reports and was put to sleep. Perhaps the policies seem more like Politburo pablum, certain sedatives. We the People can count on Summers to serve us vigilantly and diligently. Somebody should tell Larry there is a crisis to manage!!


Key provisions are outlined in the European Union Bank Bailout plan that permit backdoor scuttles. The first provision states that the aid package will be "immediately and irrevocably cancelled" if it is found to breach the EU Treaty's official No Bail-out clause. Such finding can come in a ruling by the European court or the Constitutional courts of any EuroZone nation. The second provision states that if any country finds it cannot raise funding for the rescue at interest rates below the 5% level agreed for Greece, it may opt out of the bail-out. One might soon observe the biggest sellers of European Govt debt and speculators in the EuroBond sovereign Credit Default Swap contracts might be the governments themselves. That includes both the distressed nations in the PIGS group, and the core healthier nations themselves which have born the brunt of the intramural welfare system in fracture. In my view, the Greek Govt debt crisis has been used as a distraction from the extreme problems not only in Spain, Italy, and Portugal, but in the United Kingdom as well. The sovereign debt rejection in the bond markets serves as an indirect repudiation of the global monetary system, whose backbone is not gold but rather debt. The climax will be the UKGilt default followed by its partner default in the USTreasurys. The primary truth in the sovereign debt market is that these bonds cannot be rescued, since the device for any rescue under consideration is more fiat currency, whose basis is indebted acid in the mix.

Notice the string of failed sovereign bond auctions, most notably in Germany. Rejections are in progress, in lands that do not possess the Printing Pre$$. Expect the bailout in Europe to lead to little remedy. Its litmus test is the Euro currency itself. It has fallen to a lower level than before the announced bailout. These are band-aids applied to a potentially fatal wound, in need of more than tourniquets. It needs a new monetary vehicle upon which to build a new foundation. Its failure can also be seen in the separation effect. The rising Euro no longer spreads good tidings or provides favorable winds for US stocks. See the above graph.


Word has come to the Jackass desk from the War Room itself, where important decisions were made in a series of meetings inside Germany. The new Northern Euro currency is finally in its formative stage. Contracts have been forged. Relationships with the more independent Central European central banks have been arranged. Market mechanisms with the commodity markets have been delegated to Finland. A role for Russia is being planned, source of many commodities. The timing of the new Northern Euro is planned for June 2011, with perhaps little if any formal news releases. The key element of the new Northern Euro will be its gold component. Permit a Jackass conjecture of a 1% or 2% cover clause, meaning $100 million in Northern Euros could be redeemed for assets that contain $1 or $2 million in gold bullion. The new currency will be born in crisis. One must wonder if Saudi crude oil will eventually require payment in Northern Euros. Maybe it will contain not only a gold component but a crude oil component.

For over a year, my openly stated belief has been that the first nations to create a monetary and banking system with clear distance set from the USDollar will be the next global leaders emerging. It will be Germany and its cohorts that include the Benelux nations and Austria. In debate is the future role of France, which might be assigned squire duty for the Germans who hold 94% of their sovereign debt. By the way, the Northern Euro as planned is a USDollar Killer, since the present day world reserve currency will fall rapidly in valuation, finding its true value versus direct competition, after proper evaluation of its hemorrhage of USGovt deficits. Its debt ratios place the USTreasury debt securities in the same PIGS pen as the Southern Europe nations heaving in convulsion.


Take a minute to be reminded of the model at work for almost two decades, ever since Goldman Sachs took control of the USDept Treasury in 1992, the start of a dangerous trend. Much has been written in the past few years in these columns about the Fascist Business Model, where large corporate interests are merged with the state. Federal policy actually melds with those of Wall Street, or the former is directed by the latter. Much has been written about the near total lack of remedy, lack of reform, lack of liquidation, and lack of law enforcement. The key characteristic of the Fascist Business Model is that its conflict of interest and inefficiency lead to an eventual breakdown of the system. At high risk on the path toward conclusion is the failure of the state and breakdown of the economy. The housing market failure and chronic insolvency is its bitter fruit. The insolvent banking system is its backfire blast. The TARP Fund fiasco was a huge flag signal of the unchecked flow of funds in the shadows. The Louisiana Oil Volcano is one further point of aroused suspicion. The ultimate breakdown will be seen as a USTreasury default, whether technical or actual.


Jim Willie CB
Editor of the "HAT TRICK LETTER"
Hat Trick Letter
May 28, 2010



Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at . For personal questions about subscriptions, contact him at