The Engine Room of American Monetary Policy
by Rob Kirby, Kirby Analytics. July 28, 2008
Who hasn’t heard of the Federal Reserve’s vaunted interest rate policy group, the FOMC? We’re all aware that this group is constituted of Fed Governors who meet every-so-often and at the conclusion of their meetings, make an “announcement” regarding their target for short term interest rates or the Fed Funds Rate. Accompanying the decision on interest rates, there is typically a simultaneous release, or statement, espousing the views of the governors who make up the FOMC – which is short for Federal Open Market Committee.
It is generally accepted that the Fed then utilizes Open Market Operations, generally conducting billions in temporary [TOMO] or permanent [POMO] to direct or implement their policy decisions.
So far, so good – right?
What I’d like everyone to realize is this; what’s outlined above is only what’s visible above the waterline:
Below the waterline, things are different. Remember folks, it is stuff below the waterline where few seldom see, that has created some of the world’s worst tragedies:
Enlightenment Below the Waterline
Nowadays, we frequently hear, in generalities like CDO, SIV, ABCP and Sub-Prime Mortgages, about how over the counter [OTC] derivatives have run amok and how they have contributed to the financial malaise affecting America’s Ship-of-State.
What is seldom mentioned or explained adequately is the common thread that defines or binds all of these products together, namely, that they are ALL interest rate, or fixed income products.
In a system of usury, which broadly defines our current monetary order, interest rates are supposed to act as valves, closing or restricting money and credit when the economy overheats, and opening or extending money and credit as the economy cools.
The real inflation rate serves as the thermometer which tells the operators of the economy the ambient temperature and ergo, hints at the future course of interest rates.
That folks, in general terms, is how the system of usury is supposed to work.
In our system today, for starters, the thermometer is BROKEN. Inflation reporting has been corrupted, altered and falsified in an egregious manner.
This has led to the mis-pricing of capital or what we commonly know as money and/or credit.
The mis-pricing of the value of money has, in-turn, led to the mis-pricing of a host of financial assets [like CDO, SIV, ABCP and Sub-Prime Mortgages mentioned above].
Why the Ship Hasn’t Sunk or Capsized Yet?
The reason why the economy has continued to operate in a fashion more-or-less consistent with the view that all’s well for so long is quite simple: MARKET MANIPULATIONS, or, what we have not been able to see below the waterline.
The tables of data below are compiled from Call Reports – this information is supplied by the banks to the Office of the Comptroller of the Currency [OCC] as part of their regulatory compliance. The OCC then publishes this data in Quarterly Derivatives Reports three months in arrears on their web site.
Take special note of how the Fed’s proxy in the commercial banking marketplace – J.P. Morgan Chase – ramps their short term interest derivatives positions from quarter to quarter over a time period that “brackets” the onset of the sub prime crisis [began Aug. 07].
Everyone needs to realize and understand that in conducting trade in these interest rate products, what they are in fact trading is 3 month interest rate futures based products [predominantly 3 month Eurodollar Futures which, coincidentally, determine 3 month Libor – the ‘standard’ or benchmark in determining rates for commercial bank loans].
When one institution trades 7.6 TRILLION worth of this product in a three month period, they are no longer merely a market participant, but rather, THEY ARE THE MARKET. Incredibly, the mainstream financial press doesn’t even seem to notice.
Common sense dictates that regulators would NEVER allow any independent bank to throw around 7.6 Trillion of these instruments, exercising dictatorial powers in the short end of the interest rate curve in one quarter without shutting them down and charging them with market manipulation. Ergo, we know that these are actually the actions of the Fed, operating in the name of J.P. Morgan to obfuscate their actions to give the appearance of a “free market.”
Folks also must realize that, particularly from an historical context, a rapidly rising price of gold would categorically alert financial market participants that something was amiss, hence the need to suppress its price:
The build in J.P. Morgan’s Q3 / 07 gold derivatives was intended to quell a rising price of gold:
Note the 7.6 TRILLION ramp in short term Int. Rate Swaps Q3 / 07.
And here is the demonstrable effect this MANIPULATIVE had on bond prices / interest rates:
The saying that “for every action there is an equal and opposite reaction” could best be described in monetary terms to explain the result of this “undeclared, unreported and misunderstood” simulative monetary policy by it’s manifestations in the CRB Inflation Index [a less corrupted brother to the completely falsified government inflation data we are all so familiar with]:
The “goose up” in inflationary forces in the economy compelled monetary authorities to relent somewhat as evidenced by the dramatic reduction [achieved by simply allowing 3 month interest rate futures contracts to mature without renewal] in the < 1 yr. portion of J.P. Morgan’s Int. Rate Derivatives book in Q4 / 07:
Out of Sight, Out of Mind
I chronicle all of this because it’s imperative that regular hard-working folks understand what is happening to the value of their money. My subscribers are reading about prudent courses of action to protect themselves from the ill effects of the imposition of this nefarious and undeclared monetary policy.
While it’s true that obfuscation has brought us to this point and many may think that more-of-the same can continue indefinitely – I offer you this:
CARSON CITY, Nev. (AP) - The 28 branches of 1st National Bank of Nevada and First Heritage Bank, operating in Nevada, Arizona and California, were closed Friday by federal regulators.
The banks, owned by Scottsdale, Ariz.-based First National Bank Holding Co., were scheduled to reopen on Monday as Mutual of Omaha Bank branches, the Federal Deposit Insurance Corp. said.
The FDIC said the takeover of the failed banks was the least costly resolution and all depositors - including those with funds in excess of FDIC insurance limits - will switch to Mutual of Omaha with "the full amount of their deposits."…..
This negotiated deal clearly took days or weeks to put together. In another glowing example of “transparency” on the part of monetary regulators, it was announced to the world at 10:30 p.m. last Friday night.
So, we can all see – CLEARLY – things really are changing.
Can you afford to not be protected?
Overseas equity markets started the week on a quiet note with Japan’s Nikkei Index gaining 19 points to 13,353. North American markets swooned with the DOW falling 239.60 to 11,131.10, the NASDAQ losing 46.31 to 2,264.22 and the S & P giving up 23.35 point to close 1,234.40. NYMEX crude oil futures added 1.44 to finish the day at 124.70 per barrel.
On foreign exchange markets the U.S. Dollar Index fell .19 to 72.69.
Interest Rates eased somewhat with the benchmark 5 yr. bond finishing the day at 3.32% while the 10 yr. bond ended the day at 4.02%.
Precious metals rallied with COMEX gold futures adding 1.40 to 930.60 per ounce while COMEX silver futures added .13 to finish the day at 17.50 per ounce. The XAU Index added .42 to 173.94 and the HUI gained 1.18 to 410.19.
On tap for tomorrow, at 10:00 a.m. July Consumer Confidence data is due – expected 50.0 vs. prior 50.4.
Wishing you all a pleasant evening and a happy tomorrow!
© 2008 Rob Kirby