Market Intervention, Data
Manipulation Still Accelerating
Systemic Risks Increasing, Cartel “End Game” Threatening,
thus, A Solution - Part 1
by DeepCaster LLC, deepcaster.com | June 27, 2008
Print“Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: we view them as time bombs, both for the parties that deal in them and the economic system.”
“…The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear…”
“…In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Warren Buffet, February 21, 2003
Positions in OTC derivatives grew at an even more rapid pace than turnover. Notional amounts outstanding went up by 135% to $516 trillion at the end of June 2007 (Table C.5). This corresponds to an annualized compound rate of growth of 33%, which is higher than the approximately 25% average annual rate of increase since the current format of the triennial survey was established in 1998.
Growth accelerated in all risk categories. The highest rate of increase was reported in the credit segment of the OTC derivatives market, where positions expanded to $51 trillion, from under $5 trillion in the 2004 survey. Notional amounts outstanding of commodity derivatives rose more than sixfold to $8 trillion…Open positions in interest rate contracts increased by 119% to $389 trillion, and those in equity contracts by 111% to $11 trillion. Growth in notional amounts outstanding of OTC foreign exchange derivatives was less brisk at 83%, taking the volume of open positions in such contracts to $58 trillion. (emphasis added)
Bank for International Settlements
Triennial Central Bank Survey, December 2007
“Foreign exchange and derivatives market activity in 2007”
“The fact that the mid-March, 2008 financial markets crisis, capped by the demise of Bear Stearns, was accompanied by substantial drops in Gold and Silver prices is quite significant. After examining the evidence, how can a rational observer conclude anything other than that the price of Gold, Silver, other key commodities and equities markets are manipulated?” Deepcaster, June 25, 2008
This July, 2008 Report is the seventh in a series of Deepcaster's work originally entitled "Juiced Numbers" regarding Market Intervention and Data Manipulation. The primary topics of this Report are: 1) An updated Overview of the Market Intervention and Data Manipulation Regime based on, inter alia, including the recent Releases from the BIS, BLS and The U.S. Federal Reserve reflecting that Market Intervention and Manipulation; 2) Highlights of recent Interventions culminating in the mid-March 2008 financial crisis and accompanying Takedown of Gold and Silver and the Cartel’s “Validity Fog” surrounding the early June, 2008 Intervention; 3) Cartel Intervention as the key feature of the aforementioned and other Takedowns; 4) Data Massaging; and 5) The Cartel “End Game.”
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IMPORTANT NOTE: Deepcaster has spent considerable time reviewing important recent data releases from the BIS (Bank of International Settlements - - The Central Bankers’ Bank), the U.S. Bureau of Labor Statistics, and the U.S. Federal Reserve. They are quite astounding. They reflect a considerable acceleration of Market Intervention and ongoing Data Manipulation. They also reflect dramatic increases in OTC (Over-the-Counter) Derivatives (Dark Liquidity), and in Exchange-Traded Derivatives, and an apparent intensification of Data Manipulation. The total notional value of all Derivatives Outstanding now exceeds One Quadrillion U.S. Dollars! As we demonstrate, these facts reflect dramatically increased Systemic Risk and also reflect the significance of The Cartel’s creating (and/or having available) more OTC Derivatives in order to affect market outcomes. This Report is based on publicly available sources believed to be reliable, but their reliability is not guaranteed. In sum, this Report provides even more evidence of Increased Risk of Systemic Collapse, and of the beginning of the attempted implementation of The Cartel’s Nefarious “End Game outlined below.”
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In order to put the Interventional Takedowns in context, the discussion is interwoven with significant excerpts from the "Juiced Numbers” Series 1, 2, 3, 4, 5 and 6, Deepcaster's initial essays describing "How the Government Gets the Statistics it wants, Markets get manipulated, Citizens get Deluded, and Worse."
By describing the aforementioned Interventional Episodes, we provide evidence to the skeptical of the pervasive influence of Market Intervention and Data Manipulation.
The Interventional Context - - Overview
Deepcaster is periodically asked to explain, and provide evidence for, our view that a U.S. Federal Reserve-led Cartel (apparently composed of the U.S. Federal Reserve, the Bank for International Settlements ("BIS") - - The Central Bankers’ Bank - - and key Primary Dealers, acting with the cooperation of major Central Bankers) manipulates a wide variety of markets. [Apparently one “Operational Vehicle” through which The Cartel works is called “The Working Group on Financial Markets” established after the 1987 crash, and which is often informally and widely referred to as “The Plunge Protection Team” or PPT.]
So it is important to explain what we mean by our claim of Cartel Intervention, and to indicate how studying “The Interventionals” has facilitated Deepcaster’s profitable recommendations displayed at www.deepcaster.com. [It is important to note that virtually all of the evidence we cite is from publicly available sources as indicated below. For example, the Gold AntiTrust Action Committee has amassed substantial evidence regarding the Cartel’s manipulation of the Gold and Silver Markets at www.gata.org.]
First, we do not (usually) mean that the Cartel totally controls prices in any particular market, at all times. Various markets are affected in varying degrees, at varying times, by Cartel manipulation efforts. Cartel actions can substantially affect, but often do not totally control, prices in many markets - - though they certainly have that capacity much of the time. The price of Crude Oil is relatively difficult to manipulate, for example, but there has been substantial manipulation (as we shall show) for several years.
It is important to note that evidence that the degree of manipulation, and, therefore, control, varies from time to time and market to market.
In markets such as the (relatively) Small Cap markets for Gold and Silver securities, Cartel manipulation attempts can have much more impact and are, at times, and for certain time periods, tantamount to control.
To answer the exceedingly important question regarding how the wide variety of markets are manipulated one must recognize that there are two main methods of manipulation, Direct and Indirect.
I. DIRECT INTERVENTION
Direct Intervention to manipulate a variety of markets appears to be accomplished primarily via two vehicles: “Repo” Injections from The Fed, and via the Over The Counter (OTC) Derivatives reported by The Bank for International Settlements (see www.bis.org, and details below). The Fed makes injections of Repos (Repurchase Agreements - - usually TOMOs - - Temporary Open Market Operations typically expiring in 1 to 30 days) into the market nearly every business day.
Repurchase agreements are loans (at Fed Fund rates) issued daily by the Federal Reserve to Primary Dealers, the proceeds of which can be used to buy, for example, Dow index futures, if the Fed seeks to boost the Dow. The total amount of un-expired Repos on any given day constitutes the “Repo Pool.” Monitoring daily changes in Repo Poll levels (which is publicly available information) is crucial to determining how the Interventions will likely affect the markets.
Thus, the several Primary Dealers (e.g. Goldman Sachs, J.P. Morgan Chase. Citibank), who apparently work under the Fed's direction, are able to use these loaned funds to buy or sell various securities and futures to affect the markets. [Note: One species of Repos, POMOS (Permanent Open Market Operations), never has to be repaid, but explaining the significance of that (beyond the obvious) is beyond the scope of this article.] The fact that the loaned funds can be used to purchase Derivatives (as well as plain equities) gives the manipulators the tremendous leverage which derivatives afford.
But along with that tremendous leverage comes tremendous and tremendously increasing (as the recent data releases described below indicate) systemic risk.
Daily Repo additions are made in amounts typically ranging from U.S. $1 to U.S. $20 billion.
The Challenge: Determining the Impact of The Interventionals
The challenge for investors and forecasters is to determine where (i.e. in what Sector/s) and how (immediately, in increments, etc.) the Repo-backed funds (or other Derivatives) will be employed. Deepcaster and those very few others, who monitor the daily Repo injections (and related Cartel and their Allies’ Actions), make educated Forecasts of where and how such funds are likely to be used based on patterns, tendencies, and judgments. But no outsider can know for sure (So where is the transparency, Ben?).
Those who doubt whether the Cartel has the capacity to manipulate the markets (and especially the larger markets like the multi-trillion dollar currency and bond markets) are invited to inform themselves about the $91 trillion Derivatives Colossus at Fed Primary Dealer J.P. Morgan Chase, or the $34 trillion derivatives colossus at Fed Primary Dealer Citibank (see Appendix A), or the U.S. $393 trillion in December 2007 (up from U.S. $291 trillion in Dec. 2006) Derivatives position at the Bank for International Settlements (the Central Banker's Bank) devoted to “Interest Rate Contracts” (see www.bis.org. Then follow the path: Statistics>Derivatives>Table 19). Note that that OTC Derivatives total has increased by over U.S. $100 trillion in just one year!
Attitudes of The Fed/Treasury/BIS Toward Intervention
Regarding the awareness and intentions of the leaders of the U.S. Treasury and the U.S. Federal Reserve concerning market manipulation and public perceptions, it is instructive to review what their leadership has said.
Former Secretary of the Treasury, Larry Summers, for example, in his own treatise "Gibsons Paradox and the Gold Standard," indicates "determination of the general price level then amounts to the micro economic problem of determining the relative price of gold," Journal of Political Economy, page 529, 1989.
This much publicized conclusion indicates that our monetary and financial leadership know that in order to manage the general price level and interest rates it is necessary to determine the relative price of Gold. Therefore, of course, it follows that capping the price of gold (and, by necessity, the price of that other “Monetary Metal” Silver) would be extremely important.
Regarding allegations of "news management" (which some have indelicately called "news manufacturing") we refer you to the words of the Fed Chairman B.S. Bernanke himself, in his September, 2004 Treatise on "Zero Bound Rate Systems." Note Deepcaster's underlines which call attention to the use of "communications policies" to "shape public expectations," and to the use of the Central Bank's balance sheet and the “targeted purchase” of Treasury Securities (yes, The Fed purchases the U.S. Treasury’s own paper and) to achieve Fed goals:
"Monetary Policy Alternatives at the Zero Bound:
An Empirical Assessment (non-technical summary page i)
In this paper, we apply the tools of modern empirical finance to the recent
Experiences of the United States and Japan to provide evidence on the potential Effectiveness of various nonstandard policies. Following Bernanke and Reinhart (2004), we group these policy alternatives into three classes: (1) using communications policies to shape public expectations about the future course of interest rates; (2) increasing the size of the central bank's balance sheet, or "quantitative easing"; and (3) changing the composition of the central bank's balance sheet through, for example, the targeted purchases of long-term bonds as a means of reducing the long-term interest rate." (emphasis added)
http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf
To Deepcaster all this indicates that the Fed-led Cartel will go to significant lengths necessary to control long-term interest rates (in addition to short term rates, which, it is widely acknowledged, they also control), cap the price of Gold and otherwise achieve Central Bank ends (see evidence for Fed control of long-term rates below).
Brief Anatomy of the “U.S.” Federal Reserve
An excellent analysis of the defects of the “U.S.” Federal Reserve - - so far as the United States’ National Interest is concerned - - is well documented in G. Edward Griffin’s superb book, The Creature From Jekyll Island: A Second Look at the Federal Reserve).
Indeed, the Profit Motive lies behind Fed Actions. Even the most causal student of Economic History knows that the United States’ Federal Reserve system, or “The Fed” as it is called, is not a U.S. government owned or controlled entity, but a privately owned, for profit, entity.
Various international private banks, several of which are headquartered in Europe, own “shares” in the “United States” Fed. Moreover, this “United States” Fed leads a Cartel of Central and Private Banks* who collectively intervene in a wide variety of markets, as Deepcaster demonstrates here. All this is obviously quite financially incestuous.
These International Bankers, acting through their “U.S.” Fed, profit both by creating money out of “thin air” and by collecting “interest” from U.S. Taxpayers on the Treasury Securities it has bought with U.S. Dollars (Federal Reserve Notes) it has created out of thin air. This is all eloquently described by the Dean of the Newsletter Writers, Richard Russell:
“I still can’t get over the whole Federal Reserve racket.
Consider the following - - let’s take a situation where the U.S. government needs money. The U.S. doesn’t just issue United States Notes, which, of course it could. These notes would be dollars backed by the full faith and credit of the United States. No, the U.S. doesn’t issue dollars straight out of the U.S. Treasury.
This is what the U.S. does - - it issues Treasury Bonds. The U.S. then sells these bonds to the Fed. The Fed buys the bonds. Wait, how does the Fed pay for the bonds? The Fed simply creates money “out of thin air” (book-keeping entry) with which it buys the bonds. The money that the Fed creates from nowhere then goes to the U.S. The Fed holds the U.S. bonds, and the unbelievable irony is that the U.S. then pays interest on the very bonds that the U.S. itself issued. (With great profit to the private owners of The Fed - - Ed. Note) The mind boggles.
The damnable result is that the Fed effectively controls the U.S. money supply. The Fed is …not even a branch of the U.S. government. The Fed is not mentioned in the Constitution of the United States. No Constitutional amendment was ever created or voted on to accept the Fed. The Constitutionality of the Federal Reserve has never come before the Supreme Court. The Fed is a private bank that keeps the U.S. forever in debt - - or I should say in increasing debt along with ever rising interest payments.
How did the Fed get away with this outrage? A tiny secretive group of bankers sneaked through a bill in 1913 at a time when many in Congress were absent. Those who were there and voted for the bill didn’t realize (as so often happens) what they were voting for (shades of the shameful 2002 vote to hand over to President Bush the power to decide on war with Iraq).” - Richard Russell, “Richards Remarks,” dowtheoryletters.com, March 27 2007
After President Wilson signed the Federal Reserve Act into law in 1913, he reportedly said, “I am a most unhappy man, I have unwittingly ruined my country…a great industrial nation is now controlled by its system of credit…the growth of the nation, therefore, and all of our activities are in the hands of a few men…”
Insightful economic forecaster Ian Gordon notes several negative consequences of the nearly 100-year reign of The Fed, consequences with which we cope today.
“Since its inception in 1913, the Federal Reserve Board has been responsible for almost 95% devaluation of the U.S. Dollar. All this has been achieved through its ability to continually inflate the money supply.
And, between 1985 and 2005, the Federal Reserve Board has increased the money supply by five times. This extraordinary money creation is merely the catalyst for debt creation. In a fiat money system, money is debt…there is absolutely no way this money can ever be repaid except by continued inflation. But, now that the credit bubble is blown up, inflation is no longer an option; bankruptcy looms.” “The Federal Reserve…What Has It Done For You Lately?”
Ian Gordon, December 29, 2007 (www.axisoflogic.com)
The one conclusion that one can make from the foregoing is that the failure to take account of the power, force and pervasiveness of Fed-led Cartel Manipulations (i.e. The Interventionals) is an invitation to financial and investment suicide.
Gold and Silver Market Manipulation
The profound impact of these manipulation efforts has been most well documented regarding the price capping of the Gold market. For those who have any doubts whatsoever about the fact and extent of government (Central Banks) manipulation, we have (thanks to Bill Murphy, Chris Powell, and other leaders of the Gold Antitrust Action Committee) the following June, 2005 blatant admission of manipulation by the Head of the BIS (Bank for International Settlements - - i.e. the Central Bankers' Bank) Monetary and Economic Department, W.R. White:
"…It is perhaps worth spending a minute on what is meant by Central Bank cooperation…{it includes]…last, the provision of international credits and joint
efforts to influence asset prices (especially gold and foreign exchange) in
circumstances where this might be thought useful…"
Among the many items of evidence cited by GATA Secretary Chris Powell in his superb article “There Are No Markets Anymore, Just Interventions,” all of which are matters of public record, are:
It was a matter of public record in January 1995, when the Federal Reserve’s general counsel, J. Virgil Mattingly, told the Federal Open Market Committee, according to the committee’s minutes, that the U.S. Treasury Department’s Exchange Stabilization Fund has undertaken “gold swaps.” Those minutes are still posted at the Fed’s Internet site: http://www.federalreserve.gov/fomc/transcripts/1995/950201Meeting.pdf
It was a matter of public record in July 1998, six months before GATA was formed, when Federal Reserve Chairman Alan Greenspan told Congress: “Central banks stand ready to lease gold in increasing quantities should the price rise.” That is, Greenspan himself contradicted the usual central bank explanation for leasing gold – supposedly to earn a little interest on a dead asset – and admitted that gold leasing was all about suppressing the price. Greenspan’s admission is still posted at the Fed’s Internet site: http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm
Incidentally, while we gold bugs love to cite Greenspan’s testimony from July 1998 because of its reference to gold leasing, that testimony was mainly about something else, for which it is far more important today. For with that testimony Greenspan persuaded Congress not to regulate the sort of financial derivatives that lately have devastated the world financial system.
The Washington Agreement on Gold, made by the European central banks in 1999, was another admission – no, a proclamation that central banks were working together to control the gold price. The central banks in the Washington Agreement claimed that, by restricting their gold sales and leasing, they meant to prevent the gold price from falling too hard. But even if you believed that explanation, it was still collusive intervention in the gold market. You can find the Washington Agreement at the World Gold Council’s Internet site: http://www.reserveasset.gold.org/central_bank_agreements/cbga1/
Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003. On that date Barrick filed a motion to dismiss Blanchard & Co.’s anti-trust lawsuit against Barrick and its bullion banker, JP Morgan Chase, for rigging the gold market.
Barrick’s motion said that in borrowing gold from central banks and selling it, the company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit. Barrick’s confession to the gold price suppression scheme is posted here: http://www.rba.gov.au/PublicationsAndResearch/RBAAnnualReports/2003/Pdf/…
For skeptics, Deepcaster asks: What could be clearer than all this?
Interest Rate Manipulation
Clearly the fact that the intervention occurs is amply documented.
In addition, the aforementioned Bernanke statement in his academic paper "Zero Rate Bound Economies" can reasonably be taken as a justification for the Fed purchasing its own paper, otherwise known as monetizing the debt. Specifically, regarding long bond purchases, the purpose of this would be to boost the 10 and 30-year bonds, and, therefore, reduce long-term interest rates.
But in light of increasing Real Inflation (see “Indirect Manipulation” below) one can reasonably ask: So why haven’t the storied “Bond Vigilantes” pushed interest rates (and especially long-term interest rates) up to account for the massively expansionary monetary inflation of recent years?
That is because the Fed-led Cartel of Central Bankers and Allies has been using “interest rate swaps” and other Derivatives (via their Chosen Primary Dealers) to suppress what would otherwise be dramatically rising interest rates, both short and long term, according to Rob Kirby. Consider that there were $393 trillion in Outstanding OTC Interest Rate Contracts as of December, 2007 according to the BIS.
Kirby’s excellent paper, “The Elephant in the Room,” demonstrating how interest rates (which would, if there were no suppression, be dramatically rising) have been suppressed by The Cartel, was presented at the Spring 2008 Washington, D.C., GATA (Gold Anti-Trust Action Committee, www.gata.org) Conference. Kirby concluded:
“Monetary authorities have long been pursuing expansionary monetary policies while attempting to cloak their actions by suppressing rising interest rates and other natural market reactions.
This has completely perverted our whole banking and monetary system.
This is why false values have been assigned to a host of financial instruments.
This explains why the gold price has been suppressed. It’s another canary in the coal mine that was vigorously and nefariously silenced.
If you’re wondering why J.P. Morgan never seems to get caught up in any sort of hideous market-to-market losses concerning their derivatives or hedge book – consider that back in the spring of 2006, Business Week’s Dawn Kopecki reported, “President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye.”
Thus, what would otherwise be the markets’ “normal” reaction to the ongoing and worsening credit, subprime, and other financial crises - - dramatically rising interest rates, especially on the long end - - has been suppressed by The Cartel’s Interventional Regime
The Interventional Regime – Motives, Causes, and Consequences
But The Interventional Regime is showing increasing signs of stress which are reflected in accelerating Derivatives Creation, and thus in Increasing Systemic Risk. The nearly $600 trillion OTC Derivatives Colossus (see www.bis.org, path: statistics-derivatives-Table19 and following) on which the Interventional Regime is built is increasingly subject to counterparty defaults and to Darkly Liquid OTC Derivatives turning illiquid (resulting, inter alia, in the ongoing credit freeze-up) among many symptoms.
Clearly, The Cartel has created a Financial System subject to ever-greater Systemic Risk. Why?
Harry Schultz, one of the Eminence Grises of the Financial Newsletter writing fraternity, puts the question in this way - - what is the reason for this “seemingly random monetary mess that multiplies its momentum every day? The answer, in one word, control. The elite/insiders already have control of the financial system, but they wanted more, much more…and it was is not random, it is planned.”
And what is the effect of all of this on the average investor? In the inimitable words of Harry Schultz, “How will all the above manifest itself in your life? The answer: “All you own will shrink...your income, assets, net worth, will shrink year after year in real terms inflation adjusted and possibly also nominally.”
Harry concludes by advocating that we all try to shrink less “relative to the herd” so that we hold our position. Part of the strategy for shrinking less, according to Harry, is “it will, over 10 years, involve moving in and out of investments as price action will be very dramatic. Buy and hold will not work in any area, including gold.” HS Letter, April 27, 2008.
Indeed, Deepcaster has been sounding the theme that the “Buy and Hold Strategy Increasingly Fails” since the inception of Deepcaster’s newsletter.
But Deepcaster is not satisfied with a strategy which merely accepts “shrinking less” as a goal.
Thus, Deepcaster has developed a strategy for coping with and profiting from the “Shrinking Assets” problem. That strategy can best be employed in the Precious Metals Sector, with Gold and Silver bullion and shares. It is entitled “Defeating The Cartel…With Profit” and was published on 3/28/08 and can be found in the Alerts Cache at www.deepcaster.com.
From the Fed's point of view, the aforementioned Interest Rate Takedowns would presumably reflect a national policy to support the housing market by lowering interest rates, thus encouraging continuing robust consumer spending mainly through the vehicle of the Home-ATM. In addition, it is very much in the Fed's interest to focus investors' funds on purchase of their paper (and, especially, their 10-year Note) and to buoy their fiat currency. In this way, the Fed maintains and enhances its power. But, we reiterate, the “U.S.” Federal Reserve is owned by private international banks and is not a U.S. government entity.
[As an historical note, recall that President Kennedy was unhappy with Fed policy and therefore caused U.S. Notes to be printed as a substitute for Federal Reserve Notes. The issuance of these Notes ceased shortly after President Kennedy's assassination.]
Deepcaster must issue a Word of Caution here: The paper-based edifice of increasing Fiat Currencies, OTC Derivatives and the Repo Intervention is not indefinitely sustainable. It will collapse, and that is why The Cartel has begun to plan and implement its ominous ‘End Game’ referenced below, and fully described in Deepcaster’s June, 2007 Letter “Profiting From the Push to Denationalize Currencies and Deconstruct Nations” available in the Letter Archives at www.deepcaster.com.
Cautions for Investors and Traders
Finally, we issue a word of caution to our readers. So long as The Cartel is in a very active Interventional Mode (e.g. as in taking down the price of Gold and Silver) do not be lured into thinking that the periodic up spikes in the prices of Gold and Silver necessarily present a "breakout" or a buying opportunity. As a practical matter, technical breakouts are sometimes a lure designed to suck in more "longs" prior to a subsequent deeper Takedown.
Nonetheless, it is essential to study the Fundamentals and Technicals even though the Interventionals can override the Fundamentals and Technicals. One must study the Fundamentals not only for all the usual reasons but also because Fundamentals somewhat constrain the timing and effectiveness of Interventions by The Cartel.
Similarly, one should study the Technicals for all the usual reasons and, in addition, because it is in The Cartel’s interest to make its actions seem technically plausible in order to continue to “run mainly under the radar.” It is not in The Cartel’s interest to make its Interventions any more visible than they already are. Indeed, there is powerful evidence that The Cartel often uses and/or helps create technical patterns (i.e. “painting the charts”)which lure certain investors (such as hard asset investors) into getting “off sides” before Cartel actions such as taking down the price of Gold or Silver.
Thus a primary Deepcaster goal is to identify interim bottoms of Gold, Silver, Oil and other sectors, through the use of Fundamentals, Technicals, and Interventionals, and thus to help readers profit from their inevitable resurgence and ascendance to new heights. For example, Deepcaster’s profitable recommendations displayed at www.deepcaster.com were facilitated by attention to the Interventionals, as well as Fundamentals and Technicals.
Significant and Increasing Systemic Threats via Derivatives
Dramatic increases in two major species of Derivatives emphasize the increasing magnitude of Systemic Risks.
Exchange-Traded Derivatives: Exchange-Traded Derivatives soared 27% to an all-time-high $681 trillion in the third quarter 2007, according to BIS figures.
The largest single category - - Exchange-Traded Interest Rate Derivatives - - increased 31% to $594 trillion, during the third quarter, 2007.
These increases reflect a remarkable increase in risk, for many reasons, including the increased aggregate magnitude of the leverage they reflect, and the concomitant increased opportunities for counterparty default.
However, being exchange-traded, they are, to a degree visible. Yet that other main category of derivatives-over the counter (OTC) are not visible, except for the BIS and other reporting agencies disclosures. Yet the inherent risks are, if anything, greater.
Over The Counter (OTC) Derivatives: Consider the import of the data from the BIS' own website - - Review Table 19 at www.bis.org. Follow the path: Statistics>Derivatives>Table19. Note that as of December, 2006 there were:
• $6.475 trillion Commodities Contracts (excluding gold) Outstanding
• $40.271 trillion foreign exchange contracts outstanding
• $291.582 trillion interest rate market contracts outstanding
But consider the stunning increases in OTC Derivatives in just the twelve months between December, 2006 and December, 2007. As of December, 2007 there were:
• $8.405 trillion in Commodities (excluding gold) Contracts Outstanding,
a $1.930 billion (approx.30%) increase in only twelve months
• $56.238 trillion in Foreign Exchange Contracts,
a $15.967 trillion (approx. 40%) increase in only twelve months
• $393.138 trillion in Interest Rate Market Contracts,
a $101.556 trillion (approx. 35%) increase in only twelve months
What is also obvious from a comparison invited by Table 19 - - comparing December, 2005 figures with December, 2007 figures - - is the increasing Systemic Threat this interventional regime imposes. Note also the dramatic jump in most categories of derivatives from December 2005 to December 2007.
Gold Derivatives
Increases in the amounts of OTC derivatives outstanding for the Gold Market are perhaps the most stunning:
From the $359 billion outstanding at end-June 2004 they nearly tripled to $1,051 trillion at end-June 2007, an increase of approx. 290% (source: BIS “Table A OTC derivatives market, Triennial Central Bank Survey of Foreign Exchange and Derivatives market Activity”).
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