It is one thing to raise concern, something different to scream fire in a crowded theater.
This is exaclty what the Bank of International Settlements (BIS) is doing. Of course, all the knuckleheads on Twitter are going apeshit over this. The goldbugs are calling for the collapse of the entire system.
Yada Yada Yada.
You would think someone would figure it out. But then, the BIS said it, so it must be true. After all, they are honorable and noble. Oh wait, they are scummy bankers expect when they espouse our point of view.
It is like the CPI. For the last year, we hear how it is showing hyperinflation and uncovering the Fed's "printing press go BRRR". Of course, before that, the CPI was a farce, manipulated, and changed in the 1990s to hide the true measure of inflation.
Such is the way of the world of the foolisness.
So what is the deal with the "suddenly" found derivatives. Well, nothing was found by anyone other than Central Bankers who weren't looking to begin with.
It Is The Eurodollar System Stupid
How long has we discussed the Eurodollar system? Did we not mention off balance sheet transactions that total trillions, on top of what is done daily through the custodian in the Repo market?
The reality is we have nothing new. Just because BIS suddenly woke up and looked around does not mean anything. Banks have been using off balance sheet assets for decades. This is what fuels the global monetary system.
Unfortunately, Central Bankers actually think it is their reserves or a nation's currency that actually do anything. This hasn't been the case since the 1970s (at a minimum). Even Alan Greenspan knew in the late 1990s and early 2000s that they had no idea what money was NOR where to find it. The banking system left them in the dust.
What happens was the Eurodollar system stepped in (on) the Central Banking system. This was something that might have worked nationally but, in a world where the economy was going global on a rapid basis, it was insufficient. The system the banks designed took care of global monetary issues, something Central Banks were ill-suited for. They could not advance much past their borders.
Of course, the bureaucrats (and economists) at the Fed etal is clueless to this. Now they are screaming about $80 trillion in deriviatives. There is nothing that will get the (dumb)masses stirring like the word derivative.
How Institutions Use Derivatives
When they mention $80 trillion in debt, it is vital there is another side to the trade. What appears as a liability on someone's balance sheet is an asset somewhere else. Hence, the derivatives actually cancel themselves out producing a new of zero. Of course, there is still counterparty risk and liquidity to consider, two things the BIS is not discussing.
Derivatives often are used as a hedge. In an era of Value-at-Risk (VaR) models, banks operate within a range of asset allocation. If they exceed it for any reason, a move to offset it is required. Here is where derivatives enter. A bank might pick up a certain asset, say an interest rate swap, that will offset some risky lending. This would end up getting their model in alignment, meeting the specifications the bank operates under.
The problem is organizations such as BIS are using outdated theories that do not work. We saw this in the 1970s when they screamed about inflation (which was truly a result of money) only to see their actions cause the USD to skyrocket, causing a currency crisis elsewhere.
In short, the monetary authorities over the last 50 years are entities that do not know anything about money or where to find it these days. Yet these are the people who get the masses wound up and spewing all kinds of crap.
We are in a global liquidity crisis. This is evidenced by looking at most metrics. There simply is not enough money out there especially since bank reserves do nothing for the economy. Now, we have derivatives which has BIS up in arms. The reality is that, if this were just found, it would be a boom for the global economy. Nothing was found. The banks knew it was there all along and were utilizing it as best they could.
The constraint on the balanace sheets is causing the entire Eurodollar system to contract. Money cannot effectively be allocated as it is required, hindering the entire global economy. This started with the Great Financial Crisis and never stopped.
Perhaps it is time for BIS to go back to sleep.
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