-- Posted Wednesday, 1 October 2008 | Digg This Article | Source: GoldSeek.com

I wrote a short article recently Only One Way to Save the World  which stated succinctly that the only way to save the world's financial system is to:

1) Close out as many derivative contracts as possible and
2) Monetize the rest

My conclusion was that this would require at least 100 trillions dollars of monetization.  One response to this has been:

"100 trillion to bail out the crooks - No Way!"

While I agree with that sentiment, I think that it's very important to think clearly about the reality of our situation.  Here is my response to one e-mail:

Banks don't hold mortgages any more.  They hold financial instruments.  Money market funds hold financial instruments. GE is in the structured finance business, so is GM, so is every insurance company. 

Over the counter derivatives have been used to obfuscate ownership of real assets and package them as financial instruments.  It is a mis-direction, meanwhile all the real capital has been taken out the back end in fees.

Most companies and almost all banks are holding these financial instruments, not real assets.  The entire credit system is rife with fraud.  It is not possible to untangle the whole web so there are two choices:

1) Default 99% (the default process is inherently more destructive) all financial instruments - this will destroy the financial system, destroy the division of labor it facilitates
2) Devalue all financial instruments 90% through monetization - this is the alternative I discuss in the article.

In the end, some of those who have stolen the most may end up in jail or fighting to hang on to their real property.  But it will not be simple to prove. 

Thinking clearly about this is powerful.  For instance, consider China.  They hold something like 1.3 trillion dollars worth of dollar denominated financial instruments, about 400 billion of that in US treasuries I believe.  Do you think that China is in a position to destroy the US financially?  Don't make me laugh.  1.3 trillion is now chump change.

By the same token the bailout package, all 700 billion is chump change.  The FED does not need the money.  They are doing currency swap deals in very large amounts.  This is direct monetization.  Is this legal?  You tell me.  The bailout legislation was about legal immunity for Paulson and changing the rules about mark to market for banks.  Today (Sep 30, 2008) the SEC changed the mark to market rules without a word from congress.  Does Paulson still care about immunity?  Maybe not.

So you see that the derivative monsters are eating everything and legal niceties be damned.

You should ignore everyone who does not get it. 

What is happening now is without precedent.  It's running away very quickly and the only thing that can stop it (my view) is tangible money, hard core 100% backing.  I'm sure that the people who are making this happen are long gold and silver, very, very long.

Vincent Bressler
vincentbressler@yahoo.com
-- Posted Wednesday, 1 October 2008 | Digg This Article | Source: GoldSeek.com

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