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Tuesday, 9 December 2014

Are the rats ready to leave the sinking ship?

So what a day today was in the world; it started in China -

China Securities Depository and Clearing Corp (CSDC) said in an announcement after the market closed on Monday that with immediate effect, only corporate bonds with the highest rating of AAA and those issued by firms with a high rating of AA and above could be used for bond repurchase. Analysts say the regulators' exclusion of lower grade bonds from being used in bond repurchase contracts, a key source of secondary liquidity in trade, increases the risk of trading such bonds, depressing demand and putting upward pressure on yields. (You may recall that for example, Amazon Inc bonds, are rated BBA and so would be excluded). This immediately removed $80 billion of eligible collateral and lowered the fx rate to 6.2 Yuan per dollar.

The knock on effect was that money that banks had borrowed in Japan (at 0% interest) and placed in Chinese bonds (earning 2% interest was swiftly repaid).

This 2% money for nothing earnt by borrowing at a lower rate and than is collected from the money borrowed (also known as the Carry Trade) has been going on since 1987 when Japan first lowered its interest rate to 0%.

All this money which had been freshly pulled out of China was paid back to Japan raising the value of the Yen from 122 to the dollar to 118 to the dollar collapsing the Japanese Stock Market from 18,200 to 17,500.

But this was not the only country to suffer...

In Greece the stock market also crashed by 13% with banks dropping by 25% and the interest yield on Greek debt (both 3 year and 10 year) soared back over 8%. Thus we are back to the position we were in prior to the bailouts of European Countries with nations struggling to borrow money and then subsequently to make interest repayments.

The reason is that all western banks are heavily leveraged in the carry trade; including those banks that we are dependent on to over pay our civil servants.

This prompted both Moody's and S&P (the ratings agencies) to issue warnings about European banks and highlight the risk that bank bail ins (where depositor's money is taken to pay the debts of the banks) were likely to occur in 2015.

On the bright side gold jumped 2.3% and so we know how this is going to play out and where the sensible money is, well since only gold and silver are money, it is the same place it has always been.

So there we have it the first rumblings of the imminent crash in the western financial system and a warning from the ratings agency (yes the very ones who maintained Jersey's AA+ rating recently) that the end is less than a year away.

The towering morass of financial derivatives built on sand has given its first shudder, the collapse is now just a matter of time.

What plans have our government made for this or have they just got their private gold vaults overseas ready to leave the sinking ship like the rats they are?