It is amazing what little is written about the looming cataclysm of interest-rate derivatives. You can Google “interest rate derivative black swan” or “interest rate derivative disaster” or any derivation of these terms and you won’t get a fraction of the warnings published on this web site alone. Therefore, I have to write about it yet again in the hopes that an awareness of the coming Armageddon will be heightened.

First of all, one of most important factors most economists miss is the actual utility of interest rates. As fiat currencies become more and more disconnected from their utility and continue to massively lose their worth against anything with intrinsic value, the only remaining utility lies in the multiplier used to repay it.

While most economists focus on the central banker’s power to regulate the supply of currency, this is no match for the power to regulate the discount rate, which applies to every unit in circulation. The huge volume of currency printed by Bernanke’s central bank in the last two years has had little affect on the money supply in circulation, which is still contracting. However a 4 point rate increase, as we experienced between October 1979 and February 1980, would today have destructive financial consequences to bonds, treasuries, almost any security or financial instrument, far exceeding what we experienced in the fall of 2008 (which resulted primarily from the unwinding of credit default swaps, but also, indirectly, from the Fannie meltdown which began as a result of interest rate based derivative losses beginning in July of 2003).

So far, most financial experts, economists and the like, have recognized the systemic risk of the volume of interest rate derivatives, citing the dangers of market makers delta hedging in the same direction at the same time, or the dangers of the financial system being so precariously dependent upon low short term interest rate futures. Others, myself included, cite the sheer volume of notional “at risk” in the interest rate derivative “unknown”. This is the broad concern of the logician, not a financial or market particulars analyst.

I have written about this in the past, citing my concern over both the volume, and exponential growth of notionals, and I maintain that the volume of credit risk remains severely understated by the BIS, and the OCC. I would add that call reports cannot be completely trusted, OTC derivatives are not as large a percentage of the total as estimated, and off-balance-sheet risk miscalculation is endemic. It is the DTCC that will be the final arbiter of the derivative end-game, albeit post-mortem.

I want to keep this short because waning CONfidence in the secondary markets, as well as EU intervention in the German debt markets signal that time is growing short now, and the mathematical certainty of a global financial lose-lose scenario is approaching.

Just remember that the concentration of U.S. risk, at 97%, is in the hands of 5 US banks who are primary shareholders of the FED, and the remaining concentration, internationally, is in the hands of the European banks who are the remaining primary shareholders of this same central bank which independently regulates the interest rate of the world’s reserve currency. Nearly all of the notional credit risk in the system, nearly all denominated in US dollars, all dependent upon short term interest rate futures, all delta hedged by the same market makers in the same direction, all egregiously understated in volume … all of this … is in the hands of a few powerful men who have been granted freedoms and exemptions and diplomatic immunities that very few people realize, or would believe.

These same men, who currently head the families of generational banking dynasties whose legacy reaches back far before the formation of the United States, hold many tons of gold in underground vaults, which no government and no organization has any accounting of, and they have agreements with governments exempting them from any accounting of their wealth, or taxation of it, or any binding laws of any country. A quick summary of their immunity, dating to agrements made in 1931, includes:

  • diplomatic immunity for persons and what they carry with them (i.e., diplomatic pouches)
  • no taxation on any transactions, including salaries paid to employees
  • embassy-type immunity for all buildings and/or offices operated by the Bank for International Settlements
  • no oversight or knowledge of operations by any government authority
  • freedom from immigration restrictions
  • freedom to encrypt any and all communications of any sort
  • freedom from any legal jurisdiction

These freedoms far exceed the power of material wealth so treasured by the nouveau riche.

However, though they might presume to act as such, these men are not Gods. They are not infallible. They are not indestructible. And finally, they will never be protected from themselves.

We the People, of the United States of America, can protect ourselves from them – for their power is derived through a financial system of their making. We must not honor it. If we refuse to honor it, they are reduced to mere mortals. If we honor it, they become our masters.

There will be pain in this repudiation of their financial system. I don’t mean to be cryptic, I am just trying to lay the foundation for what will make sense in the coming months.

The People of the United States of America must TAKE ACTION. Only the people have the wisdom, the will, and the courage, to shape their own destiny.

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