Gresham’s Law in action: The diminishing availability of physical gold from the market (per several different accounts in London) corresponds to the proliferation of fiat currency printing and paper gold derivatives.
Since September the Fed has increased the size of its balance sheet by $414 billion or 11% in less than four months. It’s the fastest rate at which the Fed has printed money in its history. The Fed insists that this “repo” program is not the reinstatement of “Quantitative Easing.” In one sense the Fed is correct. This money printing program is a direct bailout of the big banks. And now the Fed is proposing to start bailing out hedge funds:
Federal Reserve officials are considering lending cash directly to hedge funds through clearinghouses to ease stress in the repo market. But that could be a tough sell for policy makers (WSJ).
Yes, liquidity in the inter-bank overnight collateralized lending system dried up in September. But it’s not because of a shortage of cash to lend. The reason is two-fold. First, banks needed cash/Tier 1 collateral to shore up their own reserves. Why? Because bank assets – especially subprime loans – are starting to melt-down – i.e. rising delinquencies and defaults. This is provable just by looking at the footnotes in quarterly bank 10-Q’s. Second, hedge fund assets – primarily the bottom half of CLO’s, credit default swaps, leveraged loans – are melting down.