The Most SHOCKING Interview You’ll Hear In 2020!
For years I have been hearing about “shadow banking.” I would hear about China being run by shadow banking, the United States is run by shadow banking, and Europe is run by shadow banking. The problem was, I could never fully understand what that meant. So I started to study… to learn about shadow banking and what it is.
I thank Danielle DiMartino Boothe, and her book Fed Up, for bringing shadow banking out of the shadows.
I will do my best to keep the explanation of shadow banking simple—actually KISS… keeping it super simple.
First of all, modern shadow banking could not occur if these events did not take place:
- If Richard Nixon had not taken the dollar off the gold standard in 1971
- If the Greenspan Put had not been initiated, following the 1987 stock market crash
- If the repeal of the Glass-Stegall Act, by President Clinton, President of Harvard Larry Summers, and Secretary of the Treasury, Robert Rubin had not happened in 1999.
Simply put, shadow banking is off-balance-sheet banking, banking in the dark, and out of sight of the traditional world of investing. Shadow banking would be like if you had a friend who owed $100,000 to his father but did not disclose that debt on his loan application to his bank.
In her book, Danielle made shadow banking simple, but my simple brain could not totally comprehend shadow banking’s complexity. Most people cannot. And the complexity of shadow banking is why the world economy is on the edge of collapse.
Danielle emphatically states: “Now pay attention, because it was shadow banking that caused the crisis of 2008. Though the subprime housing market was the virus, shadow banking transmitted the virus that nearly killed the patient. The Fed’s army of a thousand doctors of economics had no understanding of its enormity and its significance.”
In other words, it was not the real estate market that nearly caused the world economy to collapse in 2008. It was not derivatives such as MBS, Mortgage Back Securities, CDOs, Credit Default Obligations, and ABS, Asset-Backed Securities, that caused the 2008 crash.
Shadow banking rules are opaque, loose, fast, and changing, which is why shadow banking is beyond complicated—it’s complex.
What Are U.S. Dollar Swap Lines?
The shadow banking started with the 1913 Reserve Act that Congress passed. It evolved as a short term solution that really got out of control. In 2008, when the global financial crisis happened, the dollar swap line was created.
The intent of a swap line was to “help maintain the flow of credit to U.S. households and businesses by reducing risks to U.S. financial markets caused by financial stresses abroad.” Basically, they are lifelines for certain nations who are stressed by a lack of U.S. dollars.
According to the Federal Reserve, they define swaps as:
“The Federal Reserve provides U.S. dollars to a foreign central bank. At the same time, the foreign central bank provides the equivalent amount of funds in its currency to the Federal Reserve, based on the market exchange rate at the time of the transaction. The parties agreed to swap back these quantities of their two currencies at a specified date in the future, which is the next day or as far ahead as three months, using the same exchange rate as in the first transaction. Because the terms of this second transaction are set in advance, fluctuations in exchange rates during the interim do not alter the eventual payments.”
The swaps grant unlimited lines of credit to 15 central banks around the world:
- Bank of Canada
- Bank of England
- European Central Bank
- Bank of Japan
- Swiss National Bank
- Reserve Bank of Australia
- Banco Central do Brasil
- Danmarks Nationalbank
- the Bank of Korea
- Banco de Mexico
- Reserve Bank of New Zealand
- Norges Bank (Norway)
- Monetary Authority of Singapore
- the Sveriges Riksbank (Sweden)
- Central Bank of Indonesia
If you look at this list, you’ll see that all the countries who are given these lines of credit are allies of the U.S. and who have also agreed to its terms.
And a surprising fact is that Fed Chairman, Jerome Powell, doesn’t need the approval of anyone to grant swap lines.
Risks of Dollar Swaps
Take Boeing for example. President Trump has an affinity for the second-largest defense contractor. So much so, that Trump has put pressure on some of the U.S. allies to buy products from Boeing. But also, Boeing has also received several billion in federal loans and guarantees.
So to say it nicely, Trump is going to do what he can to save Boeing.
But at the same time, almost $200 billion has gone to the European central bank that then funds, Airbus—the Boeing equivalent of Europe—which is being subsidized by access to these swap lines, to compete with an American company,
Essentially, it’s the American people that are funding the cannibalism of their own industry.
But also true, is these countries aren’t paying back what they borrow. The debt is compounded further and further.
Marin Katusa explains, “That’s what the whole battle has been about. And what they do then is they take those U.S. dollars, convert them into the euros to prop up the debt of a company like Airbus. They subsidize the manufacturing of those planes. Specifically now, when the airline industry is on life support, they’re using dollars from the U.S. to extend the lifeline into the European airline industry, which is directly competing with American Boeing. That’s just one example of many.”
Let’s say you are the owner of a producing gold mine in one of the 15 ally countries, you probably have nothing to worry about. But let’s say your producing gold mine is in one of the other countries who haven’t been granted a line of credit from the U.S. It is a real possibility that the gold mine could be seized and nationalized by a desperate country.
Take Indonesia for example. There’s an American mining company that operates the biggest gold, silver, and copper mines in the world. Indonesia kept pushing the goal post and wanting more royalties, and a larger portion of the mine. In August of 2017, the company divested ownership so that Indonesia now owns 51%. The fundamental lesson here is that if you have a stake in an American company that operates in a country that has not been granted a swap line, you could be exposed to losing big time.
But then, as many countries struggled with a dollar shortage triggered by the coronavirus pandemic, Indonesia found itself desperately needing a swap line. So, in April 2020, Indonesia became the 15th country to be granted a swap line. As I mentioned before, only those that play by the rules set forth by the U.S. are granted a swap line. But, because of the geopolitical angle, they agreed to the terms.
So, the warning here is if you have gold stock with a company producing in one of the non-swap countries, your investment could be at risk.
Editor, Rich Dad Poor Dad Daily