I belong to a credit union, the oldest continuous one in America. So far, they haven’t jumped into the same bon fire of vanities as other banks.  They still have a sensible reserve, just for example.  I have been very angry about the US throwing away the entire concept of ‘reserve ratios’ as well as the concept of ‘interest rates’ and even ‘basic banking.’  Denninger wrote a hot article about this last December and I think it is time to flesh all of this out, even more.


December 11. 2008:   Karl Denninger   Den Of Liars – The Market Ticker


In 2000 our GDP was approximately $10 trillion.  At 270% of GDP that would place total debt at $27 trillion dollars.

The reported GDP in 2007 was $14 trillion (again, give or take one.)  At 360% of GDP this places total debt at approximately $50 trillion dollars.

Assuming a linear appreciation over that seven year period we have a total GDP expansion from 2000-2007 of approximately $2 trillion annually over seven years, or $14 trillion in total of “salutary” GDP expansion over that seven year period.

But – total debt went from $27 trillion to $50 trillion, or an expansion of $23 trillion dollars. 

Of course the debt taken on is spent on something, which means it shows up in GDP.

I would be utterly content if Denninger was on Obama’s economic team.  Obama claimed, he wanted more than one point of view, after all. Just seeing Denninger, who is in love with basic statistics, graphs and historical charts, go into a meeting, yelling and throwing things while shouting, ‘LOOK AT THIS HOCKEY STICK, YOU PUCKS!’  

Heh!  A great time for us all.  Televise this, too, while we are at it.  It would be even nicer if I could help out.  Maybe, cast some spells, ‘Hocus pocus, you will all turn into flying pigs!’ Or something dramatic.  What will it take to force these people to see reality?  

Has the light bulb come on yet?  HAHAHA.  Nope.

Let me explain this in very simple terms – again, assuming more-or-less linear expansion of the debt (which is in fact not true since claimed GDP expanded, so the growth in debt rate is actual a derivative function) there was actually a $9 trillion dollar contraction in GDP over the previous eight years, since taken-on-debt that is spent is not actual output expansion any more than I am “improving my wealth” if I go borrow $200,000!  In fact I am damaging it because I must not only pay the $200,000 back I must pay interest as well!

Ah, striking at the heart of the matter!  It is even more insidious: debts are assets for bankers so long as these are created out of thin air AND also are NOT based on ANY reserves at all!  This is pure, unadulterated, 100% fake funny money!  It is the easiest to make. And the most dangerous.

The inevitable outcome of a ZIRP 0% down, 0% interest and 0% reserve ratio system is….hyperinflation.  It doesn’t take off instantly.  Again, thinking about this as we imagine goddesses, it is much easier to emotionally understand.  

When the goddess of inflation wakens, she shakes her magic wings, yawns, stretches, runs her hands through her hair, preens her feathers a bit.  She might even say to her twin sister, Zero, ‘Off to have some real good fun!’  Zero sharpens her sword.  ‘Yes, I can’t wait to butcher everyone.’

Once Infinity is flying high, we can’t escape so easily.  We will add more and more zeros in a vain attempt to make money valuable only it loses value every step of the way.  The paradox of this isn’t accepted since people insist on thinking of inflation as pricing, not as a dire goddess of Infinity taking hold and wrecking tremendous destruction until everything valued in numbers: assets, property, jewels, stocks, bonds are rendered worthless and only food and fuel are left as necessities are needed to stay alive, so they shoot up in value, so a loaf of bread will cost more than a mansion cost just 10 years or 20 years earlier!

That’s right folks – we haven’t had an expansion in GDP over the last eight years.  Congress and its organs of reporting economic “facts” have lied.  We have in fact actually seen about a 10% contraction in real GDP from 2000 levels; all of the so-called “expansion” of the Bush Administration has been a lie intended to prevent recognition and working through of the recession that should have happened in 2000….

The Bush team lied about nearly everything including Bush’s military records [he went AWOL], drug arrests, and of course, all the 9/11 and Iraq war lies.  When in power, the temptation to lie is extremely strong.  If one has organs in the media playing merrily along with outright lying, it goes rampant.  

Lying about economic matters is par for the course. Instead of telling the truth, we get lying.  Again, think of the Cave of Wealth and Death.  Libra, the lady who loves truth, accuracy and accounting of deeds, sits there with her sword and scales.  To get around her, the gnomes tunnel into the Cave from the side and loot it.  But it is all in vain.  The loot loses value.  So they lie about this loss of value as they try to deceive us into thinking, the illicit loot is valuable when it is really a rotting pile of wilting cabbage leaves.

The worse news is that we have taken a 10% contraction in GDP, which was necessary and could not be prevented in 2000, and through the “magic” HAHAHA of debt and compound interest turned it into something far worse.  In order to recover equilibrium we will now have to shrink GDP by close to 30%, and if our government doesn’t quit dicking around and trying to prevent this contraction from taking place it will be far worse.


Yes, this is very much magical!  And again, my focus here has been on the magical because….this is actually the easiest way to figure out, what is going on and predict the future.  For the most important thing for us to do in order to survive is, see the future with some accuracy.   It doesn’t matter what we choose to peer into the murky fog of the future.  


My tools are the ones I selected over the years.  Incidentally, the Chinese laughed at first at my Tarot card readings but would then come by, one at a time, to ask for a private session.  Most people try to be ‘normal’ and ‘rational’ and use graphs and charts.  This is why there is a present fad to figure out ‘heads and shoulders’ of various graphs and speculate about turning points based on ‘candlesticks’, etc.  


These things are good…for looking into the PAST.  But obviously, do not work so hot, viewing into the future due to several obvious factors that are particularly amusing to the Norns, the goddesses of Past, Present and Future.  That is, if everyone uses these tools that are all giving all the same information, they all end up doing the same thing at the same time and thus, wreck the crystal ball!  It becomes worthless since it only amplifies the actions of the group using it as an observation system.


From time immemorial, the best tool for investing has been gossip.  Honestly, people passing stories to each other, people snooping around others, big ears and big noses, that is the main way to gain a foothold with the elusive future.


Denninger here talks about the DOUBLING of our jeopardy when Bush and Greenspan flooded the markets with funny money with the 1% interest scheme coupled with wild and totally irresponsible tax cuts.  With the Obama and Bernanke helicopter dump doubling our monetary base, this now has QUADRUPLED or rather, UTTERLY ANNIHILATED the future ability to pay off this mess and restore balance.


Frankly, Libra is so pissed off, she took off her blindfold and now is out hunting us down, with her sword.  We must fear this force!  Already, the goddess of Deflation is slaying all our assets, bonds and other paper items that depend on numbers for value.  And we are running a 0%-across the board system!  IT WILL NOT WORK.  And this is obvious to me because, if we run off to the Goddess of Zero, she is also the Goddess of DEATH.  Note where she lives: in the deep interior of the Cave of Wealth and Death.  


After all, it took humans all of our evolution until just 2,500 years ago, to INVENT ‘zero’.  This should astonish us all.  Zero was discovered by magicians who were religious philosophers seeking eternal life.  And they rejoiced when they found zero.  Little knowing, they found death.


Market Skeptics: *****US Banks Operating Without Reserve Requirements*****

Banks typically have 3% of their assets in cash in order to meet customer needs. Since 1960, banks have been allowed to use this “vault cash” to satisfy their reserve requirements. Today, bank reserve requirements have fallen to the point where they are now exceeded by vault cash, which means lowering reserve requirements to zero would have virtually no impact on the banking system. US banks are already operating free of any reserve constraints. The graph below shows reserve requirements falling to zero over the last fifty years.

So, the news is, UNLIKE CHINA, the US has chosen to run a ZIRP reserve system on top of our new 0% interest system.  This is, of course, totally wretched and violates all banking rules going back to the first use of paper money and the number zero, started by the Chinese, 1,000 years ago.


In summary, today most depository institutions are satisfying their entire reserve requirement with this vault cash, which they hold to meet the liquidity needs of their customers and would hold even in the absence of reserve requirements. For these institutions, reserve requirements are effectively non-existent.

We have no savings.  We are paying down debts right now, of course.  As fast as we can.  Even 1% interest costs in a ZIRP system that has dropping prices and dropping asset values, is still extremely high.  Incidentally, I had to buy plywood yesterday.  The Home Depot plywood isles were deserted, as always in this last year.  But prices were AMAZING.  Sheets that cost me only $8-12 just four years ago are STILL going for over $22 or more, a sheet.  Only the very, very cheapest fake plywood, was $7 a sheet and this was still 100% more than 5 years ago.


Sheetrock shocked me.  The cheapest sheetrock was more than the cheapest plywood!  Inflation lurks very near.  A finished house has lost tremendous value but the COST OF BUILDING MATERIALS IS STILL VERY HIGH.  This means, the profit margin is collapsing, badly.


The ENTIRE US system runs on no reserves.  The Federal Reserve has no reserves. Nor do our banks.  Nothing has any cushion at all which is why we are sitting on a cactus.  Let’s go the the official Federal Reserve weekly statistical report:


Federal Reserve Statistical Release H.3 – March 26, 2009




Millions of dollars
Date Reserves of depository institutions Monetary base5  Total borrowings  from the Federal Reserve, NSA
Total2  Nonborrowed Required Excess, NSA4
  Feb 2008     42826    -17331    41100    1726    821355    60157 
  Mar 2008     44299    -50224    41321    2978    825910    94523 
  Apr 2008     43561    -91848    41716    1846    824631    135410 
  May 2008     44128    -111652    42115    2013    827170    155780 
  Jun 2008     43364    -127914    41089    2275    832490    171278 
  Jul 2008     43330    -122334    41353    1977    838062    165664 
  Aug 2008     44559    -123520    42568    1991    842815    168078 
  Sep 2008     102784    -187321    42733    60051    905174    290105 
  Oct 2008     315516    -332803    47612    267904    1130304    648319 
  Nov 2008     609937    -88849    50883    559053    1433490    698786 
  Dec 2008     820942    167376    53530    767412    1651175    653565 
  Jan 2009     858416    294920    60167    798248    1700800    563496 
  Feb 2009     700963    118466    57460    643503    1554120    582497 
Two weeks ending7  
  Jan 28, 2009     852384    287286    59339    793045    1699216    565099 
  Feb 11, 2009     673861    112529    62455    611406    1522792    561332 
  Feb 25, 2009     727031    138121    53598    673433    1582773    588910 
  Mar 11, 2009     678690    48513    57172    621518    1535273    630177 
  Mar 25, 2009 p     824555    219707    53362    771194    1684939    604849 


February 2008. the total borrowings from the Federal Reserve was only $60 billion.  It grew in leaps and bounds to the present amount, $605 billion in just one year!  A ten-fold increase.  If we look closely, we can see that it was last October when this suddenly shot upwards.  Namely, when the Bank Bail Bill was being argued in Congress.


The whole thing happened very suddenly, we see it jumped from $30 billion to $70 billion in less than two months!




Millions of dollars
Date Total borrowings from the Federal Reserve Term auction credit Other borrowings from the Federal Reserve1
Primary Secondary Seasonal Primary dealer and other broker-dealer credit2 Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility Credit extended to American International Group, Inc. 3 Term Asset-Backed Securities Loan Facility Other credit extensions
  Feb 2008     60157    60000    155    0    3           
  Mar 2008     94523    75484    1617    0    6    16168          1249 
  Apr 2008     135410    100000    9624    0    21    25764          0 
  May 2008     155780    127419    14076    0    47    14238          0 
  Jun 2008     171278    150000    14225    70    75    6908          0 
  Jul 2008     165664    150000    15204    107    98    255          0 
  Aug 2008     168078    150000    17980    1    97    0          0 
  Sep 2008     290105    149814    32632    35    87    53473    31877    22187      0 
  Oct 2008     648319    244778    94017    38    28    114953    117457    77047      0 
  Nov 2008     698786    393088    95839    117    8    60655    71009    78070      0 
  Dec 2008     653565    438327    88245    52    3    47631    32102    47206      0 
  Jan 2009     563496    403523    70436    39    1    33061    17745    38690      0 
  Feb 2009     582497    438822    65463    11    3    26250    13533    38414      0 
Two weeks ending5
  Jan 28, 2009     565099    415945    63304    54    1    32367    15038    38391      0 
  Feb 11, 2009     561332    412883    66000    20    3    28035    16046    38345      0 
  Feb 25, 2009     588910    447563    65200    6    3    25810    12629    37701      0 
  Mar 11, 2009     630177    493145    64724    0    2    21766    8542    41998      0 
  Mar 25, 2009 p     604849    468589    64233    6    3    19882    8204    43597    337    0 




I decided to total all the AIG numbers=  $501,646,000,000

And here are the Asset-backed Commercial Paper MMMFLF numbers= $ 344,182,000,000

Total of both gaping maws of the Outer Darkness where the Derivatives Beast is feasting:  $844+ billion.


Aggregate Reserve of Depository Institutions 

Millions of dollars

Date Reserves of depository institutions Monetary base1 Total2 Nonborrowed Required3Month5   Feb 2008     42796    -17361    41070    821917    Mar 2008     42709    -51814    39731    825559              Apr 2008     43487    -91922    41642    823379    May 2008     45075    -110705    43062    826882    Jun 2008     43890    -127388    41616    831974              Jul 2008     44059    -121605    42083    839215    Aug 2008     44046    -124032    42055    840149    Sep 2008     102507    -187598    42456    900649              Oct 2008     314834    -333485    46930    1125965    Nov 2008     609416    -89369    50363    1435217    Dec 2008     821135    167570    53723    1659219              Jan 2009     860652    297156    62404    1705311    Feb 2009     701238    118741    57735    1554430  Two weeks ending6             Feb 11, 2009     673207    111875    61801    1521197   Feb 25, 2009     728704    139794    55271    1584802              Mar 11, 2009     675840    45664    54323    1534550    Mar 25, 2009 p     823643    218795    52450    1684779  

The monetary base more than DOUBLED very suddenly between August, 2008 and January, 2009.  In just 4 months, it DOUBLED.  Usually, it takes over 10 years when there is damaging inflation rates.  The other day, I pulled up the graph below from the Fed showing clearly that the monetary base shot upwards at an insane rate starting with the collapse of AIG and the need to feed the Derivatives Beast across the entire planet.




Now, risk is much, much higher if we have no cushion and no basis for creating loans.  Turning what was once a normal, healthy banking system into a sick, ugly corpse was easy: everyone sought ways to undo old rules, regulations and laws and prevent anyone from stopping wild lending.  Here is one company that did this for a living:


fi-linx Deposit Reclassification: Our Implementation


Our System  created in 2007


Deposit Reclassification works independently of your core processor.  We partition each of your transaction accounts into two virtual subaccounts: a transaction subaccount and a non-transaction subaccount.  These subaccounts exist for reporting and regulatory purposes only.  Your reserve requirement is dramatically lowered by keeping the maximum possible balance in the non-transaction subaccounts, which are not reserved on.

A transaction subaccount carries a very small balance to cover day-to-day activities.  When necessary, a small amount is transfered from the non-transaction subaccount to keep the balance postive.  Bounded by Regulation D, these transfers can only occur six times a month.  Deposit Reclassification calculates the amount of these transactions and the time they will occur individually for each member, based on their transaction history, to maximize the efficiency of the reclassification.

We also generate your weekly FR2900 report, with you reclassified account information, in a file format that is easily submited to the Federal Reserve.



Oh, goody gum drops!  All banks should love this scheme!  All they have to do is CHEAT!  I keep pointing out, the gnomes will excavate all sorts of cunning holes and rig all sorts of cunning systems so they can evade laws, rules, regulations and systems set up to stop them from manufacturing, out of thin air, funny money by adding lots and lots of zeros!  So it is, here.  


They have a calculator with this business website so I put in some local information since I know this bank is very solvent and cautious.


Deposit Reclassification: Savings Calculator


Your Information

Charter Number 51STATE EMPLOYEES
Data From:   03/31/2008



Total Shares – Total: $1,384,390,144.00
Total Transaction Accounts Balance: $191,723,520.00
Total Non-Transaction Accounts Balance: $206,758,080.00
Asset Size: $1,539,434,368.00

Cash On Hand: $9,485,290.00
Cash at Federal Reserve: $79,190,056.00

See?  A pretty solid reserve!  This is a GOOD THING.  A healthy, well-run bank. Now, I asked how this company could ‘save’ my bank oodles of dollars and this is what came up:


Quick Savings Calculator

Your estimated reserve requirement is

Before Reclassification: $36,387,160
After Reclassification: $5,458,074
Change: $30,929,086

This requirement can be met by

Cash at other FI’s $79,190,056.00
Cash on Hand  $9,485,290.00

Total $88,675,346


In other words, if my bank was run by a bunch of crooks, they could evade sensible reserve requirements and thus, underfund it by over $30 million and the fix is simple: all the ‘cash on hand’ for paying out at the teller machines, etc, will be ‘pooled’ by all the other participating banks in this scam, and this pool of cash will magically turn into a reserve which means ALL the banks can lend based on this SINGULAR reserve which is the same size as the one for this one, single, small banking credit union!


The only problem with this is simple: THIS ISN’T A RESERVE AT ALL!  Even if they use a legal fiction to make it look like one, it still is not one at all.  The changes to the laws that allowed this sort of criminal scam is a crime, itself.  And the Chinese are now bitterly complaining about how we cheat the banking systems.  Now, on to the Federal Reserve vis a vis the IMF:


International Reserves and Foreign Currency Liquidity – United States


Current Data: In Millions of US Dollars (end of period)      
I. Official reserve assets and other foreign currency assets (approximate market value) 4
  March 20, 2009
A. Official reserve assets 76,353.00
(1) Foreign currency reserves (in convertible foreign currencies) 40,320.00
(a) Securities 22,914.00
of which: issuer headquartered in reporting country but located abroad  
(b) total currency and deposits with: 17,406.00
(i) other national central banks, BIS and IMF 17,406.00
(ii) banks headquartered in the reporting country  
of which: located abroad  
(iii) banks headquartered outside the reporting country  
of which: located in the reporting country  
(2) IMF reserve position 7,843.00
(3) SDRs 9,179.00
(4) gold (including gold deposits and, if appropriate, gold swapped)5 11,041.00
—volume in millions of fine troy ounces 261.50
(5) other reserve assets (specify) 7,970.00
—financial derivatives  
—loans to nonbank nonresidents  
—other 7,970.00
B. Other foreign currency assets (specify)


Germany has, under the ‘gold swapped/gold deposits’ a total of $103,545 million.  The US has $11,042 million.  WOW.  The UK has only $9,494 million.  We do NOT know how much gold the Dragon has in Asia.  We DO know that the world’s #1 producer of gold is…CHINA.  Why does Germany have 10x more gold than the US?  We used to have the most gold on earth, back when I was a teenager!


It is much worse.  All these years, I have visited the IMF website for US data.  And the boxes below were ALWAYS EMPTY.  Not now!



    Maturity breakdown (residual maturity)
  Total Up to 1 month More than 1 and up to 3 months More than 3 months and up to 1 year
1. Foreign currency loans, securities, and deposits 6        
—outflows (-) Principal        
—inflows (+) Principal        
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps) 7        
(a) Short positions ( – ) -327,728.00 -184,946.00 -142,782.00  
(b) Long positions (+)


WHAT THE HELL IS THIS????  We are shorting to the tune of $330 million?  Huh?  Wow.  Let’s compare us to other nations like….JAPAN:

International Reserves and Foreign Currency Liquidity – Japan



Current Data: In Millions of US Dollars (end of period)      
I. Official reserve assets and other foreign currency assets (approximate market value) 4
  February 2009
A. Official reserve assets 1,009,354.00
(1) Foreign currency reserves (in convertible foreign currencies) 980,145.00
(a) Securities 892,340.00
of which: issuer headquartered in reporting country but located abroad  
(b) total currency and deposits with: 87,805.00
(i) other national central banks, BIS and IMF 6,354.00
(ii) banks headquartered in the reporting country 21,068.00
of which: located abroad  
(iii) banks headquartered outside the reporting country 60,383.00
of which: located in the reporting country 60,383.00
(2) IMF reserve position 2,533.00
(3) SDRs 2,897.00
(4) gold (including gold deposits and, if appropriate, gold swapped)5 23,422.00
—volume in millions of fine troy ounces 24.60
(5) other reserve assets (specify) 357.00
—financial derivatives  
—loans to nonbank nonresidents  
—other 357.00
B. Other foreign currency assets (specify) 70,994.00
—securities not included in official reserve assets  
—deposits not included in official reserve assets  
—loans not included in official reserve assets 70,994.00
—financial derivatives not included in official reserve assets



II. Predetermined short-term net drains on foreign currency assets (nominal value)
    Maturity breakdown (residual maturity)
  Total Up to 1 month More than 1 and up to 3 months More than 3 months and up to 1 year
1. Foreign currency loans, securities, and deposits 6        
—outflows (-) Principal        
—inflows (+) Principal        
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps) 7        
(a) Short positions ( – ) -71,168.00 -29,392.00 -41,776.00  
(b) Long positions (+)    


First, Japan has over a trillion in its reserves!  Wow.  And is also shorting something!  But far less than the US, only $71 billion.  What is going on here?  They never had anything in the short box before.


IMF Survey: Mexico Seeks $47 Billion Credit Line from IMF


IMF Managing Director Dominique Strauss-Kahn welcomed Mexico’s interest in a precautionary credit line from the IMF and said he intended to move forward rapidly to seek approval from the Executive Board.

Mexico announced it was seeking $47 billion under the IMF’s new Flexible Credit Line (FCL) launched by the IMF last month to buttress strong economies against fallout from the global crisis.

“Last week, the Executive Board approved an historic reform of the IMF’s lending instruments, including the creation of the Flexible Credit Line. Following that meeting I invited strong performing countries that may be affected by the global crisis to use the new FCL as a tool to underscore international confidence,” Strauss-Kahn said in a press statement in reaction to the announcement by the Mexican authorities.

“Today, I am very pleased to report that, as stated yesterday by President Calderon, Mexico has responded to my invitation and has indicated its interest in an arrangement under the FCL.”

Mexican Finance Minister Agustin Carstens told a press briefing in London attended by IMF First Deputy Managing Director John Lipsky that the country is not planning to use the credit line, saying it was intended as “a precautionary line.” But the facility would effectively “bullet-proof [Mexico] from any future uncertainty or events that might tighten market liquidity” and help the economy recover from the global crisis impact….“Mexico has had a strong macroeconomic performance for over a decade, marked—among other things—by solid growth and low inflation; a steady strengthening of public and private sector balance sheets; and a strong and well capitalized banking system. This has been underpinned by very strong economic fundamentals and policy frameworks, as well as a sustained track record of implementing strong policies,” Strauss-Kahn said.



Just like when the Federal Reserve opened its first ‘new window’ for bankrupt zombie banks to borrow fake funny money made out of thin air: they said, ‘This is all an EXPERIMENT.  We just want people to feel comfortable, borrowing trillions…OOOPS!…borrowing small sums from us just to see what happens and to GET RID OF THE STIGMA.’ 


Well, Mexico is NOT strong.  Vast battle with bloody drug lords are destroying whole regions. The right wing president got into office via very fishy voting business.  Oil production is down on top of oil prices falling like a rock!  Remittances from illegal aliens has collapsed.  Mexico is sinking.  Iceland already sank, Ireland and all the former Warsaw states are also going under.  And the IMF knows this.  And needs lots and lots of money form a sovereign wealth fund and guess who they are?


The Dragon hisses as it moves forwards, ponderously.







P.O. BOX 483

BERLIN, NY 12022

Make checks out to ‘Elaine Supkis’




1 Comment

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  1. Pingback: WHY THE US HAS NO RESERVES « Culture of Life News

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