Interview Of Adrian Douglas About Central Bank Operations

I am delighted that two intelligent and knowledgeable investors have answered my questions about the Fed’s actions last week.

I asked Adrian Douglas of Market Force Analysis the same question I asked Rob Kirby:

Mover Mike: I am a long time subscriber of Le Metropole Cafe and enjoy your contributions. I have a question about the “temporary” injection of liquidity by the central banks over the last two days. The central banks inject cash by buying bonds; repos. How does that money come back out? What happens to a three day repo at the end of the three days? So far it looks like all the CBs have injected about $300 Billion. Is it in the system permanently? If not aren’t we back to the same circumstances as before the injections?

Adrian: In theory these injections are “loans” but in practice they will be permanent. After 3 days when repayment is due the FED can make another TOMO to replace it and then again when that expires such that the “loan” just keeps rolling. They also add some “POMO”s which over time will gradually replace the rolling TOMO’s and so the money never gets paid back.

In theory this debt based money system has an in-built mechanism to drain the excess dollars that were created by loan default because repayments remove dollars and as credit tightens less new dollars come into the system. If interest rates are raised this will further reduce new credit and draw dollars out of circulation into savings to benefit from higher interest. BUT this is on the assumption that the system still remains functioning. IF there is widespread default then here are suddenly not enough dollars in
circulation, this will create a domino effect of defaults then once there is widespread default the dollars that have been hoarded as savings come gushing into circulation as foreigners dump dollars and then there are too many dollars and hyperinflation. These massive injections from CB’s are to prevent the domino effect of defaults. The coordinated injections world wide were to prevent differential depreciation; trashing all currencies equally gives the impression things are stable but ONLY if gold is simultaneously capped; the (Gold) Cartel have done that enough times to know the drill!

Defaults and injection of funny money can NOT make the funny money more valuable. This is the perfect set up for a huge rally in gold once the Cartel realizes they don’t have enough gold to keep the game going forever.


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