Derivatives 101: Engineering The Slow Burn

In our last two Solari Reports we listened to two astute commentators (Dmitry Orlov, Clif High) describe why they believe the U.S. dollar could lose its reserve currency status, including in the next year.

On this week’s Solari Report I will be presenting an introduction to derivatives. Wikipedia describes derivatives as follows:

“Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying value on which a derivative is based can be an asset (e.g., commodities, equities, mortgages, real estate, loans, bonds) , an index (e.g., interest rates, currency exchange rates, stock market indices, consumer price index (CPI), weather conditions, or other items. Credit derivatives are based on loans, bonds or other forms of credit. The main types of derivatives are forwards, futures, options and swaps.”

The title of my presentation is:

Derivatives 101: Useful knowledge in plain English about credit default swaps, interest rate swaps, futures and other complex financial instruments that help centralize the financial system, steal money in the trillions and make the financial news incomprehensible.

I will address why these financial tools are so important to maintaining the dollar as reserve currency and continuing the “Slow Burn.”

I coined the “Slow Burn” scenario years ago to describe a politically managed economy in which financial and economic failures would not translate into system collapse. Instead, they would translate into continued transfers of resources from political outsiders to political insiders to subsidize and manage the asset values and power of various corporate and bank interests.  Countries would be drained to feed the system, or various populations, species or places. Replenished by draining others, the system would continue to move forward.

For many years, a variety of highly capable, intelligent people have tried to persuade me that the dollar is imminently going to lose its status as the global reserve currency and collapse and that the price of gold is going to shortly increase to $2,000/oz. or more.  When these events do not come to pass and time goes by—something strange happens. We never sit down and do a “lessons learned” to determine why it did not happen. No one wants to discuss it. There is no venue to ask and answer the questions:

  • Why does the dollar’s performance defy economic fundamentals?
  • Why is it that U.S. trade and budget deficits don’t matter?
  • How can $20 trillion in global bailouts not yet trigger global hyperinflation?

It turns out that understanding the Slow Burn and the amazing strength of the U.S. dollar requires several “building blocks” of knowledge that most of us have not acquired through our formal education or media:

Shadow Governance: Our world is governed on a highly centralized basis that networks into every industry (or so-called “cartels”) and every place—whether country, region or local area. This system is not new—it has evolved organically for centuries within “the central banking-warfare model.” Much of its evolution has organized around intergenerational pools of capital, the growth of which reflect the fundamentals of economic and military warfare as they determine command of intelligence, technology, populations, natural resources and trade routes.

The U.S. Federal Credit: The U.S. economy is a highly controlled political economy, with most of the economy managed through the U.S. government budget—both the Congressionally approved budget as well as secretive black budgets run with no transparency and oversight but with the benefit of governmental powers and authority. Building literacy of how this governmental financial mechanism operates both globally, throughout financial and commodities markets, and at the federal, state, and local levels requires an understanding of the financial ecosystems of places and industries.

Suppressed Technology and Knowledge: Political control depends on suppression of knowledge. We do not have ready access to the knowledge that we need to understand our history and economy. Significant health, energy, information, military, and space technology has been suppressed, from the citizens who funded its development and management.

Advanced Surveillance Technology and Weaponry: Historically, financial leadership requires some form of military dominance and enforcement – which comes down to supremacy on land, on sea, and/or in the air. What this means is that invisible weaponry, particularly that created with new advanced technology, can have a profound influence on our world while many people can not fathom that such powers exist. The U.S. has sea and air supremacy which is critical in supporting the dollar.

Control Files and Tools: Many of us have enjoyed the movie, The Matrix, yet we fail to understand how our own incentives and behavior are manipulated. While it has become easier to see the control on a broad, national scale, we are resistant to seeing and understanding how it operates at a more intimate level—in the media and entertainment we choose, within our own family, our school, our workplace, and our community. We see the torture in Guantánamo Bay. We do not see it in our community.  Indeed, to see the control mechanisms and how to navigate them often requires that we understand the areas of knowledge described above.

One of my goals for The Solari Report is to break down these different areas, help you understand them and see the threads weave through the current news of the day. The more you are armed with this knowledge, the more powerful you become. I want us to address what is holding up the dollar and why. Understanding this is critical to understanding how to best manage our time and assets.

In this week’s Solari Report, in Money & Markets, I will discuss the extraordinary success of the Obama Administration’s first 100 days in further centralizing political and financial controls and how this is shifting popular opinion, answer your latest questions in Ask Catherine and then present Derivatives 101.

What are derivatives? Who uses them and why? Why are derivatives at the heart of the current bailouts? We will cover these questions as well as how critical derivatives are to the political management of the financial system and maintenance of the Slow Burn. Understanding derivatives is part of understanding the federal credit system—and how the Anglo-American interests maintain a strong dollar and trigger and exploit the selective collapses that subsidize it. Derivatives are at the financial heart of building Empire.

This week, in Let’s Go to the Movies, we will be discussing A Very British Coup. Made for British television, when a populist committed to disarmament becomes British prime minister, he finds himself up against the entrenched Anglo-American partnership of spies, diplomats and investment interests and some of the dirty tricks they can bring to bear on an honest government official. Want to communicate effectively with your political representatives? To do so, you need to understand the pressures they face when trying to act in our interests, including the risk that the media will not allow the truth to be told.

If you are a subscriber to The Solari Report, you can post your questions at your private panel or as a comment to this blog post. If you would like to learn more about The Solari Report and subscribe, click here.

We would love to have you join us.

View this week’s Money & Markets Charts here.