American Meltdown: Book Two of The Economic Collapse Chronicles (4 page)

CHAPTER 7

“All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation.”

-John Adams

US Treasury Secretary Melinda Chang answered her phone. “Hello.”

              Commodity Futures Trading Commission Chairperson Nora Brooks was on the line. "Secretary Chang, this morning's bond auction appears to be creating some anomalies in the secondary markets."

"Nora, the Fed is buying all of the bonds from this morning’s auction. Why would the auction have any effect on markets?" Chang shot back. She knew the CFTC Chairperson had earned a bit of a reputation as being a worry wart. Brooks had been preaching a message of the "end is nigh" that nobody wanted to hear. The Fed and Treasury
were working with the major Wall Street banks and the rest of the Plunge Protection team to keep kicking the can down the road for nearly a decade. It had worked this long. Sure, things weren't good, but they had been able to manage the decline and avoid freefall.

Brooks said
, "Yes, ma'am, but it's the secondary markets. There are a lot of sellers and no buyers. There's also a lot of 30 day and 60 day Treasuries maturing today. The Fed bought the new issues, but I just spoke with Ivan who is overseeing the transaction process and he said they were under the impression that the market would buy the rollover debt. They're not authorized to buy any of the short term rollover debt."

Chang noticed a tone of panic in her voice that was more pronounced than usual.

"Nora, relax. We'll figure it out. We always do. This is really not your problem in the first place. You need to let us handle it," Chang said in a condescending voice.

"I don't mean to argue Madam
Secretary," Nora replied politely, "but it is my problem. Interest rates on 10-year notes are up 280 basis points today. This is catastrophic. The interest rate swaps are not sufficiently structured to withstand that much of a spike in such a short time."

While still wildly unregulated, interest rate swaps were derivatives that fell under the jurisdiction of the CFTC. 

Nora Brooks continued her explanation, "These derivatives are based on risk formulas which assume this type of one-day increase could never happen. This is the equivalent of a car insurance company that insures every car in the world. All of a sudden, every car in the world just had a wreck. No insurance company could cover that. What’s worse, because no one would listen to my testimony before congress, there is no regulation on who can buy those insurance policies. Back to the car insurance analogy, every car in the world just had a wreck and every one of these cars are insured by 20,000 other people against loss. It’s really much worse than that, but it’s the only analogy I can come up with at the moment to try to get you to understand what is happening right now."

"O
kay, and what is the total value of derivatives based on interest rate swaps?" Chang was starting to understand that this was a bigger problem than she realized.

"$700 trillion," Brooks said somberly.

"I am sorry," Chang needed clarification. “Did I hear you correctly? Did you say billion?”

"No, Madam Secretary," Brooks answered
, "I said trillion."

Chang sat her phone down. She felt weak in the knees and light-headed. The voice on the phone, it couldn't be real. Deep inside, though, she knew it was true. She felt sick all of a sudden. She sank to the floor, paralyzed by fear.

Nora Brooks could tell Secretary Chang wasn't going to be much help, so she called the Chairperson of the Federal Reserve, Jane Bleecher. She explained the activities within the derivatives market.

"So the 10-year is now 18.35%?" Bleecher asked.

"Yes, Ma'am, up 280 basis points since this morning's bond auction. That represents an
18% increase in the 10-year rate, in a matter of hours. There are no buyers for the existing US debt." Brooks explained.

"How could the banks have so poorly mispriced the risk in the derivatives?" Bleecher asked
.

"The risk models are all based on historic statistical data
," Brooks explained. "There has never been a one-day rate increase like what we saw today. We have never seen more than a 100 basis point jump in a single day. These derivatives are priced using the same risk formulas that have always been used. The pricing models aren’t that much different than what insurance companies use. This is an extreme outlier event, probably in the neighborhood of 9 standard deviations from the mean."

"Thank you, Nora," Blee
cher said, "I have to call the President right away."

Howe answered the phone. "Jane, they are telling me this is important. I hope it is, because you are interrupting a very important meeting."

Jane explained the situation. Anthony Howe had come from a Wall Street family. His father was the co
-founder of the Wall Street mega firm Howe Clancy. He understood the implications right away.

"Jane, I want you to hang up with me and call the SEC. Have them close all the markets in 30 minutes. Call Brooks back and have her halt all commodities and derivatives trading. Also get the FDIC and tell them to shut down the banks in 30 minutes. I want everything to close down simultaneously in 30 minutes. Do you understand me?"

"Yes Mr. President. I’ll get straight to work on all of that." She hung up.

Howe got straight to work as well.

He called his financial planner inside Howe Clancy and told him, “Sell everything and get as much physical cash out of the system as you can. Wire the rest to Zurich. After that, go to as many coin shops as you can and clean them out by any means necessary; cash, check or credit card. Move fast, buy any silver or gold the shops have available.”

Soon the rumor of Howe's move had spread throughout the building at Howe Clancy and everyone knew this was the big one. Most did not have time to react before the banks and markets were closed down.

CHAPTER 8

“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”

-George Washington

Matt was bringing some wood up to the house on the dolly. Adam Bair pulled into Matt's drive and got out of the truck. Matt called out from across the yard, "Hey, Cousin!"

"Why don't you drive your truck down there and bring up a rick or two at a time?" Adam asked.

"It's my exercise," Matt explained. "I can only stay in the house for so long. This gets me out and keeps me warm while I'm doing it. Plus, it saves gas."

"Well, they just shut down the banks and the markets," Adam said.

"What happened?" Matt asked.

"An interest rate spike triggered some type of derivatives Armageddon according to CNBC," Adam answered.

"Do you still have anything in the bank?” Matt asked.

"A few hundred that I kept to pay bills with," Adam responded.

"You should probably try to spend that with your debit card," Matt suggested.

"I tried," Adam responded. "All the credit cards are shut down. There are zero banking services operating in the US. I can't even sign in to my online banking account."

"Do you mind if we shoot over to your house and check out a few news sites so I can try to get a feel for what’s going on?" Matt requested.

"Let's do it," Adam said.

"Karen will probably want to go also. I'll get her." Matt went in to get Karen, but she was busy making some cookies.

"You go ahead, I'll walk over when I’m finished," Karen said.

"Drive the truck over. I don't want you walking around by yourself," Matt said.

"Is a bunny going to eat me?" Karen joked.

Matt had not gotten past his overprotective paranoia from living in South Florida. Crime was so bad when they left, he was constantly worried about Karen when she was out by herself. Now, they were in the middle of the woods and he had to remind himself that she was finally safe.

"O
kay, walk but bring your pistol," Matt negotiated.

"I don't leave home without it," She said.

Matt and Adam jumped in the truck and headed to Adam's house.

When the guys walked in, the rest of the family was gathered around the television. The story had moved past the financial channels and had permeated all of the news stations.

Matt watched for a few minutes then went to the computer to check out Zero Hedge. He knew he would get the most accurate version of what happening from Zero Hedge. Matt read what they had posted and checked a couple more sites before returning to the living room.

"It looks like all of the big banks are bankrupt," he announced to the rest of the room.

"What does that mean?" Janice asked.

"It means they owe a lot more than they have, and the holders of the interest rate swaps want their money now," Matt said.

"Won’t the government bail them out?" Shelly asked.

"They owe about $700 trillion this time
, Shelly. I don't think anybody can bail them out," Matt said. "Even with the out-of-control money creation by most every central bank in the world, the global M2 money supply is still less than $50 trillion dollars. The banks owe 14 times more than all the money in the world. If they’re going to get a bailout, it’s going to have to come from another planet."

"But depositors will still be covered. Right?" Janice
inquired.

"The 2005 bankruptcy reform act, pushed through by our good friends at Howe Clancy, Goldman Sachs and JP Morgan Chase, made sure
that derivatives holders would have super priority in case of a bankruptcy. Depositors are now considered unsecured creditors," Matt explained.

"But that
’s the depositor’s money!" Shelly protested.

"Not according to US bankruptcy law," Matt said.

"The FDIC will still make good on insured amounts, though," Wesley said. "I bet they knew this was coming. Maybe that's why they dropped the FDIC insured amount to $75,000."

"I don't know. This event would have been hard to pinpoint when it would happen. The interest
-rate market is built purely on confidence," Matt said.

"Unless someone planned this event," Adam added.

"It's possible, but folks on our level will never know if that's what happened," Matt said. "As far as the FDIC reimbursing depositors, they only have about $30 billion in the fund insuring over $10 trillion in deposits. So yeah, the first one third of a percent of depositors should theoretically have no problem getting their money. The other 99.7% are on their own."

"But the Fed can just print the money to reimburse them," Wes stated.

"And nearly double the money supply in doing so," Matt said. "Either way, the paper money won't be worth having by the time this is all over with."

"So should we run out and try to buy stuff with the little bit of cash we have left?" Adam asked.

"If there are staples you need and think you can get, yes," Matt said. "There will probably be a run on anything like food and personal supplies. We’ll probably see worse rioting than we saw in the last EBT riots. If there are no banks, credit cards and EBT cards won't work at all this time. In addition to the dependent welfare class rioting, everyone who put their faith in credit cards will also be joining the show. If you’re just looking to get rid of the rest of your dollars, I would wait. In the short run, we’ll probably see a major liquidity crisis where people who haven't prepared are looking to sell everything of value for a few bucks. We might see jewelry, ammo, tools, farm animals or even farms being sold for pennies on the dollar to try to get cash. If the grid stays up for a while, Craigslist may be a gold mine in the next few days. Once the smoke clears though, dollars won't be good for anything except lighting fires."

"Well," Adam said, "I guess we
’re pretty well set on staples. Ladies, why don't y'all write a list of everything you would like to buy if this was the last day grocery stores were going to be open. Me and the guys will go to Kroger and pick up what we can find."

"Sounds like a good plan
," Matt said, "But, I think we should try the Piggly Wiggly. It’s a little more out of the way. Piggly Wiggly is less likely to have trouble and more likely to have the stuff we're looking for."

"Good call," Adam said.

"Karen is coming over in a while; tell her I'll be right back," Matt said to Janice.

"You better get something for her," Janice said.

"Oh, I know what she'll want," Matt said.

"What's that?" Janice inquired.

"Cheese, mostly extra sharp Cheddar.  Maybe a little Swiss; Brie if I can find it. That's not likely at Piggly Wiggly, though," Matt said.

The guys loaded into Adam's truck and headed out.