Friday, August 09, 2013

Credit Outbids Cash = Resource Wars

There are real-world consequences to over-issuing credit and currency.


Creating credit is the same as printing money when interest rates are zero. If I borrow $1 billion at 0% from the Federal Reserve (because I'm a Too Big to Fail bank, for example), it is functionally equivalent to printing $1 billion in cash currency because the credit costs nothing.
Let's say there is a .25% interest rate cost and printing cash also costs .25%. The carrying costs of both are trivial.

As a result, those with access to cheap credit have the equivalent of a printing press. I illustrated this recently with an example of three traders entering a trading fair: Trader 1 only has cash that has been earned and saved; Trader 2 has access to leveraged credit (i.e. borrowing $100 based on $10 of cash collateral) and Trader 3 has a printing press that creates cash currency. The Financial System Doesn't Just Enable Theft, It Is Theft (July 31, 2013)

As a result, Traders 2 and 3 could buy a lot more real-world goods at the fair than Trader 1, enabling the two traders with essentially unlimited credit/cash to reap enormous profits on carry-trades and other speculative trading.

Longtime contributor Harun I. recently pointed out an even more destructive consequence: resource wars.
Not only can trader 2 and 3 purchase more goods than trader 1. Trader 2 and 3 have no limit on what they can bid and therefore can price trader 1 out of the market completely. This can and does lead to economic warfare and control over states that have to import the majority of their food and/or energy.
This is a profound insight. Let's take two states, both of which issue credit and currency. The first is the U.S., and the second is a beleaguered state (State 2) with too much public and private debt and little collateral (for example, gold reserves) to back its currency.

The second state can issue as much currency and credit as it chooses, but the value of that capital falls in direct proportion to the quantity issued. Those sellers who accept this credit or cash as payment for real-world goods have little trust that the money issued by State 2 will retain its current purchasing power in the future. As a result, there is a huge risk premium priced into the trade, and relatively few traders will accept the risk of trading a potentially worthless currency for their scarce resources.

For whatever reason (and there are more than one), the trader trusts that the U.S. dollar will retain its purchasing power long enough for the trader to trade it for some other asset or form of capital, or even hold it as collateral for future loans.

Harun's point is the U.S. can outbid State 2 for oil or any other resource because it's essentially free for the U.S. to issue credit and cash. The price for the resources in U.S. dollars will soar in a bidding war, and while the U.S. can simply issue more credit/cash, State 2 is rapidly impoverished as the cost of essential resources rises.

Eventually this leads to a bidding war for trust: Whose credit/cash will be trusted to retain its purchasing power? There is a grand irony here, of course; as issuers of credit/cash attempt to debase their currency to boost their exports, their debased currency buys fewer real-world resources.

In a global credit crisis created by the over-issuance of credit/debt, which currencies will lose trust and which will gain trust? Those which retain or gain trust will enrich the issuer and those who lose trust will impoverish the issuer.

Nations that lose this bidding war for trust may reckon it's "cheaper" to wrest control of the needed resources by force rather than go through the arduous steps necessary to rebuild lost trust in their credit and currency.

In sum: there are real-world consequences to over-issuing credit and currency.



Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)



Thank you, Gregory S. ($5/month), for your most-excellently generous subscription to this site -- I am greatly honored by your support and readership.Thank you, Daniel G. ($5/month), for your superbly generous subscription to this site -- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act
This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Limit the Use of My Sensitive Personal Information.


Regarding Cookies:


This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP