Convertibility

122
Sun, Mar 23, 2014 - 6:02am

A long, long time ago (not so long, really), around 400M people lived in a strange, double-tiered system. The currency issued by the state was pure scrip, forced into being by the will of the committees ruling the lands. They represented the future work output of the people thus ‘led’ by the committees, and to a smaller extent the natural resources of the countries. The problem with the latter was that trade and exports were restricted, and property/contract law was enforceable only at the discretion of the state in question, not any of its trading or investment partners.

The fiat money was colorful, adorned with historical eras and figures of old. Heroes, martyrs, idealized fools of history, battles won, poets, landmarks, national symbols. All of which was intended to make the unfortunate residents feel better about their ‘money’. So there would be less grumbles raised about how it was not convertible into any currency used by other countries EXCEPT those within the same trade zone, and then only generally with restrictions. Nothing could be bought from any other country, except those within the trade zone.

While some real money was issued as a token gesture, this was unattainable to the vast majority of the population.

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Beyond these handicaps, a further issue was that economic output (including the manufacture of goods, production of food and raw materials, energy sources, etc.) was centrally planned by the same all-knowing committees mentioned above. Simple things, like coffee, citrus and nylon pantyhose became luxuries. Since both supply and price were centrally controlled, even those items which WERE being manufactured were often scarce goods. Having cash was not enough to make a purchase, you had to be friends with the store manager, the butcher, the department store clerk (or know someone who WAS), so the item would be reserved for you (generally in exchange for a surcharge or an owed favor). You could buy a LOT of stuff in Moscow in the seventies with a suitcase full of bluejeans.

If you wanted ‘Western’ goods (or Japanese electronics, French perfume/cognac, caviar) and were not a member of the elite, you could either go to the black market, or traipse over to a small number of special shops allowed to transact ONLY in non-local, hard currency. The annual allowance of currency one could buy: __spamspan_img_placeholder__-0. While not always explicitly reserved for foreigners and domestic VIPs, these stores (like travel abroad and real money) were generally out of reach for the vast majority of the populace.

The system was, in historical terms, a transient one. But if you ask the residents how long their 40-80 year respective period lasted, they might answer: generations.

While that specific scenario is not by any means necessarily going to repeat, it is interesting to observe that not only was such a system possible, but it managed to prolong its existence over half a century or more. And depending on your view of how things currently operate in the countries in question,

one might argue that committees are increasingly dictating currency issuance and valuation (and thus prices), as well as gaining increasing influence over what is produced and where it is sent. Not just in this region, but throughout the rest of the world as well – especially the part that generates the vast majority of the global economy. The yuan is a partially convertible currency, after all – and the conversion seems to mostly only happen in one direction.

‘Buying local’ would take on an interesting new meaning, if one were to start shopping for a cheap US-made knockoffs of Asus laptops and iPhones, or if those in the West seeking to conspicuously advertise their wealth were to drive bullet-proof Russian SUVs instead of tricked-out Hummers…

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When Zero Hedge first started out, in those heady days and weeks after the proper website had been established (and we eventually found out the servers had been located in Switzerland), one of the hallmarks of the content was original research reports from large investment banks. Sometimes without their explicit, specific permission to use the material.

Though the domicile of the published data and materials perhaps made it more difficult for the legal departments of aforementioned financial institutions to get direct access to the ‘perps’ (in their view, anyway), the flow of these reports began to be outweighed, then dwarfed by the independent research and content. I suspect that the old nemeses such as GS eventually decided that acknowledging the existence of such 'digital dickweeds' was a necessary price to pay to obtain a cease-and-desist order to stop the flow of such reports. But this piece from our very good friends doing the work of God on behalf of everyone (but most especially themselves and their owners) is a throwback to the old days.

Tyler(s) of course take the research in a direction not stated by its original authors. But it connects quite a few dots, IMHO. Very much worth a read:

How China Imported A Record Billion In Physical Gold Without Sending The Price Of Gold Soaring

Given the size of the legal department attached to her (soon to be former) company, Blythe way very well have been telling the literal truth when stating that their commodity positions were on behalf of clients. Since their in-house side bets may either be covered by some other loophole (or simply a NatSeck designation from an appropriate authority, forbidding the mention thereof, like IT companies and their data flows), they might have judged that a public statement known to be untrue in one sense, may be perfectly defensible in a legal sense.

Zero Hedge articles, even if correct in their premise and based on provable, documented premises, take anywhere from months to years to come into the mainstream, and begin to be publicly discussed by MSM, regulators, and on a few occasions politicians and people who appear to wield significant power.

However, things seem to be accelerating just a tiny bit lately. The note published above, in combination with the current geopolitical situation, not to mention even Nostradamus and the triumvirate of (FO)(FO)(A) forecasting and broadcasting the eventual inevitable flammability (or watery death) of paper representations of precious metals (or at least gold) would start to make me a little bit nervous to hold substantial amount of wealth in such paper products.

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The problem is one of a slippery slope – at what point does the invalidation of the paper representation of some piece of wealth stop? What forms of wealth can and which cannot be represented via paper, are precious metals truly the only ‘examples’, if they ever become such? How are other tangible assets recorded and traded around the world? At what point does conversion between various abstract/fiat representations and the true articles themselves become difficult, or even impossible?

Apparently, the saying was Scottish, and really originally went:

“Possession is eleven points in the law, and they say there are but twelve.”

Keep stacking.

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