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.

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…

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.

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.

About the Author

  122 Comments

Undecided
Mar 23, 2014 - 6:17am
Louie
Mar 23, 2014 - 6:30am

#2

Second

gold slut
Mar 23, 2014 - 7:09am

Great article JY!

An excellent subject for discussion. I often have to catch myself when I become a bit too obsessed with getting my cost average down, or whether I can save £5 next month if I hold back a purchase this month.

The day will come when we wake up to find there is none to be had anywhere at any price... £5 off or not.

'Possession is eleven points of the law', so true. I suppose the 12th point is whether the goons can find it if they come looking.

El Gordo
Mar 23, 2014 - 7:43am

China gold imports article...

I seriously studied the China gold imports article posted at Zero, and despite my background in finance and at least average intelligence, I still haven't fully comprehended the process. I will probably study it a little more before concluding that either I am an idiot or that the scheme being utilized is too complex to be understood by anyone - in which case it could also be total BS, but who would know. Things we take for granted today which are understandable by all used to be considered magic when majority of the populus was illiterate (a condition we are trying our best to recreate), at least in the US. Long Island was purchased from the natives for a few shiny trinkets, so how would you value those trinkets exchange value? Paper is paper, even if there is some claimed underlying asset represented. Real estate is merely rented from the government who retains the right to tax it right out from under you if all other methods fail. Hiding your meager metals may be the only way to preserve anything of value, but what good are they if there is nothing to trade for. Obviously, if you read this, you can determine that I'm more than a little confused by all this, but of one thing I am certain - there is no better time than the present to take advantage of relatively cheap metals prices and load up while you still can.

Gold Dog
Mar 23, 2014 - 7:51am

I drink

the fifth! Now to read.

Motley Fool
Mar 23, 2014 - 8:32am

Jy

Thanks for the link. I quite enjoyed the ZH comments. I find it interesting that this was posted roughly about the time the crash JPM buy silver campaign was reaching its height. So much confirmation bias, ahahahah. Fun to see.

For amusement value, I have been saying for years that these are the current dynamics, china selling papergold and buying physical, though of course I did not speculate on the exact mechanics.

Gold Dog
Mar 23, 2014 - 8:38am

On convertibility

It occurs to me that anything and everything is worth exactly what someone will pay/barter for that item. You can't eat gold! Some preppers have a years worth of diesel saved up in case the power grid goes down. What will it be worth if we suffer from an EMP event and the generator is toast? What is it worth if that chap is the only one in ten miles that can recharge your batteries. I have about two winters worth of firewood and a wood burning fireplace stashed in my back garage, what is it worth if I am afraid of using it because the smoke and smell of cooking canned bacon just makes me a target? There is a viable and dynamic market for everything, including labor going on at all times. On another note, either here or on ZH someone posted regarding the Gubbmint's balance sheet recently put out by the GAO. I call bullshit on the total value of the assets only being in the $2 trillion range. -What would land developers pay for Yosemite? The Grand Canyon and surrounding areas, including the water rights of the Colorado River? - What is the 80% of Utah that they own worth? - All the airports and associated systems? - The natural resources are vast, vast I tell you! - The interstate highway system alone would probably fetch close to a quarter trillion for someone that wanted to own some toll roads. Tu amigo, Don Perro

Gold Dog
Mar 23, 2014 - 8:39am

And another thing...

Thanks JY, good article as always! Ta, DP

Motley Fool
Mar 23, 2014 - 8:47am

El Gordo

If you like I will put in simple terms what I understood from their explanation. 1. Company in china borrows money in yuan. They have to pay Chinese interest rate. 2. They use this money to buy gold, and store this gold in a warehouse. They get a warrant showing their ownership of said gold. There are some storage costs. 3. They use this warrant as collateral to take out a loan in say USD, with much lower interest rate. 4. They hedge the price of gold changing by taking out a short position on the gold in the futures market. (The physical serves as the underlying long, making them net neutral.) 5. Chinese interest rate - USD interest = Gross Profit - storage and transport costs - hedging cost = Net profit. 6. At this point it gets a bit fuzzy...but either the company uses this same warrant to take out another loan. OR. (more likely)...the company who now have possession of the warrant uses it to make a loan in USD with the warrant as collateral. 7. The warrant keeps switching hands and new loans keep being made on it. Each one hedges on the paper market with a short. So. Several shorts are created for one underlying stack of gold, creating downwards pressure on the price. The problem of course lying in there not being a limit of the warrant only being used as collateral once. Of course the above explanation is still not wholly accurate, as they talk of gold fabricates moving, and increasing apparent import and export values. Perhaps this is how they created the illusion of more gold existing, allowing them to issue more warrants on one underlying stock. So perhaps step 2.5 is : They send off this gold for fabrication, and re-export to hong kong, while hanging on to the warrant.

Patrancus
Mar 23, 2014 - 9:19am

Convertibility

the piece reminds me of the scrip issued by various Barter exchanges during the mid 70's to early 80's. all manner of scrip could be found for trading into goods and services. These various forms of scrip might also be valued differently depending on what happened to be in inventory of the various exchanges. Trade brokers within the exchanges competing with one another for trade transaction fees charged for transactions between members of exchanges. In some instances it was a basic model for a basket of scrip or currencies for that matter as long as the barter exchange membership's fiat cash business was not working for them as was the case then with no cash buyers for warehouses filled to the brim with inventory, or not enough cash services being sold to the street, very different times now, no inventory piled high, only cargo ships anchored in Asian ports, and dry shipping companies selling off containers by the 1000's to preppers waiting for sky-net.

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