Tuesday, June 10, 2014

Unleash the KRAKEN!

Following the theme of our last post on gold expectations, it seems that there was a rather well managed expectation of more copper in Chinese bonded warehouses than there actually is ... and apparently certain people have become quite upset about this.

I'm really not sure why. If the loans thought to be collateralized by physical copper are defaulted upon, they could easily be made whole by the issuance of more paper, for that is all that backed them anyway, a claim of collateral, a pledge ... a bond. And the loans made? Well, they are quite useful in our paper world, but the repos are just paper, as is the liquidity, as are the loans themselves.

You see, we live in a world where paper, and electronic digits and "accounting" control the price of everything, the demand of everything and the supply of ... well, paper.

So this "rehypothecation scandal" as some call it is MUCH bigger than a few tons of copper. The rehypothecation of reality DEFINES our entire global monetary system through the ubiquity of derivatives ... and the lesson to be learned here is that the viral nature of "dollar wealth for it's own sake" spreads to all nations "systemically", because there is no competitive, resource-based "physical supply" system to challenge it ... yet.

Some focus on the derivative gold market as the critical market which will "break" under the weight of its paper fractionalization. But ALL paper wealth is fractionalized by it's very nature, as explained in earlier writings. Gold is just the monetary metal which historically functions to address the problem of rehypothecation, when all paper begins to "unravel". This copper fractionalization is but a "micro-issue". Central banks know their history. China and Russia do, and are preparing.

And so the US dollar has been "unfriended" by it's social support mechanisms, almost as if a BRIC has been thrown through the window of its paper house. How odd now that we turn our attention, right on cue, to China.

There are many "paper millionaires" who have plowed their savings into equities, and are as exuberant today as the man who bought a home in 2001 for $100,000.00 and thought it to have tripled in value to $300,000.00 by 2006. It is the same home after all, and not much has changed in 5 years (save for a little fading of the shingles) and today it sits on the market for $90,000.00, and for six months no buyer comes a courting.

Well, at least it gives shelter to the borrower of the debt it represents - but that is of little consolation to the securities investors who plowed their savings into the single income stream from that loan repayment, which too was pledged a hundred times over, to hundreds of investors. Ahhh, but this was made whole on the balance sheets of the issuing banks. With more paper of course, thank goodness, for the debt must be saved if the system of debt is to function at all, does it not ???

There is perhaps a clue in this. You see, there is plenty enough of everything the Roacheforques need in this world, as long as the rest of world goes hungry. And as long as the rest of the world continues to happily accept the status quo, then there is plenty of oil and copper and pork bellies and oranges and beef and fruit to supply our global depression for years to come. What joy!

But a world where the quality of life for the masses, or the middle classes, includes all of these things in abundance cannot be had until the real world of resource supply breaks free from the paper world of the exorbitantly privileged 1%.

It is a hard thing for the little people to understand. They are taught to live and die by debt. But once the Kraken of reality is unleashed, this paper world we have come to accept will be no more. If a few tons of copper awakens the sleeping giant, so be it. But I do not think so.

Nor do the Roacheforques have any assurance which domino will fall first. But you can bet your life and limb they will not be caught holding paper when it does.

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