Tuesday, June 7, 2016

Humanity's Curious Equation

Though the conclusion is somewhat mistaken, the chart itself is a worthy visual reference of the overwhelming influence of our times. It can be broken down into a more or less mathematical equation which sums up the dominant quality of human nature: "something for nothing is greater than something", or "S x 0 > S".

Of course, the logic of the equation is flawed, but no more flawed than our times. Logic tells us that "something for nothing" comes with a price that is greater than "nothing". In the days before ZIRP, that price was either "interest" or the debt impairment of default. But as we see the incredible rising prominence of "something for nothing" we see the elimination of logic. There is a diminishing interest rate, even to the extent of negative rates (yes, in Europe there is talk of negative mortgage loans where the lender is actually paid to service the 0% loan). And of course, with regard to default, there is none.

We witnessed the death of default in 2008 when trillions were issued to banks to cover defaulting securities, created by defaulting (mostly mortgage) debt. As the families well know, the issuer of our faith-based money will cover all systemic losses and mitigate all systemic risk, while the little people are shuffled about from one loan to the next as their standard of living declines relative to the rise of the lending class.

As jobs and opportunities deteriorate, the littlest people will gradually lose title to their S x 0's, but the banks will be made whole and the assets owned will be serviced by the next tranch of debtors who can still service consumer debt. The CDOs and MBSs will be covered by the issuing of electronic digits that represent the currencies which the little people labor to earn, and this is where we get our phenomenal growth in S&P, DOW and of course US Debt.

As long as the unit of account remains as a functioning means of exchange, the Ponzi can run indefinitely. We asserted several posts ago that the store of value function has no meaning, or bearing, upon the matter. It has been negated by ZIRP (even NIRP) and the drive to eliminate "hoardable" physical cash units.

In the last post, we illustrated how the functioning of a currency is now the primary driver of it's "value", another slap in the face of logic due to its circularity (the unit functions well because it functions well). This fallacious argument has stood the test of time due to sheer depth of holdings. And the massive 1.75 quadrillion in OTC derivatives (and related layers of underwriting, as with AIG and Generali) are designed in essence to broaden further the depth of dollar denominated debt - which makes the "US debt" an oxymoron.

Debt has no national boundary. All debt is tied together globally under the FX regime. While the dollar is preeminent, it is the global currency market (a massive derivative market) which codifies the global equation that the human condition authors: something for nothing.

All classes strive for it, and the striving gives it power. So while Ender is correct that the currency that functions best is the one that buys things at relatively stable "prices" and with broad acceptance around the globe, we would do well to remember that the currency that functions best is the one that never defaults.

There is no reason for Saudi Arabia, China or Russia to refuse payment (for "some things" like oil, gold or wheat) in dollars, if those dollars buy Lamborghinis, islands and villas all over the world. And likewise, there is no reason for the USD not to prop up the DOW, the S&P and its primary dealers with trillions of units of account, since that activity keeps the equation of "something for nothing" alive. This is why the dollar sanction exists. It is the "stick" of strong dollar policy.

The only downside in this perfect Ponzi of "S x 0 > S" are the makers of Lamborghinis and the builders of Villas who have already made more than enough of both for the 1% to exchange between one another and now have no way to service their debt through earnings. This is why the helicopter drops are spoken of - it is merely a spraying of crumbs to appease civil unrest in a world where real work is in much less demand due to the overproduction of "most things" - a byproduct of global debt expansion.

We must ask ourselves why dollars would ever stop being used as a means of exchange under this current paradigm of a working something for nothing model. When we look at this closely, though war and isolationism (clearly on the horizon) might seem to be the only answer, it is in fact the enigma itself which provides the answer.

The issuers of Ruble and Yuan (and their trading partners) wish for their currencies to have the magical S x 0 > S function. As the nature of being human demands, they wish to have the same advantage for their currencies - and this is how our currency wars linger, though the dollar has for many years outmatched the contenders with dept of derivative (including bond) holdings.

It is the act of breaking free from dollar dominance - painful at first - which defeats it's power of functionality, but which becomes easier to adapt to, even logical to proceed with, as the US Consumer weakens as a source of trade, and US output has little value in trade, since most output has been dedicated to the war mongering of dollar function protectionism (strong dollar policy).

In the end, try though they might, humans are powerless over the magical alchemy of something for nothing, even if it works for decades, because every tribe pits HIS something for nothing against YOUR something for nothing. Trade imbalances in the form of currency claims are key. Or, as Ender so eloquently puts it:
Economies around the world don’t exist or work in a vacuum. Rather, they all interact. Thus, we have to touch on exports and imports. Economies that produce enough to export gather the currencies that function in other economies – they become savers (China). Likewise, if they don’t produce enough they end up giving up claims on their currency – they become spenders (USA). In today’s world the ‘savers’ continually grow their claims against another economy.

Remember, function of a currency is 90-95% of its value. In normal situations, the savings that you generate is just what’s left over.

In today’s world, the bulk of the import and export trade is balanced out by eventually buying goods and services from each other. It falls into that 90-95% range. But what about what’s left over? The problem is that it remains a – claim. That is a problem. At least that will become a problem. As claims build up they always get to the point where he who is in debt simply defaults. They can’t survive under the strain. It’s either war to keep what you have or you go to auction.

Is there a better way to redeem that claim? Why not just get paid in full? This is where, you guess it, gold finds function. Gold is payment in full. Gold is not a claim, it represents the opposite.

In today’s world, the claims that wait to be settled (derivatives) are so huge that the (role) that gold is currently playing while being under the influence of the strong dollar policy prevents it from functioning to settle these claims. In other words, at strong dollar prices, there is not enough gold in the world to settle claims – claims continue to build.

At some point, the claims will overwhelm the economy. At some point, the world will realize that their claim doesn’t really mean anything. At that point, they will do whatever they can to redeem their claim. That, my metal-headed friend will lead to dollar craziness – which we are currently experiencing.

In the absence of the strong dollar, gold can find its rightful (role) as functioning to settle the surplus claims in the system.

This implies that in a local economy that effectively generates a surplus gathering claims against other economies, they will redeem their surplus claims – in that other economy where the currency functions just like they redeem ALL their other claims – for gold (again, China). 

[...] Economies that run a surplus settle for gold which makes extra gold available in that (economy's) currency. As more gold becomes available, it has the tendency to drive down prices. This falling gold price over time will make the people feel that they will be able to get MORE gold for the currency in the future. Thus, a falling gold price will grow the usage of a currency – more people will hold it for future payoff. Any currency that will buy more gold in the future than today will be seen as a strong currency.

Likewise, those that run a deficit will see foreigner(s bid) the price of their gold up as it moves into other economies. As gold gets scarce, it will have the opposite effect on the people’s feelings about holding the currency. Thus, the currency will weaken.

In light of our conversation, does it give new meaning to the function of gold? Does it help explain why every other currency wants gold out from under the control of the dollar? Ultimately, surplus claims need settlement and economies should be judged upon their ability to produce for the world and currencies should reflect that fact.

[...] Once people understand that gold is NOT functioning today and they can see how it SHOULD function, they start to think about the ramifications of how they might benefit.

Thus Another’s conclusion – he who follows in the footsteps of giants will be in for the windfall of a lifetime when gold starts to function FREE of its current control.

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