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USD, Oil pricing and Currencies
I am very happy to hear the rumor that the issue of oil pricing is being discussed. Right from the beginning, the so-called Credit Crisis has been a pricing crisis. This may sound strange but it makes sense if you think about it. How many times have you heard about the problem of “pricing assets” as the root of each specific problem without ever noticing that pricing was the issue ? How to “price” shares ? How to “price” debt ? How to “price” currencies ? How to “price” real estate ? If only we could “price” things properly then we would be able to figure out what to do – but – darn it – we have no way to “price” things.
Handle with care ! Start by assuming that this blog post is probably completely wrong. I have no insider information, no “hot tips” and no information which is not public and freely available on the Internet.
Why is pricing so important ? Well, if you don’t control the pricing of your product then speculators will eat your lunch. Then, later, you will have to go as a beggar to the counter-party which has already consumed your work and your product to try and get value from all of those “pricing units” (generally thought of as currencies but any IOU is the same thing) that they gave you. Surrendering control of your “pricing unit” is the “Greater Fool” theory of investment at the level of nations.
Example : China has lots of USD. But the only assets that they were allowed to buy in the USA were assets that would crash within a very short time frame. Ouch.
Oil pricing has huge geopolitical and social implications. The oil producing countries have a very complex tangle of political, economic and social relationships. I would suggest that poor oil pricing could actually tip the world into World War.
Why is the USD a particularly dangerous “pricing unit” ? The answer is simple : The USD is worth less than nothing. I’ll repeat that : it’s not worth nothing. It’s worth less than nothing. For the following reasons :
Nobody knows how many USD are in circulation (including counterfeit and leveraged counterfeit money). This is already a pricing disaster. Just wait until the issue of counterfeit USD hits the news waves. You can’t use a currency for pricing if you don’t know how many “pricing units” are in circulation.
The USD collateral is worth “less than nothing”. The big US banks have leveraged their collateral into hundreds of trillions of declared dollars on the asset side of their balance sheets. The collateral is illiquid; it has counterparty risk; it has no determinable market price (ie “the government” must take all downside risk to sell any of it – even for pennies on the dollar); it is depreciating over time; and getting rid of the garbage assets (due to transaction costs, deleveraging of loan portfolios and closing out the swaps) would cost the bank more than 100% of the value of the collateral.
The guarantors of the USD are worth “less than nothing”. The currency is guaranteed by a bankrupt US government which, in turn, is guaranteed by bankrupt citizens.
To even begin to use the USD as a pricing unit the US would have to issue a new currency at 2:1 to identify and flush all of the nicely washed counterfeit money out of the system and provide a reliable number for the number of dollars in circulation. Since this would make US taxpayers liable for the devaluation of their purchasing power that would result as all of that counterfeit money flows into the official numbers – this won’t happen.
So, what will happen ? Well, here are a few useful things that are not impossible :
Investors will start trading their USD for the assets of US corporations located outside of the USA. Companies and governments outside the USA will stop accepting USD for their transactions and will stop issuing debt in USD. The end result is that 1) the only entities that can use US dollars to buy things in the USA will be US corporations and 2) the only thing that they will be able to buy with their USD are assets inside the USA. This will certainly re-flate asset prices in the USA. Hyperinflation does that.
Large trading entities will start creating their own privately held and specialized currencies for trading amongst themselves. The model is not a bank. The model is a co-op. This is the model where you own shares in the co-op and use the shares for settling trades. It prevents speculators from raiding your “pricing unit”. It also provides a wonderful and fully automatic hedging process for the participants. It is a dynamic “pricing unit” that provides a stable store of value for deals that can take months or years until full resolution of settlement.
US share prices will rise as US corporations find themselves with tons of useless cash, no top-line improvement and no margins. Their best investment will be buying back their own shares ! This could drive the US market into outer space. Unfortunately, the price of a coffee will be $ 2,000 when that happens so the joy may not be distributed evenly.
The US government will have no tax revenues. People will just stop running their cash through the bank and their company books to try and keep enough of it to stay alive. The float will create a serious taxation problem. So, likely outcomes are : Federal Sales Tax, tax the internet and a law making it illegal for citizens to use cash for buying merchandise at stores. Will that be debit card or credit card ? (Kind of funny if you think about that choice for a moment).
Add it all up and you get default of the US dollar. Time frame ? I don’t really have an opinion right now. I might sit down and try and calculate it. The US is only about 25 % of the nominal world economy (and much smaller if you factor in localized purchasing power). Even a 20% decline in US GDP over the next few years would hardly affect the global numbers. In fact, with the way things are going with unemployment and the handling of the credit crisis in the USA there may not even be a country called the USA a few years from now. How’s that for a guarantee on your dollar’s value ?
I repeat : Handle with care ! Start by assuming that this blog post is probably completely wrong. I have no insider information, no “hot tips” and no information which is not public and freely available on the Internet.
http://emsjuwel.com/business/2009/10...nd-currencies/
Some Assembly required if you do
USD, Oil pricing and Currencies
I am very happy to hear the rumor that the issue of oil pricing is being discussed. Right from the beginning, the so-called Credit Crisis has been a pricing crisis. This may sound strange but it makes sense if you think about it. How many times have you heard about the problem of “pricing assets” as the root of each specific problem without ever noticing that pricing was the issue ? How to “price” shares ? How to “price” debt ? How to “price” currencies ? How to “price” real estate ? If only we could “price” things properly then we would be able to figure out what to do – but – darn it – we have no way to “price” things.
Handle with care ! Start by assuming that this blog post is probably completely wrong. I have no insider information, no “hot tips” and no information which is not public and freely available on the Internet.
Why is pricing so important ? Well, if you don’t control the pricing of your product then speculators will eat your lunch. Then, later, you will have to go as a beggar to the counter-party which has already consumed your work and your product to try and get value from all of those “pricing units” (generally thought of as currencies but any IOU is the same thing) that they gave you. Surrendering control of your “pricing unit” is the “Greater Fool” theory of investment at the level of nations.
Example : China has lots of USD. But the only assets that they were allowed to buy in the USA were assets that would crash within a very short time frame. Ouch.
Oil pricing has huge geopolitical and social implications. The oil producing countries have a very complex tangle of political, economic and social relationships. I would suggest that poor oil pricing could actually tip the world into World War.
Why is the USD a particularly dangerous “pricing unit” ? The answer is simple : The USD is worth less than nothing. I’ll repeat that : it’s not worth nothing. It’s worth less than nothing. For the following reasons :
Nobody knows how many USD are in circulation (including counterfeit and leveraged counterfeit money). This is already a pricing disaster. Just wait until the issue of counterfeit USD hits the news waves. You can’t use a currency for pricing if you don’t know how many “pricing units” are in circulation.
The USD collateral is worth “less than nothing”. The big US banks have leveraged their collateral into hundreds of trillions of declared dollars on the asset side of their balance sheets. The collateral is illiquid; it has counterparty risk; it has no determinable market price (ie “the government” must take all downside risk to sell any of it – even for pennies on the dollar); it is depreciating over time; and getting rid of the garbage assets (due to transaction costs, deleveraging of loan portfolios and closing out the swaps) would cost the bank more than 100% of the value of the collateral.
The guarantors of the USD are worth “less than nothing”. The currency is guaranteed by a bankrupt US government which, in turn, is guaranteed by bankrupt citizens.
To even begin to use the USD as a pricing unit the US would have to issue a new currency at 2:1 to identify and flush all of the nicely washed counterfeit money out of the system and provide a reliable number for the number of dollars in circulation. Since this would make US taxpayers liable for the devaluation of their purchasing power that would result as all of that counterfeit money flows into the official numbers – this won’t happen.
So, what will happen ? Well, here are a few useful things that are not impossible :
Investors will start trading their USD for the assets of US corporations located outside of the USA. Companies and governments outside the USA will stop accepting USD for their transactions and will stop issuing debt in USD. The end result is that 1) the only entities that can use US dollars to buy things in the USA will be US corporations and 2) the only thing that they will be able to buy with their USD are assets inside the USA. This will certainly re-flate asset prices in the USA. Hyperinflation does that.
Large trading entities will start creating their own privately held and specialized currencies for trading amongst themselves. The model is not a bank. The model is a co-op. This is the model where you own shares in the co-op and use the shares for settling trades. It prevents speculators from raiding your “pricing unit”. It also provides a wonderful and fully automatic hedging process for the participants. It is a dynamic “pricing unit” that provides a stable store of value for deals that can take months or years until full resolution of settlement.
US share prices will rise as US corporations find themselves with tons of useless cash, no top-line improvement and no margins. Their best investment will be buying back their own shares ! This could drive the US market into outer space. Unfortunately, the price of a coffee will be $ 2,000 when that happens so the joy may not be distributed evenly.
The US government will have no tax revenues. People will just stop running their cash through the bank and their company books to try and keep enough of it to stay alive. The float will create a serious taxation problem. So, likely outcomes are : Federal Sales Tax, tax the internet and a law making it illegal for citizens to use cash for buying merchandise at stores. Will that be debit card or credit card ? (Kind of funny if you think about that choice for a moment).
Add it all up and you get default of the US dollar. Time frame ? I don’t really have an opinion right now. I might sit down and try and calculate it. The US is only about 25 % of the nominal world economy (and much smaller if you factor in localized purchasing power). Even a 20% decline in US GDP over the next few years would hardly affect the global numbers. In fact, with the way things are going with unemployment and the handling of the credit crisis in the USA there may not even be a country called the USA a few years from now. How’s that for a guarantee on your dollar’s value ?
I repeat : Handle with care ! Start by assuming that this blog post is probably completely wrong. I have no insider information, no “hot tips” and no information which is not public and freely available on the Internet.
http://emsjuwel.com/business/2009/10...nd-currencies/
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