Adonis Diaries

Posts Tagged ‘derivatives

Color of your money; (Dec. 25, 2009)

Consider a settled community. Suppose that in the beginning each extended family has its own water source, its lot to grow food, its chicken, a goat or cow for milk. For a time, this extended family is sufficient; it might not occasionally eat its fill but it does not suffer of famine or existential danger. Due to calamities in weather, disease, or family problems then productivity for survival is at risk. The slack periods of labor, during winter season for example, has encouraged the extended family to becoming proficient in specific economic practices.

One group of families opts for artisanal productions (such as clothing, pottery, woodworking, metal tools, stonework…) and it trained a few of the members to that kind of non perishable products. Another group of families goes into raising cattle; a third group goes for agriculture of grain based or fruit products. Question: which group of families has potentially the upper hand economically within the community?  Maybe the cattle raisers can existentially survive better and exchange or barter better their products with other kinds of merchandizes. Most probably, goat, cows, or sheep might become the basic common “currency” for exchanges during community market days, events, marriages, and daily routines. The cattle families grow richer in worth especially that they are producing existential needs.

Calamities strike the community and raising cattle is no longer profitable. Suppose that artisans supplant other extended families in economical exchanges and cloth, tools for productions, or other artworks become the basic currency for bartering. It stands to reason that an artisanal product cannot be counterfeited easily because it requires years of training. Communities aid families in time of distress for a short time but customs require that help be returned, for example in labor work.

Life is not that predictable; after trying dominance of one group of families over other extended families then alliances emerge among families. A chief is selected from the allied families; the chief main worry is to establishing stability and good working relationships in the community. A trading and unifying “currency”, agreeable to the alliance, is accepted by the community. Most probably major warehouses for various products are instituted by the chief and his powerful alliance of families. The chiefs learn to consider a currency that is more effective and easier to handle than actual bartering. Soon, metal coins are manufactured: they are not easily counterfeited because they require skills and much training. By the by, rare metals are considered and monopoly for the rare metals is concentrated in the hand of the chief’s entourage. Gradually, political systems learn that a currency has to enjoy properties such as being small to handle, having intrinsic value, rare, and difficult to counterfeit. Families not designated to manufacture the currencies will have to invest large capitals for acquiring the raw material and the skills. Police force is established to guard the warehouses and to apprehend counterfeiters and then hang them. The effigy of the chief is stamped on the coins.

A new class of families emerges (the bankers) that specifically manufacture the coins and distribute them to “oil” the economy.      Conflicts of economic supremacy among groups of “professionals” are frequent and these conflicts turn political by mechanism of alliance of interests. When the political system changes, then the rules of the game change by exercising “preferential” treatments to the alliance. The victor will inherit the warehouses and a new currency is coined to the advantage of the alliance. Other community chiefs might counterfeit the “enemy’s” currency with lower quantity of gold or silver for profit and for discrediting the enemy chief. In general, pride along with the dissemination of perception that the enemy is expanding economically on territory forces the counterfeiting chief to “recall” the counterfeited currency.

The colonies in the US before independence experienced economic expansions while England was having hard times. Benjamin Franklin, Ambassador to France after the US independence, let out the secret: Economic expansion was related to the colonies enjoying the right to “printing” currency when the economy needed this “oiling” mechanism. England then convinced the U, after its independence, to have the monopoly of issuing money; the Rothschild family endeavored to ruin the US economic expansion by refraining from distributing needed currencies. The dollar received a higher value than being simply an oiling mechanism: the dollar was overvalued and the economy shrank. After the civil war of secession two powers got in conflict: the bullion gold group and the “Green buck” who rightly considered the bullion currency as undemocratic and favoring the northern States who horded most of the gold.

This concept of money as simply lubricating mechanism continued to be adopted by economists since Adam Smith: economists set the money aside as an economic factor of interest and analyzed the economy as a barter exchange of good that was no longer valid.  Money is an entire social fact; it is a language and an institution (a set of rules, regulations guaranteed by political power that should be accepted as legitimate); money reflects the tag of war among classes in times of financial crisis: money has not the same value and meaning for the poor and the rich. The rich classes have the connections and political cloud to efficiently utilize and fructify their worth in money. Money is indeed unequally distributed and has become a cultural capital that divides communities.

What happens when a currency with intrinsic value is substituted with paper money or banknotes? What kind of confidence the community members enjoy to resume exchanging good products with just papers or fiduciary banknotes?  What happens when citizens are forbidden to exchange this fiduciary paper with gold put in reserves to guarantee their worth?

Question: “how this currency is guaranteed to be accepted by the entire community for smooth exchange of merchandizes?” There are three levels of confidence required for times of financial crisis. First with have the “methodical confidence”; a check worth $100 from one national bank should be exchanged with $100 at another national bank; the institution of “independent” National Banks guarantee this kind of confidence when one bank goes bankrupt. The second kind of confidence is “hierarchical confidence”. In times of financial crisis there are hierarchical structures to quick “arbitration mechanisms” among financial institutions based on rules, laws, and regulations. The third kind of confidence is the “ethical confidence”. The political power in charge of supervising money distribution makes decisions that are never neutral economically and socially. If legitimacy of the authority is lacking due to ethnic or religious conflicts with a State, then ethical confidence is perturbed. It is the conformity to a system of values that is the last barrier against monetary crisis. This is what happened in Argentina, especially when Argentina tied its currency to the overvalued US dollar and thus Argentina lost its independence of issuing money relative to the internal trading expansion.

It is inevitable that globalization will institute two kinds of currencies; one currency meant for the little people and “derivatives” for the big players. The traditional monetary system for the little people will adopt an international banknote based on a basket of rare metals, critical industrial raw material metals, and other existential products. This currency would actually function as a redistribution mechanism of accumulated currency reserves from States to other needy States in currency. The little people currency would be transferred as fiscal exchange among federated states.

The “derivative” currency (future, forward, and option) will be established after international institutions guarantee the three kinds of confidence for derivative exchanges and stop being a competition among enemies.

The greatest illusionists; (September 13, 2009)


            The Federal Reserve, the World Bank, the International Monetary Fund, the European Central Bank, The Central Bank of France, and the Central Bank of Germany are spreading false data of economic improvements with the main target of cheating the public to regain “confidence” on the archaic liberal capitalist system.  For a year now no substantive regulations on liberal capitalism have been instituted.  The Chairman of the Federal Reserve Ben Bernarke is at it again; he said lately “We should not attempt to impose on credit lenders heavy restrictions that might prevent the development of new financial products and services in the future. We all know that the improvement of easier access to credit has reduced costs and widened the range of choices.”  Are not the liberal new financial gimmicks for easier credit that brought on the crash of 2008 and the several crashes before it?

            What “confidence” is these great illusionists trying to resurrect from the tomb without a clear alternative financial system?  So far, bonuses are extended to the financial acrobats crossing dry rivers while employees are sinking in troubled water and not finding decent jobs. The USA is experiencing an official rate of unemployment of 10% and the European States even higher rates. For 2010, the International Organization of Labor (IOL) is expecting an additional 60 millions of unemployed and an additional 200 millions of people earning below two dollars a day.

            The States of California, Illinois, and New Jersey have declared bankruptcy; they lost over 30% of their assets during the financial crash.  These States refused to increase taxes for decades and they are no longer able to increase taxes because of their restricting legislative structures. The Security and Exchange Commission (SEC) is allocated a budget of one billion dollars to spend on 3,500 employees. The same SEC that failed to uncover Madoff’s practices for over 30 years and even asked for his expertise many times! There is this joke in the financial circle of Shadock maxim “The more you fail the higher the odds for success in the future”.

            There are several economic time bombs strewn around; they may blast one after another or all together. Among these time bombs we can explain the following: Obligatory Crash, Effective increase of interest rates, Refinancing of public dept, Monetary over valuation, and Newer and botoxed up (lifting) exotic financial derivatives.


            The public debts of the USA, France, and Britain are expected to reach 90% of the GNP in a couple of years; Japan will hit the 200% mark. Obligatory Crash is more imminent than forecasted previously. The real values of the treasury bills of these nations designed to refinance the public dept will collapse abruptly.  Chinese households have been saving for two decades and accumulated three folds during the last 7 years; these savings are re-invested in purchasing treasury bills of the developed States.  Pretty soon, the citizens of the developed nations will start bypassing their State middlemen and purchase directly Chinese treasury bills for higher returns; especially that the Chinese currency is endemically undervalued and cannot but goes up. Then, what will happen?  Would the USA declare the Chinese treasury bills illegal or not marketable in the US market?  The USA did that previously but antagonizing China is a different ball game.

            Effective increase of interest rates has been eating up any economic improvement in the indebted nations. The price of obligations has been decreasing. Let us say if an obligation returned $30 on the thousand and it is re-purchased at half the price for the same return then the State is effectively paying $60 for the thousand. Thus, with the doubling of the interest rate States will not find takers for new issues of obligations but by offering the higher interest rate.

            When allowed, central banks of States may refinance public debts by purchasing titles on the open market and thus sustain the prevalent interest rate.  This process is in fact creating new money printing and devaluing the currency value.

            The developed nations have monetary over valuated because they are unable to compete in other emerging markets like China, India, and Brazil. The exterior balance of commerce is thus in deficit and the currency keeps over valuating; it is a vicious cycle unless the developed nations reduce drastically the price of their products to be able to compete.  China is able to keep its currency under valued simply because it can afford to sell at competitive prices.


            Before WWI the economic principle was “Demands carry the economy”.  Then this principle was upturned; it now states “Offers carry the economy” which means “We produce and then we find ways to encourage consumers to purchase.  We entice the consumers by promotional gimmicks, by much lower prices, by creating new trends of standards of living, and by lavishing plenty of credits.” It worked for a while until what is being produced is getting too expensive, of lower quality, and basically not that essential in tight financial downturns.  How about educating the consumers of what is essential for resuming a decent life without the faked propaganda of what constitutes a “high standard of living”?




October 2020

Blog Stats

  • 1,427,875 hits

Enter your email address to subscribe to this blog and receive notifications of new posts by

Join 775 other followers

%d bloggers like this: