Posted by: graemebird | November 1, 2008

Commodities As Cash Balances.

To the kids the shiny coins are like a vision of ancient stories of buried treasure, forbidden cities, and pirate fortunes, and it was with some excitement that Mogo would soak the big copper coins in the lemon juice and when he would wake up in the mornings they would be shiny like brand new.

Mogo works two thirteen hour shifts every 8 days. He started, when very young, doing odd tasks, driving cows, cutting thistles, spraying weeds, driving the cows to be milked in the evening and in the morning as well.  But he and the outfit he works for have big plans for him.

When he would gather enough of the copper and silver coins he would trade them in for silver bullion kilo bars and the gold coins. 

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The psychological effects of having proper money rather than government crap to save up is not to be underestimated. For kids to grow up with sound money is a gift that will alter their lives and mostly for the good. People will hold onto this money tightly and their cash balances will be very high. Its important to keep our commodities industries “ahead of their game” as it were. And today we see the dangerous consequences of our failure to store commodities when they are in the down cycle. We see that ponzi-commodity trading is not just silly its dangerous. 

Take the oil price right now. Depletion rates from existing oil-wells are very fast. Maybe 9% on average. And yet oil companies are slashing their exploration budgets because of the ridiculously low price of oil. People are beginning to buy big vehicles again. And this is a failure in the pricing of this gear. A failure to store commodities when their price is low.

Once the kids are old enough the strategy of going from copper coins, to copper bars and silver coins, to silver bars and gold coins ought to be augmented by computer trading. Bear in mind that any ponzi-trading is illegal or sheeted off to the area of gambling under my system. Hence the markets ought to be stable enough for kids to look into it. And the fundamentals ought to match the price without the sort of mysterious mismatches we have under the current debauched markets. 

Kids should be able to listen to industry experts to figure out where the demand and supply of the various commodities are going to go. And if they see a looming shortage they could well offload their gold to store up the commodity for which it is expected that there will be difficulties in production.

So the kids could trade out of silver and into liquified-coal if the silver appeared to be overpriced and the liquified-coal appeared to be underpriced.

Now we have a sort of heirachy of invesment holdings.

And that goes like this:

1. You start building cash balances.

2. Then you have interest-bearing savings in term loans.

3. Then you have equity-investments.

 

This is the sort of natural heirachy of it.  You cannot really save money until you have high cash balances. And you probably ought not start throwing money at shares until you have saved money. All I’m saying here is that in a system of 100% backed multi-commodity money, then building cash balances ought to have an aspect of commodity-speculation to it. It ought to have this commodity-speculation to it since you ought to be building your cash balances in underpriced commodities.

Now supposing if you have high cash balances in a commodity that is underpriced. Supposing if the price then goes up and now you thinking that the price is too high. Well this coincides with a time period where producers who CONSUME this commodity in the course of their business are finding it hard to afford this gear. This is a good time to trade this commodity in for a commodity that is not overpriced. But it is also a good opportunity to lend out your commodity to these businesses at a high interest rate. A high interest rate denominated IN THE COMMODITY ITSELF.

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Lets look at resource allocation under progressively more sophisticated scenarios.

Imagine there is the building of these cash balances. And the trading of these commodities as people are building them. But there is no lending of any sort. No banks that take term loans.

Well already thats a pretty good allocation of resources right there. Capital formation goes to those who have the best cash flow. Capital formation comes from reinvestment. Borrowing and lending doesn’t add extra resources to this scenario. And there is the very real possibility for the existence of banks that borrow and lend to hash things up and make resource allocation less effective for capital formation.

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Now lets add another layer of sophistication to all this. We now have share buying and trading with 100% equity companies. We have people building and trading their cash balances in commodities. Building and trading on the basis of what commodity they think is cheap at the moment or that might get more expensive down the track.

But now we have non-limited-liability companies borrowing in commodities and paying their interest IN THOSE COMMODITIES. So a small company has plans to expand. And the liquified-coal prices appear to be high and likely to come down. So they borrow this liquified-coal and pay a high interest rate BUT ONLY IN THE LIQUIFIED COAL ITSELF.

Ok right there thats a pretty righteous system of resource allocation as well. And here we have banks playing a very limited role. Consider that if people know that we face many years of high diesel prices AND WE DO they will know that they can build their cash holdings in this commodity and keep building it and from time to time, when the price is high, they will be able to lend it out to struggling or expanding businesses for very high interest rates. Thats a pretty cool system right there and it shows that we only want 100% backed bankers that know they have to make loans to create wealth OR WHAT THE HELL ARE THEY GOOD FOR? We just don’t need the ponzi-money.

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Now lets get back to what Mark Thornton talks about. To the fact that once a new-record-breaking skyscraper gets under construction the recession will be upon us before construction is finished.

Well you see that is just not going to happen under 100% backing multi-commodities.

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NOT JUST A PROBLEM FOR THE RECORD-BREAKERS.

Its not just the skyscrapers we are talking about here. Look I know this might come as a surprise. But land ought to be getting cheaper. The reason being that high-rise is a land-substitute. But we never get the super-spacious oversupply of high-rise living and working space that we need. In fact the high-rise apartments only seem to go up in a very short window within the cycle. This is the fault of ponzi-money and having gold and silver will help end this. But multi-commodities on top of the gold and silver would do even better.

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Consider this. We are saying the heirachy is such that the savings don’t go ahead until the cash balances are really high. And they will tend to be savings lent at high interest IN THE COMMODITY ITSELF.  And we are saying that equity investment won’t go ahead until the savings are high.

So everything begins with the high cash balances which are high commodity levels in storage with quite a range of commodities in storage. So much so that the prospect of people borrowing to mitigate a sudden spike in the price is not really likely. Now the high interest rate is probably only available for the long-term loans. Which means thats when the prospect of the real big investments are opened up.

Now bear in mind this setup would have our extraction industries and primary industries fully capitalized up and “ahead of their game.” So we wouldn’t get this malinvestment caused by ponzi-money. But its also the case that these really big investments are not going to strip the economy of commodities and resources. 

Instead of the big investment and the high-rise going on frantically for just a short period of time we would get a far more steady accumulation of this important long-term capital. And without any need for a downturn.

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Responses

  1. The current debate at Catallaxy about the congestion tax is terrible because both sides are atrocious.

    We have the stupid side of the debate. Thats Sinclair and the others. And then we have the evil side of the debate. Edney, Soon et al. I’m amazed that the wicked Kodjo didn’t show up.

    Yes of course congestion tax is the right idea. Because it brings rational pricing reality to the road system and user pays. It brings rational pricing to city-layout and to the choice between city and country living. The stupid side of the argument has no serious answer to that.

    But the evil side of the argument is wicked indeed. These are Pigouvian extremists. Every day they go to see what Mankiw has to say and they love the Harvard brand-name.

    What they are really after. What they really want, is for the truck driver (lets say) to pay income tax, cap-and-kill-tax, GST, excise tax on fuel, non-renewable resources tax, a seperate non-CO2-pollution tax, a road damage charge and on and on until they acheive sexual fullfillment at the death or bankruptchy of all the drivers. They want each of these hateful taxes cascading backwards and forth on eachother and as well the congestion tax. And they don’t want to make sure the funds are for roads alone. No they want to steal it all. Put it into some socialist slush-fund for trains or something.

    The congestion tax will be harmful if its not about more mileage rather than less. And less taxes rather than more. Cheaper costs per mile and more miles driven. It ought to come in in such a way as to help and not hurt our truck drivers. It will not be an economic success unless the change in the mix of taxes leads to great relief for the truck driver.

    Bear in mind the truckies will be sorely put out. They’ll basically have to pull off the roads at peak time if they are headed the wrong way.

    Its got to be congestion tax and congestion tax alone. Thats got to fund the entire road system and only the roads and we have to get rid of all of the other taxes cap-and-kill not excepted. And it ought to come in with a 5 year suspension of income tax for truckies as well.

    We cannot be too careful about this matter. Because a progressing economy in the first instance progresses via a lengthening in the structure of production. That means more and not less mileage in the short run. Perhaps down the track we might develop more wharves and there will be more tugboats and things operating all along the coast. Tug boats can pull immense amounts of cargo very cheaply but at a slow price. And in the longer run this might steal a lot of custom from the truckies. But this pigouvian extremism is so destructive. Because they get hold of one of the few areas where a charge makes sense and they go all extremist with it.

    Also note that none of these guys mentioned the critical supply-of-fuel factor. If we want this congestion tax to pay for the maintenance and building of all these new roads and tunnels and things to make that nut work we want gigalitres of extra fuel production. That means nuclear plants providing the heat and hydrogen for liquified coal as well as the nuclear plants crowding out coal-electricity which is a shocking waste when nuclear is available. But no hint of that. In the Pigouvian extremists world its just a world of suffering. And every fucker having to take the train. And mark my words, a big part of this deal is these guys wanting to steal off the motorists to build trains everywhere. They won’t feel satisfied if thats not part of the deal.


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