 The long
and the short of it
Hugo Salinas Price
Feb 23, 2009
Several years ago - I don't
remember the date - I read an interesting comment:
"The great boom that
the world is enjoying, is in effect an enormous shorting of cash
and going long on debt. Eventually, there will be a short squeeze
on cash which will have to be covered by going long on cash and
shorting debt."
This appears to be a succinct
description of events we are now seeing. A tenet of the Austrian
School of Economics holds that all human action involves choosing.
I am indebted to Professor Antal E. Fekete for the insight that
choice involves going long what we choose and giving up - shorting
- what we give in exchange.
The US consumer has been shorting
cash for decades. The very low, sometimes negative savings rate
has shown that Americans have not wanted to accumulate cash.
Americans did not want to go long on cash, they wanted to short
it. They went long on houses to live in, houses to speculate
with, boats to have fun with, new cars, extra cars, ocean cruises.
They also went long on stocks - now selling for 50% of their
value in October 2007.
US businesses went in for "Cash
Management" - which was supposed to minimize cash balances
- short cash - and go long on purchasing short-term or overnight
debt from banks to meet coming maturities. Holding plain cash
or checking account balances was old fashioned.
Worse, businesses also wanted
to expand at all costs. Extend more credit - short your merchandise
and go long on accounts receivable - in order to increase sales.
Car manufacturers had their own financial arm, to enable them
to short their own excess production of autos, and to go long
on debts due from customers up to six, seven year's out.
The long position in debt held
by US banks is enormous. The debt (bank assets) whose market
value is known is classified as "Tier 1". The debt
whose market value can be assumed by comparison with the market
value of similar debt is classified as "Tier 2". The
debt whose value is strictly an assumption on the part of the
bank is classified as "Tier 3". Then there are the
highly dubious assets that some of the big banks are allowed
to keep off their balance sheets, as "it would not be practical"
to put them on the Balance Sheet, where accountants know they
belong. The banking system of the US went hog wild shorting cash,
throwing it around the world in exchange for anything with a
signature on it: shorting cash and going long on trash debt instruments.
The squeeze on those who shorted
cash is now tremendous. The figures on outlandish leverage in
US banks and the figures on household debt illustrate the situation.
The Fed and the ECB are trying to meet and overcome the short
squeeze by providing enormous amounts of money, available at
the banks, in an effort to provide funds to those who are trying
to cover their shorts on cash by going long - obtaining cash
- to cover their long positions on debts owed.
The enormous increases in cash
available at the banks are insignificant in comparison with the
prevailing enormous shorts on cash and long positions in debt.
The squeeze is implacable.
In effect, everyone on God's
green earth is trying to obtain cash - going long on cash - in
order to cover their long positions on debt.
"If consumers and businesses
refuse to spend and instead pay back debts" This is saying
in effect, "consumers and businesses are now attempting
to go long cash and cover their long positions on (i.e., short)
debt". High time they did so. News today is that US businesses
face $200 billion in debt coming due in the next three years.
They are going to be terribly squeezed for cash. Maybe lots of
businesses will simply declare bankruptcy.
"Cash is being hoarded
by banks and consumers alike" means "Banks are going
long cash and shorting debt (trying to reduce their leverage)
and consumers are saving cash (going long on cash) and shorting
spending."
Deflation and Depression are
actually a manifestation of a massive short squeeze on cash in
an attempt to reduce a gross and unsustainable long position
on debt.
The Deflation and Depression
will continue until the long position on debt is reduced. The
long position on debt in the world is so massive, that it will
only be reduced by equally massive defaults.
Only until these defaults reduce
the long position to a tolerable figure will the squeeze on cash
terminate. At that point, banks and consumers will once again
be willing to short cash and go long on debt: the banks will
once again be willing to lend and consumers will be once again
willing and able to take on debt and spend, or reduce their rate
of saving and become buyers once more.
Delaying the inevitable will
only drag out the agony of Deflation and Depression for many
years. Bringing all the massive liabilities of the banking system
onto the Treasury's indebtedness - while the corresponding assets
are worth far, far less than these liabilities - will solve nothing.
Debt must be reduced by
defaults and bankruptcies. There is no other solution!
The driving force behind the
rise in the price of gold at this time is not the fear of inflation
but rather the fear of placing cash where there is a possibility
of default. Only physical gold in possession is free of
this risk.
I may add that even national
treasuries do default on their bond obligations (Nouriel Roubini
just confirmed this) and can and do default partially by devaluing
their currencies. The world is gradually realizing this and this
is propelling investors into gold.
Could it be there is Method
in the government's Madness? Perhaps the unspoken idea is to
save some critical institutions by bailouts at all costs and
then - the Treasury defaults later on this year?
Feb 20, 2009
 Hugo Salinas Price, President
Asociación Cívica Mexicana Pro Plata, A.C.
Mexico City
email: plata@plata.com.mx
website: http://www.plata.com.mx
321gold Ltd
|
