We Promise to Pay You unless We Decide not to
Given a free market choice, very few people would buy so-called sovereign debt, i.e. government debt. That is one reason why central banks create money out of thin air and use it to buy the debt. But let us take a look at what’s happening, ignoring the group fictions and analysing it from the perspective of individual human action.
There are politicians and bureaucrats who borrow the money to pay themselves large salaries and to advance the interests of the financiers controlling the politicians. They want the system to continue for their benefit. On the other side, buyers of the debt are bankers who get large bonuses and enormous power from control over the private issuance of government money.
They also want the system to continue for their benefit. When there is a problem, the banks get bailed out. Who pays for this? The bankers and politicians want taxpayers to pay. In Athens, in early 2012, the taxpayers burned down 45 buildings. They too were willing to kill. Was that the beginning of a war where the issue is who is the sovereign, the big banks or the taxpayer? The people in parliaments and bank offices or the new revolutionaries?
Many doomsayers predict a New World Order in which most of the population is reduced to servitude and poverty. We do not believe that is what the future holds. We are optimistic. The world is far more prosperous and free now than it was 50, 100 or 250 years ago. We are of the view that Karl Marx got one thing right, political systems are a reflection of the economic system. The information age requires freedom. It is possible to destroy the Internet but not without paying an enormous economic price. So let’s profit from what we have learned so far.
The opportunity for speculative profits (OSP) exists if the difference between the free market price (FMP) and the government obstructed price (GOP) exceeds the cost of arbitrage (COA).
There are a number of useful ways to express this.
If FMP exceeds GOP plus COA then OSP exists
Or:
FMP > GOP + COA = OSP
The syllogism would be:
Premise 1: If FMP exceeds GOP plus COA then OSP exists
Premise 2: FMP exceeds GOP plus COA
Conclusion: OSP exists
Another way to express this when FMP is larger than GOP is to compute the amount of speculative profit (SP):
FMP – (GOP + COA) = SP
Also:
If GOP exceeds FMP plus COA then OSP exists
Or:
GOP > FMP + COA = OSP
The syllogism would be:
Premise 1: If GOP exceeds FMP plus COA then OSP exists
Premise 2: GOP exceeds FMP plus COA
Conclusion: OSP exists
Another way to express this when GOP is larger than FMP is to compute the amount of speculative profit (SP):
GOP – (FMP + COA) = SP
The general plan in each of the above two examples would be to buy in the low price market and sell into the high price market: buy low and sell high or sell high and buy low. The sequential order and way in which the transactions can occur will depend on many factors including legal restrictions and practical considerations. This can best be understood by going through examples.
[box type=”info” style=”rounded” border=”full”]Excerpts from the Art of Speculation during Civil War – Sun Tzu Meets Jesse Livermore is a private manuscript copyrighted 2012 by Art Fixed.[/box]
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