sort of an op-ed by rdan
I have noticed from Yves Smith that the Baltic Dry Index is tanking*, and that letters of credit cost 3-4% to establish instead of the lower 1% or so. Trade has relied on ‘letters of credit’ to keep goods flowing. Correspondingly ‘sovereign bartering’ between governments is increasing as pricing becomes increasingly difficult due to the volatility and fears about once stable currencies.
*(Hat tip Naked Capitalism for Yves post on the Baltic Dry Index plunge and some connection to “Letters of credit” used in the banking system for centuries in order to maintain the flow of trade).
One impact of the at least perceived relative scarcity of rice (in nations whose populations that rely on rice for survival) is the ‘value’ of rice as a commodity appears to have risen to the level of ‘currency’, much as oil has done. Governments are by-passing currency considerations and swapping product in increasing quantity, especially commodities.
There is perhaps some threshold in quantity of such trade that will impact the ‘value’ of the US dollar as it is bypassed (and the sudden possible trillions of dollar influx of extra dollars even if re-couped over time) and possible hyper-inflation pushes the volatility further. Remember that $13 trillion is roughly the GDP of the US for the year, and dollars are being added as we speak…we are at 76% debt/GDP ratio approximately without considering state and local debt.
There is also an synopsis of an interesting book on all this….why and how.
“the authors find that counter-trade accounted for perhaps 10 percent of
total world trade in the mid-1980s and that barter deals accounted for approximately half of industrial sales in Russia and Ukraine in the late 1990s. The authors argue that the simultaneous existence of imperfect capital markets and problematic contract
enforcement create conditions in which a non-monetized transaction is Pareto improving relative to the most likely alternative, which is no transaction at all. Central to their argument in explaining both counter-trade in the 1980s and barter in the 1990s is illiquidity. In theformer case, illiquidity came about through the debt crisis of the early 1980s. In the latter case, illiquidity exists in the FSU countries because the banking sector is reluctant to provide capital.”
“Thus the non-cash economy helps to maintain output that would otherwise
collapse due to imperfect input and credit
Some more: Iran and Thailand bartering. Iran is under an embargo so is not a typical example?
Philippine trading manager placing a barter/counter-purchase offer in an
Estonian trade site.
China and Russia have recently increased use of a barter system on some items for commodities and oil.
ASIAN commodity and currency markets could be plunged into chaos after Malaysia threatened to abandon standard trading in favour of a barter deal.
With Malaysia struggling to shelter its people from the steep rise in the cost of rice and desperate to expand its painfully diminished “buffer” stockpile, its Minister for Plantation Industries and Commodities said the country would swap palm oil for rice with any rice-producing nation willing to make the trade.
The highly unusual offer marks a significant “no confidence” vote in commodity markets by a country that owes more than a quarter of its GDP to exports of crude oil and palm oil.
“Thailand is our main supplier of rice, but we are ready to offer palm oil to any exporting country that is ready to give us rice of suitable quality,” Peter Chin said.
Recent volatility in food prices and the emergence of rice as an asset – now thought by some to be on a strategic par with crude oil – have shaken many countries’ faith in the ability of global markets to price food properly.
Several large rice producers have curbed exports for the sake of domestic calm, and various barter deals are thought to have been struck behind the scenes. None has been as open as Malaysia’s offer, which could be imitated.
The barter makes some sense because Malaysia is a leading world producer of palm oil and is reliant on imports for about a third of its annual rice consumption. Palm oil prices have soared amid increased demand from China and India.
Commodities experts fear that similar deals would be unsettling to orderly markets if other raw materials, such as rubber or rare metals, even energy, were moved around in a series of large off-market deals with no formal pricing.
Commodity traders in Tokyo said that Malaysia’s decision to barter was a clear sign that food as an asset class was in crisis.
Kenji Kobayashi, a commodities analyst at Kanetsu Asset Management, said: “What is worrying is that these barter deals, which should only be for truly terrible situations like the Iraq oil-for-food program, are going to increase in size and number from here.
“We are now seeing all the hidden mistrust in the markets being expressed through barter.”
This post raises an interesting idea:
What happens in a world where the actual value placed on the monetary unit suddenly no longer corresponds with the actual goods?
Not sure that makes sense. Try it this way. The dollar is high in part because of the world’s debt must be paid in dollars. The world’s currency (the dollar) is seriously out of whack. Actual asset value is plummeting-that is what is happening with other commodities, oil, for example. Oil producers will eventually have a
problem: They will not be able to produce oil at cost! Why? In part because of the strong dollar…which is the exchange currency. In part because production costs are measured in dollars-Are the actual field workers going to lower there salaries? Are those who supply the machinery going to lower their costs in dollars?
The barter system begins to come into play. I need oil…you need rice
just as bad. Ok…let’s trade. Forget about dollars.
No expert here – but until debt in dollars has been wrung out of
the system-and the dollar crashes (it will)-and some other kind of unit of
exchange arises, we are in trouble.