The Credit Crisis is Just Another Way of Describing a Loss of Trust
1. The BDI measures the Baltic Exchange; a market index that calculates the price of a ship lease... for the buying and
selling of time charters of ships. If I need a ship, I lease one from a ship broker and the ship broker reports the terms of my lease
ie: price, size of ship, lease period etc... to the Baltic Exchange and they record the price.
Wall Street speculators entered the market and started buying up time charters. There were no speculative sellers, only buyers. Thus, this inequality between buyers and sellers in an especially illiquid, hitherto "commercial player only" distorted prices.
When the speculative bull decided to cash out of the market, the market collapsed.
In COMEX, you have commercial and speculative buyers and sellers and a highly liquid market.
The Baltic Exchange wasn't historically a speculative market. When speculators finally exited, the BDI crashed.
2. Letters of Credit Explained.
There are many types. Only one matters to the current crisis: Intenational.
Letters of Credit are financial instruments which guarantee payment before delivery.
Example: I'm not shipping copper w/out a letter. I might not get paid on delivery. Your court system may not honor my just argument when I go to sue.
Thus, I need a guarantee before delivery.
Banks used to trust each other, now they don't...
Why not? Off balance sheet accounting.
Commercial buyers and sellers are no different.
The letter of credit is the Achilles heel of the global economy. Without it nothing moves.
The BDI gauges economic activity.
The dishonoring of that document known as the letter of credit, gauges the lack of trust.
The issue, as Rick Santelli points out, is fundamentally one of trust.
Until we have trust we will not have an economic recovery. We can have an inflationary recovery, where the general distrust of is outweighed by the fear of holding currency which is rapidly losing purchasing power/value.
ie: "I'm afraid to hold cash and my fear overwhelms my fear of my counterparty so I'm compelled to put it back into a market that I don't trust" is the only rationale which currently exists to force bullish speculation in the market.
And this rationale isn't tenable until the Fed starts honestly, diligently...throwing money out of helicopters.
And they have to throw it faster than the banks can pick it up.
They must either debase the currency until people panic or prosecute the liars.
One or the other.
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