Is the biggest short yet to come?

Q: Is the biggest short yet to come?
A: Yes. I think so. We are in a much larger bubble than the Internet/Tech Bubble or the Real Estate/Subprime Mortgage Bubble.

Q: What is the bubble and how did it develop?
A: Before I explain, I need to cover a few economic principles. Every transaction involves a shorting element. For instance, when you buy IBM shares, you’ve determined that the shares have more value than the cash used to buy them. In a very real sense, you are long IBM and short USD. If the value of US dollars goes up faster than the shares’ value, you will have a loss on being short the cash. If you had kept the US dollars, you would have had a profit from being long cash. This analysis is subject to further refinement if we look at the role of money.

All value is subjective. People buy and sell based on their value scales. Money is the medium of exchange used to facilitate indirect exchange. Ultimately, its value depends on its usefulness in satisfying the wants of consumers. In every instance, when a buyer decides to buy the most highly valued item on his value scale, he foregoes purchasing the second most valued item on his value scale. In value terms, the price a buyer pays is his foregoing the second most valued item on his value scale. The cash paid is simply the medium used to facilitate the exchange of values.

Every transaction always involves a decision to value A over B. Essentially this equals being long A and short B. This duality is inherent in the human condition. It results from the fact that all our objective senses function on information received as relative rates of vibration. We are only able to know hot if we know cold, wealth if we know poverty, etc. Looking only at the long side ignores half of reality.

Long-term consistent success depends on being balanced. That requires embracing all of reality, not just half. The market is perfectly balanced every day, usually with brokers selling to a public that is buying. The average investor is unbalanced because the average investor is only long. The brokers want to keep it that way. They do not want you to be balanced. They want you on the long side so they can be on the short side. That is the balance they wish to maintain.

Q: OK, I understand that every transaction involves an ordering of priorities: A over B. Where is the bubble?
A: The bubble is in government promises, which are expressed as government debt, which is expressed as legal tender money. People sponging off this bubble have profited from the increased liquidity. For them, it’s been a successful intervention in the market economy. The bubble is founded on the compelled use of legal tender money to pay government imposed taxes. It was possible to transition to a fiat currency on August 15, 1971 because the paper money had previously been commodity based — backed by gold.

Only the market can determine what money is. Once money is established, the government can modify it. The USD was originally a receipt for gold or silver. In order to make the change to a fiat system the long-term government bond was set to pay 15% per annum and Arab oil producers were given a security guarantee to price their product exclusively in USD. Even so, the average person suffered — living standards dropped significantly and the inflation rate reached 15% per annum. A successful move to a cashless system would mean total victory for the interventionists. Gold and silver might then be relegated to use in criminal activity or simply adornment.

I am not a gold bug. I do not have a product — metal or stock — to sell. The foregoing summary reflects my understanding of recent history and how the bubble has grown so huge. Money is 50% of every transaction. The capital base of the USA money supply is federal government debt. The official USA legal tender — the world’s reserve currency — is founded on USA military and police powers, on their ability to inflict harm. Saddam Hussein and Muammar Gaddafi are just two recent casualties of the global war to maintain USD hegemony. That is the bubble. When the perceived ability to harm diminishes, the bubble will deflate. Remember, all value is subjective. This includes the value of perceptions — what people perceive to be the ability of the USA military and police to do harm.