Consider the year 1979. In the USSR, the government obstructed price of one ruble is $1.65. Soviet law forbids entry into the country with rubles, meaning tourists are forced to buy the currency at this high price. However, you decide the risk taken in defying Soviet law is worth the potential gain, buy rubles in Vienna, Austria at the free market price of $0.31 per ruble and enter the USSR with the currency. In Leningrad, you use these rubles to buy caviar to take out of the country upon departure.
In this example, GOP is $1.65 and FMP is $0.31 while COA depends on your point of view. Arguably, there are real and psychological consequences to committing what Soviet law determines a crime. If discovered, the currency bought in Vienna could be confiscated as could the caviar bought with it. Soviet police could make real trouble for you. On the other hand, perhaps these considerations are negligible considering the gratification of defying an oppressive regime and the likelihood of success in completing your transactions and leaving the country with the purchased goods.
For our purposes, let’s say COA is negligible. In this case, OSP (Opportunity for Speculative Profit) exists.
GOP > FMP + COA = OSP
OSP per USSR ruble is the following:
GOP ($1.65) – ((FMP ($0.31) + COA (0)) = OSP ($1.34)
The difference between GOP and FMP is OSP ($1.34). Divide this by the FMP ($0.31) and you find the resulting profit is 432%. With FMP rubles, you are able to buy 4.32 times more caviar than with GOP rubles. You are able to sell FMP rubles into the GOP market for a more than respectable profit.
Another way to profit from government intervention in the free market is to buy in a market with less government obstruction and sell into a market with more government obstruction. For example, in the United Kingdom, the sale of children’s clothing is exempt from VAT (Value Added Tax) while in Poland the VAT for this item is 23%. Poland’s business regulatory environment also results in relatively high operating costs compared to the UK. These two factors contribute to higher retail prices in Poland. It is possible to buy designer brand children’s clothing from a wholesale supplier in the UK at a much reduced cost to what retail customers pay for the same clothing in Poland.
You travel to the UK and buy children’s cotton shirts in bulk at 3 Euro per shirt which in Poland you sell at 8 Euro each. Through word of mouth, your client list steadily grows because in Poland, the same quality shirt retails at 12 Euro.
The formula for calculating OSP is different here than in our previous examples because we are dealing with two free market prices. It looks something like this: If the first FMP plus the cost to circumvent government obstruction (COC) is less than the second FMP, then OSP exists, or,
FMP1 + COC < FMP2 = OSP
The COC in this example includes travel expenses between the two countries and the risk taken when VAT is not paid in Poland. If we assume COC is 1 Euro per shirt, the formula for OSP is
FMP1 (3 Euro) + COC (1 Euro) < FMP2 (8 Euro) = OSP (4 Euro).
This results in a profit of 200%.
A currency reset is another type of government intervention which can lead to OSP. Governments typically take this action when prices, due to government action in the first place, namely inflating the money supply, have risen markedly over a period of time. The mechanism is simple. In a 10:1 reset, for example, holders of old paper currency worth 10 units must exchange these for the new paper currency worth 1 unit. The paper currency’s purchasing power remains the same, at least theoretically, but what happens to the coins? Often, coins are ignored in the reset process because few remain in active circulation. Therefore, in this example, their purchasing power increases nine times.
With foresight, you can plan for an eventual reset by stocking up on coins. When the reset occurs, each old GOP coin with a one-unit denomination is now worth nine times one new GOP paper bill. COA is zero because you simply buy coins with equivalent GOP paper money before the reset happens. In this case,
GOP1 + COA < GOP2 = OSP
or,
GOP2 (10) – (GOP1 (1) + COA (0)) = OSP (9)
This is a 900% profit, meaning the buying power of one old coin with the same face value as one new paper bill is nine times that of the new paper money.
[box type=”note” style=”rounded” border=”full”]For reference purposes, the following economic formulae is used in the book – The Art of Speculation during Civil War – and also the definitions of the abbreviations contained herein.[/box]
Speculation Short-selling Formulae
OSP: opportunity for speculative profits
FMP: free market price
COA: cost of arbitrage
SP: speculative profit
GOP: government-obstructed price
FMI: free market income
GOI: government-obstructed income
COC: cost of circumventing government obstruction
[tabs style=”default” title=”Formula Equations”] [tab title=”One”]If FMP exceeds GOP plus COA then OSP exists
Or:
FMP > GOP + COA = OSP
FMP – (GOP + COA) = SP[/tab] [tab title=”Two”]If GOP exceeds FMP plus COA then OSP exists
Or:
GOP > FMP + COA = OSP
GOP – (FMP + COA) = SP[/tab] [tab title=”Three”]If the first FMP plus (COC) is less than the second FMP, then OSP exists
Or:
FMP1 + COC < FMP2 = OSP[/tab] [tab title=”Four”]GOP1 + COA < GOP2 = OSP[/tab] [tab title=”Five”]FMP > GOP + COA = OSP[/tab] [tab title=”Six”]FMP (FMI) > GOP (GOI) + COA = OSP[/tab] [/tabs]Extraordinary speculative profits are possible with minor risk if you verify the truth, properly use logic and keep it private. The establishment will continue to make war and milk the public. If you understand exactly how they are doing this, you will also be presented with the possibility to learn how to protect yourself and profit far beyond the norm. If you are short selling shares that the establishment is short, your risk level is low and potential for profit high. This is not investment activity or undertaking a market risk. It is speculative profit in time of civil war.
Read more of: The Art of Speculation during Civil War
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