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On the Nature of Cash, Bonds, Digital Cash, and the Derivative Market

by Argentus Maximus, TF Metals Report:

People talk about derivative markets as dangerous places for the uninformed.

Educated investors have said that zero or near zero interest rates cause distortions in markets. Bonds which bear very little interest become overvalued at those times.

And cash has the nature of a zero coupon (interest rate) bearer bond. So when interest rates paid on bonds are every low, cash becomes more attractive than at other times. Cash competes with bonds when bonds pay under the fair rate of return.

And for that and also for other control reasons that they call regulation but is nothing of the sort, the indebted nations’ central bankers want to remove cash and replace it with something that is not a bearer instrument, that is, their digital currency would be a trackable negotiable instrument upon which fees and charges may be levied. Like a bond.

So given this logic about these features of bonds, cash, and zero interest rate regimes, here is a question …

Is a crypto currency a derivative of a bond, or not?

Because the bond market has been in a 36 year bull trend. So when bonds make their new trend visible, what of crypto-FX? I acknowledge that different FX can rise and fall against each other. But the BIS central bankers’ united team want every FX to trend downwards at the same time so that everybody else’s flight to safety is prevented. That, by the way, is tacit admission that their particular cash is a bond derivative – if bonds are going down cash will too, broadly speaking. People flee to bonds and cash when the economic outlook looks bad.

At the period that cash competes with bonds, zero interest rates or zero real rates, bonds can “lose out market share” and begin to move opposite to cash or a cash substitute, and act as if it were the cash of a foreign sovereign. So the amount of cash is kept low, a small percentage of the total amount of bonds. And nowadays, in addition to cash, the new cash substitute is the crypto currency. It’s relative attractions arise from dissatisfaction with the aforementioned instruments. Crypto currency therefore derives it’s value from them to a certain degree. When people are unhappy with bonds, cash or digi-cash become more desired and rise in value. Like bonds in the bonds market,or stock IPOs during bull Markets, increasing amounts of fresh digi-FX issues will be made available while demand is high. So digi-cash proliferates across brand names if not in each individual crypto-FX brand.

In which case, if crypto-FX is actually a bond derivative, a variety of contra-bond, then real (inflation adjusted) interest rates matter to it. If it is a form of cash, then sovereign risk matters to it too. Bonds are about power to take resources, or earn them, and trust of remaining around long enough to repay the buyer of the bond.

For instance, if a country is invaded and taken over by the country next door, both it’s cash and it’s bonds become worthless.

External sovereigns attitude affects the value of cash, especially when they are willing to take executive action. A sovereign has historically been able, given enough commitment and resources deployed, to kill the currency of another. Are those days gone? Even if they all agree to act together?

Could it someday turn out that selling digital-FX and buying gold may eventually be looked back upon as the killer trade.

Read More @ TFMetalsReport.com

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