How China's Rehypothecated "Ghost" Steel Just Vaporized, And What This Means For The World Economy

Zero Hedge ^ | 9-17-2012 | Tyler Durden

[grey_whiskers]

One of the key stories of 2011 was the revelation, courtesy of MF Global, that no asset in the financial system is "as is", and instead is merely a copy of a copy of a copy- rehypothecated up to an infinite number of times (if domiciled in the UK) for one simple reason: there are not enough money-good, credible assets in existence, even if there are more than enough 'secured' liabilities that claim said assets as collateral. And while the status quo is marching on, the Ponzi is rising, and new liabilities are created, all is well; however, the second the system experiences a violent deleveraging and the liabilities have to be matched to their respective assets as they are unwound, all hell breaks loose once the reality sets in that each asset has been diluted exponentially.

[Kenny Bunk]

We can make sneakers right here in Maine.
For $2.50 a pair?

That's the trouble with Maine. People from away always trying to outwit us ... and succeeding. No way José am I sellin' you them sneaks for $2.50. You're just going to have to give me more of the $39.99 you're goin' to sell'em for. In fact, I don't give a hoot what you sell'em for, longs I get somethin' like $6.50 a pair for'em.

BTW, if they was sellin' retail in Shanghai for $2.50, those wily ex-laundrymen musta been makin'em for about 35 cents!

I once did a job for an outfit that was importing bikes from China. With 20 American employees and 1 small warehouse, they were creaming about $15 Million a year ... and growing. Drop ship to major retailers and pick up the check. They were buying themselves expensive ($1,000 and up frames) Euro bikes, taking pictures of'em and sending digitized isometrics to China, where they could make a reasonable (sorta) facsimile for next to nothing, ship it all the way here, and retail it in WM for O say, $239.95 and make a $70 profit! Their turn around time on a new model was astoundingly short.

One Chinese bike factory was also a prison. "Good news for You! You make 10 bike today Wong, you get two bowl rice, and best of all, you are no longer a kidney donor!"

Point is, maybe this outsourcing will have to stop when none of us can buy anything ... no matter how cheap. Remember Henry Ford and his $5 a day? Maybe we ought to try a little of that.

[neverdem]

Thanks for the ping.

[GeronL]

bump

[thecodont]

Thanks for the ping.

This sounds like kiting checks, but on a grander scale.

[Sequoyah101]

OK, see if you can explain to me, if you will please, how having less of something than originally thought makes it worth less?

Isn’t the fall in prices due to over supply and finite demand?

http://www.businessinsider.com/by-2015-hard-commodity-prices-will-have-collapsed-2012-9

The rest of this ponzi scheme is fractional banking come to its logical conclusion when all the loans default at the same time. When you make too many loans (too low a reserve ratio) you only increase that risk and hasten the day when one or more default totally. They played the odds that only some acceptable portion of their loans would go bad and not all at the same time and only after they had made enough to cover the losses. They lost. Just as they lost the bets on CDS where a statistical failure is a total failure.

[American Constitutionalist]

" Much of their vaunted economic growth and growth rates were FICTION " ..... propagandized and perpetrated by our own main stream media.

How many stories did we see in the main stream media in the last 10 years in how America's manufacturing base is dead and the miracle of China with main stream media's " Tingle up their leg " like Crissy Matthews seeing America's demise ?

[GeronL]

too many

[grey_whiskers]

There's a difference between the actual item "in hand" being worth less (two words), and the item "on paper" --a claim that one has such and such quantity on hand -- being worthless (one word).

But by mass psychology, if people are distrustful of the supply, or, there are so many claimants of limited stocks of steel (for financial reasons) over those few who really need it (for production) the loss of confidence may cause people to turn *elsewhere* (say to Mittal Steel in India, or Australia, or the US) because they are reliably delivering physical steel, causing the price for local "steel" (which may or may not be there) to drop.

Once a few creditors have been burned by non-existent collateral, they will start insisting on rigorous (and, if they are smart, repeated, as stocks can be moved) verification of any claimed stores of steel.

This will present a problem in the following cases:

1) Massive rehypothecation (customer stocks which were used as collateral by the customer, then being used as collateral by the supplier as well)

2) Multiple pledges based upon the same physical quantity (one type of fraud)

3) Pledges made upon entirely fictitious stocks (another type of fraud).

Depending on how much of this has been going on for with steel, and (by extension) throughout the Chinese economy, this could spell the beginning of *really* bad things for China and then the rest of the world (dictatorships start wars to distract attention from their failings; Chinese authorities have *already* barely been keeping the lid on massive unrest from the peasants -- if the nascent middle classes have their temporary prosperity taken from then due to fraud, whether by loss of jobs or accumulated savings by systemic fraud, then the moo goo gai pan will REALLY hit the fan).

Which is another way of restating what you yourself posted. Cheers!

[familyop]

"Will try to force my brain into submission and understand this."

As you do so, remember that there are some intentional omissions and misconstructions in the stories. Our merchants are getting loans for every shipment. Others through the chain of distribution toward the West are also running on debts. They stop paying, China stops shipping to countries of our former western culture. But China won't stop shipping completely. There's more to the world than Europe and the USA.

He who hordes resources will have physical, useful things. He who hordes funny money,...well, plans to con his elite way into buying useful things from those he robbed before by artificially propping up his funny money: a currency without a cause (without real products manufactured at home for trade).

It's similar to the debacle with layers of derivatives from our western mortgages (some of which were put into Chinese manufacturing/construction by our fellow westerners). I can find a link to an old but very clear explanation of that, if you like. Good place to start.

There's no intention of paying China back or to allow technically inclined westerners to go back to work (see the effete, earth-worship, coveting).

Obviously, China's been preparing for decades to extract payments by force or through dirty deals with foreign traitors to their own kind (maybe natural resources).

IMO, part of the noisy business with Japan now is only a ruse kind of demonstration (except for the issue about the islands, which China wants). The nationalist/historical part (about Japanese being Chinese) of the show might be a probe. Probes provoke reactions to see--movements and costs (oil, for one, which sucking sound is being smothered in propaganda to the contrary, of course). Costs big oil to move many big planes and ships--common knowledge.