The Musk that fell to earth

From Jalopnik (H/T Climateer):

The episode, titled The Musk Who Fell To Earth, reportedly has Mr. Burns losing all of his cash to Elon, leaving Burns bankrupt and on the street. Considering the Springfield billionaire’s love of all things nuclear, it’s safe to assume that Musk’s push for sustainable power will play heavily in the plot line.

The David Bowie/Musk connection has, of course, been noted before :) And here. 

Can’t wait for the episode!

The problem with official emoney…

I was talking with someone who knows a lot about the origins of money the other week and he responded to my point that the central should issue its own emoney with a comment that I thought that was very good indeed.

“Why should the central bank complicate its by with issuing emoney when it currently outsources that job very successfully and efficiently to private banks?”

I thought it was a great way of looking at it, and of course totally true. And hardly revelatory. But sometimes we forget that that’s exactly what the central bank does do.

The only point I would make to counter that, of course, is that it used to make a lot of sense for private banks to compete to provide emoney infrastructure for the opportunity to issue state money directly on a conditional basis to customers. They would more than cover their costs. And emoney tech was a useful way of attracting cheap funding.

Unfortunately at the ZLB the cost of infrastructure + no worthwhile opportunities to make those costs back safely = a negative implicit rate for private banks.

In other words, it’s precisely because private banks have to fund the cost of the public emoney infrastructure that makes them even more cautious about lending, because at the very minimum they have to make those costs back.

If the government took that cost on for the public good banks might be inclined to lend a little more than they currently are.

It all reminds me of the petrol business. Everyone knows the downstream ops of major oil producers — a.k.a the retail petrol business — is loss-making on the petrol side due to the cost of carrying and managing the distribution network. Those stations make up their costs by selling sandwiches and convenience goods. The only reason oil majors carry retail networks is for branding purposes and information gathering. All the real money is made on the production and wholesale trading side. Just like with banks.

Does trust imply collaboration?

I’m curious to know what people think apropos the current obsession with eliminating trusted intermediaries from the system?

Is it really about efficiency? Or is it about eliminating the need to collaborate and depend on other people, rationalising the view that selifshness is always in your interests?

To what degree does eliminating trusted intermediaries justify the idea that a system is best served by everyone doing what is best for them?

If everyone does what’s good for them (not you), you can’t really trust anyone but yourself.

Or are the two unrelated?

It just seems to me that a society that depends a lot on trust, is going to be more collaborative by definition.

Bitcoin works best when everyone defends and supports the system, and thus doesn’t trust anyone else to do it for them. It breaks down when too much trust accumulates in certain centres (MT Gox etc), and people forget you shouldn’t be trusting anyone in that system.

This is different to banking which openly solicits yours trust.

But even with Bitcoin, you have to trust that people will always do what’s in their interests, and follow the protocol that tells them to do that. So there’s still trust!

Am curious for views about this. Instinctively I feel that trust can’t be eliminated, and that that’s because society always benefits from some form of collaboration. Perhaps trust can be diluted, but not eliminated?

———–
Update

Here’s a related post on the evolution of trust.

It makes the point that trust isn’t being eliminated but rather is evolving. The core trusted intermediary model is being replaced by a network trust model instead.

You will rent your room to a stranger if he has a good network score, and you will rent a room from a stranger if he has a good network score.

Reputation goes two ways now.

But didn’t it always? I guess it’s just that what used to be local knowledge is now global knowledge. You get barred from one hotel, you actually get barred from all of them. You get a bad review you lose customers.

It’s panopticon society?

Don’t fear the NSA because (just like in communism) it’s everyone else who is doing the watching on their behalf. Your neighbors. Your peers.

Does this lead to a freer society? I don’t know. It’s a very unforgiving society that’s for sure. Some bad or stupid behavior early on can lead to terrible social exclusion even if you have changed or learnt your lesson.

Surely trust and de facto collaboration is about taking a risk? In a world where everyone is a watcher, however, things are derisked by almost a fear of god effect. There is no risk.

Is the collaborative economy a misnomer?

Not sure it’s as much about trust as it is about sanitizing trust.

Surely value comes from being able to take a risk in trusting a known convict and collaborating with him to achieve something that would not have been achieved otherwise. This is the sort of trust arrangement which has for generations been facilitated by cash. You will work with the convict providing he pays you in verifiable cash.

Bitcoin’s solution is based on encouraging you to work with the convict providing x amount of people witness the transaction and promise to not conveniently forget about it when it suits them. They also promise to verify it without the need of knowing who the two of you actually are thanks to cryptography.

You’re having to trust a wider network to replace the physical certainty of authenticated cash. But that network needs to witness and watch all the time in order to make that situation work. That commits a lot of energy to just watching. Energy that could be used elsewhere?

The only alternative is trusting one third party to witness and verify transactions professionally. Since his business depends on being a trusted and guaranteed watcher he can be more efficient about it and has an interest in not conveniently overlooking transactions. Conventionally he has needed to know the identities of whoever he is watching and implicitly guaranteeing.

Though a third option is using a single trusted counterpart to witness your transaction as per above, but not have him know who you are. You can call that the David Birch plan, and it’s generally much more energy efficient. It’s also a little liberating.

I like this last option the best.

As for the collaborative economy’s solution? That seems to me about developing trusted networks by simply eliminating all non-trusted parties from the system. Not sure how collaborative that really is? In fact it gets kind of biblical.

Once excluded — say because you failed to abide by the collaborative economy’s 10 golden credit-score commandments — you actually need a third party (ideally with a flawless credit score) to vouch for you to get back into the network. But by being associated with you, that third party ends up sacrificing his own perfect credit score to get you back in. In other words he redeems your credit score at the cost of his own.

You have to wonder what’s in it for him?

 

 

Fixed vs flexible regimes

Debt may be a giant monetary short-sale, but it’s not a capital short-sale.

Hence why I contend that a system based on fixed monetary units representing capital — which actually has infinite expansion potential — has the capacity to be so disruptively squeezed. And that’s the case whether the fixed units are gold, bitcoin or fiat.

In a fixed regime, you’re lending units for the purpose of creating more capital — which can be expressed in many other things than just the units you’re lending — but expecting only the underlying fixed units back, not a pay off in the new capital. Unless the money supply grows in tandem with the new capital created, however, there is always going to be a squeeze. This is what the cross of gold argument is all about. It punishes the economy for creating new capital.

As Paul Krugman has explained in the past:

First, a gold standard would have all the disadvantages of any system of rigidly fixed exchange rates–and even economists who are enthusiastic about a common European currency generally think that fixing the European currency to the dollar or yen would be going too far. Second, and crucially, gold is not a stable standard when measured in terms of other goods and services. On the contrary, it is a commodity whose price is constantly buffeted by shifts in supply and demand that have nothing to do with the needs of the world economy–by changes, for example, in dentistry.

The United States abandoned its policy of stabilizing gold prices back in 1971. Since then the price of gold has increased roughly tenfold, while consumer prices have increased about 250 percent. If we had tried to keep the price of gold from rising, this would have required a massive decline in the prices of practically everything else–deflation on a scale not seen since the Depression. This doesn’t sound like a particularly good idea.

In that piece Krugman also cites the moral of the story of King Midas, which in his opinion is about teaching Midas that gold is only a metal, and that its value comes only from the truly useful goods for which it can be exchanged.

That’s not to say that a gold standard isn’t a good thing in economies that are prone to depleting resources and capital rather than adding to them. But discouraging waste is a very different to discouraging growth.

As an aside, purpose-based currency could change this because it could see people paid back in underlying goods produced rather than money, preventing the money supply short squeeze from happening at all. That, I have to say, would be a truly great monetary innovation in a world which clearly can’t tolerate the central bank adjusting supply by judgment alone.

That way, if you have a need for bread rolls in your local area, you provide the start up capital to a company committed to making more bread rolls. When you’re paid back in bread rolls or in kind rather than dollars, it doesn’t really matter if the expansion of bread roll supply in your area prevents the company from being able to fetch enough money to pay off its debt to you. You just care about receiving the rolls which you would not have got had you not invested.

Had the debt been in dollars not bread terms, the only way business — which might still be viable, necessary and desired — could sustain itself is through cheap credit and the ability to continuously roll the debt on and make the payments on it. And then it might be classified a zombie business, even though it’s not.

The China case

Which leads me to the only place in the world where they seem to understand this fundamental problem with money-supply short squeezes: China.

China has managed to get itself out of the poverty trap (a.k.a the Cocktail trap) — a trap in which hard work is never enough to allow you to catch up with incumbent wealth since success is actually dependent on serendipity or luck, not meritocracy — by understanding that the West’s fixed monetary supply obsession can be used to their advantage if one is prepared to expand the money supply in their place.

What do I mean? Well, it’s very similar to taking advantage of the Bitcoin no-debt doctrine. As I’ve explained before this is the idea that you can always enter the Bitcoin economy via work or labour alone, and that that’s a fair system. In reality ‘s stacked in favour of incumbents or capital owners.

What China realised, however, is that this vicious cycle can be broken if the money earned by labour is prevented from returning to those who own all the capital, and switched into a more accommodating currency instead.

From China’s perspective that meant a) attracting dollars to China by means of extremely cheap labour and b) retaining them in China by substituting them with a much more flexible currency such as the yuan, thus preventing them from being spent on goods, resources and services produced by US capital owners.

To the contrary, yuan were spent on Chinese goods and services which ended up empowering Chinese capitalists instead.

This was the main genius of the “currency-swap” strategy. The second bit of genius was ensuring that Chinese capitalists, unlike American capitalists, could never rely on a safe yuan-denominated store of value, because it would be constantly debased.

What you ended up with, consequently, was a yuan fractional reserve system collateralised by dollar reserves. Think of it like a giant ETF that issues way more units than it holds in underlying collateral, and pegs its units to a depreciating rate versus that collateral by taking a nice sovereign level management fee for itself.

The constant debasement of yuan relative to the US capital stock it retained soon enough created a negative savings rate for the population. This meant no matter how wealthy the Chinese capital owners and/or employees got, they would be “debased” unless they reinvested that money in capital expanding operations. As always capitalists sought out the most productive ventures and/or investments which they thought would be hard to debase like property — though this just led to a massive incentive to build loads of property.

Since this made wealth accumulation very difficult in China, the richest (and luckiest) one per cent became very prone to corruption, nepotism and/or capital exodus into economic zones which were much more sympathetic to protecting capitalist interests. Those who couldn’t protect wealth in that way had a greater incentive than most to spend on luxury goods and other wealth symbols.

This proceeded into a very positive feedback loop for China. The more the yuan was debased to spread wealth around, the cheaper Chinese goods became for those who still had dollars in the US, encouraging even more dollars to flow into Chinese coffers and be trapped there against an ever expanding yuan base.

The only dollar exodus was now in exchange for raw materials and commodities.

As far as the Chinese state was concerned, as long as the dollars didn’t flow back into the US in a way that benefited US  capital owners but the wider population, which would now redirect those dollars back to China anyway, that’s all that mattered. And so the trapped dollars came to be reinvested not in a way that sent dollars back up the capital chain but rather towards public securities like USTs and later MBS. In short, rather than rewarding capital owners via Chinese consumer spending choices, the state — by issuing yuan against the dollars it collected — could chose how to strategically deploy those dollars according to its much more socialistic agenda. The result was cheaper financing for the US state, as well as for US leveraged property buyers.

China, in short, was able to subsidise US public spending and housing.

Had the US offset the Chinese debasement with its own debasement much earlier on, however, it would have prevented China from capturing as much wealth as it did at the cost of US capitalists.

QE, however, shows that the US now realises that capital owners not debased by its own hand can still be debased by the hands of other clever states that have the means to attract dollars and stop them being returned to the US.

Putting this in Bitcoin terms..

Imagine if I wanted to leverage the increasingly concentrated capital in the Bitcoin economy. All I’d need to do is acquire a handful of bitcoin via my own labour, and then refuse to spend them in the bitcoin economy. Instead, I would issue my own dizzycoins against that bitcoin supply, and allow that supply expand more quickly than the supply of bitcoin. Since this would depreciate my dizzycoins versus the bitcoins, bitcoiners would be incentivised to spend bitcoins in my economy, not theirs, because the exchange rate would be much more favourable. I’d then mop up even more bitcoins and issue even more dizzycoins against them.

Eventually I could totally squeeze the bitcoin economy simply by refusing to trade out of bitcoin. Unless Satoshi changed the rules and started printing more bitcoin to compete with my favourable valuation, the entire bitcoin economy would be squeezed to smithereens and suffer a deflationary collapse.

In the meantime, if I felt the bitcoin economy was particularly unfair because it was rewarding drug barons and pimps rather than the wider public, I could deploy my bitcoin with conditionality back into the bitcoin system. For example, I could lend all my bitcoin to people who promise to dedicate it to public infrastructure spending or housing development.

Either way my ability to corner bitcoin supply and deploy a greater number of dizzy coins in their place would be the means by which I could extract wealth from that economy.

Naturally, I would have little interest in liquidating my bitcoin reserves unless bitcoiners retaliated with FX wars of their own, prompting my currency to become overvalued in comparison, and encouraging my citizens to leverage themselves in bitcoins rather than dizzycoins. (This is approximately where we are now.)

The commodity contango trade turns to Bitcoin

It was only going to be a matter of time before professional commodity gurus — no longer able to mis-sell commodities to the dumb money in conventional commodity markets, because these guys have got wise to the fact that commods don’t always go up — were going to turn to the extremely squeezable Bitcoin market instead.

Bitcoin is perfect for these guys because it allows them to deploy all their conventional volatility and cornering strategies outside the annoying supervision of regulators. It also allows them to take advantage of a whole new sub group of dumb money.

Bitcoin contango trades at the moment are ridiculously profitable. And there’s hardly any storage costs to account for making it even easier to arrange. Your only risk is counterparty default risk on the derivatives leg. Hence the push to create legitimate exchanges that can enforce payment and/or collect margin to protect the nifty commodity traders who bag these opportunities.

The only positive side to this is that it’s only dumb money being exploited, and the side-effects are limited to bitcoin prices not real commodity prices that impact the prices of essential food and energy.

I truly hope that overtime the dumb money will catch on to this blatant value extraction con, and realise that at the heart of everything is an even more riggable market than any in the conventional market place. Also that this is the equivalent of gambling in a casino, where the odds are actually stacked against the little guy. In my opinion it also exposes the totally valueless contribution of many of these intermediaries in markets. The fact that they can use a totally synthetic market to encourage mispricings from which they then extract rents proves this to be the case.

Hence be wary of stories like the following. The more commodity gurus and hedge funds enter the market the more the market is going to be used to bleed honest (but gullible) people who think this is some sort of value protection system.

Bitcoin taps former Credit Suisse commodities boss Adam Knight

A UK-based Bitcoin exchange has tapped the former global head of commodities at Credit Suisse to lead its attempt to promote professional trading of the virtual currency.

Adam Knight, who has been an angel investor in London since leaving Credit Suisse in 2011, has become executive chairman of Coinfloor and taken a stake in the company in a fresh fundraising round.
“Having spent my career trading commodity markets, I understand the exchange, clearing house and storage models well and wanted to find a team with the right skills and approach to build a robust global Bitcoin financial services business,” said Mr Knight.
“Bitcoin has survived some pretty significant shocks and proven to be far more robust than I had initially expected.”

And the biggest red flag of all:

Daniel Masters, a 50-year-old veteran commodities trader, started working for some of the largest companies in the world right out of university, trading in London, New York and Zug, Switzerland, for JPMorgan Chase and Phibro before moving on to the New York Mercantile Exchange, a short walk from Wall Street. By all appearances, it was your standard Wall Street career.

This is not market legitimisation. This is about priming lambs for slaughter!

And whilst it might seem like a perfect trade, because no-one can theoretically counteract your cornering of the bitcoin market with more supply, the way those darn shale developers were able to rumble the oil market, for the trade to work you still need a consistent flow of new money into the scheme.

When prices get so high that bitcoin becomes unaffordable, the whole thing crashes. The only way to make money on that, is to a) have information advantage on that side — i.e. be the one that suddenly dumps the supply into the market and front-runs it via derivatives markets or b) create a shorting market in bitcoin, which lends itself to the creation of a bitcoin debt economy, which begins to mess with people’s real businesses and lives. Being short bitcoin is also pretty risky given its propensity to be squeezed before you can benefit from a crash.

And let’s not forget, the more it is squeezed the greater the incentive to launch a double spending attack, rumbling the whole darn thing.

* I should point out that if you don’t have any ethical objection to using something like this strategy to legally extract money from the sort of people who can least afford it, by all means this is an excellent way to get rich quick. Especially if you can control the derivative exchanges cartel style that ensure you are always paid out.

** I should add that the original contango trade was about extracting dollars from the dumb buyside which was always unable to participate in the physical trade. With Bitcoin it will exploit anyone who doesn’t know how to buy bitcoins directly and will use an ETF or derivatives to acquire exposure to them, and also the physical premium provided by Russian and Chinese exit dollars.

*** One other point. At the moment there’s a lot of dumb money and/or desperate money (i.e. the money that is illegitimate and trying to desperately legitimise itself via bitcoin, and thus happy to suffer a discount) in the market to exploit. But the more professional money comes in to try and corner the whole thing, the more the low hanging fruit will be picked off. At which point, when the whole thing is crowded out by professional money and it all becomes a giant game of Liar’s Poker where the winners are the ones that best read the intentions and bluffs of all their co-participants.

The Cocktail trap

Flow is what happens when you take some time out, surround yourself with different things and reframe your view of things. Writer’s block turns into writer’s mania.

After something of a dry patch I am now experiencing a state of flow. A series of shortish posts on a range of different topics, based on a different — but hopefully still useful — way of viewing things is about to follow. I have at least five topics I want to write about.

This post builds on the last couple of observations about debt being a short-sale.

My hypothesis is not only that debt is a short-sale, but that it’s currently a short-sale rigged in favour of the stock lender. So yes, markets are rigged, but not by the central bank. The central bank, if anything, is derigging the markets from their natural state of riggedness. Because debt, just like short selling, can be a great and good thing for markets if done right. Without this intervention it would be incredibly hard for anyone to break free of what I will now refer to as the Cocktail trap.

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What’s the Cocktail trap?

Well, Cocktail is an excellent a 1988 Tom Cruise film about a barman called Brian Flanagan who desperately wants to strike it rich. He’s hardworking and willing to learn, but despite being fabulously goodlooking (okay, that’s a biased opinion) and everything going for him he can’t catch a break in any of the industries that can conventionally propel a working class chap like him into the fabulously wealthy social stratosphere. These industries include banking, trading, advertising or sales. Before he knows it, what was supposed to be a temporary job becomes his real job. He’s a barman who takes pride in his work.

His transition towards becoming a professional is quietly encouraged from the sidelines by his much more jaded contemporary Doug. Unlike the wide-eyed Brian, Doug is acutely aware of the fact that the American dream is a fraud. In his opinion guys like him can’t elevate themselves to the next rung of the social ladder by means of hard work alone. In Doug’s mind, it’s a question of risk, work and return. While Brian is willing to read a million econ strike-it-rich books and mess around with capitalistic ventures like Cocktails and Dreams, a bar which can be franchised in every suburban mall, Doug assesses that there is just as good a chance if not a better of striking it rich by remaining a barman and marrying money instead. The bar, essentially, is a fabulous place to pull.

Doug is proved right. He lands a huge fortune by marrying “a rich chick” while Brian resorts to tending bars in Jamaica in a bid to try and raise the capital for his venture.

But, of course, this is a classic Hollywood movie, which can’t conclude on such a cynical message. Doug’s easy route to riches is soon enough struck down by hubris. Having failed to educate himself properly about money, Doug bankrupts himself and his wife. Not being able to face the situation, he commits suicide. 

The twist in the movie is that Brian ends up falling in love with an even richer chick, without even knowing it.

A hitherto unappreciated risk is however added to the rich chick strategy: she is disinherited as soon she commits to marrying a barman.

But this, of course, suits the moral message of the film because it teaches us that it’s best to stick to an honest hard working strategy after all. In the end Brian’s uncle lends him the capital to start Cocktail & Dreams. True love and the american dream prevail. The concluding message is you don’t need ancestral wealth to elevate yourself in America. (Though, of course, a loan from an extremely money tight uncle can go a long way.)

This is very different to the real world, where the Cocktail trap persists and where Coughlin’s law (Doug’s strategy) remains the surer and smarter bet.

Also, nobody mentions that even if Cocktails & Dreams is a major success, the system is still loaded against Brian from the start. Furthermore, Brian can only achieve the success he needs to elevate himself to the next social class if someone else’s business is disrupted. Even then he still has to pay off his uncle before he can do that.

It’s a situation that can only be overcome if someone — say the government — recognises the wealth Brian has added to the social infrastructure of America and adds additional monetary credits (money) into the system to represent that fact. Only then can a prosperity-driven money short squeeze be avoided.

Debt as a massive short sale

Just read Scott Skyrm’s defence of short selling here.

This increasingly makes me think that looking at the phenomenon of debt as a short sale is a pretty useful way of understanding what drives the financial system.

Viewed in this way, banking crises are nothing more than your archetypal short squeeze situation, easily relieved if only the rules could be amended or if an intermediary agent could just provide you with the stock you need.

This fact is hugely important because the key thing to remember about short squeezes is that they are not a reflection of the real fundamentals or a phenomenon of value (as CYNK testifies to). They are a phenomenon of cornering, market dysfunction, friction and illiquidity.

There is no better example of this than the RINSageddon episode of last year. All it took was one rule change and bang, a potentially bankrupting crisis was made to go away. Not saying that RINs in and of themselves are a bad thing. They are a means by which a government is trying to incentivize the private sector to accelerate changes which are (arguably) good for society but which the short-termism of markets doesn’t care about. But with a social cost already introduced to the market for doing things their way rather than the government way, it was never in the government’s interests to allow a synthetic instrument like a RIN to be squeezed to such a degree that the whole scheme became unstable. This is the perfect example of how allowing more RINs into the market actually helped to stabilize the market and keep the goals of the government in tact.

So back to debt as a major short sale, and banking crises as an example of unnecessary and totally synthetically maintained short squeezes, with real economic costs.

In a regular short sale, the owners of assets lend those assets out so as to receive an improved rent from the assets that they would be holding anyway. They “put those assets to work”. And yes, there is risk associated with lending to unscrupulous borrowers, so a lot of the time these loans are collateralised. But not always.

Either way, the person doing the borrowing is hoping that he knows how to deploy those assets in a way that ensures he will always be able to get back more of them back than he needs to close out the borrow. Usually that means swapping them into something he considers to be a better store of value than those assets… I.e. The dollar. If his bet pays off, his dollars will be able to acquire more assets than he needs to pay off the loan with, and whatever he doesn’t need to acquire to square his position can be booked as a dollar profit for him.

In that sense shorting is the exact same thing as money lending, just that the capital being deployed doesn’t expect a return in quantity of equity but quantity of dollars.

The lender of the stock doesn’t care about anything else other than the return of his assets plus the dollar rent. Which is actually a bit nuts from their perspective as it suggests getting more of the underlying equity or bond is not as important as getting dollar rent. Money lenders are much smarter.

The mechanism in a money loan, of course, is exactly the same except that the thing being lent out is money (potentially collateralised with assets or not) and the rent is expected in additional quantity of money, not another arbitrary unit. From the perspective of the borrower he is still borrowing stock (money stock) and swapping it into the market for a basket of alternative goods or resources which he believes will ultimately lead to the accumulation of more money via a quantity return. The return is based being able to attract all the additional money units in the system to him. Though it’s also possible he’s invested in something he believes will simply be a better store of value than the dollar in its own right, like a house.

Though, if he’s used the money to swap into a house rather than to build a productive company that has the capacity to attract quantities of money to it, he is betting either that money expansion will make his asset appear more scarce and thus a better store of value, or in a fixed money supply world, that the simple preference for holding houses longer than holding money will lead to the same effect.

To recap here are the dynamics at play.

Short sale

Equity holder => lends equity to borrower => charges dollar rent

Equity borrower => swaps equity into dollars => anticipates dollar will hold value better than equity (there will be more equity available per dollar than dollars per equity).

If the short sale pays off the equity holder is worse off despite the dollar rent. (The dollar has appreciated much more vs the equity than the original compensation plan accounted for.) However, had the equity holder charged a return in additional equity not dollars — i.e. the equity was the numeraire — even if the dollar appreciated it would be unclear if the short seller had broken even. The dollar position, in other words, would somehow have to result in the acquisition of more stock to breakeven on the loan.

If the equity holder happened to own all the residual stock, or there simply wasn’t a way to create more of it because no-one was lending or creating it, acquiring that additional stock could be troublesome and a short squeeze would prevail benefiting the equity holder.

Debt loan

Money holder => lends money to borrower => charges dollar (quantity) rent

Money borrower => swaps dollars into assets => anticipates assets will hold value better than money. But that doesn’t matter because he owes additional money units not assets. Even if his assets replicate into many more assets, that doesn’t make the loan immediately successful, unless those assets all hold their value against the dollar.

The irony is, the more productive his investment is, the more assets there are chasing fewer dollars, compromising the original dollar swap commitment.

That means the only way to avoid a dollar short squeeze is either to invest in horribly unproductive or scarce assets and hope their value goes up in relative terms to money due to basic preferences and s&d (because more people want houses than money), or that by the grace of god more dollars enter the system so that your productive assets don’t depreciate unfairly versus your dollar debt.

Deflation in that sense is a major “money supply” short squeeze, propagated by the fact that money lenders want an absolute quantity of money in return rather than a relative sum denominated in the additional quantity of assets created by the loan. All of this is exacerbated if the money lenders also happen to own most of the spare stock that can deliver the necessary additional money returns, and refuse to allow more stock to be added to the system to offset the short squeeze effect.