Why all financial markets will crash

It’s all about credit. Demand to fund rising government deficits and keep zombie corporations alive will drive up interest rates. This article explains the consequences for currencies and financial values.

It’s all about credit

All transactions and all valuations are in credit. The key aspect of credit is that it is always matched by an obligation, or debt. Credit is extinguished when that obligation is discharged or defaulted upon. But in today’s financial systems, the repayment of debt is always in another form of credit, usually the transfer of ownership of a bank deposit, which is also credit. 

Clearly, government and corporate bonds are debts. Because they are freely transferable obligations, they have a matching value expressed in credit. And that value is determined by both external influences and those specific to the debt obligation as assessed in markets. For example, interest rates and their outlook will place an external value on a bond, and additional factors specific to the issuer’s creditworthiness also apply.

The credit status of bond ownership is unarguable. But there is widespread confusion over equity rights. Most investors believe that ownership of corporate equity is a hedge out of debasement risk of bonds. They believe that they own a defined portion of a corporation’s total property. This is not true, because a share certificate is an obligation of the corporation’s management to deliver or accumulate an income stream on a shareholder’s behalf: possession of a stock or share certificate is simply evidence of that obligation recorded in the corporation’s stock register. It is possession of a right to property, not ownership of property itself.

Furthermore, with today’s dematerialised certificate system, unless you insist on taking delivery of your certificates, you don’t actually possess the evidence of your credit interest. Instead, you have an entitlement to a share of a corporation’s overall obligation to its shareholders. You are distanced even further from your property right, your property being simply credit squared.

You might think that to eliminate credit risk entirely, you should buy physical property without mortgages. But here you run into a further problem, which is that there is no such thing as absolute wealth. This is because your ownership of property is valued by its exchangeability, for guess what: credit.

When the ubiquity of credit in which all wealth is valued is understood, then it is logical that the value of everything depends on the balance of supply and demand for credit. The one exception is money without counterparty risk, which embodied in Roman law and the common laws of the Roman Empire’s successor nations and their colonies is gold, silver, and copper. Today it is primarily gold.

But this article is not about these internationally accepted media of exchange. It is about the relationship between the value of credit, and the value of products and property expressed in it.

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