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Units in issue would necessarily be transparent. So everyone would be able to see - assisted and managed by service providers - how outstanding balances compared with reserves and production levels. It's certainly possible to manipulate supply and the physical market price, but how - other than default - could Units be manipulated?

Balances in Units would be positive and negative, as with any other global currency, and the clearing union would require a framework of trust. Here, I recommend a Guarantee Society approach, not a central counterparty.

So holders of positive balances and holders of negative balances would both pay a guarantee charge in relation to the mutual guarantee into a default pool held by a credible custodian - possibly Swiss.

The analogy with Keynes' Bancor and International Clearing union is close, the difference being that there would be no central issuer, and the currency Unit would be redeemable for the intrinsic energy value of gas.

Russia, Qatar and Iran would all have far too much to gain from such an approach - compared to the financial costs and restrictions of the current system - than to fuck it up.

I note you are frequently at pains to point out how reliable Russia has been in supplying gas over the last 40 years. I doubt whether they would default in the way you appear to think, but we would require a framework of trust just in case they were tempted. As Stalin said: Trust, but Validate.

And if the three biggest producers are in, everyone would be in, I suggest.

China and Russia are already looking to settle bilaterally in Renmimbi and Roubles. We all know that the minute the rates diverge one way or another too painfully, one or the other will default.

Unitisation transcends that, and China would be only too pleased to be able to pay any other gas supplier with the Units they have bought from Russia subject to a globally valid guarantee.

I noticed that EDF and Gazprom have just agreed a transatlantic gas swap. Unitisation within a clearing union would make the risk management of that transaction much easier. Sterling and dollars would be priced in gas, not vice versa.

The existing dysfunctional markets are travesties. The financial market is falling down around our ears, and the energy markets are shamelessly manipulated by trading intermediaries to the detriment of producers and consumers alike.

And yet you claim these are demonstrably better than a simple neutral, transparent and globally valid Unit redeemable in payment for gas?

You surprise me.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Oct 26th, 2009 at 07:52:15 PM EST
[ Parent ]

how - other than default - could Units be manipulated?

default is a very real risk. And it's just a small subset of the "political manipulation" ensemble. It's a big enough risk to make an absolute certainty that your units will never fly.

My job as a project finance banker is not to lend money - most of my clients in the energy sector have more money than the banks. It is to take political risk.


subject to a globally valid guarantee.

Who can credibly provide that? I mean, other than the US (in which case, your "unit" will be called the "dollar") or maybe the Europeans (in which case, your "unit" will be called the "euro")

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Oct 27th, 2009 at 06:35:32 AM EST
[ Parent ]
"default is a very real risk."

But is it not a very real risk with debt denominated in currency as well?
True, oil producing countries are not the most trusted of governments. But, let's say Germany creates units redeemable for its wind turbines production, would the fear of default be that strong?*

Although, of course, a central bank can always decide to print more money than it expected to, whereas Germany can't decide to produce more electricity -so the risk of default is probably greater with a redeemable unit.

"in which case, your "unit" will be called the "dollar""

Is that so necessarily? Is the point not to back the unit to something useful that cannot be devalued easily? Would USA directly price their goods in the unit if it existed?

Couldn't the guarantee be provided jointly by USA and the EU? Of course, the next question is would they want to (since that would stabilise the exchange rate somewhat, not necessarily what governments really want).

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Tue Oct 27th, 2009 at 09:31:53 AM EST
[ Parent ]

"default is a very real risk."
But is it not a very real risk with debt denominated in currency as well?

The point is that it is a separate, additional, source of default.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Oct 27th, 2009 at 04:16:45 PM EST
[ Parent ]
So you could manage political risk with debt finance but not with unitisation? Quite a feat, since in fact, because there is no interest burden in unitisation the obligation is less. Conventional debt finance is clearly MORE likely to default.

What's so difficult about (say) an International Gas Trade Association whose members - sell-side and buy-side - enter into a mutual guarantee agreement, and back it up with provisions into a default fund in respect of trade balances?

As you say, its the end users who have the assets to back the guarantee - not the banks.

You prove my point that banks should move aside and become service providers in respect of the undated direct peer to peer credit which exists between the Unit issuers and Unit holders.

It's in banks' own interests to move to service provision - don't you understand that? The only capital requirement they then have is that necessary for operating costs.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 27th, 2009 at 11:38:39 AM EST
[ Parent ]
you add a extra layer of risk with your structure - in addition to the operational risk of gas production and transport, and political risk linked to your supplier, you add the political risk of your units being degraded by that supplier (close to the same risk, but not quite) or by the other backers of the unit.


So you could manage political risk with debt finance but not with unitisation? Quite a feat, since in fact, because there is no interest burden in unitisation the obligation is less. Conventional debt finance is clearly MORE likely to default.

No, it's less likely to default, because it takes no risk on the unit validity. If you don't want to take price risk (on gas or interest rates), you can negotiate fixed prices / fixed interest rates very easily.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Oct 27th, 2009 at 04:21:08 PM EST
[ Parent ]
I have always been quite clear - for maybe 8 years now - that the next (internet) generation of markets will have a holistic global market architecture configured around transaction and title registries. Indeed I said as much to the UK Treasury Select Committee last year when I gave evidence.

The political risk of default by Unit issuers will be addressed through the Clearing Union/Guarantee Society mechanism. ie a globally applicable interactive/consensual framework agreement, not some monolithic centralised quasi Central Bank issuing global fiat currency ex nihilo.

The backing for the mutual guarantee would not come from the limited balance sheets of credit intermediaries - or a single point of failure counterparty probably owned by them (and from which they would in all probability walk away in extremis). It is based upon the balance sheets of end user producers and consumers collectively, which you said yourself is where the financial substance is.

This mutual guarantee would be supported by a guarantee payment/provision collected from both the sell side and buy side (ie analogous to Keynes' Gesellian Bancor proposal), and held by a custodian.

Risk management, access to data/transparency, dipsute resolution etc and the equivalent of monetary policy - ie Unit issue compared to supply capacity - would be carried out by service providers.

It is necessary to view my proposal for energy unitisation in the correct context, and that is the International Energy Clearing Union I have advocated for several years.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 27th, 2009 at 05:31:32 PM EST
[ Parent ]
that would work, but good luck with getting everybody to give up sovereignty to such an entity.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Oct 27th, 2009 at 05:56:35 PM EST
[ Parent ]
....it's an agreement.

There's no sovereignty given up, any more than there is under - say - the BOLERO contractual platform for transfers of title of goods in transit.

BOLERO is a very interesting beast in relation to international trade finance, with which you may or may not be familiar.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 27th, 2009 at 09:36:58 PM EST
[ Parent ]

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