A Preposterous Postulate: ‘We Should Ban the Short Squeeze!’

For most speculators, the notion that ‘short squeezes’ should be banned is utterly preposterous. Why then, do we embrace this absurd postulate in the sphere of money?

 

I always reiterate the simple (but perhaps backward) idea that debt is a short on money. It helps us see the folly of certain public policies by exploding the flaws of unintegrated and compartmentalized thought.  Let me make this concept clear:

 

What does shorting a stock entail? One borrows a stock, sells it on the market for money, and buys it back at a later date. If one sells the stock higher than one buys it, one can keep the difference. Otherwise, one pays the difference. What is debt then? Well, one borrows money, ‘sells’ it for something (e.g. a house) and ‘buys’ that money back at a later date. If one ‘sells money’ higher than one ‘buys money’, one can keep the difference. Otherwise, one pays the difference. The symmetry should be clear. In normal, everyday language; ‘selling money’ consists of buying things and ‘buying money’ consists of selling things. In everyday life, we happen to think of prices in terms of money; this doesn’t change the principle that debt is a short on money.

 

‘Hey, we don’t like this short squeeze, we’re going to ban it!’

 

So, using this interpretation of debt, we can see the true essence of recent monetary and fiscal policies. It’s that they don’t like – for whatever reasons – the implications of an old-fashioned short squeeze. Every jargonistic interpretation has this concept at it’s core. When people say things like; ‘the social consequences of the debt de-leveraging cycle necessitate extraordinary fiscal and monetary policies: including but not limited to an increased deficit and balance sheet expansions by the Fed’ what they really mean is; ‘Hey! We don’t like this short squeeze. Let’s ban it!’. Plain and simple.

 

Attacking the premise of interventionism:

 

The above shouldn’t be (intellectually) disturbing even to the advocates of recent fiscal and monetary policies. After all – although they wouldn’t use these terms – they would say that ‘banning’ the money short-squeeze was ‘necessary’ for some reasons. Of course, I have misgivings with these notions. A statement about the necessity of anything can be explicitly grounded, or not explicitly grounded. For example, one can either say something like; ‘Such and such is necessary in order to achieve such and such‘ or – simply – ‘Such and such is necessary’. When the advocates of the recent interventions explain themselves, they use one of these structures; let me attack both.

 

When the interventionist says ‘Intervention is necessary in order to achieve A‘ we have to consider the validity of ‘A’. In the case of the USA, this kind of statement would only be valid if each and every American advocated ‘A’. For any intervention perverts existing contracts and moves around wealth from those who’ve got it to those who don’t. As everyone wants to live (it is undeniable) and property is in favor of life: Only in the case where every person involved (with money) agrees with the notion of A, is this an acceptable form of argumentation – for then everyone would maintain their ownership rights. But if this was the case, there would be no arguments about this issue at all (and no compulsory laws on these matters). Since there are controversial debates and laws about these matters we can say that the interventionist’s argument must be rejected on the basis that not everyone agrees with the stated goal.

 

When the interventionist says ‘Intervention is necessary’, what is he saying? Either he implicitly includes an ‘A’ as above or he is saying that it is necessarily in the interest of all. In the former case we can reject his argument (as above), in the latter case we have think a little more. In the latter case he’s saying that everyone necessarily wants something, and that his proposed intervention necessarily achieves that thing. But if – as I believe – everyone necessarily wants life, then that something has to be compatible with life and its necessary corollary; property rights. But if it were the case that property rights were preserved in this ‘necessary thing’ then we wouldn’t require laws, debate or any semblance of contention. Thus the interventionist’s argument must be rejected on this count also.

 

Put simply: intervention is indulgent and not ‘necessary’. It is something that involves harming property rights, which cannot be for ‘good’ by definition. The notion of ‘moral intervention’ is necessarily oxymoronic.

 

Conclusion:

 

Debt is a short on money, and we’ve experienced at least two profound short-squeezes over the past 11 years. These are politically unpalatable and bring calls for a ‘ban on short squeezes’. The advocates for such bans have no ground to stand on and thus ought be ignored (if we seek truth and life).

 

As contrarian speculators, we should be wary of these false premises, the speculations executed by people who believe in them, and the unintended consequences of the resultant policies.

See here for our collection of rare historical economic data.

Posted Mar 18, 2011
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