Read Mish for a good handle of economic news, which is trending toward a bottom. Keep in mind the bottom is not low prices, the bottom is no sales. For example in real estate, we did not bottom in 2010 because things were still selling, albeit at lower prices. There needs to be a decade of almost no sales, say 1935-45, to know you've reached bottom. Anyone buying real estate today, indeed the last decade, will see the price of that asset drop dramatically, until it is essentially worthless. Then it will begin to appreciate again. Prices must fall for the economy to recover. Wages of college graduates are falling, which is a good sign. The safety nets assure that things will get far worse, because safety nets hide the market signals which would guide people in the best allocation of resources. As we see presently at all levels of The State, the depth and breadth, command and control is gone. We are now seeing the order out of chaos, people cooperating in the absence of State interference, well, trending up anyway.
The State will re-assert itself in some way, adjust to make sure it does not become irrelevant. One disaster looming is a currency crisis, which will bring back the Letter of Credit, a payment mechanism The State hijacked as a currency control mechanism. When the currency crisis spins out of control, control will be re-asserted by means of requiring letters of credit in international trade. We've been there before, we'll see it again.
As an expert on this instrument, let me make some early points:
1. Letters of Credit are sold by banks as security in an international trade transaction, thus warranting the high fees. Letters of Credit provide no security whatsoever. The only security you have in international trade is your relationship. If something goes wrong with a transaction, you have no recourse except whatever the other party agrees to. There are no situations in which if you lose money using a letter of credit, the bank will make you whole. There are situations in which a letter of credit is involved in which you will lose your money. Therefore, it is true, you can lose money while employing a letter of credit. The risk exposure rate is running about 80% with letters of credit.
2. Because letters of credit are sold as security, they are a preferred method of advancing fraud. Since the USA side of the deal is under the mistaken impression that the letter of credit provides security, it is all the easier for people intent on fraud to use the system to defraud Americans. If you are defrauded, you have zero recourse. Your money will not be coming back, or, if you are on the other side of the transaction, you'll never get your goods back.
If any banker desires to debate me on this, I will lay him waste with facts and figures and examples. Plus I'll produce bankers who will say the same thing I am saying. We might not be able to escape a requirement to use letters of credit some time in the future, but the banks would do good to make clear that letters of credit are no security to the parties in an international trade transaction.
If we get back to where letters of credit are required, and I can see that happening easily, then the fundamental point will need be all the more emphasized: relationship is everything in international trade. If you cannot trust your business partner overseas, don't do business with them. Especially with a letter of credit as a payment mechanism.
Feel free to forward this by email to three of your friends.
The State will re-assert itself in some way, adjust to make sure it does not become irrelevant. One disaster looming is a currency crisis, which will bring back the Letter of Credit, a payment mechanism The State hijacked as a currency control mechanism. When the currency crisis spins out of control, control will be re-asserted by means of requiring letters of credit in international trade. We've been there before, we'll see it again.
As an expert on this instrument, let me make some early points:
1. Letters of Credit are sold by banks as security in an international trade transaction, thus warranting the high fees. Letters of Credit provide no security whatsoever. The only security you have in international trade is your relationship. If something goes wrong with a transaction, you have no recourse except whatever the other party agrees to. There are no situations in which if you lose money using a letter of credit, the bank will make you whole. There are situations in which a letter of credit is involved in which you will lose your money. Therefore, it is true, you can lose money while employing a letter of credit. The risk exposure rate is running about 80% with letters of credit.
2. Because letters of credit are sold as security, they are a preferred method of advancing fraud. Since the USA side of the deal is under the mistaken impression that the letter of credit provides security, it is all the easier for people intent on fraud to use the system to defraud Americans. If you are defrauded, you have zero recourse. Your money will not be coming back, or, if you are on the other side of the transaction, you'll never get your goods back.
If any banker desires to debate me on this, I will lay him waste with facts and figures and examples. Plus I'll produce bankers who will say the same thing I am saying. We might not be able to escape a requirement to use letters of credit some time in the future, but the banks would do good to make clear that letters of credit are no security to the parties in an international trade transaction.
If we get back to where letters of credit are required, and I can see that happening easily, then the fundamental point will need be all the more emphasized: relationship is everything in international trade. If you cannot trust your business partner overseas, don't do business with them. Especially with a letter of credit as a payment mechanism.
Feel free to forward this by email to three of your friends.
4 comments:
Stated above: "The risk exposure rate is running about 80% with letters of credit."
I'm not sure I understand this figure. How is the risk exposure defined? How often does a loss on a LOC actually happen? Since we're working with established suppliers, I would think that the risk of something going wrong would be low (?).
Are there any statistics on LOC losses by country, or manufacturer? - like a credit rating?
80% of the letters of credit have some fatal flaw that makes them untenable. Say your goods are on the buyers dock, and the buyer finds 8 out of 10 times the letter of credit, for some error, is invalid. the buyer is not obliged to pay. Unless the buyer has a good relationship with you, you can expect the buyer to not pay and then squeeze you, on price, or whatever, on goods sitting in a foreign country. 8 out of ten times this situation presents itself. In my career I've seen that rate about par, but I have never rejected or screwed the seller, nor vice versa.
As to what percent and by what country would be good info indeed, but I doubt we'll ever see that since it is a private matter.
Are you arguing against using letters of credits due to the high fees? Or are you saying it is necessary to know quite a bit about them to be able to use them effectively for there intended purpose?
/Jacob
The fees are what they are, nothing you can do about it. I am arguing if the time comes, again, where LsC are mandatory, never believe they are security. You can know all there is to know about LsC and they will still not be secure. (You'll just know what I know.)
When you say "to use them for the intended purpose," are you referring to the nonsense purpose, or the actual purpose/ the nonsense purpose is security, the actual purpose is currency control, in a fiat currency world.
Certainly 500 years ago an LC was for security, but then money was involved, not fiat currency. Usury corrupts all legitimate business.
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