Re: Golden Triangle Drug Traffic Arbitrage?
"Tyler Durden" writes:
An interesting though I had last night was that the Drug trade in the Golden Triangle (Burma, China, Thailand, etc...) might exist for precisely this reason...in other words, as a form of arbitrage of sorts between the actual local cost of goods and services and manpower and exchange rates of the US dollar. Heroin is an ideal medium for arbitrage, as it's price is almost a pure function of supply and demand (as opposed to cost of material). It can fluctuate with the currency markets and as a result forms a sort of 'common denominator' for translating local wealth back into international, 'real' wealth.
In other words, the drug trade is a direct result of government intervention in the currency markets.
Of course, if May were here (may his soul roast in the hell of lesser lists) he'd say this was 'obvious'...
Actually, Tim May has some understanding of economics. The notion that heroin is an ideal medium for arbitrage because its price is a "pure function of supply and demand (as opposed to cost of material)" betrays a deep and abiding ignorance. All commodities that exist outside of government regulation have prices that are functions of supply and demand. Heroin is no different than any other commodity in that regard. The notion that heroin has no cost of material is especially absurd. Do you think they can just conjure it up out of thin air? Nonsense. Heroin, like any other commodity, has significant costs to create, and those are what controls its supply. One difference with heroin is that it has very high costs to transport and distribute, relative to its creation costs. That actually makes it worse for arbitrage. Arbitrage depends on making a profit due to regional price differences. But in the case of heroin, price differentials are often reasonable and reflect the local costs of distributing and selling it. Heroin may be cheap in one place and expensive in another, but that does not signal a profitable arbitrage opportunity; rather, it merely reflects the differing costs of doing business in those regions. If the yuan is actually cheaper than it should be because of being pegged to the dollar, there's a much easier way to take advantage of the arbitrage opportunity: simply buy goods in China and sell them in America. And guess what, thousands of Chinese export companies do just that, making money off the economic downhill slide that China has erected spanning the Pacific. This effectively forces Chinese workers to be paid less than they are worth, decreasing their savings and acting as an economic stimulus for China as a whole.
Hey...I never said May was an idiot. In fact, quite the opposite. His issues with race and violence, I feel, don't emanate from stupidity by any means, but are rather codifications of some kind of issues into his thinking. Get him away from "human matters" and on the technical level he was normally very sharp. However,....
All commodities that exist outside of government regulation have prices that are functions of supply and demand. Heroin is no different than any other commodity in that regard. The notion that heroin has no cost of material is especially absurd. Do you think they can just conjure it up out of thin air? Nonsense. Heroin, like any other commodity, has significant costs to create, and those are what controls its supply.
OK, I'm punting here, and I'm not an economist. BUT, my assumption is that the costs of production of heroin is far below it's actual street value. Indeed, this is why many 3rd world economies produce such drugs.
If the yuan is actually cheaper than it should be because of being pegged to the dollar, there's a much easier way to take advantage of the arbitrage opportunity: simply buy goods in China and sell them in America.
Yes, that's precisely what the drug trade does.
And guess what, thousands of Chinese export companies do just that, making money off the economic downhill slide that China has erected spanning the Pacific. This effectively forces Chinese workers to be paid less than they are worth, decreasing their savings and acting as an economic stimulus for China as a whole.
Well, of course. What I'm driving at, however, is that a pegged yuan (or any currency) will have inevitable and unintended local consequences. For instance, let's say a Chinese consumer wants to purchase US goods in China. Obviously, such goods will be extremely expensive. However, with a pegged rate, the price for such goods will no longer reflect the true differential in the price of (for instance) labor in the US and China. In other words, goods are more expensive then they have to be, due to an artificial "barrier" created by the pegged dollar:Yuan rate, and exporting legitimate goods becomes a very expensive way to buy those goods. More than this, the value of a local "yuan" (or what have you) is not what it could be if you (as an individual, not a nation) had direct access to foregin capital at a rate that truly reflects the differential in costs, efficiency, etc... So what do you do? You export blackmarket goods for prices that reflect some sort of "reality". In addition, it probably allows local producers of other non-black-market items (some of which may not be exportable) to have access to foreign capital at the true going value, via various economic relationships with drug creators, etc.... Come to think of it "arbitrage" is not the best term. Of course, the actual growers and even exporters of heroin are completely unaware that their livelihoods are the result of macroeconomic conditions. Just a thought, could be wrong, but I see nothing in the response above to indicate I'm extremely off base. It's nominally "Cypherpunk" in that it poses the question of whether central control is actually responsible for the some aspects of the drug trade. -TD
-- On 23 Mar 2005 at 20:19, Anonymous wrote:
If the yuan is actually cheaper than it should be because of being pegged to the dollar, there's a much easier way to take advantage of the arbitrage opportunity: simply buy goods in China and sell them in America. And guess what, thousands of Chinese export companies do just that, making money off the economic downhill slide that China has erected spanning the Pacific. This effectively forces Chinese workers to be paid less than they are worth, decreasing their savings and acting as an economic stimulus for China as a whole.
Your economics is entirely sound, but I disagree with you on one minor question of fact. I doubt the yuan is cheaper than it should be. Seems to me that the fundamental reason why chinese are working cheap and providing us with their excellent goods in exchange for our rather dubious and shaky dollars so abundantly printed by the Bush administration, is that the chinese banking system is even more dubious and shaky. Chinese prefer to stash their wealth in America, rather than in China. --digsig James A. Donald 6YeGpsZR+nOTh/cGwvITnSR3TdzclVpR0+pr3YYQdkG yC4wWPvE9H0XZCRKPMW6PqvlRX3vgMVfysKz8u6u 44OJ9qSkTtN7rlOcXnJVAQ7CsuzdGN9MlipEX1/yY
participants (3)
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Anonymous -
James A. Donald -
Tyler Durden