Another thought on the Chinese energy crisis

If you have been following the news then you are aware that hundreds of millions of people in China have been under rolling electrical black-outs and brown-outs. The crisis came out of nowhere. One week there was plenty of electricity. Then next week multiple provinces in northeast China had shortages.

I want to offer one way that could have happened.

Promises are not the same as the physical reality

Suppose you run a powerplant that runs on coal. You look out your window and see a HUGE pile of coal.

The state-run powerplant pays you a salary but it is not enough to support the lifestyle you aspire to. Not only that, but your career plateaued. Maybe you owe some people because you borrowed some money because you have weakness for playing the dice.

The people who you owe money make a "suggestions". They say, "Let us sell options on that pile of coal." Then they name a price that you know will never get hit. You agree.

Then the people who purchased the options on that pile of coal hedge their bets by selling options that activate at a slightly higher price. And so on and so forth.

Then, let us imagine that the pile of coal, which has not been moved an inch, gets booked as "inventory" by every party that bought an option on it. That allows them to use it as collateral for other financial transactions.

The people who finance the transactions also book that one pile of coal they took as collateral as inventory.

One pile of coal. Multiple parties claiming it. And each party "booking" it as inventory as if it were in their physical possession.

What could go wrong?

A price spike

Suppose the price spikes. Perhaps coal miners get sweet-and-sour flu. Maybe a train derails because of track maintenance issues.

The parties that hold the options "sell" the coal to people who panic and offer high prices on it. Suddenly, the option holders are executing their options but find that they cannot take delivery on the coal. They cannot deliver to the customers who bought the coal.

Prices go into orbit as the province which was seemingly swimming in coal inventory (on paper) is suddenly bereft of coal.

If you factor in the possibility that the Head-of-Accounting and the Yard-Manager might also have sold "options" on that same pile of coal, it is within the bounds of the imagination that fifty different parties think they have a valid claim on that pile AND reported it as physical inventory.

Is everybody happy now?

It could not happen here, right?

My little story is a rehash of what the precious metals guys tell their customers.

Physical possession is 99.9% of ownership.

The financial and derivatives "economy" dwarfs the real, nuts-and-bolts economy. Everybody is getting rich laundering each others' bytes.