Last Saturday night the P5+1 nations (US, UK, France, Germany, Russia, and China) signed a limited agreement with Iran that paves the way for something which potentially would be very significant not only for security reasons but also for economic and financial ones. To some effect the sanctions imposed (especially the financial ones over the course of the last 18 months) have produced some fruit in the sense that the financial strains depleted reserves, contributed to high inflation, and thus formed the background for the new Iranian government and its willingness to accept an agreement that analysts just ten days ago thought was too one-sided (in favor of the west) with the danger that Iran may reject it. This temporary agreement paves the way that within next year a major treaty could be achieved that will start liberating markets forces in a crucial region which can contribute significantly in the collateral needed for credit and money creation.

The French philosopher Voltaire is known for two themes related to economics and commerce: First, for his political arguments regarding the pursuit of wealth through market activities; and second, the moral legitimization for the turnover of that wealth. His publication titled Philosophical Letters marked the beginning of the French Enlightenment as a public force. Voltaire was the force behind what has been known since then as the rise of intellectuals guiding public opinion and public policy. As he wrote to his comrade in arms Jean d’Alembert: “People clamor against the philosophers. They are right; for if opinion is the queen of the world, the philosophers govern the queen”.

Voltaire’s epic poem the Henriade and its preceding publications extolled the virtues of commerce and the ability of the latter to create and turnover wealth while pacifying animosities. Voltaire’s literary portrait of the Royal Exchange (known nowadays as the London Stock Exchange) presented a comprehensive argument for the politically beneficial effects of free markets and of financial capitalism in particular. In addition, Voltaire’s antipathy for institutionalized religion is pretty relevant today especially in the environment of the Middle East. According to Voltaire religious fanaticism leads to injustice, poor economic performance, and possibly to civil war.

It seems that the temporary agreement reached last Saturday is inspired by Voltaire’s call for wealth creation and turnover. It is a major achievement since important issues related to centrifuges, uranium enrichment, plutonium nuclear activity at the Arak nuclear facility, and inspections (among other issues) are dealt with in a manner that leaves no space for dispute. The trade off that Iranians got out of this agreement is the unfreezing of $6 billion worth of assets while all other sanctions remain in place. Of course, the final and permanent treaty may not be achieved next year which will complicate things, however indications point out that a comprehensive treaty is achievable within 6-8 months.

Here is what could be expected out of the new trajectory and how this new phase could contribute to better growth in the foreseeable future. If a comprehensive treaty is achieved, then energy prices will decline significantly not only for the US (which anyway is on its way to energy independence) but for the whole world as well. As energy prices decline, production and distribution costs will decline too, which will advance productivity, and profits margins. As the latter two grow, so will economic prospects, employment, and spending. Are there potential losers? Someone might claim that Saudi Arabia and Russia may suffer some losses, but on the other hand they may be forced to implement the so many needed structural reforms that any economic pain would only pave the way for a more healthy economy. This is the more obvious economic conclusion from the trajectory of this new Iranian phase.

However, the subtle, possibly elusive, and not clearly understood implication of the potential new permanent treaty has to do with the collateral consequences. It has been our position for years that what really matters is the ability of the economic and financial system to create credit and liquidity based on pledged collateral. Over the course of the last few years and especially in the last two-three months we have written commentaries about huge collateral holes and argued that unless we observe a reversal in the velocity of collateral, we may not be able to experience escape velocity in the vicious debt cycle we have been entrapped into due to credit extended based on toxic assets and collateral.

In order to obtain the necessary velocity to break free from this debt entrapment new collateral is needed that will re-start the hypothecation cycle. A couple of weeks ago, we wrote about the collateral implications of the Chinese third plenum. In late September we wrote about the repo agreements between the Fed and its primary dealers as well as hedge funds. All these new steps taken point to a systematic and conscious effort to reignite the collateral chain. Assuming that the US will assist the EU in forming a new collateral platform then, we could only say that indications point out to a new year in which liquidity will increase, money supply (and not just the monetary base) will be uplifted and equities will rise.

In this post-bubble period policymakers may have been studying Voltaire while listening to Pink Floyd and their “Post-War Dream” song:

tell me true tell me why was Jesus crucified
is it for this that daddy died?
was it for you? was it me?
did i watch too much t.v.?
is that a hint of accusation in your eyes?
if it wasn’t for the nips
being so good at building ships
the yards would still be open on the clyde
and it can’t be much fun for them
beneath the rising sun
with all their kids committing suicide

Happy Thanksgiving!