Armstrong Economics Blog/Basic Concepts Re-Posted May 30, 2022 by Martin Armstrong
QUESTION: Marty; the gold propaganda is increasing dramatically. They are now claiming there are five signs that say the dollar will collapse any day now.
- Warning Sign #1: Russia Sanctions Prove Dollar Reserves “Aren’t Really Money”
- Warning Sign #2: Rubles, Gold, and Bitcoin for Gas, Oil, and Other Commodities
- Warning Sign #3: The Petrodollar System Flirts With Collapse
- Warning Sign #4: Out of Control Money Printing and Record Price Increases
- Warning Sign #5: Fed Chair Admits Dollar Supremacy Is Dead
My friend flew in from Brazil and they pulled her over and checked all her jewelry. I think you had said they were doing that in Italy last year. This was New York at JFK. Cryptocurrency is not currency and selling oil in Bitcoin which is crashing makes no sense when it too is not backed by anything. These are the same old claims for the last 20 years that I can remember. Their solution is always – buy, buy, buy gold. My question is if they are now pulling you over for jewelry when you travel, gold has underperformed for 30 years compared to stocks and even the dollar. Will gold even survive in this crazy world?
Thank you for always being the voice of reason
ANSWER: These ideas and claims are old and never change. For years they claimed the dollar was only the reserve currency because of oil, yet oil as a percent of the world economy was at best 5%. Then the claimed Bitcoin would replace the dollar as the reserve currency. That was just another scam and based on this same old theory of the Quantity of Money that dates back to Gresham’s Law. That theory is so dead it’s crazy, but it is like one of those Zombie movies that it keeps coming back to life.
Gresham advised Queen Elizabeth based on the debasement he saw in the coinage by her father Henry VIII. He was debasing his currency because Spain was doing that and he thought it was a way to create free money. The French did that during the 13th century by altering the silver to gold ratio which blew up the financial system in Italy and ended many banking houses. Those who base their entire theory on this period TOTALLY fail to grasp the context of the period.
There was NO Reserve Currency. All the currencies of various nations traded on the first currency exchange which was Amsterdam. They traded against each other ENTIRELY on the metal content. That is what determined the value of their currency.
Coming out of the Dark Ages, the first coin to actually attain a universal acceptable which was the first stage of a reserve currency was the gold florin of Florence, Italy. This was made possible by the rise of Italian banking and the Medici there in Florence. Other countries imitated the florin for it was accepted as the standard.
Imitations of the universally accepted currency took place with the Athenian Owls, the tetradrachm of Alexander the Great, and then the Roman silver Denarius and gold Aureus. The strongest economic power saw its currency become dominant in the world so others issued coins imitating them because a Roman gold aureus carried a premium over just a plain lump of gold. Egypt never even issued coins until they were conquered by Alexander the Great yet to facilitate trade, they issued imitation silver Athenian Owls, which were really the first established world currency.
However, I have warned that analysis has two approaches. First, you start with a theory and then cherry-pick the fact to support your theory as they are doing in Climate Change. There, they ignore all the data prior to 1850 and only attribute the warming since the last Little Ice Age to the Industrial Revolution.
They took a natural cycle oscillating back up which is when economic expansion always takes place historically, They then attributed that to fossil fuels and ignored the entire natural history of the earth. This has been used solely to justify creating their one-world government because no single nation can defeat global warming.
Here we have the front cover of Time Magazine predicting climate change back to an ice age. That was dated January 31, 1977 corresponding to the sharp spike down into a negative Arctic Oscillation in 1977. In the April 28, 1975 edition of Newsweek, they actually proposed solutions for climate change that included outlawing internal combustion engines.
This is when Al Gore came to the rescue. Just like the poles flip on the sun every 11 years, Al Gore flipped the argument from manmade cooling to manmade warming to save the end goal — eliminating all fossil fuels regardless of the evidence. Who needs science when you can just make up the studies and cherry-pick the facts to support whatever you want. They have done that very same exercise with this forecast centered on gold and how the dollar will collapse all because of fiat, which every currency has been from day one when Lydia first created coins and declare their value which was always in excess of the metal content.
Even the propaganda of the Petrodollar has been mind-blowing. Unbeknownst to these people who push that theory, they are clueless about the truth behind what really took place during the 1970s. In 1976, the US and Saudi Arabia colluded to force down oil prices, which inadvertently set in motion a financial crisis in Iran that destabilized that economy and undermined the Shah’s hold on power. These facts have surfaced from declassified documents of Brent Scowcroft who worked in both the Nixon and Ford White House Administrations. Their attempt to manipulate the price of oil downward created the Iranian Revolution. The religious faction used the decline in oil and the economic recession to overthrow the Shah. OOPS!
This strange theory that the dollar is supported by oil just does not hold up. Even when we just compare the highs and lows between the dollar and oil, it does not hold up. In 2008, the dollar bottomed against the Euro but oil peaked. The dollar bottomed in 2016 but crude bottomed in 2020. The high in the dollar in 1985 coincided with the 1986 low in crude. Like global warming, they focus on just one aspect and ignore the fact that the dollar has NEVER been canceled and that it has become the world reserve currency because of that fact, plus it is the dominant economy just as Rome, Athen, and Macedonia in their times.
Emerging markets before World War I issued debt in British pounds. After World War II and all the capital fled to America because tanks were rolling down the streets in Europe, Emerging markets issue their debt in dollars – no longer British pounds. These people focus only on gold, the quantity of money, and old dead theories of Petrodollars, and totally ignore the fact that the United States has the largest consumer-based economy in the world. That is how China, Japan, and Germany have all risen from the ashes without gold reserves. They were export-oriented economies selling products to Americans. None of these theories ever mattered and that is why you have heard the same story since 1971 and everyone who followed that forecast has lost a fortune in everything else.
The definition of Fiat Currency is highly prejudiced. Investopedia says:
“Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.”
“fiat money, in a broad sense, all kinds of money that are made legal tender by a government decree or fiat. The term is, however, usually reserved for legal-tender paper money or coins that have face values far exceeding their commodity values and are not redeemable in gold or silver.”
Before coins, even the Bible stated that in Genesis 23:16: “Abraham agreed to Ephron’s terms and weighed out for him the price he had named in the hearing of the Hittites: four hundred shekels of silver, according to the weight current among the merchants.” The very first this that took place was that there was an agreement on the standardization of weight.
Therefore, it was in Lydia that the king began to stamp his symbol on these standardized denominations. He effectively took over the creation of money. The value he set was over and above the previous raw value of the metal. Thus, this became fiat which coin collectors call “seignorage” the profit over and above the metal content.
When war broke out, Lydia was the first to debase the currency maintaining the value but reducing the weight. This idea that if the money is gold somehow makes the system honest, is nothing but propaganda.
Even under a gold standard, there were periods of inflation and deflation. Read the history of the California Gold Rush. During the 1849 Gold Rush in California, the journalist for the New York Tribune, Bayard Taylor (1825-1878), arrived in San Francisco by ship during the summer of 1849. He was shocked at what he encountered and did not think that anyone would even believe what he was going to write. His dispatches about the gold rush economy in California stunned many and helped to create the 1849 Gold Rush. The average wage for a laborer in New York was about one or two dollars a day. In California, individual hotel rooms were rented to professional gamblers for upwards of $10,000 a month, which is the equivalent of about $300,000 today. The degree of inflation in terms of gold was astounding and lacks comparison in modern times. There was so much gold, that the value of goods rose even though they did not in New York. The inflation phenomenon was local.
Gold became so common; they were even striking $50 gold coins in California when $20 was the highest denomination elsewhere and $1-dollar coins down to 25 cents all in gold. Eventually, there were $1 gold coins minted in the United States for general circulation throughout the USA. Indeed, Taylor wrote:
“[One] citizen of San Francisco died insolvent to the amount of forty-one thousand dollars the previous autumn. His administrators were delayed in settling his affairs and his real estate advanced so rapidly in value meantime that after his debts were paid, his heirs had a yearly income of $40,000 [$1.2 million today].
“These facts were indubitably attested; everyone believed them, yet hearing them talked of daily, as matters of course, one at first could not help feeling as
if he had been eating ‘of the insane root.’”
As far as fiat is concerned, the true definition is when the value of a currency is declared by the government which is all money even if it is made of gold or silver. Here are two silver dollars issued in 1873. The domestic silver dollar standard was taking 70 cents worth of silver and calling it one dollar with a weight of 26.73 grams. Simultaneously, that was not recognized in Asia so they issue a Trade Dollar for external use with a weight of 27.22 grams. The value of the metal is solely based upon the decree of the government. By the 1890s, the United States had flooded the world with silver which resulted in the Panic of 1893. By then, the value of the silver was perhaps 60 cents they were calling a dollar.
These people often confuse FRAUD with the monetary system. Sweden is the oldest Central Bank. That is where the fraud all began. The first true banknotes for circulation appeared in Sweden, and these were actually used by the government to support its wars with Germany. In 1661, the government established a 30-year monopoly for its Stockholm Banco to issue these banknotes known as “letters of credit” that were to be payable in Swedish copper plate money that was extremely heavy weighing almost 15 kilos. It was not very practical for these huge plates to actually be used in circulation.
However, this practice of Fraud began whereby they abused the system. They began to issue more paper notes without the copper plates in the bank. That is entirely different from fiat currency. Here they said they were backed by the copper plates, but they needed more money so they issued notes fraudulently without the purported backing. That is NOT a fiat system – it is fraud.
This FRAUD was discovered and it led to the first banking panic in 1663 when there were more obligations than copper plates to redeem the notes. The bank was forced to close in 1664.
I have told the story before that it is so CRITICAL to understand the full context of history. William Penn took the term Philadelphos in ancient Greek which meant Brotherly Love. He interpreted that in a Christian sense that I love my brother. So he named his city Philadelphia – the city of brotherly love. Well to those of us who did study ancient cultures and languages, it was always one of the funny jokes. Brotherly Love meant you married your sister.
These people interpret gold as money and fiat and all the other nonsense with petrodollars etc, they have selected what they want to support a theory that they began with. Everything they have been telling people for decades has resulted in a lot of people losing a fortune and even some losing their homes.
They are not interested in actually looking at the truth. To them, it’s all fiat money, and only a return to a gold standard will stop inflation and create the perfect world following that same dangerous path as Kark Marx.
The system is far more complex and you CAN NOT reduce everything to a single cause and effect. That is what others are doing with CO2. It’s time to wake up and smell the roses. Garbage in = Garbage Out.
I have warned that the Russian Sanctions have begun the decline and fall of NOT the dollar – but the entire world economy. Once Biden used SWIFT to remove Russia, that was the end of globalization. It has NOTHING to do with the oil or anything else. The sanctions have severed Russia from the West’s Economy and put China on alert that they are coming for them as well. China setting up its alternative to SWIFT, is not directly trying to kill the dollar. It is recognizing that the world economy is under siege and what will evolve in the future in the collapse of all governments but the single greatest threat has been the Sanctions which have altered everything – not fiat currencies and gold.
World peace is created by everyone benefiting from a global economy. Destroying globalization leads nowhere but to war for that hand no longer feeds you so go ahead and bite it.