Armstrong Economics Blog/Economics Re-Posted Oct 21, 2020 by Martin Armstrong

QUESTION: Hi AE….think I finally get your message about money supply vs inflation. But aren’t we just dealing with a difference of semantics? If the gov’t prints endless amounts of currency, that HAS to. at some point, impact prices etc. which in turn, eventually leads to a collapse in confidence. (Savers can’t afford to buy anything.) What am I missing here?

HS

ANSWER: It’s a question of what comes first – the chicken or the egg.  First, we have the collapse in tangible assets and people will then hoard their money and spend less fearing the future. The revenue declines for governments which then forces the government to create more which use to be debasement before paper money, and today we have debt which can be posted as collateral to even trade which is now also money that pays interest as it first began during the American Civil War.

The classic definition of hyperinflation is taken from the 1956 work by Phillip Cagan who wrote The Monetary Dynamics of Hyperinflation. Cagan defined a hyperinflationary episode as beginning in the month that the monthly inflation rate exceeds 50%, and ends when it drops below 50% per month. This is the standard definition.

The general population keeps the bulk of their wealth in non-monetary assets primarily real estate which made the 2007-2009 financial crisis far more serious than a stock market crash.
The higher middle-class population outside the USA view monetary amounts, not in terms of the local currency but more so in dollars taking an international perspective. Only Americans tend to be myopic and see the world all in dollars. That’s why you constantly see these people yell the dollar will crash without ever looking outside the USA even once.

The international view of assets in dollars is also a direct result of not just the fact that the USA is the largest core economy, but the dollar is the reserve currency of the world BECAUSE there are also no restrictions on issuing debt in dollars in foreign countries imposed by the USA, and the fact that the US dollar has never been canceled. You can still spend a $5 bill from 1861.

While the analysis by academics has focused on classifying hyperinflation, they seem to lack any understanding of the real causes of all hyperinflations attributing them to have been caused by government budget deficits financed by currency creation. Peter Bernholz analyzed 29 hyperinflations (following Cagan’s definition) and concluded that at least 25 of them took place because of money creation.

These academics have also wrongly assumed that the necessary condition for hyperinflation is the use of paper money. They obviously lack any understanding of the monetary system pre-1700 when coins were gold or silver coins. The idea that hyperinflations in history are confined to paper money has seriously harmed the entire understanding of the mechanism behind hyperinflation. They see to have ZERO understanding of the history of coinage which provides a definitive historical record.

They will typically point to the French hyperinflation of 1789–1796 and claim that it took place after the introduction of a non-convertible paper currency, the assignat. They have for more than 100 years looked at this idea that money has to be commodity-based. They never apply that theory as to how Germany, Japan, and China have all risen to the top without gold and Russia, rich in gold, has languished economically.

Perhaps it simply takes a trader to see how hyperinflation even begins well in advance. Hoover explained how capital acted in 1931 rushing from one currency to the next as nation after nation defaulted, but any professional trader who was on a dealing desk in 2010 when Greece turned to the IMF for help saw exactly the same patterns. When they drew first blood with the collapse of Greece, they turned and asked: Who is next? They started selling Portugal, Spain, Italy and were even moving against France. That is how a REAL financial contagion operates.

Historically, it is NOT that people lose confidence in the money because the government is simply creating more! It is the collapse in the CONFIDENCE in the economy first (absent war), and then this migrates to the CONFIDENCE in government collapsing. This has historically led to hoarding when the money is just coins or converting to other currencies (capital flight) which has been paper (i.e. Germany & France). It is the sequence that then leads to forcing the government to enter a death spiral where they create money to try to maintain their existence. The government will typically then collapse.

This is the same problem with the myth about interest rates. The claim is that rising interest rates are BEARISH. All they remember is the tail-end. The rates rise and the market declines. When you look at it objectively, markets rally with rising interest rates. Just look at this entire rally.

The ECB cut rates to negative in 2014. When we look at the Dax in Price and in dollars, the peak was March 2015. The lower interest rates have completely FAILED to “stimulate” the economy as has been the great expansion of the money supply.

This absurdity that simply increasing the money supply will cause inflation is the typical sales pitch for the last 50 years. If gold truly rallied to keep pace with inflation, then since 1980, it should be trading at the $12,000+ level. OBVIOUSLY, there is something else going on. This is where it takes a global perspective to understand when the breakout will come and precisely when will the CONFIDENCE shift from hoarding cash to spending it because it will be worth even less next month.

Armstrong Economics Blog/Corruption Re-Posted Oct 21, 2020 by Martin Armstrong

QUESTION: Why are bankers never prosecuted? The New York courts are not trustworthy. Can you explain why this is allowed to go one all the time?

SK

ANSWER: It is very simple and the shareholders are the ones who are being defrauded. The banks can routinely engage in fraud all they want. The individuals are NEVER prosecuted because the government knows they will not get huge fines from an individual. The bank is fined and pays vast amounts of money, but the bankers themselves are never prosecuted. It is raw corruption. The very same bankers go on to commit the very next crime. They get bonuses for the money they make, and if caught, they keep the bonus and the shareholders pay the fine.

I personally would NEVER recommend a bank stock for that reason. The bonuses were paid out even during the 2007-2009 crisis. The S&P 500 Financial Index just retest the 2007 high compared to the rest of the market. The corruption between the courts, the government, and the banks is starting to wear very thin.

Armstrong Economivs Blog/Economics Re-Posted Oct 17, 2020 by Martin Armstrong

QUESTION: Do you see the Fed moving to digital currency and perpetual bonds simultaneously with other nations? I think it would be harder to pull off here, but then again, they may have no choice. I guess they have a lot of reasons to get rid of Trump, but there’s more on the side of rejecting it, at least for now.

Interesting that a few analysts, websites, newsletters… have been calling for a Fed move to digital, as soon as November 5th or January 2021. Seems optimistic. However, I haven’t heard anyone mention bond default through the transition to perpetual.

E

ANSWER: No. First of all, the US debt market is the only game in town. Europe has destroyed its bond market as has Japan. That is why they are trying to get rid of Trump to further their globalist agenda. However, the conservative Democrats will also reject it as well. Our political report will be up for sale on Monday which is not just 2020, but the next 12 years, The arrays are shocking when we run them on politics. There is an increasing risk that the Democratic Party will split just as the Republicans did in 1912 when Teddy Roosevelt started his Progressive Party. The Democrats face the same crisis – conservative (middle of the road) v extreme socialist left.

There are a host of problems. They cannot move to digital so easily because over 60% of paper dollars are outside USA used globally as the alternative. Today, the Treasury and Board of Governors staffs estimate that about 60% of all U.S. banknotes in circulation, or around $500 billion and growing, is held outside the United States. U.S. banknotes are the #1 hedge against the currencies in Europe and Asia because the USA has never canceled its currency so a $100 bill from 1934 is still valid which is not the case for any nation in Europe. The US printed $1,000, $5,000, and $10,000 notes in 1934 which are still legal tender.

It is not so easy for the USA to move digital and at best, it would have to be a two-tier system without canceling the paper money.

Armstrong Economics Blog/Bonds Re-Posted Oct 17, 2020 by Martin Armstrong

QUESTION: Interest on savings instruments (i.e. CD) for 1 yr terms is non-existent at <= 1.0%.  Why would interest rates increase in a digital currency system/world?

IS

ANSWER: The only reason rates would rise is by simultaneously converting the debt to perpetual. They have to end Keynesian Economics. They cannot raise rates as long as they have to buy the debt as in Europe. Therefore, we see most countries preparing for the real BIG BANG which is the default on dent by converting outstanding debt to perpetual, then they no longer need to artificially suppress interest rates they cannot raise if the debt is still issued.

I tend to get called in because they know I will say the truth. I do not take funds from any group and we pride ourselves on independence. It is a club because unless you have been called in by one government you will not get into others. Very interesting criteria. Nevertheless, I believe you will see this simultaneously. A digital currency swap will allow then the perfect excuse to change the debt structure and then they do not have to outright default.

Big Bang began in 2015.75 within about one year of them moving to negative interest rates in 2014. The next crack is due 2021 and the big break post-2024. We are now entering the next phase and we are running out of time. That is what these lockdowns are really about. They know civil unrest will rise when the public realizes that the old financial systems are collapsing.Categories:Bonds