QUESTION: Hello Marty

I am hoping you will print this in your blog.

Everyone knows that Govt’s/Banks print money out of thin air and then “owe interest” to this invented money. To avoid an interest payment death spiral why can’t all the Govt’s in the world just tell the banks to pound sand? Why can’t we tell them “Sorry….we are no longer going to make interest payments on money you invented out of nothing”.

Regards,

Julie

ANSWER: I actually get this question often. I understand that the sophistry out there makes it sound so easy. Unfortunately, this is nowhere near the mark. The bulk of the lending that leverages the money supply is involved in consumer loans. So this really would create a very unfair arrangement that reminds me of the incident with Mark Antony. Everyone talked about the bankers and assumed that Julius Caesar would rule that all debt was to be forgiven. Mark Anthony believed Caesar would do that so he ran out and bought Pompey estate assuming he would never have to pay for it (see Anatomy of a Debt Crisis it appears, only Julius Caesar ever understood).

To do what you suggest may sound simple but it would produce riots and blood in the streets. Your pension would be gone because most funds invest in debt. What if you were retiring and bought muni bonds to live on because you were told they were tax-free? Perhaps you could not sell your house to retire because the buyer could not get a mortgage so you took the mortgage. That would mean he now gets the house for free.

Trust me – it would be a bloodbath in the streets.

QUESTION: Socrates did an amazing job. It called the high in BitCoin right to the day. That makes me wonder. After thinking quietly about the claim that cryptocurrencies will replace everything as a new world monetary system because it will not be centralized and created by a central bank, this seems to be complete BS if the majority of money is created by lending banks. I asked a diehard proponent and he said we have to stop banks from doing that and suddenly the world will be a better place. I think that means no credit and everything would collapse. Am I far off here or are these people at least partially correct? Am I missing something?

DT

ANSWER:  No, you are correct. These people do not understand the monetary system and they take one simple fact and they blame everything on that and the solution is a cryptocurrency to eliminate central banks and the creation of money by lending. That is so impractical it just shows the lunacy of it all. If you stop the creation of money by lending, do you realize property values would crash? We would be back to the Dark Ages where if you wanted to sell your house, the price would be ONLY what cash someone has. That is why FDR created the 30-year mortgages. Real estate fell to virtually zero. It was being auctioned off at 10 cents on the dollar or less.

All pension funds would be wiped out. The savings accounts would not be there for probably 80%+ of banks would close if not 100%. To suggest that the solution is the end of central banks and bank lending, you are talking about blood in the streets. The riots would be incredible if not revolution. The Dark Age was a period where there was no banking and no trade. The Dark Ages was originally classified as the 10th and 11th centuries. There was no lending. People worked for food. They were given land to cultivate and the “landlord” took 80% of the production. They received no wages prior to the Black Death.

The coinage of this period reflects how the economy functioned. The coins are rarely found more than 30 miles away from where they were struck. This confirms that there was no trade. These castles were isolated economic systems with an economy that was 90% agrarian. Banking emerged only with merchants who began to travel selling spices that began to import from the east all over again. In Germany, the merchants who became the banker because they made so much money (merchant banking), were called “Peppermen” because pepper was worth more than gold by weight.

This is what we would return to with no bank lending and no central banking. It’s just not a practical solution. It does not matter what the money actually is. The banks that emerged took deposits and gyro banking was invented. Why? There were far too many clipped coins and counterfeits in circulation. You had to inspect each and every coin for every transaction. It was far more efficient to deposit the coins and the bank certified the coins. Thus, you wrote a check and transferred the funds from your account to another and nobody had to inspect every coin.

If we are going to look at solutions, you just throw these wild ideas out there. They are usually put out there by people who have absolutely no experience in the world economy and assume they know everything.

COMMENT: You always support the rich and never see what they do to the rest of us.

LW

ANSWER: You simply believe the propaganda of governments. The rich get richer by INVESTING in assets. They list Bill Gates among the top in the world. Do you really think one gets rich by making more per hour than the next guy? Wealth is created through assets – not wages. The NUMBER ONE suppressor of the people is all governments. I worked hard trying to get Social Security reformed and privatized when the Dow was 1,000 instead of 100% government bonds. I gave up. Ther are to many pension funds that are restricted to buying government bonds.

It is not the rich that prevent others from investing. It is always the government. If you really add up what you pay in property taxes each year and subtract that from the value, you will quickly see that you probably lost money. When you sell the house, they do not count the taxes paid for decades as part of the cost.

Wealth is created by INVESTMENT – not buying bonds. Who prevents the average person from investing? It’s not Bill Gates.

QUESTION: You have previously said that the Persian monetary system was based on gold, the Greeks used silver and the Romans began with bronze. That actually described the Biblical story of the dream of Nebuchadnezzar’s Statue interpreted by Daniel. Do you think your research into the world Monetary System confirms that interpretation?

WK

ANSWER: I have been asked that question before. Perhaps I have never answered it on this blog. The history of the world monetary system does appear to provide an accurate interpretation of that dream. However, I have my differences. The Persians had plenty of gold from Anatolia. The foundation of their monetary system began with gold. The first coins were actually issued by the Greeks who occupied Anatolia, (Turkey) which was conquered by the Persians who adopted their monetary system. The first coins were gold electrum, a natural alloy of gold and silver mixed. They eventually refined the electrum into gold and silver coins. That was the birth of the bimetal monetary system.

Mainland Greeks possessed silver mines. Athens was famous for its Athenian Owls. The only time we see Owls struck in gold was as an emergency issue during the Peloponnesian War. This is when we see the first debasement of the silver coinage. It was against this backdrop of war in a desperate fight for survival an emergency coinage was issued in gold.  Gold was scarce in the Greek world which relied upon silver. Athens in the last decade of the fifth century was surrounded by the Spartans who cut off their supply of silver by denying them access to their silver mines.

Athens was brought to its knees in the midst of military defeat. At first, Athens survived the by tapping into a reserve treasury of some 1,000 talents of silver. This enabled them to produce about 1.5 million silver tetradrachms. Then by 407BC or 406BC, Athens was no longer able to issue silver coinage. This was when they were forced to coin silver plated tetradrachms.  Aristophanes’ Frogs (718-33) indicate that the gold coins were struck in 407/406BC, and that silver-plated coins were struck in the year as well. The coinage confirms Aristophanes’ account. Some have argued that the Spartan forged the Athenian Owls to undermine their currency as a war tactic.

As for the rare gold coinage of Athens, the Athenians turned to the offerings stored on the Acropolis and the gold-covered statues of Nike. Perhaps this is when one of the Seven Wonder of the ancient world was stripped of her gold – Athena Parthenos. Most people have no clue that the famous Parthenon means ‘house of Parthenos’ meaning the house of Athena the Virgin. The Statute is said to have been taken during the 5th century AD. Some claim it was removed to Constantinople.

Athens had possessed an immense treasury, but it was completely depleted to defend in the war. These emergency funds were used to build and outfit a new fleet that in 405BC was defeated at Aegospotami in the Hellespont by the Spartan general Lysander. The Athenian gold from the war is uncommonly well documented for an ancient coinage. The bullion was stripped from seven of the eight golden Nikai on the Acropolis. Each statue was covered in about two talents worth of gold in the form of removable plates which perhaps could have produced 100,000 drachms weight in gold or 50,000 of the coin pictured here – Didrachm. What happened to this production is not known. Very few of these coins have survived and are worth up to $500,000 each. Perhaps the Spartans just melted down everything they could find.

The Monetary System of Rome began with bronze which traded at first in clumps known as Aes Rude and then took form in ingots and round coins all cast at first rather than struck from dies. The “brass” is Orichalcum which was a rare natural alloy. It was first introduced by Augustus (27BC-14AD).  Nero (54-68AD) made use of Orichalcum to give higher value to certain denominations as the Sestertius and Dupondius.

If we are to address the legs of Iron, sorry that does not fit the monetary description of the Roman Empire. The only monetary system to use iron for coinage was China – not European. Here is an Iron coin made during the period of Emperor Che Tsung (1086 – 1100AD)(33 mm 13.30 grams). After the fall of Rome/Constantinople, the Financial Capital of the World migrated to Asia. So I fail to see where the legs of Iron can be fairly interpreted to be a European Empire.

As far as part clay and part Iron, there is such a use of clay in the production of paper. It was known as China Clay Paper. Even the United States used it in the production of postage stamps for a brief period. It tended to have a bluish cast or tint to the paper.

In 1909, the United States briefly experimented with printing stamps on paper with 20% China Clay added to the otherwise 100% wood pulp used to make paper. The paper had a faint grayish tone, and the stamps printed on it are known as “China Clay” stamps.

While many know that paper money was invented in China, what they usually do not know is that paper itself was invented in China. Ever since the invention of writing, people had been trying to come up with something easier to write on than clay tablets, sheep skins (parchment), or papyrus or. However, it actually took a very long time – some 3000 years to be closer to the notch in the timeline of human society. Paper was invented around 100 BC in China. In 105 AD, under the Han Dynasty emperor Ho-Ti, a government official in China named Ts’ai Lun was the first to start a paper-making industry. He made paper by mixing finely chopped mulberry bark and hemp rags with water. He then mashed pounding it flat. After pressing out the water and letting it dry in the sun, he discovered paper. To be fair, for centuries before people used the mulberry bark to make cloth. Consequently, Ts’ai Lun’s paper was a derivative of that process and turned out to be a huge success. With paper available, Buddhist monks in China began to work on ways of mass-producing prayers. By 650 AD they were block-printing prayers. Tang Dynasty (618-907AD) marks the birth of paper money.

Consequently, I believe that the prevailing interpretation of Nebuchadnezzar’s Dream seems to be biased toward Western culture. There is no known use of iron being used for money outside of China in Europe. If we are going to use the monetary system to explain the empires, we should not omit China.

The emails have started with the conspiracy accusations that this is the second WEC when President Trump will be there in the same place. True, he was in the same hotel in 2016 in a meeting a couple doors away. This time he has announced the meeting with Kim will take place in Singapore. A couple of emails put it that once is a coincidence – twice is a conspiracy. Perhaps true in some instances. However, I do not advise Trump and I have nothing to do with North Korea. If they want to sit in the back of the WEC and learn something, no problem. We will be glad to provide the seats. Otherwise, maybe the rule should be three-times is a conspiracy and twice is still just a coincidence.

QUESTION: why national debts eventually default Martin to answer this question you said:

Here is a chart of M2, which includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds. If we look at money supply, then inflation should always exist without end. Clearly, money supply is not the only factor involved.

Here is what is known as the adjusted monetary base, which equals the sum of the monetary source base and an appropriate RAM adjustment. The adjusted monetary base is composed of the adjusted total reserves and adjusted nonborrowed reserves. When we redefine the money supply looking at the entire monetary spectrum, you get to see the Quantitative Easing and it peaked in line with the ECM.

Now let see if the money created actually made it into the economy. The Fed also created Excessive Reserves because the banks did not want to “stimulate” the economy by lending. This is why I have said the QE was an utter failure for the banks just parked the money and it was not lent out.

Now let us look at the decision making of banks. Here we can see why the banks simply parked the money at the Fed. The credit cycle comes into play and this is what more directly impacts inflation or deflation that the simple quantity of money.

We can see that the consumer delinquency rate on Consumer Loans is really the key. The idea that the Fed can stimulate the economy by handing banks more money is the most stupid idea I have ever heard. The very design of the Federal Reserve was that they would BUY commercial paper when the banks WOULD NOT to stimulate the economy directly. Then Congress instructed the Fed to buy their debt for World War I and never restored the design of the Fed. So now the Fed buys only government paper and it has lost its ability to “stimulate” the economy for this is the credit cycle which dictates inflation and deflation far more than any quantity of money theory.

When I conducted studies of interest rates relative to the stock market, I quickly discovered that the stock market ALWAYS rallied with rising rates and decline with falling rates. More importantly, it was critically influenced by international capital flows. If money was turning away from the United States, then the interest rate would move to the highest level as in 1899. When the capital flows pouring into the USA in hiding from World War I, you find the Greatest Bull Market in History with the lowest level of interest rates because the capital flowed into the USA increasing the real money supply by credit.

I have stated also many times that the domestic money supply of any nation can be increased and decreased by international capital flows. If the Chinese come and buy a piece of real estate, they bring in money for a dead asset. The seller now has money that did not exit domestically before the sale. If two Canadian sell and buy a home, nothing changes domestically. But a foreign buyer must import the cash to buy the home and thereby the available cash domestically increases with the state doing nothing. The Chinese buys dollars perhaps somewhere else which the banks create in the swap market. The government never “officially” printed anything nor did they expressly increase the money supply.

When we try to actually create a theory that one thing is the source of any effect, we always end up with egg on our face. It simply cannot be done. It is always a dance of many factors and how they come together in what combination and in what order. The Boom & Bust Cycle is far more directly impacted by the Credit Cycle than by money supply. You can create all the money you want, but if the banks will not lend and consumers will not borrow and prefer to hoard because they do not trust the future, you will be in a deflationary cycle.

When J.P. Morgan was being interrogated by the ruthless Samuel Untermyer in the Senate, the exchange showed that the government NEVER understood finance or banking. Morgan express the way banks really operate. They will not lend you a dime if they think you will default even if you have the collateral to back the loan. If you do not have faith in the borrower, you do not do business.  Remember one thing. The actual money supply is a tiny fraction of the real money supply which is created by lending. Some people BELIEVE gold is money. Other believe Bitcoin is money. So what is the definition of money? It is the broad spectrum of assets that include real estate and equities. All the studies show that if real estate is rising, spend SPEND more freely because they “feel” richer. When real estate declines, they contract in their spending.

This is why I have made it clear many times. The 2007-2009 Crash was far more devastating than the numbers show. This is why liquidity remains about 50% of 2007 level. The vast majority of homes are still worth less than they were in 2007. The average consumer does NOT “feel” richer. The youth have turned to renting and see the dream of owning your own home as a joke after property taxes for which you get no credit when you sell a house.

QUESTION:  Dear Marty,
due to 5,000-year lows in interest rates, in 2011 the US was able to triple the debt but keep the payments the same as in 1998. With interest rates rising (but still historically low) in 2017 the US paid the highest interest payment on the debt in history. Could you please elaborate on that?

Thank you for sharing your wisdom.
Kind regards,
M

ANSWER: This is going to be a major topic at the WEC. This is a major time bomb that amazingly nobody seems to be paying attention to. Rates are going higher for they need that to help the pension crisis. The USA is nowhere as bad as it appears in Europe from a debt perspective. This whole mess is going to explode in our face and this is going to be the serious trend going into the next ECM turning point.

The debts of governments around the globe are going to move up exponentially. This is very serious for some will raise taxes to try to keep the game going but that will cause even more deflation. I cannot express how SERIOUS this is. While everyone is looking at the stock market, others at the dollar and gold, they are missing the greatest threat to civilization since the 12th century.

Interest rates began to rise as soon as we passed the peak in this 8.6-year was – 2015.75. The Fed raised interest rates for the first time once the ECM turned.

The number of institutions calling and governments has been rising ever since the ECM turned. This is not going to get better and it is not going to just fade away. Sorry, if we keep our eyes closed and even hide under the bed, it will not matter.

QUESTION: If governments have been borrowing without limit since world war 2, are you saying that there is some line that is cross in debt to GDP that results in default?

Thank you

JU

ANSWER: No. The debt to GDP ratio is interesting. The USA is at about 103% and China is at 250%. The ratio is at 180% for Greece and France is at 96.5%. If we used exclusively these numbers, China should be worse than Greece. If France’s debt is less than the USA, then why is the French economy doing so badly? So what is the real issue that causes defaults?

To answer that question we need to introduce currency. France and Germany were less impacted by converting to the Euro than Greece, Italy, Spain, and Portugal. Why? Currency Inflation! Southern Europe had always issued debt and over time you were paying back with cheaper currency. The USA is insulated in that manner. $1 million in 1930 could buy 1,666 Cadillacs. Today, financed for 39 months, the cost of a Cadillac is $26,700, which means that $1 million will only buy 37.4 cars. The debt issued in 1940 has been devalued over time. This is how debts have escaped the theory that a national debt has some limit.

Then countries like Germany worry about the debt so they raise taxes to keep the ratio down below 70%. In taking that approach, they lower the standard of living of their population to support the government. The government spending as a percent of GDP in Germany has run on average about 46.5% of GDP compared to the USA average at  36.57%. The higher that ratio the lower the standard of living. It also warns that there is a limit to taxation before you reach the threshold of revolution – remember No Taxation without Representation?

The debt crisis we are currently in has been accelerated by two factors:

1. deflation making past debt more expensive and
2. artificially low interest rates

Greece converted its past debt to Euro which then doubled in value as the Euro rallied from 80 cents to $1.60. That meant the past debt was now double in real terms and there was no possible way Greece could pay such a load. In real terms, the debt rose relative to its GDP because you converted the currency base.

The crisis we face globally is that as interest rates rise, the servicing of the debt will rise exponentially. This will impact everyone around the world. Now, if the dollar rallies sharply because of the structural crisis in Europe and the turning down of the economies elsewhere, then the past debt of the USA will rise in real terms as was the case with Greece. Then add to this Cauldron and stir gently rising interest rates.

Shabam! You reach the threshold of a debt crisis!

QUESTION: Why are long-term yields on risky European debt below that of US Treasuries? Is this the European bubble madness?

HN, Frankfurt

ANSWER: This is unquestionably a bubble, but the buyer has been the ECB (European Central Bank). Yields on risky European bonds have been driven below the yields of long-dated US securities. The financial system may appear to be riddled with anomalies, distortions and erroneous prices, but all of those labels assume it is the madness of crowds rather than the government.  Mario Draghi has created the worst possible financial nightmare perhaps in modern history since governments began borrowing in the 12th century. These are not driven by a free market, but one that is manipulation of a central bank gone absolutely mad.

The average return on European junk bonds is below “risk-free” US government bonds. This is completely driven by the insanity of the ECB. In fact, Draghi purchased around $ 2.6 trillion in securities since his Quantitative Easing began in March 2015. He assumed that this would stimulate the economy. However, all it has done is kept the member states on life-support.  He is trapped and has no way out, which is why he has come out and said that the ECB will reinvest when the bonds they hold mature. There will be no end to this madness and he has single-handedly wiped out the bond markets. There is no free-market remaining so the question becomes – how will governments ever sell its debt in the future?