QUESTION: I am a mega dollar bull – I totally get how it is the only game in town.  I’ve lived it too, having seen how the big banks work their balance sheets from the inside. However… occasionally people send me charts like the one below and get all excited.  They say we are de dollarizing etc.  My off the cuff remark is that the central bank reserves are a tiny part of daily FX transactions.

Just wondered if Martin might comment on the blog?

Cheers!

T

ANSWER: Hello. Hope the institutional desk is keeping you young these days. Your chart is interesting no doubt. The central banks have been trying covertly to defend against the dollar. Even China and Russia are desperately trying to price things outside the dollar but this is not helping either.

The U.S. dollar’s share of currency reserves as reported by the International Monetary Fund (IMF) fell to a near five-year low going into the end of 2018. The Chinese yuan’s share of allocated reserves shrank for the first time in the third-quarter 2018 since the IMF began reporting its share of central bank holdings in the fourth quarter of 2016. Insofar as the Japanese yen, Reserves reached a 16-year high in the third-quarter 2018 according to the IMF.

The Central banks have been trying to use reserves to help support their respective currencies and suppress the dollar’s rally without any real impact. This is very similar to the crisis of 1927. Back then, there was also a capital flight from Europe. There too, the European share markets all peaked well before the US market in 1929. The capital flight from Europe to the dollar was massive. This was one of the criticisms of the Fed level by Milton Friedman that they did not expand the money supply with all of the refugee gold hopping on every ship to the USA.

The three main central banks of Europe traveled to New York City for a secret meeting. You might call this the first G4 in history. They lobbied the US Fed to lower its interest rates, as they have been doing of late once again, in hopes of altering the capital flows and diverting the flow back to Europe.

The Fed indeed lowered the US interest rates in 1927. However, just as quantitative easing has failed, lowering the US interest rates resulted in the opposite expectation. Instead of the capital diverting back to Europe, it intensified into the US buying real estate creating the Florida land boom, and pushing the US share market to record highs in 1929.

As I have said many times, these people try to reduce everything to a single cause and effect. This is why Keynesian economics has completely failed. Even Paul Volcker back in 1978 in his Rediscovery of the Business Cycle pointed out that this new era of Keynesian economics had utterly failed. Nonetheless, the economic community keep trying to make it work. It is like sticking your finger in a power outlet figuring sometime you will not get shocked.

The Fed lowered the rates in 1927, then as the capital inflow really intensified, they nearly doubled the interest rates into 1929 also without succeeding in prevent the stock market rally. They will most likely make the same mistake once again following Keynesianism. Expect them to chase the stock market raising rates and ignoring the rest of the world

QUESTION: Mr. Armstrong; First I want to thank you for coming to Europe this year. It has been some time since your Berlin Conference. My question is simple. How can the ECB tell countries to reduce their debt when as you say nobody ever pays off the debt? Is this just fantasy or do they really believe what they are saying?

Looking forward to Rome.

WVM

ANSWER: The sheer demographics warn that more people will move into retirement, increasing expenditures at a faster pace than there are younger generations to compensate. This means that expenditures will rise and revenues will decline. Even if we were talking about governments that actually did pay off debt, they would still not be able to do so once we pass 2020.

Insofar as do they really believe their own nonsense? I am afraid they do. They have not yet reached the point where they will come to terms with the fact that this is a fictional world in which they dream of endless powers and they will prevail in the end. We have gone past the point of no return. We now require structural change and FAST!!!!!!!

We are beginning to witness the impact of state taxes on decision making. California’s high taxes led to the San Francisco Giants losing Bryce Harper to the Philadelphia Phillies. The 26-year-old professional baseball star agreed to a 13-year, $330 million deal with the Philadelphia Phillies because the bottom line net of what California would take was insane. I know several IT firms that are experiencing the same loss of talent all because California already has the highest state income taxes in the country.

Governments are only looking at their own survival, and to hell with the people. There is a major shift in migration and California now has more people fleeing the state than desiring to move there. Taxes are a major component and they define the bottom line. We witnessed the AOC effect, as she proudly chased Amazon out of New York. Her approval rating took a turn for the worst after chasing 25,000 jobs out of the city.

REPLY: This is going to be really an interesting WEC. Whatever can go wrong in the world is going wrong. It is becoming the perfect financial storm as we head into the bottom of the Economic Confidence Model. We have politicians only looking at saving their own power blind to the implications of their actions on a global scale. There are even rumors now that Recep Tayyip Erdoğan will claim some manipulation of the election by another country in a vast conspiracy if he loses and he will refuse to leave office.

The British Parliament has rejected Prime Minister May’s BREXIT plan for a third time. This now leaves them to come up with a plan that Brussels must accept by April 12th or face a hard exit. On top of that, the phone here is melting down with questions about how “hard” is a “hard-landing” going to be from various political sources. Central banks are shifting already to once again stimulate. This is not looking very good, to say the least. Ten years of stimulation has been a complete failure in Europe. We have major political and banking turmoil and financial chaos looking ever more serious for May.

QUESTION: Re Solution to a new monetary system::
In the “Solution” presented it was suggested that the existing US bonds be required to invest in companies in the USA. Does the govt just print the money for the bond values to give to the companies? If the companies receive the bonds, how are they liquidated otherwise?

KB

ANSWER: It becomes a debt for equity swap. The debt must be retired. It is replaced with just the creation of money. Now people will yell that is hyperinflationary. Not true. Since 1971, government debt is acceptable for collateral when you trade your accounts at a broker. It is simply cash that pays interest. It is already part of the money supply. What you are implying is really old school economics that believe increasing the money supply will be inflationary. This is just not the case. Even after 10 years of Quantitative Easing, we still have deflationary trends in pockets like Europe and Japan.

Some wrongly believe that you are just increasing the money supply. Pre-1971, when bonds were not allowed to be collateral, then yes, it was less inflationary to borrow than to print. However, since the debt is already cash that now pays interest post-1971, it is just a swap. Huge distinction.

Interest expenditures will soon exceed that of the military. This solution will reduce the cost of government, and thereafter, you outlaw any possible right to borrow once again.