QUESTION: Why is Europe still in an economic crisis among its banks while the US banks are obviously beyond the crisis days of 2008-2009?

Thank you for your insight.

HT

ANSWER: The bad loans in the states were really dumped into Freddie Mac, is a public government-sponsored enterprise created in 1970 to expand the secondary market for mortgages. The main difference between Fannie and Freddie boils down to who they buy mortgages from. Fannie Mae primarily purchases mortgage loans from commercial banks, while Freddie Mac primarily buys mortgages from smaller banks that are often called “thrift” banks.

The bad real estate loans were stuffed into Fannie and Freddie so the bad debt was not in the banks. In Europe, the bad loans are still on the books of the banks. Hence, the European banking crisis was not been addressed and this is the primary difference between American v Europe.

COMMENT: Good day Martin;
Regarding: Market Talk- April 11, 2018
On the Fed minutes, you stated: “Interesting as they admit they are confused as to why unemployment is so low yet there is still no inflation.
I will accept the challenge and take a stab at it.

As you have stated many times trade is summed in dollars, not amount of goods. The USD has lost 7.0% in 2017 while imports have increased roughly 9.0% y/y in dollars. China, Mexico, and Canada make up 45% of U.S. imports, but all three countries’ currencies have been in lockstep weakening while other EM currencies have strengthened. Retail Sales increases y/y are up 4% since 2011 which may be due to a strengthening labor market but not enough to raise margins on the products sold.
Did I pass the test? Please grade.
RH

REPLY: I give you an A.  Everything is interlinked and we have to look at the full-spectrum. Typically, inflation unfolds when there is CONFIDENCE in the future. Hyperinflation takes place when CONFIDENCE in government collapses. We are dead center. There is no real CONFIDENCE in the future so people are spending less and saving more (hoarding) so there is no mad rush to go buy something today for fear it will rise in price tomorrow. As long as people remain unsure about the future, they will also be in the saving mode.

Add to this human tendency concerning the impact of taxes. What government refuses to look at is the bottom line. The more they raise taxes, the less disposable income the individual has in every class. Even those who are in the lower class where they do not see a tax increase are still impacted because wages will not rise when employers have to pay more in taxes and products will rise in price and tax increases are passed along. Therefore, if you earn $100 and take home $80 before a tax hike and now you take home $70, your disposable income is reduced and inflation is suppressed

QUESTION: Martin,
Thank you for your work and I really enjoy reading your blog. I had a conversation with someone in the hedge fund world and thought he had a very good thought/point on government bonds. He suggested that to prevent a collapse, the government would mandate that retirement accounts hold a certain percentage in government bonds. It will be a way to tax or force a purchase of debt. Maybe you have commented on this before and I missed it, but what do you think of that possibility? Pensions, 401k, and IRAs will have requirements to get the preferential tax treatment.

Thanks again for your insights.

B

ANSWER: The USA is the least of the problem. The huge crisis is in Europe. Many nations already mandate the majority of pensions must invest in government bonds. Even the US Social Security system is 100% in government bonds. The problem is that interest rates are at historic lows. Pensions need 7% to 8% on to remain solvent. Forcing 100% of all pensions into government bonds will not prevent the crisis coming. The pensions will still collapse.

This is why Europe is trying to take the Euro market away from London. They know it will crash so they want it within their control so they can outlaw shorting the Euro as they have done with Eurozone debt.  What they are doing is reverse the free market and politicians desire to isolate the Euro as if it were the Russian ruble during the Soviet era.

Instead of facing our problems and dealing with it, they are really moving to control and regulate the free market to remove its freedom. Despite the fact that the currencies of China and Russia during the communist period were not free markets, communism still collapsed. You cannot prevent the economy from ignoring the economics of reality. Regulation will always fail.

QUESTION:

Dear Mr. Armstrong

Firstly, thank you for your insights and forecasting. I am not really in a position to properly capitalize on them, but all information is useful.

The Labour government of New Zealand is conducting a taxation review. They have called for submissions and although I realize mine won’t make a jot of difference to the outcome I will try.

In a recent blog, and more as a footnote than content, you alluded to a system whereby income taxation was abolished, and the government printed the money for it’s expenses. Would you please flesh the concept out a little with regard to the checks and balances and effect on foreign exchange?

I have spent some time thinking about an all-encompassing transaction tax to replace all taxes that are not punitive (eg. tobacco and alcohol). I assume you would think this terrible, but I have not read any arguments as to why this would be so, only “it would be terrible”.

Your thoughts on this would be most helpful and appreciated.

Kind Regards

R

ANSWER: The assumption that an increase in the money supply is the root of all inflation is simply a theory that does not stack up to history. If we look at the Roman Empire, between 241BC and 68AD, the death of Nero, the Roman monetary system for that segment of 309.6 years was incredibly stable. The government minted the coinage and used it to pay its expenses. In today’s terms, we would say the government just printed money rather than borrowing it. Indeed, the Roman government had no central bank nor did it have a national debt.

Because the coins were struck from dies that were made by hand, there are subtle differences that allow us to determine how many dies were in use at a given time. We know from testing how many coins can be struck from one die before it breaks on average. By multiplying that number by the known dies, we can them determine the introduction of new money into the economy took place on an annual basis. During the Republican period, there was a moneyer who was in charge of minting the coins. We still have this tradition today.  Here is a new $1 bill with Steven Mnuchin’s signature as Secretary of the Treasury the same as the Roman coins were signed by their moneyer for that year. (see above denarius). Traditions from Rome remain in place still today with the signature of the treasurer being the moneyer.

The Roman denarius was the most secure currency in the world at that time for 309.6 years before any debasement begins under Nero in 64AD. The reason for that debasement appears to be linked to the Great Fire which destroyed much of Rome and the rebuilding costs were tremendous. Since there was no state borrowing, Nero began the debasement of the coinage reducing the weight of the gold Aureus and the silver was reduced from 97.5% purity to 93.5%. He was increasing the money supply by issuing more coins with the same amount of silver.

Therefore, all the research that I have conducted demonstrates that inflation is by no means tied to the increase in the money supply, which is the entire reason nations borrow today. They think borrowing rather than printing is less inflationary. That is not true if the debt can be used as money.

The debt they create is simply now used as collateral for loans and it is, therefore, increasing the money supply with a two-tier system whereby the debt is simply money that pays interest. That is actually how the United States reintroduced paper money to fund the Civil War. The entire term “Greenback” referred to paper money issued that no longer paid interest so all that was on the reverse was green ink and no table of interest payable on the currency depending on how long you held it. In other words, paper money was reintroduced in the USA as a form of circulating bond.

At times, the national debt of just about every major nation today has reached 70% of which is attributed to accumulative interest expenditures. As interest rates rise, the national debts will explode and because of this bogus theory of inflation tied to an increase in money supply, they will then raise taxes to try to reduce deficits. This will further create a Great Depression as deflation surges. The more people do not trust the government, the more they will hoard their wealth and fear to invest.

The ECB has engaged in quantitative easing for nearly 10 years without producing corresponding inflation. People will HOARD money if they have no faith in the future defeating the theory that an increasing in the money supply will produce inflation. Only when people no longer trust the government and flip believing that prices will rise, then they will spend the currency now for it will buy less tomorrow. It boils down to what people simply believe will happen tomorrow.

This entire crisis we face is very predictable yet there is nothing we can do to prevent it from crashing our economies. All hyperinflations take place when the confidence in government collapses.