Armstrong Economics Blog/Banking Crisis
Re-Posted Mar 19, 2018 by Martin Armstrong
The European Central Bank (ECB) has postponed its new guidelines for banks because if it did not, the Italian banking system would simply collapse. The ECB has given Eurozone area banks more time to adapt to new guidelines on how to deal with bad loans. The deadline has been postponed from 2018 off into 2021. The new rules require banks to increase their capital for all loans, which are now classified as risk-taking. Bad loans are systemic in Europe as they increased after the 2007-2009 financial crisis.
After almost 10 years of Quantitative Easing to help banks, nothing has been achieved. Because of the Quantitative Easing, Europe has become very aggressive in collecting taxes. That is deflationary and Southern Europe still suffers from joining the Euro as a whole. The Quantitative Easing has simply kept governments on life-support while failing to stimulate the economy. Mario Draghi moved to negative interest rates in an effort for force people to spend. Instead, the bought safes and withdrew cash from the banks.
This latest move is once again trying desperately to keep the Eurozone afloat until Draghi ends his term next year. Then Draghi could care less what happens, for he will not be blamed if he can just get out the door before it all comes crashing down.
Armstrong Economics Blog/Economics
Re-Posted Mar 19, 2018 by Martin Armstrong
QUESTION: You defend central banks yet the Rothschilds when clearly Mayer Amschel Bauer Rothschild said: “Give me control of a nation’s money and I care not who makes it’s laws.” Any comment?
ANSWER: No problem. He never said any such thing it was completely made up. It was attributed to him in 1838 when he was already dead for 26 years. Besides that, what is very clear is that this is based on the assumption that money is fiat. The USA began to issue paper money in 1861. During the period that Mayer lived, the money supply was primarily coined. The only plausible reference would be implied that he debased them. He was a banker and never produced the coinage.
It would be nice just for once that you bothered to actually understand the role of central banks as originally set forth. What they do today with Quantitative Easing has proven that the entire theory of an increase in money supply will be inflationary is outright BOGUS.
In every case of HYPERINFLATION, not even once did inflation ever begin by increasing the money supply. Inflation begins when PEOPLE lose CONFIDENCE in the government and they spend the currency as fast as they can or outright refuse to accept it. I have explained that the Japanese Emperor used a different approach. He DEVALUED all outstanding money to 10% of his new coinage. That led to the collapse in CONFIDENCE to the point that the people never trusted the government and as a result, the Japanese lost the ability to produce money for 600 years.
The definition of what creates inflation is entirely wrong. Even Gresham’s Law needs to be placed in context. Gresham worked in the foreign exchange markets in Amsterdam. Henry VIII debased the English coinage. But coinage traded on foreign exchange markets according to its metal content. The inflation Gresham referred to was experienced in the foreign exchange markets so what he truly observed was the decline in the British coinage value on international markets. Don’t forget, this predates the central Bank of England which was established in 1694.
The entire observation of inflation began with Gresham. However, it was extended by David Hume (1711-1776) who made observations BEFORE paper money began. This observation is not respected even today. David Hume showed why net exporting in exchange for gold currency, which then increased the domestic money supply and was hoarded by Britain, could not actually enhance wealth. Hume’s argument was essentially the monetarist quantity theory of money which would influence others over time. Prices in a country would change directly with changes in the money supply. Hume explained that as net exports increased and more gold flowed into a country to pay for them, the prices of goods in that country would rise with the economic boom. The USA saw this through the course of World War I and World War II ending up with 76% of the world’s official gold reserves. Consequently, an increased flow of gold into England would not necessarily increase England’s wealth substantially was Hume’s argument because the increase in domestic prices due to the gold inflow would discourage exports and encourage imports. Hence, this trend then counter-reacts with trade and automatically this will start limiting the amount by which exports would exceed imports. The more money that flowed into a country, like the USA, the higher the prices and this would then reduce exports. Adam Smith’s attack on mercantilism and argument for free trade, strangely ignored Hume’s argument. Hume’s view of capital flows can be verified throughout history and is really the underlying foundation of the balance-of-payments issues that Trump fails to understand. Hume also advanced the idea of “creeping inflation” that takes placed with a gradual increase in the money supply that would lead to economic growth. This is largely correct, but money supply growth must also keep place with population growth or you will produce deflation – more people and less money to go around.
With the introduction of paper money during the mid to late 18th century, the relationship between the over-supply of banknotes and a resulting depreciation in their value was noted by earlier classical economists such as David Ricardo (1772-1823). However, the issue of paper money during the American Colonial period must also take into consideration two factors: (1) England starved America and extracted money assuming they were using Spanish coinage, and (2) the American Revolution which was funded by creating paper money. There was again a lack of CONFIDENCE to the extent that when the American Revolution ended, the Constitution prohibited States from issuing money again and federally no paper money was issued again until the American Civil War in 1861.
Therefore, most HYPERINFLATION periods are associated with war like the American and French experiences. However, in Lydia, the very first government to issue coins, we see the debasement unfold as a direct result of war. Therefore, there is no evidence of hyperinflation unfolding absent a collapse in the CONFIDENCE of the people in that government.
In the case of Venezuela, obviously there has been a collapse in CONFIDENCE. The same was true in Zimbabwe after it seized all the property of white farmers. Foreign investors refused to ever participate again.
The German HYPERINFLATION came with the Communist Revolution in 1918. That sent capital into hiding and fled overseas, primarily to the United States.
Armstrong Economics Blog/Understanding Cycles
Re-Posted Mar 19, 2018 by Martin Armstrong
QUESTION: Can you define cycle inversion and answer the below?
1. What are the specific requirements to confirm a cycle inversion? I have found three elements discussed in the writings, but I am somewhat unclear whether all must be present to confirm a cyclical inversion.
i. The period following the turning point must close higher than the prior period.
ii. The period following the turning point must exceed the high of the prior period.
iii. The period following the turning point must not breach the low of the prior period.
2. Can a cyclical inversion be confirmed beyond the month immediately following the turning point? Notably, the turning points referenced above have been evenly spaced, each separated by a single month. What if each of the turning points were separated by 5 or 6 months?
Could a high on Month 3 (which is not itself a turning point, but rather mid-way between two turning points) indicate a cycle inversion? Wouldn’t a high on Month 3 (which is not a turning point) suggest an error in the array?
ANSWER: In the immediate instance, simply exceeding the January high would imply the next turning point would invert into a high. Corrections are confined to a maximum of 3 timing intervals, which means April. A failure to make new highs and a penetration of the February low after April would imply a correction moving into probably July. Just exceeding the January high intraday MAY BE good enough to qualify as a cycle inversion, but typically you need to CLOSE ABOVE it or it could be just a double top formation. The same is true in reverse with lows.
You can normally assume a cycle inversion once that event is exceeded or broken on a closing basis. We previously warned that exceeding the November high is December would lead to a January high. That confirmed the Cycle Inversion. The same will be true with respect to the January high.
The only time an Array would appear to be wrong where the TOP line fails to produce a definitive turning point tends to be when there is a Directional Change say the month before. A Directional Change can influence and become dominant. However, this is usually when a given market is being influenced by another. A major panic in one important economy can become a SUPERPOSITION influence distorting a local market by a more dominant global trend. This is still rare. The Array typically picks this up in advance. The Array can change shifting the turning point from one month to the next because of such a Superposition Principle.
This will really have to be answered in a more detailed report on cycles.
Posted Mar 18, 2018 by Martin Armstrong
QUESTION: Is there a way to teach cycles that will enable others to see them more easily?
ANSWER: Oh yes. Students who developed visual mental models of cyclical principles flourish, while students who tried to learn cycles by rote invariably struggled. The mental picture is critical. It is a roadmap to the future. Just visualize the Economic Confidence Model and it will help to comprehend the business cycle and where you are at any given moment.
For example, in 2007 when everyone is buying houses, you can keep this in mind and take a pause, encouraging yourself to wait until next year. The same is true for expanding your business. The first time I really used this model in that decision process was 1976. I signed a lease for space and I got them to give me a 10-year lease. I negotiated the elimination of a CPI clause. Everyone was talking about a depression. My accountant thought I was nuts. I told him this model was never wrong and I was going with it. The space I took at $10 a square foot was $45 by 1980.
This model can provide tremendous guidance if you keep it visualized in your mind.
Armstrong Economics Blog/Rule of Law
Re-Posted Mar 17, 2018 by Martin Armstrong
- Outlaw booze and you created the Mafia.
- Outlaw prostitution and you create abduction.
Published on Sep 27, 2017
It is going to take a heck of a lot of deep-weed education to cut through the economic gaslighting of the multinational corporations, Wall Street and their purchased institutional media. However, I give the White House team (Secretary Ross, Secretary Mnuchin, Ambassador Lighthizer and Adviser Peter Navarro) a measure of strong credit for beginning:
WHITE HOUSE: Measurement of trade flows is usually an uncontroversial topic relegated to macroeconomic classrooms and government technocrats. Recent debates about trade policy have brought the topic out of the shadows, and we hope to clarify how economists measure trade.
Every day there are international transactions for tens of thousands of different products. Physical goods, interchangeably called merchandise, are what usually comes to mind first. However, an increasing share of international trade is in services that are not physically transported between countries—think about financial insurance, licensing of trademarks, or services like consulting.
To make the world a bit more complicated, goods and services are increasingly bundled together, such as when a manufacturer sells a piece of machinery along with an international maintenance contract. The machinery is a good, but the maintenance agreement is a service.
From a macroeconomic perspective, economists typically use the balance of payments (BOP) basis. The BOP captures flows of what we would normally think of as imports and exports of goods, but also includes a series of adjustments. This process better aligns trade data with national income accounts such as GDP. The BOP has the added advantage of being applicable to service transactions as well.
The International Monetary Fund defines BOP as “a statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world.” BOP transactions are valued using BPM6 methodology that emphasizes using balance sheet analysis to understand international economic developments and to improve comparability with other countries.
In order to construct the BOP, start with the customs value of imports and exports. A frequently used U.S. government data source reports monthly “customs basis” for transactions. There are different methods of customs valuation.
The transaction value method is the price actually paid by the buyer for the imported goods and includes all payments made as a condition of sale. But the transaction may or may not occur at the border—some international shipments change ownership when loaded, others when unloaded, some even at a specified point in transit.
Recognizing this array of contracts, alternative methods that evaluate imports based on identical or similar goods, deductive value, or computed value are used in various situations. Government statistics are specific about where the customs value is reported, with common specifications including “free on board” (f.o.b.), “free alongside ship” (f.a.s.), or “customs, insurance, and freight” (c.i.f) to designate how much of shipping costs are included in the transaction value.
Starting from the customs value, a series of adjustments are made to arrive at BOP. These adjustments are typically fairly small, but they can be significant in aggregate. The current U.S. adjustments are:
In 2017, the aggregate difference between customs goods imports and BOP goods imports was $19.0 billion on a customs basis of $2.34 trillion. For goods exports, the correction was similar—a difference of $4.0 billion on a customs basis of $1.55 trillion.
Subtracting imports from exports gives the trade balance. Trade balances can be calculated for goods, for services, for goods and services, for one country, for a group of countries, or for the whole world.
The most inclusive measure of trade covers both goods and services. Some economists worry about the measurement of trade in services, which may be subject to inconsistencies, and so prefer to focus on trade in goods alone. After all, goods are tangible things that are easier to count.
Others prefer to focus on goods alone because on average all goods-producing industries have higher wages than all service-producing industries; in Q3 of 2017 average total compensation per hour worked in goods-producing industries was about 20 percent higher at $39.97 while the same measure for service-producing industries was $32.21.
Although BOP accounting is similar across nations, each country can interpret BOP methods slightly differently, which leads to differences in reported values of surpluses and deficits. These details are typically spelled out in exhaustive detail in government documents that could be prescribed as a cure for insomnia. For an example, see the Bureau of Economic Analysis document here.
To illustrate some of the concepts presented in this post, consider U.S. bilateral trade balances with Canada. In 2017, the U.S. goods and services balance was a surplus of $2.77 billion. The goods alone balance on a BOP basis was a U.S. deficit of $23.16 billion, but on a customs basis it was a deficit of $17.58 billion. Note that the difference between the BOP goods and services balance and the BOP goods alone balance implies a trade surplus in services of $25.93 billion.
In contrast, Canadian statistics report a goods and services trade surplus with the United States of $26.76 billion, using the Canadian BOP methodology. The goods alone balance is $40.50 billion on a BOP basis.
One important difference in BOP methodology between the Canadian and U.S. approaches is the treatment of re-exported goods. USTR raised a related issue, on the role of re-exports in Census-based bilateral trade balances, in its 2018 Annual Report. (link)
Armstrong Economics Blog/Understanding Cycles
RE-Posted Mar 16, 2018 by Martin Armstrong
To survive what we face clearly requires an open mind to understand that everything in nature moves through a cyclical pattern. The majority of people see the world only in a linear fashion. Politicians proclaim they can change the world and create perpetual prosperity and/or punish those that cause recessions. Naturally, there are no mirrors in government so the culprit must always exist outside of their shenanigans.
I often get the question WHAT IF everyone followed my work. The answer is simple. That is IMPOSSIBLE. That is like saying why can we all not just vote the same. There will never be a single political party that the people would vote for because there are differences of opinion. The majority of society ignores history because that is the past and somehow irrelevant because we are more sophisticated today and those people ran around in diapers chucking spears at each other. This merely ensures that history repeats because they are far too ignorant to comprehend that life is like a Shakespeare play. It has been performed for hundreds of years and the only thing that changes has been the actors.
Human society as a whole expects a linear life of happily ever after and when that fails, they advocate punishing the person responsible. They cannot dare investigate that just perhaps the world works in a far more complicated manner than just that.
Those who think only linear cannot avoid the crash and burn. Those who see the world cyclically understand there is a time and place for everything.