QUESTION: Mr. Armstrong; What Modi has done here in India is far worse than what the press reports. I read your piece that this is part of a larger plan discussed at the G20 meetings. Is there any historical precedent for such actions that would provide some guidance for the future?

R

ANSWER: Since ancient times, many times those in power have cancelled their money supply to make a profit or collect taxes by force. It is rather absurd to think gold or silver coins could somehow exempt one from these types of actions by tyrants for they pulled off such maneuvers even in ancient times. Governments have recalled all coinage and demonetized silver and gold coins, declaring them not acceptable in payment for anything. Despite their metal content, the coins were still declared worthless. This is one of the simple truths that demonstrate not even a gold standard will save the day.

The first debasement or reduction in weight too place in Lydia, which was the first city-state to invent coinage stamped by the King. Kroisos fought against the Persians and as expenses mounted, he reduced the weight of the gold stater from 10.75 grams to 8.08 grams – a reduction of nearly 25%. Cyrus the Great won the battle and then retained the invention of coins minting the same designs. Eventually, Darius I of Persia place himself of the coinage and they then became known as a Daric denomination.

There is no evidence that Kroisos recalled the older coinage ti reduce the weight and make a profit. However, others to follow did adopt that tactic which is effectively what Modi has done replacing the currency with electronic deposits. Over the centuries, governments have routinely replaced worn coins or worn paper currency with new issues. However, not all coin recalls were about reminting old and worn coins or paper notes with new ones. Three literary passages from antiquity identify the reminting of coinage in ancient Greece that had nothing to do with recycling of worn coinage. The government did what India did, but instead of moving to electronic money, they devalued outstanding coins and recalled them for restriking regardless of their condition, specifically as a means of raising revenue for the state.

The 6^th century BC Athenian tyrant Hippias recorded, “[H]e also made the coinage existing among the Athenians legally invalid (adokimon), and, having fixed a price, ordered them to bring it to him; and after they had come together for the purpose of striking another type (character), he gave back the same silver money (argurion).” (Aristotelian Oeconomica 1347a8–11)

It is unlikely that Hippias the Tyrant (528-510 BC) simply returned the coins unchanged. He would not have carried out such a monumental task without making some profit by demonetizing and devaluing all of the coinage in the state, thereby requiring it be exchanged for the legally acceptable (dokimon) coinage that he issued at a higher value. This is similar to the actions of Modi in India.

We also find similar passages that are notable for their overvaluations of the new replacement coinage. During the 4^th century BC, Dionysios I of Syracuse (405–367 BC) and Leukon I (389-348 BC) of the Cimmerian Bosphoros pulled off similar mass recalls of coinage. Dionysios, we are told ([Arist.] Oec. 1349b27–33), and Leukon (Polyaenus, Strat.6.9.1), recalled in the existing coinage and restruck (or countermarked) it with a new type (character), thereby doubling its original value. This was an effort to cover the expenses of the state by increasing the money supply. Dionysios recalled the coinage and imposed the penalty of death for noncompliance. Leukon followed Hippias and simply demonetized all existing coinage.

Various Japanese emperors engaged in similar tactics but did not recall the existing coinage. Each new emperor just devalued all outstanding coinage to 10% of its value and issued their own coinage for profit. This practice led the population to use Chinese coins and rice. Eventually, nobody would accept a Japanese coin because of this practice. Thus, the end result was that Japan lost the ability to issue coins at all for 600 years after 958 AD.

This is why, as we move forward, it will be best to hold assets out of banks and out of currency. They can even declare gold a criminal act to possess, which is why I suggest genuine old coins rather than bullion. Just another layer of protection. Whether that would be the case, as it was under Dionysios I of Syracuse, is not unthinkable. The safest asset may simply be blue chip stocks for they would never make it illegal to own corporations unless you had a full-fledged leftist revolution that seized all private assets as in a communist revolution. That risk would naturally alter everything once again.

The Dow made a new high on Friday, but we failed to closed above the 2016 high. We still see the next major resistance level in the 21000-23000 area. A Phase Transition is only likely exceeding that level.

Gold has bounced but the resistance stands at 1197 level with support at 1130 zone. The lowest closing remains 2015 on an annual basis. We need a weekly closing back above 1222 to suggest any short-term sustainability.

Most markets, including the dollar, are really holding waiting to see what the Trump Administration looks like. The tax reform will clearly bring cash moving back to the States despite the leftist economist desperately saying it will not. Any company who does not take advantage of a 10% one-time tax compared to 40% would be one giant short illustrating that their management must be brain-dead. Nevertheless, we are on a wait and see alert for tax reform.

January is still a risk of a turning point in many markets. So you want to be careful with rallies in currencies or commodities at this particular time. The big turning point seems to be shaping up for April/May.