Posted originally on the conservative tree house June 16, 2022 | Sundance
We have been waiting for the non-essential durable goods side of the manufacturing sector to start showing evidence of demand side contraction in consumer purchases. There have been subtle sector-by-sector indicators of consumer spending shifts for several months; however, today we get the direct evidence from Samsung.
Samsung is one of the leading manufacturers of consumer electronics and products that require chips. For three months the electronics sector has shown background signals that inventory was not moving. One of the more recent indicators of a demand side contraction was the lack of upward price pressure inside the electronics sector. Essentially, consumers are not purchasing the current inventory, so prices are actually dropping in this segment. [SEE TABLE 2, CPI Chart]:
Despite overall inflation of 8.6% within the CPI, deep inside the category indexes you will note that electronic prices are actually dropping. Televisions -9.5%, Video equipment -4.3%, etc. Video and audio products overall dropped in price 1.4% for May, and dropped 5.2% year-over-year.
The supply chain in this sector is lengthy. Meaning inventory builds slowly as consumers stop purchasing in the USA. Retail store inventory turns slow, store inventory climbs, then warehouses inventories climb as stores do not need product. The negative boxcar effect travels back to the manufacturer overseas over the course of several purchase cycles. Eventually, everyone within the sector is telling the supplier we do not need product. Then the manufacturer has to quickly slowdown raw material.
Due to lengthy supply chains, including trans-pacific shipments, the process to stop deliveries in this electronic goods sector is around 90-days before the drop in retail sales reaches the manufacturer to stop production. Here is the announcement from Samsung:
TAIPEI/ SEOUL — Samsung Electronics is temporarily halting new procurement orders and asking multiple suppliers to delay or reduce shipments of components and parts for several weeks due to swelling inventories and global inflation concerns, sources have told Nikkei Asia.
The notification by the South Korean tech titan applies to components for multiple key product lines, including TVs, home appliances and smartphones, four people familiar with the situation said, and the postponement of orders involves a wide range of components across chips, electronics parts and final product packages.
The move by Samsung, the world’s No. 1 smartphone and TV maker and one of the leading home appliance providers, is the latest sign that electronics makers are pessimistic about the economic outlook amid global inflation risks.
Samsung told suppliers that the company needs to closely review its inventory levels of both components and final products to ensure stock on hand is manageable, according to the sources. Two people said the move will last until the end of July. One of the people said shipments from that source’s company have not been completely halted but the volume of the company’s planned shipment to Samsung for July has been slashed by 50%.
Samsung’s inventory assets reached 47.6 trillion won ($36.9 billion) at the end of March, up from 41.4 trillion won in December, according to its first quarter earnings report. The ratio of inventory assets to total assets also jumped to 10.8% from 9.7% during the same period. (read more)
Various Wall Street economists and MSM pundits have stated, erroneously – and many intentionally, there has been no evidence of a demand side contraction. However, CTH reviews of the data have shown exactly the opposite. There are multiple indicators of demand side contraction, including drops in retail sales units that goes all the way back to last holiday season.
Yesterday the U.S. Dept of Commerce released the May retail sales [pdf DATA HERE], showing a 0.3% drop in retail sales for the month.
Retail sales -as measured in units purchased- have been in a contracting position since June of 2021. When the current data shows a drop of -0.3% in May, the actual drop in retail sales is much, much greater. The dept of commerce calculates retail sales in dollars. When prices are 20% higher and sales are low, retailers are selling less stuff (fewer units) at higher prices. This has been the reality of our economy for several months. This is also why productivity has been declining for more than a year.
If you take the 8.6% inflation rate (far understated) and an aggregate drop in sales of 0.3% (again, far understated as a measure of inflation), that means consumers are spending limited incomes on critical or essential purchases like housing, food, fuel and energy. Consumers are not purchasing durable goods; people are hunkering down.
Yearly retail sales (May ’21 compared to May ’22) are +8.1%. However, yearly retail inflation for the same period is +8.6%. Again, reflecting that less stuff is being purchased inside the economy at higher prices. If the commerce dept was measuring actual units being purchased, we would be seeing massive drops in sales.
Posted originally on the conservative tree house on June 14, 2022 | Sundance
The “Producer Price Index” (PPI) is essentially the tracking of wholesale prices at three stages: Origination (commodity), Intermediate (processing), and then Final (to wholesale). Today, the Bureau of Labor and Statistics (BLS) released the May 2022 price data [Available Here] showing another 10.8% increase year-over-year in Final Demand products at the wholesale level.
The inflation within the total goods supply chain continues to accumulate at a more significant rate than the finished goods on the store shelves. This means replacement goods will continue arriving with higher prices than current. Final demand goods in May were 1.4% higher than April (16.8% annualized). And the May year-over-year prices show a 10.8% increase [See Table A]. However, there’s more trouble ahead:
More troubling than the final demand price increases (wholesale finished goods), are the price increases in the intermediate goods and unprocessed raw materials.
Intermediate processed goods increased 2.3% in May (27.6% annualized). The intermediate unprocessed goods, raw materials, jumped even higher in price at 6.3% for May (that’s a whopping 75.6% annualized increase). It would appear the raw materials coming into the goods sector are coming in with even higher built-in energy costs than most people anticipated.
Once those intermediate products reach the final demand stage (wholesale), the cumulative price increase will mean even higher consumer prices.
(VIA ABC) – WASHINGTON — U.S. producer prices surged 10.8% in May from a year earlier, underscoring the ongoing threat to the economy from inflation that shows no sign of slowing.
Tuesday’s report from the Labor Department showed that the producer price index — which measures inflation before it reaches consumers — rose at slightly slower pace last month than in April, when it jumped 10.9% from a year earlier, and is down from an 11.5% yearly gain in March.
On a monthly basis, producer prices climbed 0.8% in May from April, above the previous month, when they increased 0.4%.
Energy prices, led by gas, rose 5% just in May from April. Another big driver of the price gains last month was a sharp 2.9% increase in the cost of truck freight hauling, a sign that supply chain problems still aren’t fully resolved. Food costs were unchanged.
The figures indicate that rising prices will continue to erode Americans’ paychecks and wreak havoc on household budgets in the coming months. Inflation has created major political headaches for President Joe Biden and congressional Democrats and has forced the Federal Reserve into a series of rapid interest rate hikes intended to slow the economy and cool price increases. (read more)
I’ve said it before and will say it again – cryptocurrencies are not a safe investment. I know it is not a popular opinion; people have had success with trading. The problems with cryptocurrencies: (1) they depend entirely upon the government; with the stroke of a pen, they can all be seized; (2) they depend upon a power grid; (3) they also become dependent upon others accepting them.
A fourth all too common issue is that crypto trading platforms can prevent people from trading with little or no explanation. Binance recently announced that users are not permitted at this time “due to a stuck transaction causing a backlog.” CEO Changpeng Zhao stated on Twitter that the issue would be fixed in under 30 minutes. Later in the day, he said the issue would “take a bit longer to fix than my initial estimate,” but would only impact the Bitcoin network. Uncoincidentally, this sudden system glitch occurred after bitcoin fell by 10% beneath the $24,000 level.
This happens more than they would like people to believe. A few years back, a friend of mine was blocked out of their Bittrex account as soon as one of their cryptos began crashing. At one point, Bittrex suspended and eliminated numerous accounts in 2017, and it took them days to respond. They claimed the issue was a “compliance review,” as these platforms can seemingly make up any excuse they please. During that instance, they did not even inform users before they were locked out of their accounts. Unpopular opinion but the fact of the matter is that cryptos are seriously flawed.
The various handouts and moratoriums during the pandemic drove the personal savings rate down to World War II levels. Everything was closed – there weren’t many opportunities to spend. US consumers paid off a record $83 billion in credit card debt during the pandemic, but that has all come crashing down.
The Federal Reserve reported that revolving credit card debt in April reached $1.103 trillion, surpassing pre-pandemic levels and spiking 20% from the year prior. Credit card balances reached an alarming $841 billion in the first three months of this year alone, and the Fed expects that figure to continue rising due to the unsustainable price of living. In addition, household debt is now close to $16 trillion after consumer debt spiked 1.7% in Q1.
Unfortunately for those already behind, the rising interest rates will only cause them to carry a higher balance of debt. Once the prime rate rises, credit card companies will follow. The APR on credit cards is already 16.61%, nearing the high of 17.87%, on average, but is expected to rise. Debt can easily become a vicious cycle from which there is little escape for the average person. Those who budgeted in the belief that Biden would actually cancel their student debt were misled if not gullible. As housing, food, gas, and other necessities rise, those who are already void of liquid assets will find themselves in a dire situation.
QUESTION: Marty, Socrates is worth its weight in something far more valuable than gold. I want to congratulate you for you are the ONLY adviser who nailed not just the cryptocurrency bloodbath, but that the dollar would rise when everyone else kept predicting it would crumble to dust. Then you warned that emerging markets would move into crisis defaulting on their debt. You said even China was in the same crisis because many borrowed in dollars since the interest rates were cheaper.
Is the dollar behind the banking crisis in China and with all the AI systems claiming a new world order, why are they failing when Socrates succeeds?
I am so grateful. I cannot tell you how much.
ANSWER: I will answer the AI issue tomorrow. The dollar crisis is emerging because people do not understand capital flow analysis. They keep harping on the quantity theory of money. They assert that the more money the Fed creates, the more the dollar bust decline, and typically gold must rise. They do not understand that capital flows like water. It will always move to the lowest risk.
Milton Friedman came to listen to my lecture on foreign exchange in Chicago. We became friends and he explained to me that I was doing what he had only dreamed about. Yes, it was Milton who had advised Nixon on shutting down Bretton Woods and adopting a floating exchange rate system.
While many criticize Milton, they did not really understand what he saw. In 1953, he saw that a floating exchange rates system would provide a natural check and balance against the government policies. That is why he came to listen to me. I had developed capital flow analysis which was what he envisioned would happen under a floating exchange rates system. He theorized that in 1953.
I have been called in on so many FX crises it is amazing. They were selling Swiss loans to Australians in the 1980s to save on interest rates. They never considered what would happen if the exchange rate changed and the Swiss franc rose against the A$.
Just look at these two charts. The A$ was crashing and the Swiss franc rose. The default rate on mortgages exploded and small businesses who listen to bankers pitching Swiss loans to save money lost a fortune. The same crisis took place following the Swiss/Euro Peg when that broke.
Once again, the bankers were selling mortgages in the Swiss franc in Europe to lower interest rates. I cannot tell you how many times were have been called in on major financial crises around the world all for the very same reason. People make a loan in a foreign currency to save money on the interest rate. They have NO CONCEPT that the currency can swing even 40% in a short period of time.
The Chinese Central Bank warned its provinces and corporations NOT to borrow in dollars. They understood our model and understood what happens under such a currency crisis. Nevertheless, provinces and private corporations did not listen. They succumbed to the lure of the cheap interest rate.
I had even spoken with a major company and warned them the dollar would rise and there was a serious risk in emerging markets. They were new and as you say, they listened to the majority of opinions that took the opposite forecast. Now we see bank runs in China and serious problems in emerging markets.
Posted originally on the conservative tree house on June 13, 2022 | Sundance
The S&P 500 fell 151.23 points, or 3.9%, to 3749.63. The Dow Jones Industrial Average dropped 876.05 points, or 2.8%, to 30516.74. The tech-heavy Nasdaq Composite declined 530.80 points, or 4.7%, to 10809.23 (33% lower that the November record).
CNBC – […] U.S. stocks on Monday entered a bear market because the S&P 500 closed more than 21% below its all-time record close reached as recently as last January, S&P Global Dow Jones Indices senior index analyst Howard Silverblatt wrote.
Stocks had been flirting with a bear market for the past several weeks on an intraday basis, but had never actually closed below 3837, the level S&P Global needed to see in order to officially declare one.
S&P Global says a 20% decline in the S&P 500 on a closing basis from its previous peak is all it takes to define a bear market. Which means that this bear market is already more than five months old, since the S&P 500 all-time high came on January 3. (read more)
Governments are pulling off a major profound theft. They have been violating international law robbing individual Russians with no connection to Ukraine on the pretense that this will somehow put pressure on Putin to leave Ukraine. But the US has been funding the civil war against Russian-Ukrainians in the Donbas. Western Ukrainian simply hate Russians and this goes back to Bandera in World War II. The West was not upset when the Ukrainians were beating Russians on the street in Odessa, chased them into a building, and then burned them to death alive. That was perfectly fine because they were Russian
The real question here is have our politicians simply used Ukraine as the excuse to just confiscate money regardless of who owns it? There seems to be an apparent almost ownerless view of money emerging especially in Europe where governments are just grabbing money at will abandoning any rule of law. Like Trudeau in Canada confiscating people’s accounts because they supported the truckers. We seem to be entering a complete collapse in the very foundation of law upon which civilization has been sustained.
This confiscation of private Russian accounts and assets on the theory that their country is doing something that offends another is the complete collapse of civilization and it appears to be just getting started as we head into this ominous target of 2032. If we just look at Europe, savers and investors have been abused with negative interest rates since 2014, the assets have been devalued for years, and now with inflation of over 7% in Europe, there is complete drastic destruction of European capital.
The wise have been pouring money out into anything tangible. Everything from collectible cars to art, antiques, coins, and stamps have been rising. A gold Aureus of Brutus with a hole that had previously sold for under $100,000, was just sold for 2,200,000 CHF! A Mercedes Gullwing brought $1,3 million.
There are serious concerns that this is a prelude to the seizure of people’s savings on a wholesale basis for implementing You will Own Nothing & Be Happy. The Russian confiscation in total violation of international law appears to be just a test run for even more serious events in the future. In this wholesale confiscation of private assets, these politicians are using the excuse of Ukraine to implement a completely new normal procedure – the confiscation of billions without asking who the funds belong to and whether there is a connection to the Ukraine war. While some may look the other way because they are Russians and who cares if there is no connection to Ukraine or a rule of law. But turning a blind eye to what is going on is very dangerous for to accomplish this confiscation means they MUST abandon every foundation of the rule of law and without that there can be no civilization left standing.
Those who approve of such actions directed against Russia should be aware that what they can justify today with Russians can and will be done tomorrow with the savings of any citizen. They already confiscate private assets if you travel with more than $10,000 and they PRESUME it is illegal money. They do not even have to prove that there was a crime. They seize it and that is it.
Confiscating someone else’s money demonstrates how desperate politics has become. They MUST retain power and they will justify their actions just as Thraymacus argued in his debate with Socrates. Justice is always the same no matter what form of government because justice simply becomes the self-interest of those in power.
The past speaks to us if we dare to listen. History repeats because the passions of humanity never change throughout the centuries. For thousands of years, governments have been expropriating someone else’s property. No matter what century we look at, the same practice emerges when governments are financially stressed as they are today. It was Edward I who expelled the Jews from England, but the motive was not religion. He borrowed from the Jews to fund his war against France and when he could not pay, he suddenly discovered that his bankers were Jewish – OMG! How could that have been the case? So he expelled them from England but seized all their property denying them the right to flee with their property. It was Edward I who was the king in Brave Heart (being Scottish, it was the most influential film in my life).
Governments are UNWILLING to find solutions to pressing economic problems because they may result in their loss of power and our freedom. Even the plundering of private assets with the help of the low-interest rate policy has deprived people of their rightful income after telling people to save for their retirement and you will be able to live off the interest. Those promises have been destroyed.
Against the background, politicians are incapable of properly managing the state budgets entrusted to them. They no longer know even how to run for office without promising free gifts and taking money from one class to hand to another. Central banks, especially the ECB, have kept interest rates low to provide the over-indebted countries with cheap money, causing savers and investors to sacrifice their future with no end in sight.
Politicians have exploited Russia and begged them to invade Ukraine, refusing to enforce either the Belgrad Agreement or the Minsk Agreement which was to allow the people of the Donbas to vote on their own future while pretending this is a war for democracy v autocracy. They need the Ukrainian war as a diversion as a shell game to distract the people from the economic crisis hiding in the wings.
They have deliberately pushed Russia to suspend servicing their debts to Western lenders, in preparation for their own excuse to suspend their own servicing of debts. As usual with sanctions, not only the person against whom the sanctions are directed in this case Russia is harmed but also this has undermined the entire world economy ensuring its collapse in the years ahead. In this context, it cannot be stressed enough that sanctions historically have never worked and they know that they are generally pointless. They began imposing sanctions against Russia back in 2014 and more sanctions for the Ukrainian false flag of shooting down the Malaysia passenger jet trying to get the West to come in and defend Ukraine.
Even now blaming Putin for blockading Ukrainian ships carrying grain, they omit the fact that the Ukrainians have mined the harbors and are deliberately trying to create starvation to once again compel the West to enter this vindictive war against Russia. The Neocons, John McCain, and Lindsey Graham have been promoting civil war in Ukraine to create a Proxy War they are willing to fight until the last Ukrainian is dead. But nobody will dare look at the fact that this Ukrainian War has been provoked.
The day before Russia invaded, Zelensky announced he would rearm Ukraine with nuclear weapons. We invaded Iraq on the pretense he had such weapons which were never true. Here you have Zelensky standing up publicly announcing he is breaking the Belgrade Agreement and refusing to allow Donbas to hold elections as per the Minsk AGreement, but Putin is the evil person here?
Then we have Zelensky promoting World War III claiming has already begun yet all these world leaders visiting him in Ukraine including Biden’s wife while pretending Kyiv is a war zone. This is all a joke. It is such theatre for the world needs a war to hide the economic collapse they know is coming. I have warned that Zelensky will be the man that brings World War III. That is his mission in this play.
PREPARING TO CONFISCATE PRIVATE ASSETS:
There was a practice run that people have forgotten. Remember the first confiscation of Russian assets when they robbed Russians by confiscating their deposits over Cyprus. Do you recall that back in 2013, the IMF head Christine Lagarde at the time advocated a wholesale seizure of 10% of all accounts throughout the Eurozone because there may be riots and discord if there are bail-ins on a case-by-case basis. This was laid out in the IMF report. The idea is that a wholesale seizure will prevent a bank run for if bail-ins take place on a case-by-case basis then this might start a contagion. Consequently, the latest reports from the IMF discuss this super-seizure of 10% on all savings in the Eurozone they are calling a tax. This is argued to be necessary to solve the debt problem in most sovereign countries. It would be an alternative to higher taxes or spending cuts. The economists who actually wrote the paper claim it appears to be an efficient solution for the debt problem yet it lacks long-term analysis.
Today, the director of the International Monetary Fund (IMF), Kristalina Georgiva, who is also on the Board of Directors of the World Economic Forum and got the job thanks to Schwab, made a very naive statement claiming that the Russian sanctions are not all that bad. Russia accounts for only 0.4% of the world financial market. She admitted in her 60-minute interview that imposing sanctions on China for helping Russia will lead to more supply chain disruptions which will further inflation. So she justifies illegally confiscating private assets using her bogus statistics yet energy prices are soaring and the EU says the entire food crisis is caused by “Russian alone!” The disinformation is not coming from Putin, but right before our eyes here with Western pretend leaders.
This is all the surface banter that avoids the entire point of our real pending economic crisis – authoritarianism in the West. What has emerged is the justification for grabbing money that belongs to others. Even if we turn the clock back to the 2010 Greek Financial Crisis when politicians suddenly declared bonds worth millions worthless. Private investors in Greek government bonds wanted to claim 12 million euros in damages from the ECB after the debt restructuring. The European Court of Justice ruled against the plaintiffs. Th claim that the expropriation of private assets would facilitate the rehabilitation of the country. That restructuring completely failed. Governments act ONLY in their own self-interest, never in the interest of the nation or the people.
Because we are pushing this end-game of governments being able to keep funding going under this system of perpetual borrowing year after year, adding the fact that the central banks cannot keep buying the debt creating money indefinitely while being blamed for not stopping inflation, the only remaining solution open to the government is to seize the assets of citizens and businesses. This is what Schwab is selling with you will own nothing and be happy. From now on, you can only withdraw small amounts of cash that are absolutely necessary to cover immediate needs. This is always the scheme that repeats in all historical financial crises.
Just Look at Russia
There was absolutely no valid legal basis for seizing the private assets of Russian citizens. It is purely arbitrary but violates every principle of international law. There is also no DUE PROCESS OF LAW afforded any Russian individual. In principle, such a policy against Russian state funds would be legal, but only if the USA and the EU were at war with Russia. There must be a declaration of war to justify even that action. A direct military confrontation is scrupulously avoided because only the US Congress can issue a declaration of war. Therefore, as long as the Biden Administration does NOT send troops to Ukraine, then he does not need Congress’ approval for this Proxy War which has the same intentions of destroying Russia. As far as the confiscation of corporate and private assets is concerned, there is no precedent in history to justify these sanctions. This means they have TOTALLY abandoned all rule of law whatsoever.
Consequently, after already abandoning the rule of law, the intensification of this behavior will only continue when it becomes evident that the political system is collapsing. This is point 8 in Schwabs Great Reset. They know that they are pushing the envelope here and as inflation rises, so will civil unrest. They will then turn on the people just as Venezuela has done which is also why they desperately need to eliminate gun ownership. That is essential to disarm the people who the complete implementation of this Great Reset.
We have embarked upon a new Wild West Economic Policy of just confiscating assets. Blocking funds that could be used to settle claims against Russian debtors is part of this strategy that they KNOW will have zero impact upon forcing Russia to withdraw from Ukraine. They have deliberately put Russia in a position where they know it cannot back down. The real question is do they really think overthrowing Putin will lead to Russia falling to its knees begging for forgiveness?
The sanctions against Russia are presented by the US and the EU as legitimate measures necessary to bring warring Russia and its President Putin to surrender. But they know that will not happen. Clearly, the sanctions do not have the desired effect under any scenario are all they have done is shake the very foundation of the world economy revealing that it is arbitrary and untrustworthy. SWIFT had committed suicide and China’s alternative is pushing the world into a Great Reset, but not the decided objective of a one-world government headed by the United Nations. Africa also just refused to sign the WHO’s dictatorship over world heath.
What is clearly in play is their idea of confiscating private assets. What started the hyperinflation of Germany was NOT the printing of money – that was the result, not the cause. In December 1922, the government did a forced loan. They too confiscated 10% of everyone’s accounts and issued a bond, We are returning to such measures. The US and the EU along with Japan and Switzerland have thrown out all rules of law. We should expect nothing less in this final stage into 2032 where it will become a war between the government against we the people – the great unwashed.
Mohamed El-Erian is generally more correct than most, but the insufferable coded language he is required to use makes it difficult for the ordinary person to see exactly what he is saying. For this CBS segment, we will apply the decipher. [Transcript Here]
Notice this key phrase in the beginning of his discussion of inflation. “Of course, we know about the Ukraine war, we know about the energy transition, also the Federal Reserve mischaracterize inflation and fell behind.” No, Mohamed, most Americans do not know about the forced energy transition and how that has created this unavoidable inflation spiral. How about dropping the code and saying it directly? Joe Biden initiating the Green New Deal means much higher prices are permanent.
El-Erian speaks about supply side inflation, but doesn’t want to talk about the next phase, demand and service side inflation. The three month inflation data is higher than the year-over-year inflation data. That means inflation is growing. There is no way for inflation to drop when the most recent price increases are significantly higher than the previous price increases. Inflation is now detached from any intervention. WATCH:
Consumer demand for non critical goods are contracting at the same time prices continue rising (that’s stagflation). Demand side contraction, what El Erian calls “demand destruction,” means lost jobs (that’s recession). Food, fuel and energy prices all continue rising. The field costs are higher than current fork costs, and that (30%+) wave of inflation coming in from over the horizon is going to blow the doors off any economic growth. The process is unavoidable now.
The credit markets will feel the impact before the end of the year as consumers will no longer be able to make payments for loans, and still eat. Mortgage defaults will increase, vehicle repossessions will increase, credit card debt and bankruptcies will increase. The credit markets will get drowned in a tsunami of default. That’s the direct language El Erian will not use, but it is present inside the coded-language he does use.
If you did not purchase a house this year, you are ahead financially. Equity and values are plummeting.
The European Central Bank (ECB) has a major crisis beginning. The free markets always win, and the spreads on the interest rates among the member of the EU are widening for Greece and Italy. Fools are telling Lagarde to use stronger language to signal that divergences among the member states will not be allowed to take place. The borrowing costs of more vulnerable countries such as Italy and Spain cannot be contained.
When they were creating the euro, the Commission attended our 1998 London Conference — the same one when I warned that Russia was about to collapse. It was then when I had a discussion with them, warning that a single currency WOULD NOT produce the same interest rate for all.
All the talk was that a single currency would set a single interest rate. I tried in vain to explain that would never happen. They were comparing it to the US federal government and I made it clear that they were not consolidating all the national debts and this meant that there could be no single interest rate and the difference in the currency would be transferred to the bonds instead. They simply refused to listen because that was one of the selling points to get the euro going.
It did not matter, they just wanted the euro at all costs. Now we see the widening of the spread and one central bank cannot impose a single interest rate any more than the Federal Reserve can control the interest rates all 50 states must pay to borrow money. In the United States, Massachusetts has the highest debt per capita in the country at about $11,130 with a AA rating while Tennesse has the lowest at about $875 and has a AAA rating.
The ECB knows it is facing a nightmare. The ONLY possible solution is to consolidate all the national debts of the member states and that would then become federal. Only then could it possibly be on the same footing with the dollar. Back then, the Bundesbank was against the euro. They were feeding us all the notes of the meetings because they really could not come out and speak. The Bundesbank understood the potential long-term crisis, and they opposed the merger of national debts.
So here we go again. COVID set off the fuse; Ukraine is the time bomb about to explode. As the soothsayer warned: Caesar beware!
The American view during the 70s was more concerned about gold rather than the value of the dollar against world currencies. Most Americans never traveled to Europe so their impression of currencies was the Canadian dollar which was about par with the dollar that Americans would encounter when visiting Niagra Falls. I remember as a kid the family would drive up there and we would cross the border for the best view from the Canadian side. That was probably my first experience with a foreign currency other than ancient Roman coins when I bought my first one for $10 when I was probably 10 years old.
The other hot spot outside the United States was crossing the border to visit Tijuana in Mexico. That was a real hot spot largely promoted due to the Prohibition Days during the Roaring 20s. The Mexican peso was just this cheap thing that nobody really understood and they never understood how to count their change.
It was Roosevelt who confiscated gold from the banks and created a two-tier system whereby gold was used for international transactions, but silver was used for domestic currency backing until Kennedy ended the silver standard in 1965. Because gold was illegal to own except in coins dated 1947 or before, Americans really had little exposure to foreign currencies. They did not see the foreign exchange rate of the dollar during the 70s and 80s, it was all about gold. I even had a conversation with Paul Volcker who was focused not on the inflation rate as much as he too was obsessed with the rise in the price of gold from $35 in 1971 to $875 on January 21st, 1980 which he saw as the real inflation measurement.
As for the Europeans, they were focused on the dollar and the collapse of Bretton Woods. They were all buying gold after March 1968 when the first crack in Bretton Woods took place allowing a parallel free market in gold in Europe. That was the birth of a two-tier monetary system. Overall, the Europeans were pushing the price of gold up in terms of dollars.
It was a wild time during the 70s. Because I was in New Jersey, the three major gold refineries were there. I was dealing with Englehard which ended up being Phibro post-1975 which took over Solomon Brothers. Before 1975, Americans could buy gold in coin form as long as it bore a date of 1947 and before. Austria, Hungary, and Mexico were the big sellers of gold. They were restricting coins with old dates so Americans could buy gold before 1975.
So I was in the thick of things back then insofar as trading was concerned. I had European clients in Gold and I dealt with all the Swiss banks at the time. By sheer fate, being a market maker in gold, taught me a lot. Gold was the first financial instrument for futures trading beyond currencies. The US bonds began trading in 1977 and S&P500 futures came in during 1985.
Gold rallied into 1974 on ANTICIPATION of Americans were going to run out and buy gold. They were expecting a gold rush. Being in the business, I never got one phone call about buying gold because it would be legal. Everyone who believed in gold had been buying gold coins all along.
The talk of the town was that gold would go to $500 as soon as the Americans were allowed to buy on January 1st, 1975. I sold gold short at the top mainly on a fundamental basis. I did not see any new demand. My Economic Confidence Model said it was a high. But I traded based on my observations.
I watched gold collapse back down to about $100 going into 1976. This is when after watching the ECM for 6 years, I went with it. I opened a new store in the Quakerbride mall and I signed a 10-year lease with a personal guarantee and I got them to eliminate the CPI clause. After all, the talk then was about another depression.
I watched 1968 was the first crack in Bretton Woods and the birth of the two-tier monetary system. The Organization of the Petroleum Exporting Countries (OPEC) oil embargo was a decision to stop exporting oil to the United States. Then-president Richard Nixon appeared particularly concerned that Arab nations might impose a selective embargo on the United States for its pro-Israel policy. He was correct. Oct. 19, 1973, was the official start of the embargo when the Middle East countries announced a 5% production cut per month in response to the Yom Kippur war between Egypt and Israel. They saw Israel’s victory in that war, was because of aid from the United States. The embargoing nations then threatened that the cuts would be restored once Israel withdrew from Palestine and Jerusalem. Obviously, that never happened.
As always, we MUST look at the CONTEXT of the period. First, the climate consensus was that we were heading to a new Ice Age – not global warming. That meant there would be a higher demand for oil to stay warm in winter. In 1971 and 1972, fears began to grow in the developed world that if we were not already running out of energy supplies, we would soon as additional nations adopt western industrial structures.
Thomas Malthus (1766-1834) warned the population would outgrow the food production so we needed to curtail the growth of the population and advocated deliberately creating a plague among the poor to reduce their number. If you ever really read Malthus, you can see the influence he has still had on people like Bill Gates, George Soros, and Klaus Schwab.
Thus, in 1976 I went with the ECM. That was the wild wave of inflation and the very top of the next wave turned out to be 1981.35 which was the day of the high in interest rates.
What I learned was that none of the fundamentals mattered in the end. Gold would decline with inflation at times and rally at other times. It was more complex than that. The final rally from the $400 level to $875 had nothing to do with inflation, that was the invasion of Russia into Afghanistan.