Economics is well known for rather unrealistic theories based upon fundamentally unsound principles, such as the assumption that all things remain equal. Reality parts with academics whenever such assumptions are drawn to a foregone conclusion. However, greater false assumptions, which go unnoticed, lie at the foundation of so many theories in economics – primarily the assumption of linearity.

In our thinking process, we all are trapped by the Aristotelian sequence of logic – if X takes place then Y must follow. Unfortunately, we think in a linear fashion and, as such, most theories seek to embellish this very basic assumption. The financial world honestly wants to believe in simplistic notions. Raise interest rates and demand will subside along with inflation is but one false linear assumption. Man prefers to believe in linear relationships and systems, because anything beyond two variables becomes far too complex for rational thought processes.

Man’s natural tendency toward linear thinking has indeed created many heated battles. The arguments between supply and demand-side economics is one such example. Given the assumption of a linear economy, demand-side economists argue that the economy can be controlled through the manipulation of government spending and interest rates. In effect, demand-side economics seeks to use the consumer (demand) as a club to beat capital over the head. Yet these same demand-side economists claim that supply-side economics benefits the rich at the expense of the poor. Strangely enough, throwing the consumer out of work and causing higher unemployment to affect lower demand is the core of demand-side economics. It is hard to see how demand-side benefits the poor at the expense of the rich. The supply-side economist argues that there should be less government intervention in demand. Instead, government should stimulate the economy through encouraging greater output through supply stimulation.

Both sides have identified two extremes within a non-linear system, even though, based upon a linear assumption, their arguments assume that the other is totally wrong. If we look at just the last 10 years of economic activity one can clearly see changes within the infrastructure which provide a period where each form of economic management would indeed be appropriate.

Looking at the period of 1976–1980, it would be difficult to label this period as anything other than an inflationary spiral led by demand. Raising interest rates would be appropriate under such conditions when it is demand which flourishes wildly beyond its normal capacity. Hoarding and speculation was in full bloom. Therefore, one should employ “demand-side” economics when it is, in fact, demand which is out of control.

Nevertheless, in the post-1986 era and particularly since the ’87 crash, speculation is hardly the issue. We do not find excessive demand leading to the hoarding of commodities, as was the case leading into 1980. Yet, governments around the world are still employing demand-side economics to curb inflation, which is being caused by real shortages in labour and commodities. Clearly, in this case at least, supply-side economics makes much more sense. If interest rates continue to rise, the world economy will be threatened by a sharp and severe recession. However, the shortages on the supply side in energy, agricultural and base metals will not be corrected by raising interest rates. Higher interest rates will not cause the weather to return to normal. Higher interest rates will certainly not encourage miners to open new mines. Higher interest rates will also not cause a reversal in trend within the energy sector where exploration has been cut by more than 50% in the last two years.

Supply-side economics is as valid as demand-side. There is a time and place for everything within the system because the system itself is non-linear. The chart provided illustrates our Theory of Non-Linear Intervention. This theory is essentially very simple and is based upon actual observation.

The standard economic assumption under demand-side economics is that raising interest rates will lower demand and inflation. If, in reality, this were the case, then Argentina with 300% interest rates per month would not be possible. However, continually raising interest rates does not prevent inflation. At some point in the system, confidence breaks down and higher costs in interest rates only add to costs of production and doing business. Eventually, this spurs on inflation instead of reducing it. Today we have gone to negative interest rates trying to stimulate inflation by punishing people if they fail to spend their money. What is constantly overlooked is the mere fact that if people worry about surviving the future, they will hoard money and save for the rainy day. The evidence of this are all the hoards of ancient Roman and Greek coins that reveal in times of uncertainty, people simply buried their money for a rainy day.

The very basic assumption that the system is linear is obviously incorrect. The business cycle exists throughout all times and portrays that the system is very much non-linear. If any effect is taken to extremes, the exact opposite effect emerges. This is the result of Non-Linear Intervention. Each economy possesses a different infrastructure. Consequently, the threshold where interest rates will cease being anti-inflationary and transform itself into the catalyst of inflation resides at different levels in each economic system. Differences in the value of labour, taxation, political systems and market mechanisms must be taken into account.

In conclusion, government intervention, which seeks to manage the economy in an efficient manner, always fails because they are conflicted with self-interest. They are the biggest debtor within society. Attempts to only manage the economy by  demand-side economics ignores the free market entirely. Intervention cannot possibly work when government remains in the dark about how the economy even functions. They fail to comprehend the direction and cause of inflation or deflation. The first step is recognizing that there is a business cycle, the second is to accept that a cycle exists, and third, we merely try to prepare for the downturns exactly as David advised the Pharaoh – 7 years of plenty v 7 years of drought.

The 2017 Year End Report is going to really be important as we enter the beginning phase of the Monetary Crisis Cycle in 2018 combined with the Pension Crisis, which is the next domino to start the process of the Sovereign Debt Defaults to come. Keep in mind that a system collapses from from the core, but from the peripheral economies inward.

If you simply read Herbert Hoover’s memoirs for 1931, you will see how the Great Depression began as a contagion in Austria and the spread like the flu infecting all the economies until it led to a worldwide Great Depression. It was just two years later in 1933 that the economic contagion produce widespread political change. It was 1933 when Adolf Hitler came to power, Mao in China, and Roosevelt in the USA. It is never a particular political philosophy that wins, it has historically been a shift to whatever is the opposite of the current system.

This year’s 2017 Report will be very important. This will provide the signals on a global scale that will allow us to see the trend globally and the contagion that is preparing to infect the world economy unbeknownst to the political elite.

This Year’s Report will be included for the Orlando attendees of the WEC.

This Year’s Report will be $300

It will be Available December 1st, 2017

QUESTION: I read a credible theory recently about China taking over US as the top superpower via economic pressures. Namely by replacing the US dollar with the Yuan as the standard currency for international trade. This shift is (supposedly) being enacted through 1) increased control over Developing countries through international lending from the New Development Bank, 2) increasing control over global oil via financial ties to Saudi Aramco and Russia’s Rosneft, 3) trying to denominate global oil transactions in Yuan through the Shanghai oil futures market & backing up the Yuan value with the massive gold reserves China has been accumulating.

WM

ANSWER: China is on the rise and it will become the financial capital of the world after 2032. However, it has a long way to go. China can price every commodity in yuan and demand all trade deals are in yuan. That still will not displace the dollar. The center core issue behind the dollar ironically in the US National Debt. For now, this is the place institutions can park their money. You can trade in any currency, but where do you park you profits?

China will displace the USA as the financial capital of the world when (1) people begin to trust China as a place to park money. Bitcoin exploded because the Chinese were using it to get money out of China, which had reach 98% of trading. China has been steeping in against BitCoin to stop the capital outflow.

It’s the capital flows that are the key – not trade. The daily trading volume in FOREX alone has exceeded $5 trillion. Most investors are familiar with the stock market, yet they are unaware how small in volume share trading is compared to foreign exchange. The Forex market dwarfs the trading in equities and futures markets.

FOREX trade and investment capital flows DWARF trade flows. Absolutely nothing compares to the Foreign Exchange Markets.

Anyone can write a contract in dollars. You cannot do that in Japanese yen. If you issue a bond in yen you have to apply for permission back in Tokyo. All these argument are made up by the dollar-haters who are so desperate to find an excuse that the dollar will crash. It’s time will come. Just not yet.

COMMENT: Re:  Germany To Tax VAT Just Billing People Before they Pay

Please note in Italy we had the same = pay VAT to the government before collecting it from client for decades, until a couple of years ago (approx), when Italian government changed the rules (first you collect VAT from clients, then you send VAT to the Government).
They changed rules because Italian companies had a collapse (in sales, payments, orders,… nearly almost 50% were bankrupt) and nonetheless they have to pay the VAT to the Government  before to collect it from customers, and they were using cash or credit resources or even open bank loans to pay VAT (not yet cashed from customers). The largest and the smallest companies were in serious trouble; a lot of them forced to close or to go bankrupt.
Then this change in law just to give some …relief …to the remaining economic structure…
Thanks for your attention and for sharing with us your knowledge.
All the best
D

REPLY: Yes I am aware of the change in Italy. You are correct. This will stop companies from contracting installment payments and it will complete alter how you enter into employment contracts. Politicians are just incapable of understanding how the real world works which is self-evident from how they pass laws like this.

This will seriously hurt the German economy and further add to the deflation and economic decline ahead.