While so many people claimed that Quantitative Easing (QE) would produce inflation for it was the creation of money, the truth is very far from this simplistic idea. The theory used by the central banks is seriously flawed and throw-back to ancient times before 1971. There use to be a difference between debt and cash when you could not use debt as cash to borrow on. Then it was less inflationary to borrow than to print. But that changed post-1971 and today if you want to trade you post TBills as cash. The REPO market has emerged where AAA securities can be borrowed against for the night.

Therefore, buying in bonds to inject cash into the system under the old way of running the monetary system pre-1971 made sense. Today, it is proving to be a FOOL’S GAME. Why? This is merely swapping debt for cash and the REAL money supply has not increased when the true definition of the base money supply in effect reality is debt + cash. Then you add the leverage from banking.

So what does this new reality mean? This is why the BONDS may not crash but instead become extinct. Under QE the central banks are the bidder supporting the market in the same stupid manner as attempting to peg a currency. The ECB under Draghai has lost its mine. They keep increase the percentage of bonds they are buying in hopes of creating inflation but nothing is working. The bonds will not crash, but instead, they could become extinct. In order for a crash to materialize, there has to be a free market.

Little known to most analysts was that during World War II, Congress ORDERED the Federal Reserve to do something similar to QE. The declared the Fed MUST support the bond market during the war and be the constant buyer at PAR. The market went sideways during the war and what we see is a flat line. 

In the case of the central bank artificially supporting the bond market during World War II, that decree was lifted in 1951. Our present situation is different insofar as the central banks have bought in all the long-term debt so there is a shortage of debt in the short-term. This is also why the Fed is accommodating the banks paying 0.25% on excess reserves.

In trying to figure out this Rubic Cube mess they have created trying to cunning and stalking the financial market like a cat, the truth is rather scary. The rise in taxation is destroying the economy. Ancient Egypt is considered by some to have been the most heavily taxed nation in history and this was the primary reason it collapsed under the weight of the levies imposed on the populace that destroyed its economy weakening the nation from the inside out.

This time, unlike 1951, we are at the extreme in economic destruction by the state in their hunt for taxes. Payroll taxes were just introduced for the war. It was postwar when taxes were reduced in 1951 and the economy began to take off. We are exactly on the opposite side of the curve with rising taxes. This warns that we are in a collapsing side of the Bell Curve.

It is like alcohol. A little is good and too much kills you. Studies have shown that people who drink a little are healthier than those who drink too much or none at all. This time, with taxes rising, there is a contracting global economy and we are in serious trouble, The central banks have bought in the debt rather than declaring they will support the market. This means that they will not have a market to reverse the position and sell the debt they bought in. This means that a sovereign default wipes out central banks as well. Hence, the long-end of the market is being systematically rendered extinct.

We may see the bonds crash in price to the extent that people are not interested. However, the central banks will have to buy in more and more debt. This raises the risk of “conversione forzosa” whereby even if you bought 30 day government paper, they simple decree they will not repay that obligation for 10 years. They can simply convert short-term to long-term. We are more likely to see this type of action before any real reform.

Some people have wrongly expected a crash in the long bonds. What has actually happened is that China and others have sold into the high, liquidating their long bonds, and moving short-term. This is why rates are negative on the short-end. The CRASH comes in the opposite direction this time. Why? Because the central banks have engaged in Quantitative Easing. The ECB (European Central Bank) stepped up its buying of long-term debt to hold the market from 25% to 33%. Smart money is not interested in buying long-term paper, especially when the Fed keeps warning that they MUST normalize interest rates, i.e. raise rates.

So whom has the bonds and will take the loss? Guess who? The central banks. They are loaded to the gills and cannot sell the long-bonds they bought. There is no bid. In this debt crisis, there is no bid for debt, which is typically how empires, nations, & city-states collapse.

The system is now highly geared and we will see in the months ahead that short-term rates rise when people begin to wake up and realize that this system is failing. The U.S. Congress tried to push the debt ceiling from the September 30 deadline, which was precisely the day of the ECM – 2015.75. They could not make it out to December. There is a war within Congress and this is critical, for if the debt ceiling fight gets much worse, then we may indeed begin to start the perception that this is not going to look very pretty the further we move from 2015.75.

QUESTION: Mr Armstrong,

I am an avid fan of your site and thoroughly enjoy your posts.

As much as I am against tax, would you not agree it’s rather sick that a company the size of Facebook paid out less tax than I did last year?

http://www.bbc.co.uk/news/business-34504474

I know you advocate a tax on sales, but in the UK we already pay VAT on goods.

Any suggestions on a fair system?

Many thanks for all your work.

Regards,

G

ANSWER: This is the problem with taxation. Major public corporations can move their tax domicile offshore to avoid taxes legally. The average person cannot move his labor offshore to lower his taxes, which is a disadvantage we must address with tax reform. With VAT, that is far worse than a sales tax. Every person in the chain must collect and file paperwork. It must require three times the number of people to administer such a system compared to a point of sales tax collection.

But that issue aside, there should be ABSOLUTELY NO income taxes whatsoever. That not only eliminates government having to track everything, but it also eliminates the whole movement of capital solely for tax purposes. This is unfair, for the average person cannot send their labor offshore to avoid taxation without moving. Even then, that would only get an American the first $100,000 tax-free; after that, it would be subjected to U.S. income tax.

The Founding Fathers of the United States revolted over taxation without representation. We are back to that now, for we are being taxed to pay interest to service debts from the last two generations. We had no right to vote on that spending, which took place before we were born. This is not a democratic process.

There should be ONLY a retail sales tax EXCLUSIVELY for local government. Federal government should be prohibited from imposing ANY tax and it should be barred from borrowing money. The local tax will naturally be checked by the free market, for if they keep raising taxes, businesses will move to the next town and there goes the jobs. This will help to restrain government on a more practical level.

Moreover, there should be NO PUBLIC SCHOOLS. All schools should be private for then there will be no mismanagement, crazy pension failures, or tax hikes to line their pockets. Schools should be by voucher and run by private industry just like Catholic schools, which were always known for having better education in the States.

It is the teachers and their unions who have ruined society, as taxes are imposed on property and people cannot afford to retire in their home where they raised a family. They are forced to sell because they cannot afford taxes that never stop and only rise. PROPERTY TAXES must also be abolished.

Our problem is the total mismanagement of government. They promise and award themselves all sorts of perks, which reduces the quality of life for everyone else. We must look at the cause and that is the seriously flawed design of the financial-economic-governmental system.

UK Prime Minister David Cameron reflects the serious problem we have with politicians. Politicians have ZERO respect for our human rights for they only think about how they are going to raid our wealth to pay for their families and retirements at our expense. Cameron actually asked, “In our country, do we want to allow a means of communication we cannot read? My answer to that question is: ‘No, we must not’.”

These people are highly dangerous. They only see government as the solution and do not grasp that we have rights. Government wants to eliminate all encryption because they are hunting money. You have a 1000 times greater chance of dying in a car crash than by a terrorist. They use terrorism as the great excuse to collect everything we do.

How did the world function before the internet? Did they intercept every letter in the mail or record every phone call? Why is it that with the internet these people feel they have a right to listen and read everything we communicate? This is EXACTLY the same paranoia displayed by Stalin. Human rights do not simply vanish because we have entered the internet age. We still have rights that governments need to respect, but refuse because they are always desperately in need of more taxes to pay their bankers. The OECD has stated, “Co-operation between tax administrations is critical in the fight against tax evasion and a key aspect of that co-operation is exchange of information.” It’s all about money any nothing else.

In 2010, the U.S. enacted legislation known as FATCA (Foreign Account Tax Compliance Act), which is destroying the world economy and lowering economic growth globally. Effectively, FATCA requires foreign financial institutions around the globe to report account details of their U.S. customers to the U.S. tax administration. However, this requires foreign institutions to file that they do not have any American clients. The legal and cost issues of this approach imposed by the USA are being adopted by five other countries including France, Germany, Italy, Spain, and the United Kingdom. FATCA has become a model for the intergovernmental cooperation in hunting taxes. The postwar economy was built on the free flow of capital. Americans cannot open accounts overseas because the penalties are far too stiff for failure to report any American to the U.S. authorities. They will be giving up everyone to their respective countries, which will be implemented in 2017.

If we do not eliminate taxes and transform the monetary system into a new era where the cost of government is held to 5% of GDP and money is merely created to fund the cost of government, along with abolishing career politicians, we will lose everything. We are heading into the direction of a total loss of all rights simply because of taxes.

The latest economic news from China shows that, in dollar terms, imports collapsed 20.4% in September from a year earlier to $145.2bn. This is one of the sharpest declines ever, and it is far beyond what was expected. This has had a further impact upon the raw commodity sector and metals. This latest drop in Chinese imports was down 20.4%, year-on-year, compared with a 13.8% decrease in August. Meanwhile, China’s exports were also down 3.7% during September after a 5.5% decline during August.

The other side of 2015.75 still looks like a sharp cliff going into next year. From an economic viewpoint, the economy turned down Wed., Sept. 30, 2015, on a global scale coinciding also with our Cycle of War on the international model. We should see the economy turn downward into a steeper recession moving into Wed., Sept. 28, 2016, which is the next turning point on the Economic Confidence Model followed thereafter by Tues., Oct. 24, 2017. Caution is advisable for it appears we should see an overall recessionary trend emerge on a global scale this time.