QUESTION: Mr. Armstrong, have you ever heard of a short lived Wörgl Experiment in Austria? It was shut down by the Austrian Central Bank they say because it was successful. Have you looked into this experiment they claim defied deflation and inflation?

ANSWER: Yes. This was by no means an isolated instance. True, it was touted as the “Miracle of Wörgl” during the Great Depression. The very similar “experiment” took place in the United States with over 200 cities also issuing their own currency. You have to understand the dynamics of the period. This was the very age of AUSTERITY where the assumption was the collapse was a lack of confidence in government so they increased tax collection and cut spending unleashing both deflation and a dwindling money supply. This led many cities to create their own money due to the lack of money in circulation also impacted by hoarding.

The Wörgl Experiment began on July 31, 1932, the very month that the Dow Jones bottomed. The experiment involved issuing of “Certified Compensation Bills”, which was a form of local currency known as Scrip generally, or Freigeld. The monetary theories of the economist Silvio Gesell were applied by the town’s then-mayor, Michael Unterguggenberger. What differed with Gesell’s idea was that the currency would expire. Believe it or not, there are some government’s looking into currency which expires. Europe since World War II issued currency which expired roughly every 10 years. This forced people to bring out the old currency to be swapped and thus prevent hoarding.

The central part of Gesell’s idea was how to stop HOARDING of money. This is why FDR also confiscated gold. He too saw the problem of people hoarding money and not spending it. This is part of every economic decline. If there is no CONFIDENCE in the future, people save more. This is simply human.

Nevertheless, the Wörgl Experiment resulted in a growth in employment largely because you had to use the money. This allowed the local government projects could all be completed, which many called a miracle for it appeared to defy the depression in the rest of the country. Inflation and deflation are also reputed to have been non-existent for the duration of the experiment. But this was simply the result of money expiring so there was no purpose in hoarding “money” shifting it back to “asset” appreciation as in a hyperinflation.

Despite the appearance of success, the Wörgl Experiment was terminated by the Austrian National Bank on the September 1, 1933.

Something very interesting is unfolding. Included in the new year-end spending bill was a waiver of the Foreign Investment in Real Property Tax Act (FIRPTA), which had been implemented during the late 1980s when the Japanese were buying everything. They claimed to have focused on buying U.S. farmland, but it also applied to buying trophy U.S. property like Rockefeller Center in New York City.

This position has been reversed in the new year-end spending package. While some attribute this to a grand conspiracy, giving far more credit to those in Congress and in the White House than they deserve, our sources simply tell the plain story of lobbying to allow foreign buyers, who are supporting the real estate market in key areas, to purchase properties. Especially after London basically kicked every foreigner out of town by telling them their money was not welcomed, and with lightning speed they instantly turned to New York City.

High properties, even in Florida, are being sold to the Chinese largely in cash deals whereas Canadians are buying the greatest number of properties. The lobbying has been from the real estate and banking industry who see a market they want to service. Slipped into the $1.1 trillion spending measure, which was passed to avoid a government shutdown, were tax breaks for Americans that simultaneously treats foreign pension funds the same as Americans. There has been lobbying from foreign pension funds because they see no hope in Europe and have been pleading for permission to enter the U.S. market in a big way. For the first time this provision waives the tax imposed on foreign investors under FIRPTA.

This is perfectly in line with our cyclical models because the DOLLAR has become the world reserve currency for real and by default. The dollar bears, who keep claiming it will crash, are looking only domestically. They have no peripheral vision and thus remain blind to the trend globally. They may sell stocks, assuming lower oil means more deflation. What if they are wrong?

COMMENT: Dear Mr. Armstrong,

Dear Mr. Armstrong,

What you wrote concerning the possible repeated start of the banks collapse from Austria, once again, is right. The biggest lenders in Romania are some Austrian banks, among some Greek ones which are already in a coma.

A new law has been passed and violent attack started from banks, including the National Bank of Romania. Today, 4 European mother-banks having subsidiary in Romania appealed an threaten with lawsuits in a letter addressed to the Romanian President, asking/demanding him not to endorse this law. My guess is they are Erste, Raiffeisen, Societe Generale (French) and either Alpha Bank (Greek) or UniCredit.
One IMF Director met one week ago with the Romanian President but agenda was not disclosed – guess what…

Pressure and lobby is huge. If this law is promoulged, banks are quite in shit, cause the estimated no of families who’ll give back homes to banks is 30 -100 000.
If not, President’s career and image goes in the toilet – so it comes political instability and next year are scheduled local and general elections.
Best Regards,
AI

REPLY: The crisis throughout Eastern Europe has been selling mortgages in Swiss francs without disclosing the currency risk. This law, passed by the Romanian Parliament, is actually fair. The banks would have to take back the property and end the debt. That is how Caesar resolved the debt crisis, for then too the bankers would not accept property and would take the borrower’s children and sell them into slavery to pay off the debt.

Romania’s National Bank (BNR) has asked President Klaus Iohannis to send back to the Parliament the recently approved law, which defines making payment on a mortgage by allowing the mortgage debtors to hand back to banks the mortgaged assets to terminate the debt. The bankers want no risk and will screw the people every time. This law is fair as the banks sold mortgages without guidance.

The bankers are demanding that Parliament amend the bill based on a financial, legal, and ethical perspective to their benefit without acknowledging the issue. What is not understood here is that at the moment a loan is given, the bank values the property to be in balance with the value of money. When the value of money rises (DEFLATION) then assets decline. The same amount of money might even buy two houses. This is an economic gain for the lender and a loss for the debtor.

The bankers warn that this will affect even local banks’ financial stability. Local bankers say that the law violates the constitution and that it will bring them big losses and limit access to financing. The rumor is that Parliament will review the law and limit it to loans under €250,000, according to political sources.

This is the paradox of the business cycle. It needs to be examined and understood for this has often resulted in civil unrest and revolution.