QUESTION:
Mr. Armstrong:

I hope you are well. I ask you:

1. What were the contributions to the economy and international trade, of the great bankers of the modern history, such as, Medici, Fugger, Welser, Berenberg, Rothschild and Morgan?

I look forward to hearing from you as soon as possible.

Sincerely,

J.E.M.V.

ANSWER:The contribution was to facilitate the advancement of society by enabling the free movement of capital and thus the integration of commerce. Of course, people will immediately disagree with me by citing the Rothschilds who did lend to the governments of Europe. They were more of the exception rather than the rule.

The Medici were different. Raymond de Roover, who became a Professor of history at Brooklyn College, wrote “The Rise and Decline of the Medici Bank,” which was first published in 1966. It remains the seminal work on this period. He had access to contracts and internal documents. A special clause was entered into the core contract of the Medici bank “to deal as little as possible with the court of the Duke of Burgundy and of other princes and lords, especially in granting credit and accommodating them with money, because it involves more risk than profit.” (id/ p 343)

Obviously, Raymond de Roover makes it clear that the Medici did not wish to lend to the prices of Europe, for there was no way to collect a debt from a sovereign. The contract continued by warning that “many merchants in this way fared badly…our fathers have always been wary of such involvements and stayed aloof, unless it was a matter of a small sum lent to make or to keep friends.” The Medici policy was “to preserve their wealth and credit rather than enrich themselves by risky ventures.”

Indeed, later generations ignored this command, and once they lent to government, that was the end of the Medici. The Fugger’s were the German bankers wiped out by the default of Spain, which was rather stupid since they had previously defaulted after wiping out the Italian bankers.

Banking has always furthered the economy and raised the standard of living for all. When the bankers get in bed with government, society is placed in a dangerous position.

Merkel wants to regulate real estate loans in Germany. The Federal Government is planning to implement extensive regulations on real estate loans. Among other things, debtors will be required under certain circumstances to repay their loans within a given period. The Federal Government said on Monday that the draft law should be followed by recommendations from the German Committee on Financial Stability.

While there is no real estate bubble right now, it appears they are concerned about further capital inflows, perhaps caused by the failed euro. The new hurdles to be imposed for new loans may have the negative impact of making sales of property in Germany far more difficult as a whole. Such schemes have tended to have a negative impact upon price.

QUESTION: Mr. Armstrong; You have said that the only way to reverse the deflation is to raise interest rates not lower them. I understand that the low rates only reduce the cost of funds for banks, but it hallows-out savings and pensions. Has anyone listened to you and tried the opposite trend to raise interest rates? It seems the Fed is listening to you but the IMF and others plead to the Fed not to raise rates. Can you point to any hope in this regard?

Thank you for you do. Truly you make us think.

KS

ANSWER: Actually, all you have to do is look at Iceland. Not only did they throw the bankers in prison instead of giving them bonuses, but they also raised interest rates unlike everyone else in the Western world. In an attempt to stimulate their economies, Western central banks lowered rates and the European Central Bank (ECB) moved to negative rates after implementing a very unconventional monetary policy suggested by Larry Summers. Meanwhile, the Central Bank of Iceland (CBI) did precisely the opposite by raising interest rates and reducing the size of its balance sheet. This stands in direct contrast to the ECB, the Bank of England (BOE), Japan, and the United States.

Just step back and look objectively at the evidence. Back in July 2011, the CBI’s benchmark rate of 4.25% was significantly higher than the ECB’s benchmark rate of 1.50%, and it was substantially higher than the BOE’s benchmark rate of 0.50%. Since that point in time, the CBI’s benchmark rate increased relative to both the ECB and BOE.

Iceland now has the strongest economy in all of Europe where its GDP has risen more than 100%, doubling since 2009. This stands in amazing contrast to the ECB where European growth since 2009 has been just 14%, and in Britain, the total GDP growth since 2009 has been 27%. This is clear evidence that this policy of low interest rates is nonsense. The rate of interest reflects inflation and future opportunities. If rates are at zero, it demonstrates that there is zero confidence in the future of Europe. I think even an ape could figure out that this is not working.