The emails have started with the conspiracy accusations that this is the second WEC when President Trump will be there in the same place. True, he was in the same hotel in 2016 in a meeting a couple doors away. This time he has announced the meeting with Kim will take place in Singapore. A couple of emails put it that once is a coincidence – twice is a conspiracy. Perhaps true in some instances. However, I do not advise Trump and I have nothing to do with North Korea. If they want to sit in the back of the WEC and learn something, no problem. We will be glad to provide the seats. Otherwise, maybe the rule should be three-times is a conspiracy and twice is still just a coincidence.

QUESTION: why national debts eventually default Martin to answer this question you said:

Here is a chart of M2, which includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds. If we look at money supply, then inflation should always exist without end. Clearly, money supply is not the only factor involved.

Here is what is known as the adjusted monetary base, which equals the sum of the monetary source base and an appropriate RAM adjustment. The adjusted monetary base is composed of the adjusted total reserves and adjusted nonborrowed reserves. When we redefine the money supply looking at the entire monetary spectrum, you get to see the Quantitative Easing and it peaked in line with the ECM.

Now let see if the money created actually made it into the economy. The Fed also created Excessive Reserves because the banks did not want to “stimulate” the economy by lending. This is why I have said the QE was an utter failure for the banks just parked the money and it was not lent out.

Now let us look at the decision making of banks. Here we can see why the banks simply parked the money at the Fed. The credit cycle comes into play and this is what more directly impacts inflation or deflation that the simple quantity of money.

We can see that the consumer delinquency rate on Consumer Loans is really the key. The idea that the Fed can stimulate the economy by handing banks more money is the most stupid idea I have ever heard. The very design of the Federal Reserve was that they would BUY commercial paper when the banks WOULD NOT to stimulate the economy directly. Then Congress instructed the Fed to buy their debt for World War I and never restored the design of the Fed. So now the Fed buys only government paper and it has lost its ability to “stimulate” the economy for this is the credit cycle which dictates inflation and deflation far more than any quantity of money theory.

When I conducted studies of interest rates relative to the stock market, I quickly discovered that the stock market ALWAYS rallied with rising rates and decline with falling rates. More importantly, it was critically influenced by international capital flows. If money was turning away from the United States, then the interest rate would move to the highest level as in 1899. When the capital flows pouring into the USA in hiding from World War I, you find the Greatest Bull Market in History with the lowest level of interest rates because the capital flowed into the USA increasing the real money supply by credit.

I have stated also many times that the domestic money supply of any nation can be increased and decreased by international capital flows. If the Chinese come and buy a piece of real estate, they bring in money for a dead asset. The seller now has money that did not exit domestically before the sale. If two Canadian sell and buy a home, nothing changes domestically. But a foreign buyer must import the cash to buy the home and thereby the available cash domestically increases with the state doing nothing. The Chinese buys dollars perhaps somewhere else which the banks create in the swap market. The government never “officially” printed anything nor did they expressly increase the money supply.

When we try to actually create a theory that one thing is the source of any effect, we always end up with egg on our face. It simply cannot be done. It is always a dance of many factors and how they come together in what combination and in what order. The Boom & Bust Cycle is far more directly impacted by the Credit Cycle than by money supply. You can create all the money you want, but if the banks will not lend and consumers will not borrow and prefer to hoard because they do not trust the future, you will be in a deflationary cycle.

When J.P. Morgan was being interrogated by the ruthless Samuel Untermyer in the Senate, the exchange showed that the government NEVER understood finance or banking. Morgan express the way banks really operate. They will not lend you a dime if they think you will default even if you have the collateral to back the loan. If you do not have faith in the borrower, you do not do business.  Remember one thing. The actual money supply is a tiny fraction of the real money supply which is created by lending. Some people BELIEVE gold is money. Other believe Bitcoin is money. So what is the definition of money? It is the broad spectrum of assets that include real estate and equities. All the studies show that if real estate is rising, spend SPEND more freely because they “feel” richer. When real estate declines, they contract in their spending.

This is why I have made it clear many times. The 2007-2009 Crash was far more devastating than the numbers show. This is why liquidity remains about 50% of 2007 level. The vast majority of homes are still worth less than they were in 2007. The average consumer does NOT “feel” richer. The youth have turned to renting and see the dream of owning your own home as a joke after property taxes for which you get no credit when you sell a house.

QUESTION:  Dear Marty,
due to 5,000-year lows in interest rates, in 2011 the US was able to triple the debt but keep the payments the same as in 1998. With interest rates rising (but still historically low) in 2017 the US paid the highest interest payment on the debt in history. Could you please elaborate on that?

Thank you for sharing your wisdom.
Kind regards,
M

ANSWER: This is going to be a major topic at the WEC. This is a major time bomb that amazingly nobody seems to be paying attention to. Rates are going higher for they need that to help the pension crisis. The USA is nowhere as bad as it appears in Europe from a debt perspective. This whole mess is going to explode in our face and this is going to be the serious trend going into the next ECM turning point.

The debts of governments around the globe are going to move up exponentially. This is very serious for some will raise taxes to try to keep the game going but that will cause even more deflation. I cannot express how SERIOUS this is. While everyone is looking at the stock market, others at the dollar and gold, they are missing the greatest threat to civilization since the 12th century.

Interest rates began to rise as soon as we passed the peak in this 8.6-year was – 2015.75. The Fed raised interest rates for the first time once the ECM turned.

The number of institutions calling and governments has been rising ever since the ECM turned. This is not going to get better and it is not going to just fade away. Sorry, if we keep our eyes closed and even hide under the bed, it will not matter.

QUESTION: If governments have been borrowing without limit since world war 2, are you saying that there is some line that is cross in debt to GDP that results in default?

Thank you

JU

ANSWER: No. The debt to GDP ratio is interesting. The USA is at about 103% and China is at 250%. The ratio is at 180% for Greece and France is at 96.5%. If we used exclusively these numbers, China should be worse than Greece. If France’s debt is less than the USA, then why is the French economy doing so badly? So what is the real issue that causes defaults?

To answer that question we need to introduce currency. France and Germany were less impacted by converting to the Euro than Greece, Italy, Spain, and Portugal. Why? Currency Inflation! Southern Europe had always issued debt and over time you were paying back with cheaper currency. The USA is insulated in that manner. $1 million in 1930 could buy 1,666 Cadillacs. Today, financed for 39 months, the cost of a Cadillac is $26,700, which means that $1 million will only buy 37.4 cars. The debt issued in 1940 has been devalued over time. This is how debts have escaped the theory that a national debt has some limit.

Then countries like Germany worry about the debt so they raise taxes to keep the ratio down below 70%. In taking that approach, they lower the standard of living of their population to support the government. The government spending as a percent of GDP in Germany has run on average about 46.5% of GDP compared to the USA average at  36.57%. The higher that ratio the lower the standard of living. It also warns that there is a limit to taxation before you reach the threshold of revolution – remember No Taxation without Representation?

The debt crisis we are currently in has been accelerated by two factors:

1. deflation making past debt more expensive and
2. artificially low interest rates

Greece converted its past debt to Euro which then doubled in value as the Euro rallied from 80 cents to $1.60. That meant the past debt was now double in real terms and there was no possible way Greece could pay such a load. In real terms, the debt rose relative to its GDP because you converted the currency base.

The crisis we face globally is that as interest rates rise, the servicing of the debt will rise exponentially. This will impact everyone around the world. Now, if the dollar rallies sharply because of the structural crisis in Europe and the turning down of the economies elsewhere, then the past debt of the USA will rise in real terms as was the case with Greece. Then add to this Cauldron and stir gently rising interest rates.

Shabam! You reach the threshold of a debt crisis!