Janet Yellen signaled that the Fed is grappling with the problem I have been warning about; the dollar has become the de facto only real currency and the Fed is indeed becoming the world’s central bank. Yellen has admitted that the Fed is being lobbied by everyone to surrender its domestic policy objectives to international. This is precisely what took place in 1927. Yellen stated that the Fed should worry less about inflation domestically than about global growth risks. While pointing to the slowdown in China and depressed commodity prices, Europe is a real basket case. She used the words that the Fed must consider “caution is especially warranted” when it comes to raising interest rates. This has put most Fed watchers off to expecting any possible rate hike into retirement as they expect nothing before September. The BREXIT will most likely be rigged because it is exactly opposite of what they are telling the Brits that they will be isolated and the economy will collapse if the exit the EU. Nobody says Britain did fine before it joined only in 1973 or that it is the other-way-around; with BREXIT, Europe will fail. This heated issue in Britain is most likely the final nail in the coffin. Britain will collapse with the Euro and should have just handed its sovereignty to Brussels. Europe will never reform so it will be all go down together. The political risk in Europe is tremendous and Yellen cannot prevent that with simply interest rates.

It is ironic that it is also the same conditions setting up today as was the case in 1927. The Fed back then lowered US rates to try to deflect the capital inflows to help bailout Europe. The markets eventually backfired and capital shifted pouring into the USA doubling the US share market despite doubling interest rates to try to prevent the crisis they helped to create. This all led to the 1931 Sovereign Debt Crisis and those economic declines resulted in political chaos. In 1933 FDR came to power. But so did Hitler and Mao. That was all made possible because of the collapse in government debt. We are in the very same position today and the Fed is surrendering domestic policy objective for international concerns.

What is astonishing is just how brainwashed society has become. They cheer lower interest rates as if this will eventually work to stimulate the economy and markets. Interest rates decline with economic declines and rise with economic booms. The analysis on TV is just ass-backwards. When a stock is doing well, the price rises because there is a bidding war. Mr. Larry Summers, the father of negative interest rates, admits he cannot forecast anything. Yet he advocates manipulation without any understanding the consequence of his theories in pure stupidity and remains clueless as to history or how markets even move. We can see that the Fed raised rates from 3.5% in 1927 up to 6% in 1929 and the stock market doubled on capital inflows. The Fed cannot lower US rates to prevent a crisis in Europe or to reverse the Chinese economy no less bring a bid back to commodities when the economy is not expanding. As the stock market rises, Congress will criticize the Fed for making the rich richer, and the Fed will then be forced to return to domestic policy objectives raising rate to try to stop the rally. Yet the rally will begin to take off when the public at large begins to realize government is in trouble. This is part of the 4 elections coming with the Year from Political Hell.

The risks and the reality that the Fed has lost any real ability to manage the economy have become so real, it is slapping people in the face and still they cannot see it. The Fed has little conventional monetary policy ammunition to counteract a downturn at this time. Larry Summers’ negative interest rates are destroying the fabric of the global economy. Far too many pension funds are unfunded and many countries in Europe by law require they be managed conservatively and invest EXCLUSIVELY in government bonds. The risks of total meltdown beginning in 2017 are on the horizon.

Yellen has inherited a complete nightmare. This decision to delay the long-awaited liftoff from a zero interest rate illustrates that the world economy is totally screwed. There is a lot of speculation about why the Fed seems so reluctant to “normalize monetary policy”. However, besides the normal issues such as low inflation, weak wage gains, and strong job growth, the real issue nobody seems to look has been the fact that government are now crack addicts on life-support with negative rates. A hike will increase the Federal deficits of all countries globally. The smart institutional clients coming to our World Economic Conferences have shifted their portfolios selling government debt and moving to blue-chip corporate. Corporate debt is the only alternative to government debt in crisis and emerging market debt other bought thinking they have no risk since it is dollar denominated. When government debt goes bust, you get absolutely nothing and they can change the law at any given moment. They can re-denominate your debt holdings as well as extend the maturity and there is absolutely nothing any bondholder can possible do.

SELL GOVERNMENT BONDS & SHIFT TO BLUE-CHIP CORPORATE BEFORE IT’S TOO LATE

Richard Nixon unsuccessfully tried to pass a version of Milton Friedman’s plan, and his Democratic opponent in the 1972 presidential election, George McGovern, also suggested a guaranteed annual income. Milton’s basic guaranteed income proposal was well thought out and substantially different than simply the welfare state. Our welfare system has seriously alter human behavior. It has paid people not to work and paid others per child creating incentives to have children to gain more money. The welfare system has done much to alter human behavior and destroyed the family structure.

Milton’s proposal was to flip the process to create incentives rather than destroy them. It is ironic that the one president who tried to implement this plan was taken down by the Watergate Scandal. The proposal passed Congress and the Democrats stopped in in the Senate under the pretense they wanted more money.

Another important aspect of this Friedman proposal was that there were no string attached. The government did not attempt to tell people what they could buy or do with the money. Whenever government get involved, the typically screw things up pretty good. Driving to work I see signs offering cash for diabetes materials people get from government on welfare. Others would sell the food stamps. When you just hand people things, they will alter behavior to get them if if they do not need them. Milton’s proposal eliminated the government red tape yet instilled the spirit to raise oneself up out of poverty. This type of system made sense.

QUESTION:  you wrote the Socrates site on 3/23/2016 “Once the “confidence” in government cracks for the BULK OF THE SILENT MAJORITY who do not listen to money supply and conspiracy theories, then we move into game over. That is when we will see assets rise as confidence shifts from a corrupt government for the majority will no longer trust then and they will turn to the private sector.” Mr. Armstrong can you please name the private assets that will appreciate? and if there are similarities with 1929, where we are now in 2016? Thank you for all your efforts to teach us the world economy.

DS

ANSWER: There is absolutely no correlation with 1929 from the USA perspective. The people who see that nonsense do not know the facts or the history. The 1931 Sovereign Debt Crisis was omitted from the history books. John Kenneth Galbraith blamed corporations in his book the Great Crash which ignored the government defaults and blamed corporate America. There was no “helicopter money” for it was exactly the opposite – massive DEFLATION. There was a shortage of money to the point that hundreds of cities began to issue their own “Depression Scrip”.

All of these forecasts keep projecting hyperinflation are based solely upon a misguided notion of what caused the German hyperinflation. The USA suffered massive DEFLATION because of a contraction in money supply, not inflation. So what we face is not a 1929 scenario and the analysis put out there on that event is commingled with the German hyperinflation creating a hybrid of something which has NEVER taken place in history even once.

Everything hinges upon the “confidence” of the silent majority. They are starting to rumble. That is the key to the future. We are watching this beginning and that is Trump, precisely in line with out model calling for political chaos to emerge in 2016.

It might surprise many, nonetheless, governments have routinely spent more than they take in from taxes. In ancient times, governments simply minted more coins to fund their operations, they did not generally borrow. Some Greeks borrowed from the temples to fund wars and did default. However, typically, tax revenues amounted to only about 80% of expenditure. Records have survived as well as dies from which coins were struck. Pictured here, you will see an actual Roman die from the Republican period which has survived. Each die was hand carved so we can distinguish between dies and as such, the fact that the average number of coins produced before a die breaks is about 15,000. Here is a coin struck from this issue that this die represents. Since we can catalogue the number of known dies, we then can reasonably estimate the annual production of money in the Roman Republic as well as the Imperial era.

The above chart demonstrates the annual production of coinage during the Roman Republic 155-66BC. We can differentiate periods of contraction (deflation) from inflation. We can see that some periods were clearly deflationary and there emerged a shortage of money at times. The Roman Emperor Tiberius, who followed Augustus in 14AD, was notoriously frugal. We find private coinage appearing as tokens to make up the difference for such periods of deflation.

The private token issues during the period of Tiberius (14-37AD) are reminescent of the Great Depression when hundreds of cities issued Depression Scrip. We also find private token coinage produced during the American Civil War. They even issued Postage Currency whereby stamps were exchanged as money.

If we then can ascertain the annual production of coinage with a reasonable degree of accuracy, adding up those annual production figures will give us a look at the total money supply. We are then able the also reasonably ascertain that the Roman government collected only about 80% of its total expenditure from taxes. The rest was not borrowed, but simply produced.

Consequently, this provides the understanding as to why there would even be the practice of debasement. The fact that tax revenues fell short of expenses explains that about 20% of the annual budget was covered by new mine production. Rarely has there ever been a “balanced” budget based exclusively on tax revenue.

This further explains why coins of someone like Gordian I (238AD) who reigned only thirty-six days have survived and bring today about $3,000 instead of hundreds of thousands.

Then there is the coinage of Didius Julianus, his wife and daughter who ruled only for 66 days in 193AD.  The corruption had reached such levels that it was clear that the decline and fall of the Roman Empire began at this junction in time. The Praetorian Guard actually accepted bids for the position of Emperor. There were two rival bidders who presented themselves – Titus Flavius Sulpicianus (father-in-law of Pertinax) and Marcus Didius Julianus. Didius’ bid was 25,000 sestertii per man, which was the high bid and he was duly declared Emperor. This is why there was so much coinage which has survived for someone who was in office just 66 days.

Today, to cover the short-fall, governments borrow each year with no intention of paying anything back. The Romans did not borrow, they increased the money supply to cover the short-fall in expenditure. This was the common practice and it did not cause runaway inflation. That came during the 3rd century following the capture of Valerian I by the Persians who turned him into a royal slave and when he died, they stuffed him as a trophy. This resulted in the collapse in the money supply as people hoarded and feared the invasion of barbarians. This is when the wall was built around Rome by Aurelian (270-275AD).

Should we stop the borrowing and just increase the money supply as a finite percent of GDP? This makes sense when at time up to 70% of the accumulated national debt has been simply interest expenditures.