How is Communism described in theory, and how does it play out in the real world? Join us for our question and answer series with Prof. Howard Baetjer
January 8, 2018
January 8, 2018
QUESTION: Would you please explain exactly what government debt is and who receives the interest payment that governments make on borrowings? I thought that Governments borrowed from their respective central banks and paid the central bank interest on the debt. I never understood why a government would have to pay any interest. My brother tells me that all government debt is made up of bonds and the interest payment goes to the bondholder
ANSWER: The interest paid on debt is to the bondholders, which includes foreign governments, Social Security, and private investors/institutions. The holdings of the debt change. Under Quantitative Easing, the bonds held by the central banks mean they receive the interest payments.
The French back in the 1960s had such a system where the central bank created the money and lent it to the government. That is a far better system because then the government does not compete with the private sector to borrow money thereby reducing economic growth.
COMMENT: You and Maggie could have solved BREXIT in a week!
REPLY: She would have done precisely that. Of course, they staged a coup against her to take the UK into the euro. She was not against the EU as long as it remained a trade union. We had discussions on that subject. Maggie said at the Bruges Speech:
“We have not successfully rolled back the frontiers of the state in Britain, only to see them reimposed at a European level with a European superstate exercising a new dominance from Brussels.”
While some people are claiming she would NEVER have had a referendum, that is total nonsense. Her Poll Tax was to make people have a stake in government and then they would vote and pay attention. That was her true motive behind that step which nobody understood and it backfired on her.
She was against the euro and the federalization of Europe; she would MOST DEFINITELY move to exit the EU under these terms. She would NEVER have agreed to surrender the sovereignty of Britain.
The idea of the euro was born at the Plaza Accord in 1985. The purpose was to create a single currency to compete against the dollar. It was James Baker’s idea that if there was a single European currency, then the dollar would not be the main currency and it would not rise excessively. Nigel Lawson was a big supporter of joining the euro at that time. The entire Plaza Accord and then the Louvre Accord were all about managing the dollar value in FOREX markets.
Using her Bruges Speech and trying to twist things around that she would have been against a referendum and would be in the remain camp is TOTAL nonsense. We had deep discussions about the problems with the euro. The commission designing the euro came to our WEC in London. I met with them about the structural design of the euro. I think I knew where this went all wrong and I knew where Maggie stood. She also respected that I was one of the leading currency specialists on the subject with real experience and not just theories.
QUESTION: Dear Sir,
In connection with official and real interest rates:
For us, the ordinary people, how can we benefit or lose from this situation? As it seems on first site that it simply deals with big boys (gvmnts, banks, etc)
ANSWER: Our client base is probably the most diverse in the financial world. There is a split between the fake rates of government and the real-world rates of the private sector. The little guy has NEVERmaterially benefited from the decline in interest rates because the banks never lowered the rates they charge consumers in proportion to the decline in official rates.
The consumer-level actually sets the tone for the big boys. Governments are hopelessly caught in a crisis drowning in debt and there is no possible way we can climb out of this without major problems and structural reforms.
Understanding we have a Sovereign Debt Crisis is the first step in framing your strategy. Stay away from government debt.
Next, understand that the broader trend will be toward higher interest rates. If you are a borrower as in a mortgage, that means you want to lock it in and do not sign up for any floating rates where you have to pay. If you are a lender, then you do not want to lend out at fixed rates.
Understanding there is a debt crisis, this means you need to develop a strategy of moving to the private asset classes.
The big boys will follow consumer trends. The government will try to convince everyone that they have control. This is simply a game of poker where you can bluff and win with a losing hand if you are good enough. That is the trick governments have been playing on everyon
QUESTION: I am 77 years old, and Seared in my memory is a short video and notes on the small villages in Japan abandoning government currency totally, and using chits exchanged at a table for all the village business. Foodstuffs, bicycle tires, or whatever. Maybe your fabulous researchers can find it. Germans using the currency for stove fuel, as the paper was “worthless” than coal.
I have a 500 Million note from Zimbabwe. The fascinating thing of the time it takes for the money to die is on a web site of all the currencies that have died. Worthy of note from you please.
ANSWER: Japan postwar lost all confidence in the government because the military had seized and ruined the country. There was a huge divergence in the currency during the American occupation. The US military issued what was known as B-yen in Okinawa because they intended to occupy that region even after leaving Japan in general.
Therefore, B-yen of the US occupation of Okinawa Prefecture began following the end of World War II. The US military also used a separate scrip called A-yen, while the B-yen was only used by the local civilians. Post-1945 Japan became a currency-free system where the nation fell back to bartering supplies from the authorities just like in a prison. The reintroduction of currency with the B-yen was restricted to Okinawa whereas the introduction of the new Japanese yen emerged for the rest of Japan.
In 1948, the A-yen previously used exclusively by American soldiers ended and the B-yen came to be used by military and civilians alike. The rest of occupied Japan continued to use the new Japanese yen during the occupation.
Eventually, the B-yen was eliminated in Okinawa on September 16, 1958, and was replaced by simply the US dollar at an exchange rate of 120 B-yen to the dollar. The Japanese yen was fixed at an official exchange rate of 360 yen to US$1.
Therefore, the period you are referring to in Japan was immediately after they lost the war. The previous yen was assumed to be worthless.
They did NOT print money that then lost confidence. It was the other way around. The confidence collapsed and that resulted in the printing of more money to cover expenses.
QUESTION: Dear Marty,
Thank you for the excellent source of information. Just to let you know I am a big fan of cycles.
Previously you predict China will rise and become the financial capital of the world in the 2030s. However, most communist parties do not survive in the past 75 years. Does the Chinese population need to rise up and get rid of the CCP before China can become the financial capital of the world? If yes during that turmoil, what kind of dire impact will it have on the world, especially EMs?
Looking forward to your answers.
ANSWER: Although China claims to be a Communist Party, they are by no means a Communist government. They are more of a hybrid where the leaders are still party members but they do not have to stand for election. Therefore, they do not need to make fake promises as we have in the West.
This hybrid system is much more reliable insofar as it can actually make strategic plans for the long-term. In the West, we have elections and the political parties are so antagonistic with each other that the economic business cycle is being accelerated in amplitude, which means we get more volatility. From a national growth perspective, China’s extraordinary rise to the #2 economy in the world demonstrates the effective benefits of such a system compared to our system of political rivalry.
The only way to fix our system is to outlaw socialism where they promise to rob other people’s money. Ancient Rome had social programs without class warfare. We have to end this conflict that prevents economic long-term grow
You repeatedly say that Socialism is dying. I live in a rural area of Oregon. As a personal observation, what I see around here is that more people, and especially the younger, are indeed moving TOWARD Socialism. The influence of the media is so strong that even people we know who advocate gun rights and the Constitution are willing to give up both to see Trump out of office and love the Bernie rhetoric of free everything. So, with the “dying” part, is it referring to more countries moving away from it than are moving toward it? We seem to be heading that direction, and rapidly at that.
ANSWER: Socialism is dying because other people’s money is running out. Yes, we see that socialism is rising in its extreme actions from climate change being usurped to justify the confiscation of wealth and control of the economy. It is also prevalent in the rise of Bernie Sanders and Elizabeth Warren in the USA and the Labour Party in the UK.
This is the final rally of socialism before the crash. It is more akin to the final Phase Transition of a market as it makes its fatal high like the Dot.com Bubble, 1929, or Tokyo 1989.
So do not confuse the rise in the outward demands of socialism. We are running out of other people’s money and the unfunded promises will reach $400 trillion by 2032. There is no possible way to fund that without a crash & burn.
We also see this manifesting in the stark political divide between left and right. The left in Britain is saying the Prime Minister should be jailed if he carries out Brexit without a deal. The people voted for Brexit. They lost. That does not matter.
We are in the collapse of government and the socialistic promises since World War II are all coming due. Economically, this is a battle to the end. The left wants to confiscate all the wealth of the right. This is the end of the purpose of civilization and the beginning of pure tyranny.
I for one have no desire to live in a socialistic world of tyranny. I will most certainly leave and move to Asia rather than live under such tyranny.
QUESTION: I have a question, you wrote :
“Those in Europe who have a position in cash, it may be better to have shares or a private sector bond or US Treasury. Given the policy in Europe of no bailouts, leaving cash sitting in your account could expose you to risk in the months ahead.”
For example, if one has a trading account with a bank, is leaving cash in the bank’s trading account immune to potential seizure indicated in your comment?
Appreciate your clarification,
ANSWER: The risk in Europe is that there is no true rule of law. On the one hand, there is this policy of no bailouts for that would mean money could cross borders. Then there is the rising socialism which is turning into real hatred of the rich.
There is no definitive answer. Europe will do whatever it has to do when the time comes shy of doing the right thing. I have written before when Italy could not meet its debts on short-term paper, they simply decreed that your 90-day paper was now a 10-year paper.
Governments can do whatever they desire. We have no recourse against governments. No private company could act in such a manner. This is one primary reason why I believe governments should be prohibited from borrowing. People are fools for buying their paper and always expecting that this time will be different.
QUESTION: Hi Martin,
I have been following you for about 5 years now and have been to 2 WECs. At the beginning of last year, I ventured into the forex markets with limited experience and some speculative money. I’ve have been adding money to my forex accounts over this time and thanks to you and Socrates I have just about doubled my money over this time frame. Now my forex accounts have become more than speculative money for me. I have been really looking forward to riding this dollar rally wave into the monetary crisis cycle into 2021/22 but some for your recent posts regarding the liquidity and European banking crisis brewing has given me pause. I have been planning on taking money out of my forex accounts gradually to at least withdraw all my seed money but naturally, my concern is the safety of the forex markets or brokers in regards to the crises ahead. Do forex brokers have any particular risk in the liquidity and European banking crises?
Thank you for all you do!
ANSWER: That is hard to answer. It all depends on the broker and where are they — Europe or America. I suspect you are talking about America. It depends upon the firm.
We are in a position where there is a crisis on the horizon and we will see a hard landing outside the USA. The impact of a European banking crisis can send the dollar significantly higher. The risks for accounts will be in Europe, for there are no bailout policies and others will claim that these policies would only bailout out the rich. So politically, Europe would present the far greater risk into 2021.
QUESTION: Hi Martin,
I can understand how JP and EU backed themselves into a corner with negative rates. Happy to give them the benefit of the doubt when this all started 3-4 years ago even though it was obvious this was not going to end well.
However, what I don’t understand is the thought process that reserve banks today need to perpetuate eternal growth when I would think their role should be to smooth out extremes (debatable this is even possible).
RBA is a case in point as while the Australian economy is slowing, it is nowhere near terrible. There is talk that they will now also look to lower rates to near zero and start QE. I get that all reserve banks are looking to maintain lower exchange rates and so they need to keep pace with the rest of the world but one would think they would learn better from mistakes of EU and JP.
My question is, is this a global conspiracy or just plain stupidity?
Thanks for all ….
ANSWER: The original theory was to smooth out the business cycle. The political governments turned to the central banks and argued that they were responsible for the money supply. Therefore, it was allegedly their duty to control inflation irrespective of the spending of politicians. This was an inconvenient economic truth.
The problem is that the ONLY theory they have is the Keynesian Model. They really have no other theory to rely on. So they keep lowering rates, hoping to stimulate demand, and are oblivious to the economic reality that the political side is hunting taxes and becoming more aggressive in tax enforcement. The two sides are clashing and the central banks are now TRAPPED with no alternative. They are afraid to raise interest rates for they assume the economy may plunge. Yet, they are also looking at the national debts that governments never pay off. Raise the rates and the government budgets explode and that comes back as a political disaster.
A lot of people have asked me if I would step in and restructure this mess. To even do that you have to have the crisis first. There is no way they will allow anyone to come in and avoid this crisis. They will pray at the foot of their bed before each night that their theory will somehow work. That is not going to happen or prevent anything. We must experience the pain before they would EVER consider any reform.
This is sublime ignorance rather than a conspiracy. It brings the mind those famous last words: Father, forgive them for they know not what they do!
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