Until we understand
the real wealth of a nation, progress cannot be achieved when we try to
eliminate the business cycle, by Martin Armstrong, 7/24/18.
QUESTION: Mr.
Armstrong; Do you have any comment on the latest excuse for the decline in gold
is because Trump is forcing it down so he can buy it up and move to gold-backed
bonds like Nevada? This is the latest coming from the fringe which just seems
so unrealistic any more. I am not sure why these people ignore the past. Thank
you; PF.
ANSWER: The entire
issue at its core is this endless desire to eliminate the business cycle. They
pitch that ONLY gold is money and if we return to a gold standard that every
evil will be cured. They believe that money must be “tangible” and as such,
they fail completely to comprehend the true nature of the economy. If ONLY gold
was money, then how did Germany, Japan, and China rise to the economic giants
without gold and Russia has floundered ever since 1991 when they had the gold,
oil, and diamonds?
Kondratieff’s
long-wave study observed that the rise and fall of the business cycle existed
during the 19th & 20th centuries when the world was on a gold standard. The
existence of a gold standard FAILED to eliminate the business cycle and it proved
that a “tangible” based monetary system did not make money more valuable than a
paper money system. Ironically, ever since 1776, we are still arguing over what
is money? Should it be any commodity, paper, some fixed-exchange rate, or is
the real wealth of a nation its people and their total capacity to produce? Is
this why skilled labor forces and education raise the standard of living of a
country than merely farming to grow food to sustain yourself?
Julius Caesar said:
Divide and Conquer. If the people come together and form interconnected
economic bonds, the economy expands because the synergy of everyone
collectively is greater than the individual sum of the parts. Changing the
monetary system to one back by gold has NEVER eliminated the business cycle. So
this idea that a gold-backed bond will somehow retain its value constantly is
like believing in Santa Claus of the promises made by every politician when
running for office.
The true Wealth of a
Nation was observed and expressed by Adam Smith in 1776 and nobody has been
able to demonstrate anything to the contrary. “Money” is by no means some
tangible object or a commodity regardless if it has been gold, paper, cattle,
slaves, or seashells. The true WEALTH OF A NATION is its people!
China, Germany, and
Japan lacked the natural resources but their people were its wealth and they
produced manufactured goods which they sold to the world and were paid for in
return. Russia had the natural resources but it moved from communism to an
oligarchy. You cannot open a restaurant in Moscow and compete for you will be
dead. A country can have tremendous natural resources like Russia, but unless
its people are free to develop the economy in their own self-interest, they
will never rise to the top ten list of nations. All the gold, oil, and diamonds
of Russia did not propel it to the number one economy. There are plenty of
third world nations with natural resources that are being mined yet they remain
as third world nations because their people are not educated and there is no
domestic economic synergy among the people.
Spain was the classic
example. They discovered all this gold and silver in South America. They
exploited it, brought it back to Europe, but NEVER developed their own economy
no less America. They spend the money lavishly. Unloading the ships was a job
for imported labor because it was beneath them. The gold joke was that as Spain
got rich, everyone else got richer. They used Frenchmen to unload the ships
while the Spanish drank and partied.
Indeed, the wealth
discovered by Spain even created what became as the United States dollar. The
Spanish piece of 8 (8 reals) became the standard coin of the world. Even China
adopted the silver standard based upon Spanish pillar dollars. The two pillars
represented the gateway to the Atlantic from the Mediterranean. The problem for
Spain simple. They lived lavishly and paid everyone else to work. Consequently,
they failed to develop their own domestic economy.
Spain could not wait
to spend its money coming in on the next fleet. When fleets sank in hurricanes,
they could not pay their debts. Spain became a serial defaulter moving from the
richest nation in Europe to a 3rd world status. They defaulted in 1557, 1570,
1575, 1596, 1607, and 1647.
Germany is the fifth
largest economy in the world and certainly number one in Europe. Its economic
model is based upon exports, which was why it supported the euro to eliminate
FX risk in Europe so it could sell more product. Exports are driven by
Germany’s backbone of highly innovative small and medium-sized enterprises
(SMEs). These constitute 99.6% of all companies that employ almost 60% of all
employees in Germany. Many of these SMEs are world market leaders in their
respective niche segments and actually support the larger internationally
leading companies – such as Bayer, BASF, Daimler, Volkswagen, and Siemens to
name but a few – they make up Germany’s manufacturing industrial base. They
have focused their economy on an export-based model in the old tradition of
mercantilism rather than domestically focused consumption.
Therefore, you will
have to date found jobs for qualified engineers (mechanical, automotive,
electrical and building) at the top of the list of job shortages with IT
specialists, health and social workers coming in second generally. The German
economy relies upon the euro to reduce FX risk to increase its exports, but it
really does not matter what the currency is based upon as long as it is fixed
or the same single currency. Eliminate the euro and the risk will return and
exports will decline within the EU.
So this latest excuse
for the decline in gold is just absurd. They are unwilling to look at their old
theories so they spin wild tales to justify being wrong. Trump is by no means
forcing metals to decline so the US government can buy it and issue gold-backed
bonds like Nevada. Assemblyman Jim Marchant announced the Nevada Gold and
Silver Enabling Act on July 2, 2018. He claimed that gold-backed bonds would
avert financial Armageddon, retire debt, ensure all creditors are paid in full
in nominal terms and begin the process of gold circulation.
Here is the argument
they use: “The Federal Reserve has a policy of two percent per annum debasement
of the US dollar. Other central banks around the world have similar targets,
for example, both the Bank of England and the European Central Bank set their
targets at two percent. Creditors should prefer gold assets over dollar-,
pound, and euro-denominated assets because gold is not subject to this
debasement. The 10-year Treasury yields 2.9% as I write this. Assuming that the
Fed hits its target without overshooting it, then the central bank is robbing
the investor of most of their return.”
The entire argument
assumes that somehow a gold-backed bond will eliminate inflation. History
confirms that is just nuts. The very first coins ever issued demonstrated that
inflation caused by war resulted in the first debasement of the currency.
History does NOT support this wild idea that a gold-backed bond will eliminate
inflation and the business cycle. That is just completely false!
Even if we assumed
that was correct, you can see what this type of policy would create by creating
a money supply that was fixed – it is called deflation. This is what has driven
unemployment among the youth in Southern Europe to 60%. Germany has been
focused on eliminating inflation because of their experience during the 1920s.
This policy of austerity cripples economic growth and will only lead to
revolution and civil unrest. Likewise, Germany is living in a dream world where
they do not understand their own economic history.
Gold-backed debt has
existed for hundreds of years. There was still the business cycle, periods of
inflation and deflation, as well as revolutions. This theory that somehow a
gold-backed bond will eliminate the business cycle is actually the same goal of
Karl Marx and John Maynard Keynes. Marx proposed Communism and the elimination
of all private tangible wealth would produce the perfect world. That failed.
Keynes argued that the government could manage the economy by focusing on
demand and raise or lower interest rates to also eliminate the business cycle.
That failed and even Paul Volcker came out and called it the Rediscovery of the
Business Cycle back in 1978.
John Maynard Keynes
was at least honest enough to comment before he died that he had been wrong.
Smith’s observation of how the economy works remains the only answer. What all
of these theories have in common is the assumption that to create money with a
tangible value and eliminate the business cycle, the answer lies in
manipulating DEMAND side economics rather than the SUPPLY side. In other words,
we eliminate all tangible assets or we manipulate interest rates and the supply
of money in hopes of influencing the DEMAND of the people.
Gold-backed bonds will
no more eliminate the business cycle than any other attempt to date. Not even
Larry Summer’s NEGATIVE INTEREST rate policy has been successful in stimulating
the economy by compelling people to spend rather than save. His theory has
merely created the next crisis as pension funds, who needed 8% interest to
remain solvent, cannot function with historically low rates of interest and
will default bringing socialism into crisis.
You must always ask:
What is the end goal? It is always the same – ELIMINATE THE BUSINESS CYCLE.
Norb Leahy, Dunwoody
GA Tea Party Leader
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