Martin Armstrong Is Free

You know you’re facing desperate times when an old man, wrongfully imprisoned for over ten years becomes a financial prophet on the Internet using just an old Remington typewriter.  Ironically, the man was tried in court for a financial fraud that could not be proved, while the entire financial world crumbled from the multitude of frauds committed by bankers, lawyers, mortgage brokers, central bankers and government officials.

But that’s exactly happened during the financial crisis of 2008.  Martin Armstrong’s story couldn’t be written in a Hollywood script because it’s just too unbelievable.

As tragic as it has been, hopefully his story will turn out to have an acceptable ending as Mr. Armstrong was released from prison early and is now serving the remainder of his sentence under house arrest.

Here is his letter published yesterday by a friend:

 

And Martin has also published his first piece of March 2011:

Contrahour wishes Martin Armstrong all the best and sincerely hopes that his typewriter gets upgraded to a new MacBook Pro.

If you have missed any of Mr. Armstrongs writings, they can be found here (http://www.scribd.com/kzuur58) and here (http://armstrongeconomics.com/).

Economic Confidence Model Turn Date Is At Hand

Economic Confidence Model Close UP 010909A turn date in Martin Armstrong's Economic Confidence Model will be upon us on April 19th or 20th, depending on how many days you use to calculate a year.  The graphic shows that the model is predicting a top at this turn date before heading down into a long-term low in June 2011.  As Martin explains in the essay below, the model does not necessarily mean that a top in the Dow Industrials is at hand.  For instance,  the 1989 turn date forecasted a top in the Japanese Nikkei.  The Economic Confidence Model was created with inputs from around the world and therefore is not limited in scope to just pinpointing stock market tops and bottoms.  Personally, I am looking at the US Dollar, the Treasury market or the Shanghai market for signs of a top.  All these markets have experienced strong rallies off of recent bottoms and might be ready to turn lower.

Martin Armstrong sent the following essay in February.  It provides a broad overview of how he built his model and how to interpret its signals.  He also provides thoughts on how government could use the model to better affect policy.   While it doesn't contain any specific predictions, it is a fascinating read.  Once again, I have taken the liberty to edit portions of the essay to make his ideas a bit clearer. 

You can also access most of Martin Armstrong's recent essays at Scribd.com.   

Why Models Are Our Only Hope?

Should we create a model to manage our social-economy?

In the real world, experience counts as the primary attribute in any field. The question we face in the middle of this economic crisis is simply this: "Is there anyone at the helm who has any experience at all?" Can we disregard gathering the experience of those who have gone before us by constantly re-inventing the wheel for every crisis? Wouldn’t it be nice to have gathered a database so when an economic panic took place, and we tried a particular stimulus, the result was a particular effect. Yet for every economic crisis, we seem to start at the beginning retaining no knowledge or experience from the past assuming in our arrogance that that was then.

It is time to start taking advantage of the collective progress of man that has particularly developed during the last Century. We have not merely landed on the Moon, we have developed sophisticated computers to get us there. We have even conquered many forms of disease, also through the process of scientific learning.
 
Science has revealed that our greatest form of knowledge comes not from book learning, but from hands-on experience. We have even begun to unravel how the human mind works. Now we understand the difference between "book smart" and "street smart" is based upon the simple fact that when we learn only from study, we do not acquire the deeply seeded and critical knowledge base that our mind constructs through all the senses we refer to as experience. When we actually do something, we use all our senses and construct a knowledge base recording all the little nuances that are not always self-evident as being either important or relevant. I could read every book on brain surgery, but would you like to be my first patient? Just as a medical student might have perfect book scores, they must still then start at a teaching hospital working with those who have actual experience.

The Importance of Experience

What has emerged from the study of the human mind is that it takes practical experience in a field to truly comprehend what to do. There are two broad categories of memory as explained by Eric Jensen in his excellent work, "Teaching with the brain in mind."(ASCO – Assoc for Supervision and curriculum Development (2005)). The two primary types of memories are: (1) "explicit" (clearly formed or defined) that is constructed either learning in a semantic manner (words and pictures) or more episodic (autobiographical or personal experience rather than learning about it second or third hand through books); and (2) "implicit" (implied by indirect means) that includes the reflexive memories and procedural physical or motor type routines like riding a bike, burning your hand, love, and other various experiences. Jensen points out that students that are taught by merely data dumping facts, rarely retain such knowledge id. /pg 132. Jensen pointed out that studies have shown that students who attended class knew only 8% more than those who skipped class. Consequently, this semantic method of knowledge gathering is highly limited. We need something more, to strongly bond within our minds critical knowledge. We need also to invoke the ancient method of apprenticeship of involving other sensory input. It is now understood that episodic memory process "has unlimited capacity" id. /pg 134. This puts flesh on the words "book smart" and "street smart" illustrating that it is highly dangerous to trust the operation of anything to someone who has no real world experience.

Gathering Experience

This is why we need to collect the experiences of mankind and record them to a database that allows human interaction to query "why" events take place and "when" an event should take place, as well as "what" should be the correct response, and "how" should that response be implemented. History repeats because as a society we do not learn for we lack the capacity to acquire real knowledge predicated upon the best possible form of wisdom – experience. If we are afraid to construct a model that incorporates the total global experience of mankind to better manage our society and our economy, then we will be doomed to the insane notion that the economy and our very lives are unpredictable constituting nothing more than a "random walk" like following a drunk down an alley and trying to predict will he bounce-off the wall on the left or right next.

There is no "random walk" through time. Everything is event driven, and history repeats largely due to the fact that given similar events, mankind will react within a set parameter of reactions.  Stick your finger in the flame of a candle and it matters not what culture you are from or the language you speak. You will still pull your finger out of the flame.

Understanding there is a Business Cycle

VariousCyclePatterns As I have stated many times, there is always a cycle within everything, and that includes the boom and bust swings within our economy that have caused so much political unrest, that it has fueled even the birth of Communism & effected the lives of mankind throughout recorded history. Economic swings have led to wars when a king’s finances were running low, and caused dreams of utopia that influenced Karl Marx (1818-1883) whose ideas have cost the lives of many millions of people.

Cycles may come in different patterns and are at times driven by a convergence of many individual events each functioning separately according to its own cyclical nature. This is simple the very essence of how everything functions throughout life and the entire universe. It is the cyclical nature of life from the beating rhythm of your heart, the cyclical events of the seasons, weather, movement of planets, to even how artificial gravity is created by the cyclical spin. Even the music we listen to must have a cycle or rhythm. Our social interaction we call our economy, is no different.

What Eric Jensen points out is critical to our understanding of our very ability to learn and advance as individuals. This method of acquiring knowledge applies to us as a society. Jensen explains there are differences between how our brain processes either "verbal or spatial information." When we process written or verbal words in an 8 hour session there was an 80 minutes cycle for cognitive performance while the spatial task of locating points cycled at 96 minutes on average, id./pg. 49.

While there is a genetic foundation for being smart, this accounts only for about half of our intelligence. In fact, part of the brain that deals with discrepancies and is automatically activated when the outcome differs from our expectation.  This is known as the anterior cingulate and is the hard-wiring that enables us to learn from trial and error. Jensen also makes it clear that we learn through social interaction. The case in point is the nut-case who is a loner and becomes the serial killer. Social isolation is devastating to one's health as well, id./pg 95. Even in prisons, solitary confinement absent the social contacts is intended to inflict punishment that is devastating and mentally forces the subject to comply with the demands of the jailer. We are also familiar with the problem of mob behavior that can take the form of peer pressure upon the youths in school or among adults as Communism demanded – turn in your neighbor if he says anything derogatory against the government. These are forms of mental torture imposed by all forms of governments to varying degrees.

Applying Experience to Managing Government

Our knowledge has expanded tremendously in the past 100 years. Yet for whatever reason, we have yet to apply these advances to our social collective economy and to the management of government. We have incorporated computers into science. We now rely upon computers to control traffic in cities, in the air above us, and we even trust computers to land a plane. We can trust computers to create a knowledge base of disease whereby one inputs the symptoms and the computer will give you the likely disease. We rely on Expert Systems in computer programming to record the knowledge base of experience. For example, one could input all the loans ever given by a bank. They can create detailed criteria from social status to job skills and income. A new loan applicant could fill out the same form, and the computer can generate a "more-likely-than-not" analysis of whether the borrower will default.

In medicine, we can map your DNA and more-likely-than-not even tell you that you will develop a particular disease. In fact, laws have been enacted to prevent Insurance companies from using such data, for then they could sell insurance against a heart attack to only those who they know are not likely to have one.

Yet for all our advancement in every field right down to smart bombs, we run our government and our economy as if the Puritans were still in charge and characterize any effort to understand the future of our society as devil worship. The SEC takes the position articulated by its Chairman Mr. Cox when he testified before the House Oversight Committee arguing we should not seek to create any such model; "That is probably an aspiration that we ought not to have." Why? Should we disconnect all computers from traffic lights, air traffic control, go back to carpet bombing and tell our astronauts to don't worry about it, you’ll figure out how you get there on your way? What is so wrong about trying to apply technology to run our government and economy? If a doctor can input your symptoms into an expert system and generate a dispassionate list of possible diseases, why can we not do that for society?

We view government like God. We assume someone is in charge. We know not what their master plan might be, but require pure faith to assume everything will work out in the end. We handed out $700 billion to help Investment Banks due to their speculative losses without any explanation of why or how this money was even lost. We are now about to hand out $1 trillion (the total amount equal to the national debt of the United States in 1980 from inception). This trillion dollar expenditure on infrastructure has been dreamed up with no empirical evidence that if we do (x) then the "more-likely-than-not" result will be (y). We cannot afford to act like this in today's complex world. This amounts to "trickle down" economics that was the basis of arguing against the Reagan tax cuts. We are hoping that spending all this money into economic areas that had nothing to do with the cause, will somehow make the cross-over like a virus and infect the whole economy.

This effort to spend $1 trillion on infrastructure is merely supporting the pork self-interests of government. Just because Roosevelt created the Work Progress Administration in 1935 in response to the Dust Bowl, does not mean that this solution will have any positive effect at all. The government did not have the power to make it rain and unemployment rose from 8% to 25%.  Today, many professionals expect a huge wave of inflation – not economic growth. We are coming up with ideas that someone dreams UP, there is no model, and it is "Gee. Let’s try this!"

Economic Confidence Model One Hundred Years 

No serious business would dare run its operation in such a cavalier manner. Is this any way to run the world economy? Unfortunately, others follow our lead. So if the USA makes a major mistake, we will find other nations blindly follow. The proposal to spend a trillion dollars on infrastructure to make the debt bubble disappear is insane.  Milton Friedman warned about it and took place during the 1970s – we called it "stagflation."  There was a general increase in prices from the sharp rise in oil, but this "inflation" did not in any way produce economic growth.

To the left, is the last 100 years of fundamentals that are overlaid upon the major Economic Confidence Model. There will always be a boom-bust rhythm. Joseph Alois Schumpeter (1883-1950) observed the business cycle and attempted to explain it by waves of innovation. The invention of the railroad was the internet of 19th Century allowing the efficient movement of goods.  The invention of the automobile and the airplane created new waves of innovation sparking scores of other industries to expand as well. The dot.com boom in 2000 was the beginning of another new wave of economic growth. As they do often say, "necessity is the mother of all invention." As we have economic declines, we often adapt and create new forms of innovation.

We have no idea what we are doing

We have no idea what we are doing. We call upon professional politicians who have learned only in a semantic manner lacking the episodic real world experience. Worse still, we reach back in time to drag forward the Work Progress Administration as a self-serving answer as a solution today, ignoring the context in which it was created, and with no model to see what is the "more-likely-than-not" outcome.

What if we spend all this money and it fails completely to restore economic growth? Confidence in government will collapse. Other countries will hate the United States more.  Those people will then be led to blame the US rather than their own governments.  This is how war is unleashed. With such serious implication for our children, you would think we just for once tried to stop the nonsense and put our collective knowledge to good use.

With all the billions of dollars being spent, you would think there would be at least someone who had the courage to stand up and say – hey! Maybe we should create our own expert system of government and show every time they raised or lowered taxes, interest rates, regulation, or money supply, this was the result. We do not need partisan claims to support this program or another. We need empirical evidence. One cannot claim he made a scientific discovery by saying "I think!" It either is or it is not.

We can no longer afford to run our social-economy by trial-and-error as if we were some doctor in the Middle Ages yanking out body parts to see if that cures the patient. We cannot afford to manage our social-economy on pretended "book smart" claims while throwing away the collective experiences that forms the real knowledge, wisdom, and intelligence or the human experience. At best, half of human intelligence is genetic. This is why innovation has not always arisen from a single class. We have reached that point in the evolution of mankind where it is time to make that next leap. We cannot afford to throw away the experience of generations that is the essence of all human knowledge as if they never existed. This is like burning down the famous Library of Alexandria in Egypt. This is a profound crime against all of humanity.

Why Models Fail

The very same presumption built upon arrogance that we know everything, creates the inherent reason that causes most models to fail. When we ask a question, there are often two reasons. (1) There are those who are genuinely interested in acquiring real knowledge, and (2) there are others who need to boost their ego and argue that someone is wrong and therefore less intelligent than them, but have no practical experience to offer empirical evidence to support their argument. If we try to create a model under the first approach, we will succeed. If we rely upon arrogance to try to pretend we know of what we speak, we will fail.
 
There is a middle ground we might classify as (1.5). This is where we may be interested in accumulating real knowledge, but we still deceive ourselves for we begin with a presumption that is not true. A classic example is Heinrich Schliemann (1822-1890) who was a German untrained archaeologist and a rich son of a German Industrialist. He believed that Homer (9th-8th Cent. BC) wrote about actual history in his epic tales of the battle against Troy. At that time, all the academics at the leading Universities in England and elsewhere, had argued that Homer wrote children’s fiction. No one bothered to go out and actually test their theory until Schliemann. They presumed a fact that had no empirical evidence. If you begin from an unsupported presumption, you will fail. It may be unintentional but the motive matters not, for the result will be the same whether it is produced from ego or mistake.

There is a third reason why models fail – (3) the economic evolution process. I have often written that perhaps the father of the Business Cycle is Nikolai D. Kondratieff (1892-1938). At the time that he was investigating long-term economic trends, Kondratieff discovered huge waves of booms and busts in economic activity. He relied upon the economy as it stood at that moment in time. In the 18th – 19th Centuries, about 70% of the economy in the United States was agrarian. This was a much higher number in the Third World and in Russia at that time. Therefore, Kondratieff fell into the third category of error. He started with the presumption that the economy in the future would be driven by this commodity cycle of booms and busts. If the economy evolved and it was primarily moved by a different component, then the model would no longer predict the main overall economy, but only the commodity sector. Therefore, we must understand that a model can still fail by the failure to be able to adapt to changing conditions.

Not to slight anyone, it should be also noted that Kondratieff may have been influenced by another Russian of little fame. In 1922, Professor A. L. Tchijevsky actually published a book: "Investigation of the Relationship Between the Sunspot Activity and the Course of the Universal Historical Process from the Fifth century B.C. to the Present Day." Tchijevsky established that the 11 year cycle in sunspot activity effected society by gathering evidence from 72 nations between 500 BC to 1922, demonstrating a human excitability defined as migrations, riots, wars, revolutions, and various changes in magnitude. His work may also have influenced Kondratieff insofar as looking at the economy from a cyclical nature. The low in sunspots was 2008.

Designing the Model

Now that we understand the first set of errors that will doom any model, we need to ensure absolute objectivity.  To build a scientific model takes absolute clear understanding that separates the dangerous ego inherent in so many people who need to prove themselves right because they lack personal confidence in their own ability. We also must define the scope of the model for that will determine what we can and cannot forecast, understand, and manage. We must keep that personal ego in check and that means surrendering not just the contest to be proven right, but to surrender that temptation to assume anything. It is extremely hard to get to this zone of total objectivity. But this is the only place where a model can be designed. Ironically, it is man’s ego that prevents so many from crossing that line into this state of pure objectivity. This is not a contest or a child’s game.  This is a serious matter where we accept that we know nothing and allow the real knowledge to manifest by observation. So few have embraced this state in modern economic times.

Adam Smith (1723-1790) achieved this state, but he did have the Physiocrats to compete against. Smith's competition, however, was not by argument. He established the understanding of human nature and capitalism by observation creating empirical evidence, not mere criticism. Those who criticize but have no experience bring nothing to the table. Smith observed the real world, how it operated, and produced the findings. Smith did not just offer words of disagreement like the scholars who never spent one day in the field to prove any substance but argued against Schlieman.  We need substance and empirical evidence to support words, otherwise it is just rhetoric.

The Scope

Perhaps the first misconception about the Economic Confidence model that I discovered is that it is a model for stocks, or the United States, or gold, or real estate. The truth is something quite different. There is a natural cyclical rhythm to everything in life from nature to mankind himself. The financial instrument that we may be using at the time matters not. Mankind will invest in anything and when there is a shortage of toilet paper, he will run out and hoard it, no different than gold. Therefore, we must realize that the scope of what we are dealing with is not limited to anything in particular, but is the collective behavior of mankind in all nations around the world.

We tend to be also very self-centered. We assume that people see what we see and that leads to great confusion. In other words, the business cycle is not all about "us" or "them" for it encapsulates everything and everyone. For example, the US panic of 1857 was also not a local event. It was an outcome attributed to several local developments, including the defaults of railroads on their bonds that led to the collapse in their stock prices. Many banks had invested money in railroads and subsequently failed.  The analogy is not so different than investment banks today. This was one reason that led to the separation between commercial and investment banks. As the railroad bonds were hit, the stocks fell sharply. This caused assets of banks to decline, and people lost their trust in private banks causing runs and widespread bank failures. This led to the first real sharp increase in unemployment that was a rather new product of the age known as the Industrial Revolution. Where under the pure agrarian model, labor was typically slave, indentured servants, or serfs, the Industrial Revolution caused a cycle in employment. 

What is overlooked, however, is that the Panic of 1857 was also a global force manifesting as a contagion. The Panic of 1857 in the United States also led to a money-market crisis in Europe. Europeans had been eager to invest in the New World and with major gold discoveries in California in 1849, visions that the streets of America were "paved with gold" was a popular slogan to fuel investment overseas. So, the financial Panic of 1857 became the first real "contagion" that infected Europe after the South Sea & Mississippi Bubbles of 1720.

The next major US panic was also related to worldwide events.  The Panic of 1873 began in Vienna, Austria during June that year just eight years after it lost the war with Prussia in 1866. The Austrian financial crisis spread like a contagion causing European investors to sell American assets to cover losses. This led to the collapse of a major Investment Bank, the Goldman Sachs of its day, Jay Cooke & Co on September 18th, 1873. This set in motion a major collapse dubbed "Black Friday" that resulted in the stock exchange closing its doors for 10 days starting September 19th, 1873. By the end of 1873 in just three months, over 5,000 businesses failed in the United States. Tens of thousands came close to starvation. This is where we find the first Soup Kitchens appearing in New York City.

Likewise, the 1929 collapse and the Great Depression were also worldwide events. Herbert Hoover’s memoirs provides the historical documentation for the Currency Crisis of 1931. Virtually all of Europe defaulted on its debt causing the dollar to rise to historical levels because it was still on a gold standard. This led to the collapse in exports and the cries for greater tariffs. This culminated in Roosevelt's famous confiscation of gold and a near 60% devaluation of the dollar in 1934.

In defining the scope of the model that needs to be created, we cannot ignore the world any more than the world can ignore events in the United States. We must input all economies and markets and realize that every person in every country will respond according to Smith’s Invisible Hand. Currency is like a language. We think and measure everything in the currency of our origin. That means we will invest in China if we can see a profit in our home currency, not the local currency of China.

The 1987 Crash took place because of the formation of G-5 (Group of 5) in 1985 that was organized to force the dollar down, no different than Roosevelt accomplished with his 1934 confiscation of gold and the devaluation of the dollar. The problem was, those in charge had no practical experience. They knew not the repercussions within the global economy. The Japanese had been buying nearly 40% of new debt offerings and they were heavily invested in US real estate. Once the politicians stated they were banning together to force the dollar down by 40%, they failed to realize the complex nature of the economy. They assumed that lowering the dollar value by 40% would allow the US to export more by devaluing the costs of its production. However, that also meant that those who had purchased US debt would lose 40% as did those who purchased US real estate and stocks. Thus, the stock market crashed. People called the brokers asked why people were selling, and they could not articulate why when there had been no domestic change in fundamentals.  It was the lack of fundamental news that caused the panic!

Price over Wave Perhaps this helps to understand what is truly necessary to construct a viable model. There is no individual who is capable of making so many major calculations within their head. This is beyond the human capacity only from a standpoint that while the mind could function subconsciously, we lack the ability to query the mind independently on a sustained basis.

Now, hopefully, we can see in our mind how such a model can function. The primary wave structure I have named the Economic Confidence Model is a composite of the entire world economy. This is why we see global markets in fact rising and falling in line with this model. For example, the Japanese market peaked precisely with this model on the 1989.95 peak. We also witnessed the collapse of communism also in 1989.  At the 1998.55 turning point we saw the collapse of Russia that also caused the collapse of long-Term Capital Management. We also have now a global crisis that unfolded with 2007.15 that market the high in US real estate and the Japanese markets.

The model is extremely complex. A wealth of national and market data is brought together under the Economic Confidence Model running separately and independently behind this model. It is the convergence with the overall wave structure of 8.6 years that enable one to see what economies and markets will be affected. As illustrated above, there are then two separate wave structures that also filter into the model quite independently – volatility and Schema.

Economic Confidence Model Schema Frequency adn Volatility Model 

The First Wave Structure is the volatility models. This also runs on the main collective structure of the Economic Confidence Model. However, clients were quite familiar with the forecasts we provided at Princeton Economics that called for "Panic Cycles" in specific individual markets. Thus, the illustrated component wave of a base unit of six, built into a major wave of 72. However, we also had separate volatility models on each economy and each market. Again, it would be the convergence of markets and economies as well as currencies that drives the complexity both in trend as well as volatility.  The Second wave Structure is the "Schema Frequency Composite" that tracks the global complexity and projects the patterns of development. It is this pattern base that affords the source for technical analysis and other pattern based forms of analysis.

Economic Confidence Model 72 NationsThe overall Structure of the Economic Confidence Model is dynamic with 72 nations represented and every sector and market included.  We then filter that through a country’s currency, combine that into a regional perspective, (Asia, North America, South America, Europe, Russia, Middle East, Africa. Australian and the Pacific Island Nations), and the global model begins to take shape. This is how capital moves, from one region to another. When the Americas were discovered by Europe in 1492, it sparked an age of empire building. But it also led to capital investment. The first economic boom became the Mississippi Bubble and the South Sea Bubble that led to a bust in 1720. By the mid 1800s, we see regular European investment capital flowing to US/America.  This trend was affected by the first and second World Wars.  By the end of World War II and the start of the Bretton Woods meeting in 1944, the United States had 76% of the world's gold supply. That is why the dollar became the reserve currency.

The formation of the G-5 in 1985 and the talk that they "wanted" to see the dollar decline by 40%, began a capital withdraw from the United States back to the second largest economy, Japan. As that capital contracted, both the yen rose in value globally as did its real estate and share prices. This attracted capital worldwide causing a capital concentration in Japan forming the Bubble top. As the foreign capital began to leave, it stayed in Asia, and then turned its focus to Southeast Asia. That led to another boom and followed by another bust. We then see the capital flows headed back to Europe in anticipation of the coming Euro. The US stock market also bottomed precisely with the Economic Confidence right to the day 1994.25. 

Capital moves around the globe like a herd of wild animals. We must understand that this inherent characteristic is what also causes the rise and fall of nations. For example, Italy and Spain were the dominant economic forces in the 15th Century. The wealth of the Americas was pouring into Spain. But Spain borrowed heavily and squandered its vital wealth through poor government management. Spain defaulted on its loans to its bankers, who were Italians. That default ruined both nations. The extremists emerged and the Spanish Inquisition was authorized in 1478. The Spanish were so severe, that the Pope Sixtus IV had to interfere. The Spanish Inquisition was a state tool, and it was so powerful, even the Pope was unable to restrain it. In 1483, the Spanish Government became the grand inquisitor for Castile. It was used to hunt out Jews and Muslims. This led to the demise of Spain and, eventually Italy, reducing both countries to third world status. The persecution of the Jews led to their flight to Amsterdam. This migration gave rise to the Dutch, for the Jews took with them their skills in banking and risk. We find the migration of banking to Northern Europe and the birth of insurance. This eventually migrated to London.

The same pattern is emerging in the modern world.  Following World War II, New York emerged as the new financial capital of the world. But where the US had 50% of all global IPOs in 2000, the number fell to below 5% after the prosecutions of ENRON and WorldCom. The insane new criminal penalties attached to corporate events, has driven capital out of the United States in the same manner as the Spanish Inquisition destroyed Spain.  If the Chinese make the transition to a free market without the political unrest, China will become the new center in the years ahead taking capital from the West and Japan.

Freedom To Think

While it took me the better part of two decades to construct this model, it became obvious that in order to create a worthwhile model, it had to be able to freely adapt. The failure of Kondratieff's Wave in forecasting the overall economic trend was due to the fact that the economy evolved. Kondratieff had based his model upon the price movement in commodities. This made sense when commodities had accounted for between 40% and 70% of all employment and economic growth. However, the Economic Confidence Model had to be able to also forecast the migration of capital (capital flows) as well as the evolution of economic growth dependent upon the component structure of the economy.

The model had to "think" like a human. It had to learn from "experience" and not ignore the ability to accumulate knowledge, not just data. To accomplish this goal, I had to design a system that had no predetermined rules. It had to be able to learn like a child and construct its own "knowledge base and experiences." It would have to be taught only how to think and how to analyze. This required a new method of programming. But it also required allowing the creation of skills, but without the predefined rules.

There could be no presumption that if interest rates rose, stocks would fall. No such relationship rules could be created. This would defeat the ability to create a free thinking model. It would analyze and compare azuki beans in Japan to crude oil in the Middle East. If there was no relationship, the computer had to discover that on its own. This dynamic structure was the only way to create a model. It would be the only way to survive the pitfalls and establish a collective artificial means of acquiring true knowledge – that is "experience" not the mere possession of data nor the creation of massive predetermined rules based upon assumption that could easily change with time.

In this manner, the model would be able to see the migration of capital and the evolution of economic trends. Like the precession of the equinox where the earth completes about one cycle traveling back to the same point against the full scope of the universe every 26,000 years or so, this movement is only about 1 degree every 72 years. One generation can barely notice such movement. It takes generations to discover such trends.  The economy of mankind is no different. The rise and fall of civilizations is linked to the migration of capital and people. The population of Europe in 1900 was about 400 million compared to 76 million in the United States. Things change dramatically and it takes the collective observations to even ascertain such trends as they are developing. We can look back and see what took place, but rarely can we foresee the trends extrapolated from subtle movements.
 
Universal Bank of Lebanon was one of my clients in the early 1980s. They found a ledger where someone had written down all the prices of the Lebanese pound for decades. They asked us to build a model to be able to forecast their currency. The data was input and a correlation with the global economy established. The model correctly forecast that the currency would collapse in a matter of days. I did not understand that a war was about to start and that is why the computer was correct. How could it see such events? It did not know of the war at that time. But those who do know could take financial positions to profit from the news. Those who knew moved capital in advance and that flow registered on the model.  The model understood the economic result, regardless of the fundamental cause.

This event led to the gathering of data on Rome and ancient times so that the computer could expand its knowledge of how political-economic events also have a precursor. Those who know a war or a terrorist act is about to take place, move funds and take positions that can be ascertained. Building long-term models then allowed the computer to accumulate knowledge of events that could be read no different than tree rings. It was the patterns that emerged from the fall of the Roman economy in 3rd century AD that reflected not a steady progression of trends, but a sudden shock that appeared to form out of nowhere. This database allowed the model to evolve a "generational knowledge base" unprecedented in human history, "collective experience."

It became obvious that trends emerged as a "contagion" even in ancient times.  A historical example of a “contagion” was the overthrow of the Tarquin king in Rome 509BC which created the first Republic. This "contagion" of Democracy spread as far as Athens in 508 BC. The bold new idea of “Democracy” created a trend toward an elected government and swept the ancient world within one year. The exact same trend emerged in 1989, with Tiananmen Square (June 3-4, 1989).  This was closely followed by the fall of the Berlin Wall by November 1989; Russia also withdrew from Afghanistan in 1989. This was the first Peak on the 8.6 year cycle into a Private Wave that had begun in 1985.65.  To the model, these trends may be separated by thousands of years, but they are as similar in nature and appearance as identical twins.

Collapse of Roman Silver Monetary System

For those who might question the model’s accuracy, I gave a lecture in London in the summer of 1998, within sight of the high of the next wave on 1998.55. The model was projecting the collapse of the Russian currency and economy. The London Financial Times was at my lecture and ran an article on the front page of the second section stating that I had made that forecast in London.  I gave Russia about 30 days before the meltdown. By September 1998, Russia collapsed. The Fed had to bailout Long Term Capital Management. After these events, the CIA approached me and wanted me to construct the model for them. However, they were not interested in the real economic capacity of the model and how to improve our management of the economy.  They suddenly realized the model had major intelligence value.

I was also invited to fly to China to meet with the Chinese Central Bank after the correct forecasts for 1989 and the Asian Crisis. China did come to an agreement to contract with Princeton Economics to do all its economic forecasting. The seizure of Princeton Economics in 1999 by the US Government put an end to that deal.  The computer had also correctly forecast in 1999 that crude oil would rise from $10 to $100 going into 2007. The US Department of Energy came in and wanted us to create a model of energy for them. One of my employees, James Smith, showed up before Judge Owen on October 3rd, 2000 with the proposal from the Department of Energy. It was given to the court, but the SEC objected and wanted the Princeton Economic Institute closed and all forecasting stopped.  So much for free speech. The record in court shows they would not even allow James Smith to testify.

Ability To Communicate

Still, it was cumbersome to communicate with a computer by just looking at printouts of data and relationships. It was critical to be able to communicate with a computer in the same manner as a human being. In the early 1980s, it dawned on me that I needed to teach it English and how to utilize natural language. This structure differed from imputing data of 72 nations and every market. Where in one forum I could not create any rules fearing contamination or bias, here I had to create the rules of language that would be hard-wired for form and to establish definitions of words. That was not something I found extremely difficult. That was the easy part. Giving a computer essentially a dictionary was not that hard. The tricky part was how to make it understand the words, articulate those words to describe what it discovered, and relate to a human being. I was now venturing into the world of SciFi and everything I had learned in computer engineering back in the 1960s was vital to visualizing the possibilities.

I used my two children as test pilots. They were born in the late 1970s, so they were young enough to participate without prejudice. I created a knowledge base of the English language with all the words linked as in a thesaurus. Thus, it was simple for a computer to relate one word to another and understand their meaning. I merely divided the language into subject, verb, and object, with the computer then comprehending that the language was no different than a math problem. It understood the subject and the object. What to do with them was determined by the verb.

Now I needed my children to help put a face on the computer. By this I mean I had to teach it how to communicate. I initially established a type interface. My children would type on the computer interacting with the computer. What I designed was for the computer to learn who it was talking with. It would ask intimate questions that were related to what my children liked, disliked, what they ate, who their friends were, and what sort of pets or animals they liked.  It would record answers and thus acquire knowledge like a human.  It learned from experience. This allowed the computer to have a conversation. It could renew a conversation by asking how your friend was feeling, keeping track of all relationships. It could both respond as well as initiate a conversation once it could understand who was there.

One day, my daughter came home from school and saw I had the computer apart installing voice capability. She got upset and thought “he” was dead. I assured her he was fine. But this system was able to befriend 9- child, and converse with her to the point that it began to create a working knowledge base of who she was and what she dreamed would be their future. It communicated & understood her.

Former employees have corroborated that the computer could talk. The voice modules were successful and this interface that my children helped me create was the key to real communication. Like the best SciFi movies, the computer model was now fully functional. I could talk to it and ask how it arrived at a particular forecast. The weekend before the 1987 Crash, we had a seminar in Princeton. Clients who were there knew the accuracy of the model. The target date was 1987.8 – that was precisely October 19th, 1987. I gave that seminar explaining that the computer forecast was that the S&P 500 futures would drop by 10,000 basis points. It did precisely that. It was my job to state what the computer concluded. It was not my personal opinion, it was the computer and it did an amazing job. 
 
Manipulating the Cycle

I believe I am a political prisoner no different than Kondratieff. Others have dubbed me "John Galt" of Atlas Shrugged. Whatever I am like, no one can manipulate the world economy – not even the Government or all of them together. At the very best, if everyone followed the model, one of two possibilities emerges. (1) The amplitude may be increased, or (2) the wild amplitude could be reduced. Like John Maynard Keynes postulated, Government could indeed help the economy by manipulating spending, interest rates, and taxes to indirectly effect an economic decline by lessening its degree of magnitude. But never would it be remotely possible that highs could be turned into lows by the sheer will of man himself. This would be up there with inventing a pill that defeats death.

Manipulating the Cycle

Illustrated above, the best we can hope for is taking a natural wave (A) and then having a experienced government apply calculated stimuli to reduce the amplitude of the wave to a lesser contraction (E). Our problem is the refusal of government agents to understand what is taking place and blaming high salaries of CEOs.  High CEO salaries have nothing to do with economic reality any more than overpaid sports figures.  It is the politicians same rash behavior that leads to political loss of freedoms. It was the hatred of Marx that led to communism and socialism. Government begins a war against the free markets and human nature itself.

This is the real casualty of what is going on. It is not a collapse in capitalism; it is the collapse in socialism. The same way government defines "inflation" as the rise in the price of goods and services. The government is shifting the blame to the private sector rather than defining "inflation" as the decline in the purchasing value of the currency.  That would place the blame upon fiscal policies. "Inflation" in the price of goods or services is only a private sector issue when it is isolated for one particular item for an identified reason, such as a hurricane that wipes out an entire sugar crop. Otherwise, when price increases transcend the entire spectrum of goods and services, it is not the greed of corporations, but the decline in the purchasing value of the currency.

The driving force behind the business cycle is what we call the bullish/bearish consensus. In other words, the majority must be wrong. Why? The fuel behind the cycle is the imbalance in supply and demand. There is no equilibrium, any more than there is an Easter bunny laying chocolate eggs in your garden. If there was the utopian idea of equilibrium in reality, we would be in the dark ages. No nation would become rich for it would be impossible for one nation to gather greater wealth than another.

The cycle requires that the majority is always wrong because that is the fuel that then makes it work. With every stock market crash, government tries to find the culprit who overpowered the market and forced it down. Shorts are attacked as if they were sane sort of traitor. Short selling was even declared a criminal act with the 1907 Crash.

The Senate investigations in the 1930s turned into a witch hunt. The Senate demanded to know who was short. Many people were destroyed. Mr. Fox, of 20th Century Fox, ended up with so many lawsuits against him because of wild accusations made in the Senate without any evidence, that he went virtually bankrupt. Willy Durant who began General Motors ended up with a job in a bowling alley. The Senate even summoned Rockefeller. No one was beyond their reach. The net result, the grand¬standing destroyed the free markets causing the w Industrials to fall by nearly 90% into 1932.

But it is never the short sellers that cause a decline. A major decline only occurrs when the majority are all on one side. If you reach the point that 85-95% of investors are bullish, you have sucked in the last guy. All you need is to spook that herd, and it will turn and run collectively. When you scare the majority, you have 85-95% sellers and no buyers. Never will you find that many shorts at the high. Those who sell the high against a bullish consensus of 85% – 95%, are a slim minority. 

In 1990, I was giving a lecture and small conference for our corporate clients in Tokyo. A high net worth individual bribed his way into the conference to ask me a question. Unbeknownst to me, this was the man who bought the exact high in 1989. He was in his late 60s and explained that he had never purchased stock in his entire life. He had always been conservative and did not approve of such speculation. But on the last trading day of December 1989, he bought about $50 million worth of Japanese shares. That was the precise high, and the market crashed very hard within months.  I was curious and I asked him why he purchased stock on that day? He explained that every year brokers called him and explained that the Japanese share market went up in January 3-5% like clockwork. After 6 years of watching this event, he decided to give it a try. He bought the high of the Nikkei 225. When you suck in that last guy who raises the flag and joins the herd, it is over. There is no new source of buyers to keep the cycle going. Just hold your arm straight up in the air. See how long you can keep it there. The weight of your arm will become so heavy and your energy will flee like the wino. Suddenly you will be forced to let it go. The markets function on that same principle. This is why no one can manipulate the business cycle or the world economy. This is not like picking some particular market such as silver, platinum, rhodium, or an agricultural and manipulating supply to force prices higher. This is the business cycle we are dealing with that embraces the entire economy. Not even government can manipulate that as we are watching right now.

The Biblical story of Joseph warning the Pharaoh of a coming drought for 7 years enabled the society to survive. The forecast could not stop the drought cycle, it merely enabled society to ride-out the cycle. This is the optimum achievement that we can expect. If we understand the business cycle, then we too can survive it. This is so critical, because it is this business cycle that causes even politics to swing back and forth. The Democrats are back in Washington just as FDR won in the Great Depression and Hitler came to power also in 1933. Society reacts blindly and wants retribution for its pain. The Panic of 1869 resulted in dragging the bankers out on Wall Street and hanging them causing the government to send in the troops to suppress the riot. There is always a witch-hunt. Those in power need to blame someone in the public to divert responsibility.

The dark side of the business cycle is the perpetual loss of civil rights. With every crisis, we lose more and more of our freedom, no different than it was in the primitive ancient times. The reason for this is quite simple. If you do not under¬stand how and why the business cycle works, then individuals can be misled easily into a witch-hunt to grab someone and punish them. When Rome burned, Nero (54-68AD) blamed the Christians starting the Persecutions that lasted until Constantine. But after Constantine, the Christians got even and Persecuted pagans under the same principle of being a non-believer called "heresy" punishable by death. Virgins were sacrificed to the gods to make crops prosperous or to volcanoes to quiet their spirits. We may believe we are modern, but we act the same way as countless generations before us.

How or why the majority is always wrong lies within our nature to be social insofar as we need peer acceptance. If everyone is doing something, it makes it ok. Just as we have the economic meltdown now, the Investment Banks who should have known better looked around the landscape and saw how much money was being made on the unbacked derivatives. Because one house is doing it, others begin fearing they will lose market-share. Next thing you know, they are all doing it.  Had they made a rational decision based solely upon facts alone, they would not have gotten involved.

Next time you see a flock of geese in a field, watch what happens. There is no communication between them. Yet, if something startles one and causes that bird to take flight, others will follow and soon the whole flock is in the air. They do not act by individual communication, but by following each other with no comprehension why the first bird took flight. There is no immediate danger they can see. Nonetheless, they will flee – not understanding the original decision to take flight. All flocks or herds of animals act the same way.  We too respond the same way like any other animal.

Following the 1987 crash, we did our own survey asking why professionals sold. Knowing that we were not interested in publishing individual names but in the group study, the result was interesting.  Very few professionals followed their computer models which were designed to protect against such a scenario. The stock market had closed Friday on the low down sharply.  Everyone thought there would be a bounce on Monday.  However, it did not arrive. When the S&P 500 futures fell nearly 10,000 basis points, even the professionals were in total shock. The computers were correct, but they did not follow them. Newspapers were blaming computer models. The truth was the lack of such experience overrode the models. The professionals froze and did not sell when they should. As the market began to make new lows, they panicked like any first time trader. They sold with no understanding why. They called brokers asking why there was such massive selling? The brokers had no news. This led to wild rumors and the presumption that something huge took place, someone must know what it was, so they started selling.  No different than the flock of birds. There was no news – that was the problem!

The 1987 Crash illustrated that it can be the lack of news that causes the herd of bulls to transform into a pack of bears all running for cover. Just like the birds will take flight without personal individual knowledge, humans will do the same. The events of 1987 demonstrated that all the talking heads on TV who try to give some fundamental explanation for every move create confusion and misunderstanding.  When they use the same story and the opposite effect takes place, confidence is eroded. My secretary use to have one of those stick-figures holding a sign. It had a slogan that said it all – "Shit Happens!" Sometimes there is no change in fundamentals. The business cycle will come into play and the fundamentals will strangely follow. It is like Joseph and the Pharaoh. The weather is changing. Yes we can blame ourselves, but there has always been global warming and global cooling. The ice core samples show there is a 300 year cycle. We may increase the amplitude perhaps more than in the past, but we do not create the cycle. Reducing carbon in the air will perhaps cause the cycle to be less pronounced. But it will never alter the cycle preventing ice ages in the future as they existed in the past. The Business Cycle is no different.

Why Does The Government Hate Models?

Why the Government as a whole does not fund the construction of a model for managing our social-economic world remains a mystery. But why the Executive branch seems to go out of its way to prevent any models from being created is even stranger. At hearings before the House Oversight Committee, a very interesting exchange took place, illustrating how the SEC for one deliberately obstructs technological advancements regarding the managing of our economy and nation.

When the SEC Chairman Cox was called before Congressman Waxman’s Oversight Committee, he was asked about models and remarkably gave the precise and very clear definition of the core structure of the model I devoted my life to create. He stated precisely the broad scope of what was necessary. Mr. Cox pointed out that the model would have to incorporate all economies and map the complexity of the global economy.

"With respect to modeling all of the risk in the system, I suppose at some point you run up against the problem of trying to create such a level of exactitude that you rebuild the whole world in all of its complexity. That is probably an aspiration that we ought not to have. II

Transcript, House Oversight Committee, testimony SEC: Chairman Cox, 2008, p124, 12999-3003

Congressman Snow asked a perfectly logical question that should we not have some sort of a model?

"I share the basic thrust of your question here, which is can we do better? Can we find ways to do better? It seems to me, and this is retrospective, the question is leverage in the system. When loans and debt gets to be some fraction of GDP, it probably ought to send off some signals, because GDP represents the earning power, the debt represents the obligation.

Congressman Cooper talked to us, about future obligations that vastly — that rise at a very significant rate relevant to the GDP of the United States. That sort of thing in rough and ready terms we should 'be able to model and have signals go off."

Congressman Snow, p125, L3016-3027

Congressman Snow has made a serious point. Why do we fail to collect experience and build a knowledge base and learn from that experience? Must we constantly make the same mistake dooming ourselves to repeat the same events like Bill Murray in the movie Groundhog Day? If we have no books that show if- you-do-this-that-will-happen in order to run government, then would a monkey flipping a coin do any worse? We cannot stumble through the most important aspect of government, managing our social-economy, hoping that when the lights go on, somehow a miracle will appear.

As Eric Jensen has explained, we do not do very well learning by just reading books. We need experience to create deeply seeded knowledge. If we throw away all our collective experience, we might as well burn all the books as well.

As bizarre as this sounds, the Executive branch hated the model I created and viewed this as some sort of covert means to control the world. I believe they watch too much James Bond. The Commodity Futures Trading Commission ("CFTC") even issued a subpoena demanding I turn over a list of all clients of Princeton Economics around the world accusing me of "manipulating the world economy" like some character out of a movie. My lawyers defended against that, and the CFTC lost. Yet still, their insane reasoning seems to be akin to the Puritans and their Salem Witch Hunts. They viewed that because of my experience and worldwide travels lecturing on every Continent, that the accuracy of the model proved not that the model was correct, but that I was so powerful and influential, that I could make the world shake. They even tried to get the renown Forensic Psychiatrist, Professor Paul Stuart Appelbaum of Columbia University, to testify that I was some sort of genius capable of manipulating the court and no doubt the world economy as the position of the CFTC.

Mr. Tancred Shiavoni of O'Melvany & Myers LLP conducted the interrogation attempting to solicit this image before the public.

SHIAVONI: Dr. Appelbaum, did you find Mr. Armstrong to be smart and intelligent?

APPELBAUM: My impression is that he was quite intelligent.

SHIAVONI: And do you have any way to rate his intelligence or is there any rating that you would give to his intelligence?

APPELBAUM: Well, I think without formal testing, one couldn't put an
IQ number on it, but I found him — my impression at least is that he is quite bright.

SHIAVONI: And did you find him to be rational?

APPELBAUM: I did largely find him to be rational, yes.
 
Transcript, 99-Civ-9667 (SDNY 2007), 4/27/07, p33, Lines 1-10

It is one thing to have the Government try to claim you are nuts or insane. It is something completely different when they try to portray you as Gold Finger from a James Bond movie capable of controlling the world.  The fear the Executive branch has seems to be akin to what Kondratieff experienced with Stalin. If the Executive doesn’t like what the model says, they literally try to kill the messenger. On May 10th, 2007, an inmate was allowed in my cell who attacked me from behind, strangled me from behind, beat me with a typewriter and after I passed out, jumped up and down on my chest trying to cave it in. Others yelled for the guard, but he waited until the inmate was finished and came out proudly announcing he had killed me. To the best of my knowledge, no one was prosecuted and I was taken to Beakman Hospital at NYU.  To the Government's dismay, I survived.

I am the first corporate officer in history since 1641 who has been denied all rights post-indictment claiming that since a corporation has no rights, neither do I. To think that the United States has the power to just imprison citizens, denied counsel, resources, strip you of any right to appeal, and hold you can be so imprisoned without ever being afforded a trial for life, gives pause to any claim that there is either
a Rule of law or even the potential for justice. (see Wall Street Journal 1/8/9)  .

I believe that the idea of any model seems to invoke such hatred and fear by the Government I cannot explain it. I believe I am a political prisoner and I do not believe that there is any rule of law to suggest that I will ever be released no matter what. I found this entire situation extremely bizarre because even the courts seem to be involved and have gone out of their way desperately trying to rewrite history in order to discredit the model. Judge John F. Keenan accused me of creating the model coming up with the idea after watching an Australian film named "Pi" that came out after I was in prison on contempt, and after I revealed in 1999 the relationship to Pi I discovered after the 1987 Crash.

This accusation made by Judge Keenan ignored the time-line, and took the exact opposite in the parallel SEC & CFTC civil cases. There, the notorious Mr. Shiavoni rejected allowing Martin Weiss to rent the Princeton Economic Institute to keep the forecasting going. Shiavoni sent an email to his lawyer demanding and insisting that the Institute would be closed and all staff fired unless I agreed to turnover to him the source code to a model they hated. The email was addressed to his counsel in New York, Charles Hecht. I provided a copy of this email to Gretchen Morgenson at the New York Times. Mr. Schiavoni was the counsel to the Receiver Alan Cohen from the lawfirm Q'Melveny & Myers, LLP. The Receiver Alan Cohen, had been a partner at Q'Melveny & Myers, but then was hired to be internal counsel at one of the very firms we had been investigating, Goldman Sachs. How does the internal counsel of a major Investment Bank end up running Princeton Economics? Judge John F. Keenan treated me no better, and revealed the bizarre attempt by the Judiciary to try desperately to rewrite history entirely on April 10th, 2007.

JUDGE KEENAN: Listen to me a minute, because I got a letter from somebody in Australia, it seems to me, which will be part of the record here, and there was another letter about Pi. I have a very bright and well-rounded young law clerk, turns out there was a movie called pi and it was all about cyclical developments. Did you know about that movie.

MR ARMSTRONG: Someone in Australia made the movie, and I think it was based on me, yes.

JUDGE KEENAN: It was based on you; are you sure you weren't based on it.

MR ARMSTRONG: No, it predated.

JUDGE KEENAN: No. I wanted you to know I know about the movie, I know about Pi. Unless I am completely mistaken, this was included in the material that I received and I have read it and that's what led me to discuss Pi and cyclical changes with my young law clerk who is over there. That's what led us to find out, led me to find out, thanks to her, about the movie

MR ARMSTRONG: This has nothing to do with the model, your Honor.

 Transcript 99-Cr-997 (SDNY) 4/10/07 (pg 45-46)

The courtroom was crowded with press from around the world. Judge Keenan went out of his way to try to discredit the model. It mattered not that this movie that was based on my 1999 revelation that the number of days in the 8.6 year cycle was equal to Pi (3. 141592654 x 1,000). The mere fact that they used that as the idea to create the movie in Australia where the model was capable of forecasting cyclical activity after my case began was just detail. The Judiciary was desperate to try to pretend there was no model, yet all the time keeping me in contempt of court and secretly behind closed doors, demanding I produce that what they were telling the world was created after the case began when I was in prison on contempt. I find the complete breakdown in the Rule of Law really amazing. You have no right to any-thing in federal courts and the burden is yours to prove you have any right. Then they demand others respect whatever they decree because they are judges.

Why is any model so threatening to the Government? Why do they publicly try to denounce any model would have validity, yet secretly demand to control anything that is valid and works? I cannot explain it. But I do know, when you are pushed to such extremes by ruthless tyranny, you have two choices. You sell your soul and your integrity in hopes they will keep their word and let you go, or you realize you are dealing with people who have absolutely no morals at all, and will never honor any promise they make anyway. You are staring in the face of absolute corruption.  The game is so rigged, there is no one to help or to vindicate any rights at all. You are dealing with the dark-side of humanity where the Constitution has lost all meaning.

I simply don’t trust the American legal system any more. The presumption is that the government can do whatever it wants, and the burden is always now upon the citizen to show they have any rights. Meanwhile, procedure is used to deny your access to any court or hope of a fair trial. So if the United States wants something, it is no different than any other Government. Judges just rule in favor of their boss.

I write now, because I do not know if I will ever be released. What I have learned from experience is knowledge that is too valuable to waste. So it is time that I explain the best I can before it is too late.  Why the Government hates models and refuses to allow any scientific method of understanding our social-economic environment I am not sure. I can only assume that they view it the same as Joseph Stalin – a threat against absolute power. We can presume that we have a democracy. But we also presume that when Congress calls the Executive before them, they get the truth. There are no checks and balances. This was illustrated by calling former Attorney General Gonzalez. The number of times he answered questions "I do not recall" would have been punishable by contempt had he been a mere citizen. Because he is a Government officer, there are two very clear standards – one for them – and one for us.

The Executive branch is in charge of both the military and the civil legal institutions, right down to managing the Bureau of Prisons. The power of the Executive branch is truly unlimited. We may elect the President, but we do not elect anyone else in charge of any Executive department. We can change the President, but the President does not control the Executive branch. Like Mr. Gonzalez, who is to say that the President is even made aware of what is going on in the Executive departments? No one has to tell the truth about anything for there is no one to prosecute them if they lie. Frank Sinatra sang a song "Send in the Clowns" and the punch-line is "don't bother" because they are already there. We can vote all we want. Does this really change anything when the people who run the Executive branch are not elected and are already there regardless who is President?
 
We need to create an Expert System that records all events, the response taken by government, followed by the result. Why do we respond always the same, when the result is never tracked? We cause history to repeat and amplify the boom bust cycle causing more pronounced swings. Why do we constantly repeat the same mistakes?

Book smart is not "street smart" because it is like reading about sex, but never having sex. One cannot write about that which he really knows nothing for he has never experienced it. It is time we make the next advancement. It is time to build the model that will better manage how we operate government. This model would have prevented the economic meltdown. It cannot alter the cycle turning highs into lows, but it can modify the amplitude. In other words, we can apply stimulation like a smart bomb that will not create stagflation and provides essential targeted policies.

We can preserve the real knowledge built from the experience of society. We need to collectively learn and grow the same as we do individually – from experience! We must stop the nonsense. This is not the Middle Ages. We must stop killing the messenger and just once try to gather our experience and acquire real knowledge. We are throwing away the best of those that went before us. In every science, we build upon the research of others except in how we live and manage government.

Martin Armstrong: Is It Time To Turn Out The Lights?

(Note: I accidentally published a prior edit of the essay on Sunday March 8th.  The following is the final edit.)

The following is an essay from Martin Armstrong dated February 19th, 2009.  I have taken the liberty to edit the essay.  Martin Armstrong occasionally throws complex ideas into his essays almost as a sidenote.  I have edited the essay to make it more direct and accessible for all readers and have done my best not to alter any of the content or ideas.  If you would like to read the essay in its full form, I have provided a link to it at the bottom of the essay.  

Is It Time To Turn Out The Lights? 

By Martin Armstrong

Please Register Your Email Address For Any Update News – ArmstrongEconomics@GMail.com.

Since the beginning of the year, everyone has expected either one of two outcomes: (1) The election of Barack Obama would spark a recovery and the economy would be saved by his stimulus package, or (2) we would see a major wave of rising interest rates to pay for the Obama spending-spree that would spark serious inflation. But there is a much darker side to these shallow views. To put it mildly, it may just be a far more complex outcome than anyone has dared to guess. We may be in the midst of a "Waterfall Effect" that could undermine the very structure of Western Civilization. Historically, it has always been the debt crisis that destroys the greatest plans of men and dictators.  This could be phase two of the collapse of Marxism.  After phase one reshaped Russia and China, phase two may mean that it is the United States' turn. 

Is it the Time to Turn out the Lights?

This Economic Depression is far more complex than meets the eye. I believe that the Investment Bankers, in their own greed, used the final days of the Bush Administration to try to grab as much as they could while there was an ex-Goldman Sachs boss in the driver seat. I believe they needed to scare Bush into giving them everything that they dreamed of, and Congress was stupid enough to hand-over a pile of cash with no strings attached. This scare tactic worked. The bankers got what they wanted and even settled scores by getting rid of their competition like Lehman. But in the process, they pricked the bubble in which everyone lived. They set in motion a collapse in confidence that is the critical key to a contraction.  Once people lose confidence, they get depressed which is why we call such events a “Depression."

This Depression has centered on the most vulnerable of markets – real estate. It is the least economic force of production, yet it is the most visible sign of wealth in the minds of the average person. People will hoard cash whenever they feel that wealth is impaired.

States are in crisis and their way of doing business is also facing a new reality. As the real estate base collapses, so does the tax base.  Unlike the Federal Government, the states cannot print cash without limit. What use to be safe like Muni-Bonds is no more. The end of borrowing for everything is now here.
 
Yet we are also reverting to the age old problem of Regional Capital Flows and disparities within each nation. This is a critical issue that is tearing Europe apart placing the Euro at risk. At the same time, the disparity among regions in the United states is percolating beneath the surface and is about ready to split the nation asunder.

The Disaster of One Size Fits All

Just prior to the formation of the Euro, I was giving numerous seminars on the subject and warning that the one-size-fits-all policy will not work and may be the undoing of the European Union. Some people believed that just because I was an American I was naturally pro-America. But that was certainly not true. The key warning I was illustrating at that time is starting to come to the surface. Let me make this perfectly clear. I believe Europe can survive and reverse the trend if it listens to reason!

Politicians have no long-term view because their self-interest is to merely win the next election. No one will run for office on a claim that they prevented a disaster. You just don’t know what could have happened! Just as President Obama is taking every possible wrong step that will ensure that this global economic disaster gets far worse, his advisers truly know nothing about history, trends or have any practical real world experience from the private sector to draw upon. How can we expect them to understand when such people have only lived within the bubble of government and convince themselves they have all the answers?

Call Money Rates 1870 Before there were central banks, the perpetual swings in the economies of the world rose and fell not in unity, but diversity according to the local economic mix. In the United states, these regional capital flows  created localized booms and busts. For example during the Gold Rush of California, inflation in that region was running at multiples of that on the East coast. There were even $50 gold coins being privately minted in California whereas the largest denomination in the east was $20. When the San Francisco 1906 Earthquake hit, the insurance companies were in the East and the claims were in the West. The flow of capital left cash shortages in the East that contributed to the Panic of 1907 causing call rates to rise to 125% on the NYSE. 

The analysis that followed the Panic of 1907 came to the realization that there had been a capital flow problem. The answer led to the creation of the Federal Reserve Bank in 1913 with its 12 branches. Why were there so many branches? What is not widely known today is that each branch operated independently. In other words, there could be 12 different interest rates. If cash was tight in California, that branch could raise rates by 1% and that would attract capital flows for investment.

The mistake of the Euro that is now starting to pull apart the entire system, is that the model used was that of the United states post-World War II. Because of Franklin Roosevelt and World War II, central power seemed to be the main goal. The independent status of the 12 branches was usurped into Washington and never given back. This usurpation of power completely altered the ability to manage the economy and thus, the Europeans based their model upon the mistakes of the United States. Just as there were regional distinctions in the United States, the same exists in Europe. The Euro is being torn apart by the ignorance of economic history.

The way to save the Euro before it is too late is to allow interest rates to float independently within each nation. This is necessary to allow capital to flow naturally to the regions that need it the most. Unless the Euro is fundamentally restructured, it is following the path of destruction that has been tearing apart the US economy not to mention many others.  For example, in Canada, the central bank was raising rates to fight real estate speculation in Toronto. At the same time, it was putting farmers and miners into bankruptcy in Vancouver. There can be no one-size fits-all economic policy. 

Outlook for the Euro

The Euro Monthly 2006The highest monthly closing for the Euro came in March 2008. The April high was exceeded slightly on July 15th, 2008 when the high was established at 1.5988 US. This is a clear double top that could yet be exceeded. The March 2008 highest monthly closing was in line with 2008.225, which was the first minor 'turning point after 2007.15 on the Economic Confidence Model where the US real estate peaked and made a major high that may last for several decades to come.

From the high in the Euro on July 15th, 2008, there was a bold collapse that, so far, constitutes a reaction amounting to a 3 month decline. While the Euro penetrated the low of 2007, it did hold its major closing support that remains at $1.26. A monthly closing in the Euro beneath this area would signal the end is near. For now, the Euro could still survive if the right steps are taken and Russia keeps its weapons harnessed. The greatest problem for the Euro long-term remains the geopolitical problems on the horizon in Russia, which still lives in the world of empire, rather than the age of production.

In order for the Euro to show some sign of strength, it must first accomplish a monthly closing back above $1.4215. This is the minimum threshold level from a technical perspective to show same sign of survivability. The next level of key monthly closing resistance will be at $1.4315. As long as the Euro remains below this level on a monthly closing basis, then a test of the major long-term support is still possible at $1. 1680. A monthly closing below that area and it will be very unlikely that the Euro will survive in its current form.

Currency Is Still The Key

British Pound 1919 - 1933We must understand that currency values may still prove to be the key. Often forgotten is the international and regional capital flows that dictate the overall trend and the outcome of what we face. The Free Market will always prevail. It even forced the collapse of Communism.  No matter how much politicians may want to bury it or call it a Republican dream, it cannot be suppressed. The chart to the right shows the British Pound between 1919 and 1934.  The currency clearly shows the decline of British power.  It fell from $7.50 in the 19th Century to about $5 for the start of the 20th and it has flirted with $1-$2 going into the 21st. No matter what system, the Free Markets always prevail as this now shows even during the Gold standard. This is a safety-valve that the currency absorbs economic stress in a complex relationship with interest rates. This is a dynamic between capital concentration and capital flow internationally.
 
Today, we have the same interesting trend emerging. Despite the fact that the Debt Crisis has emerged from the United States, or more correctly, the London office of AIG, capital is still fleeing to the dollar in this flight to quality. But how can there be a flight to the dollar that is a flight to quality in a rational world?

The underlying strength of the dollar is also geopolitical. From a conventional perspective, the United States is still a very difficult place to land troops. There is also the maturity factor. The dollar is one currency that has remained intact. If you have a note printed in 1934 or 1864, it is still legal tender. That cannot be said even for the British Pound.

Yet there is something more profound. So far, the United States remains the key Super Power and the largest economy. Hence, what we are really looking at is the similar effect that Rome had in ancient times followed by Constantinople. When the Roman Empire in the West fell in 476AD, the Byzantine Empire of the East became the leading world economy. Its gold coin the "solidus" became the world currency even in Western Europe when no other states existed with the economic power to issue gold coinage. The coin began to be called the "'byzant" much the way the dollar is called the "buck" or "greenback" in slang terms.

For better or worse, the dollar is still the reserve currency of the world. It may not deserve that status, but that is another story. There is only one primary world currency at a time.  The dollar may be humbled by internal stress and the political split of the nation and when that day comes, we will see it fall. For now, the world currencies have been few and far between. 
Reserve Currencies  

Silver Denarius of Julius Caesar Currency has always been a safety valve to relieve economic stress. This is not always understood, yet it is a vital component of global economics. When an economy comes under great stress where confidence collapses, people then hoard their cash. This is why Roosevelt confiscated gold, and it is why there was a Dark Age after the fall of Rome for there was no real capital flow nor banking, leverage, or borrowing – just hoarding. This drives the purchasing power of the currency higher (deflation) and when it declines, it does so against tangible assets (land, etc). The decline in the value of a currency is in reality a Free Market tax taking away wealth that is overstated. So currency can also be an indirect tax to compensate for the poor management of the state.

To illustrate the difference that capital concentration and capital flows will have on an economy, we need only look at the discount rate at the NY Federal Reserve between 1915-1933. Note that the worse economic decline was surely the 1929 Great Depression. Yet when we look at the real world effects, we come up with a different perspective.

NY Federal Reserve Discount Rate 1915The high at the NY Federal Reserve on the Discount Rate came during the Panic of 1919s aftermath – not the Panic of 1929. We can see the earlier high was 7%, yet in the Great Depression, the peak was only 6%. If we refer back to the Call Money chart from the NYSE, the peak was 1899 and in 1919 the high was 30% compared to 20% for the so called Roaring 1920s in 1929.

If the 1929 Crash was the worst in history and it was sparked by even shoe-shine boys speculating in stocks, then why did the Call Money rate reach the lowest level compared with every other crash going back to 1882? The answer is simple. Show me the Money!

The key to understanding the Great Depression is not speculation and Wall Street any more than what is going on today. There was currency crisis in 1931 that you can see illustrated by the British pound.  And England was the least European-nation affected. Yet the pound crashed and burned from $4.86 dropping to about $3.15.  It cannot be emphasized enough that the contagion spread then like today. All of Europe defaulted on its debt except Switzerland.  Britain went into a moratorium and eventually honored its debt. This created an intensive capital outflow from Europe to America. We can see that the Fed lowered interest rates (discount rate) from 6% to 1.5% very rapidly. It did not matter, for capital was still pouring into the US seeking a flight to quality driving US rates down, but driving the dollar to record highs. We can see that the British pound had fallen in the Panic of 1919 to $3.40, and recovered going into 1925. Therefore, despite lower interest rates in the US during the Great Depression compared to the Panic of 1919, the dollar rose to higher highs. So we can see that there is no linear direct relationship that can be drawn. This is a complex dynamic interrelationship that must be understood.

England Cuts Rate to Historic Low

One would have expected interest rates to rise where there is a Debt Crisis. Yet interest rates even in England have collapsed to new historical lows going back to 1694.  Indeed, most are now expecting interest rates in the United states to rise sharply in the face of Obama’s stimulus package. This is a rather simplistic view that we may not see unfold as many expect. This one-dimensional aspect of the problem is counter-balanced by the massive contraction in leverage at the core of the Great Depression of the 21st century.

It would appear that adding $1 trillion in spending would be inflationary and send interest rates higher. But this assumes that there is an alternative to investment not just domestically, but also internationally. We are also looking at a counter-trend causing the collapse in the avenues for capital to seek shelter. As I mentioned earlier, what use to be regarded as the safest bet – Municipal Bonds – for they were seen as backed by revenues, collapsed during the Great Depression. The City of Detroit defaulted on its bonds, but to be precise, it did eventually pay them off with much cheaper dollars in 1963.

Total Bonds Listed At Par Value on NYSE 1930s Another aspect of the Great Depression that has been lost in the details was that foreign nations, who defaulted on their debt, resulted in a collapse of the money supply in the United States. Back then, the investment banks sold these Bonds in small denominations to the average people. The irony of the Great Depression has been often hurried in history. Those who lost the most, tended to be the most conservative. Those who stayed away from the "risky" stock market, were still wiped out by the bond markets. For decades, there were groups of women who ware children whose family fortunes were wiped out by the collapse in the bond markets. Corp And Treasury Spread 1930s We can see from the above chart, the total amount of debt listed on the New York Stock Exchange exploded in 1928 and collapsed at the end of 1932. Another detail lost in history, the Fed lowered interest rates in 1925 in order to steer the capital flows to Europe. It was then presumed that lowering interest rates in the US would shift the capital flows and  relieve the crisis building in Europe. Yet the defaults in 1931 wiped out conservative investors who stayed away from stocks contributing to a collapse in US money supply by one-third.  We can see that the premium of AAA corporate debt over federal even reached a peak of more than 1.3% in 1932. The state and Municipal Debt also collapsed so the Flight To Quality did not subside until after 1932 and took place both domestically and internationally, not unlike what we are seeing again today.

The Waterfall Effect

The Waterfall Effect There are two primary different patterns of how markets collapse. The first kind is the speculative bubble.  Typical speculative bubbles end with a spike whereby a sharp rise goes exponential, followed by a sharp and steep decline.  The chart pattern appears like a heart-beat. This short-term panic typically does not lead to ruin. The spike formation is dramatic and highly volatile.

The far more dangerous pattern is the rolling over of an economy that is less dramatic, but does far more damage.  Suddenly you just wake-up and everything is changed.  This happened in China and Russia during 1989. There was no spike, just what I call the ''Waterfall Effect" that appears to be how a political state simply dies with no flare nor big bang. 

The greatest concern that we should have is the degree of volatility is off the charts. We are looking at nearly an outside reversal to the downside of the Euro on an annual basis! This degree of volatility is truly amazing on an annual level and has not been seen since 1933. Just look at the previous chart of the Pound. Note that in 1933, the Pound fell to new lows, but then reversed and even exceeded the $5 level, due to Roosevelt’s 60% devaluation of the dollar and the confiscation of gold domestically. The sheer level of volatility is clearly back to the days of the Great Depression.

The Rise of Volatility

I cannot stress enough that the level of volatility that we are experiencing during this financial crisis is just well beyond even that experienced during the early stages of the Great Depression and is more akin to the collapse of Rome. That is a stark comparison tells me this decline is nothing to fool around with.  However, the likelihood of either Europe or America following prudent economic policy to save our free economies is about as likely as me running for President.

Dow Industrials 1897 - 1937As we can easily see from the annual chart of the Dow covering the Crash of 1929, the decline does not reflect even an outside reversal in the first year of the decline. We can see that 1929 formed a spike high but it did not penetrate the low of 1928. The Dow Industrials did close lower than 1928, but it held the 1928 low

In 1930, the high remained below that of 1928, and it did penetrate that low and closed well below it. This provided a major annual sell signal and indeed we find the low 3 years from the 1929 high in line with the reaction rule duration of a maximum duration of 2 to 3 years.

When we look at the Dow Jones Industrials between 1897 and 1937, we actually do not find a single annual outside reversal to the downside until 1931. There was the Rich Man's Panic of 1903, the famous Panic of 1907, the Panic of 1919-21, the Panic of 1929 and then the Panic of 1937. Notice that none of these financial chaotic periods took place with the degree of volatility we have seen today, except 1937. The rise from the 1932 low into a 1937 high came with rising unemployment. Primarily, as gold was confiscated, capital was attracted back to stocks insofar as this afforded some tangible value for cash. The stock market became a hedge against the deliberate inflation that Roosevelt was creating. But keep in mind, Europe was still quite unstable economically and don’t forget that this economic instability also brought to power Adolf Hitler at the same time as Roosevelt. Change was the battle cry of politics in 1933.

Public/Private Confidence Wave

For years, I have warned that the greatest degree of volatility comes during a 51.6 year Private Confidence wave. This is a period that government, fearing losing power becomes most aggressive. For example, the Public Wave that peaked in 1671.75 was followed by a Private wave that was marked by tremendous upheaval including very serious spreading wars that included the early stages of revolution both in Britain that spilled over to Russia during 1689. This is the period of Oliver Cromwell, the beheading of Charles I, that all culminated in the South Sea. Bubble as well as the Mississippi Bubble both in 1720. This gives way to a Public Confidence wave that began in 1727.65. This wave reaches its peak in 1774.95 and that began the great period of revolution that overturned the idea of monarchy both in America and France. So we can see, we are now in a Private Confidence wave and the degree of volatility is certainly extremely high.

Call Money Rates 1870Looking at the call Money Chart, we can see that the pre-1913 period displays a much greater period of volatility. The end of the previous Public Confidence Wave peaked in 1878.15 and it bottomed in 1882.45. This is precisely the year we see the first spike to the upside with call Money Rates reaching the 30% level.

The Private Confidence wave marked the near bankruptcy of the US Treasury in 1896 and we can see that the major high in interest rates actually takes place in 1899 at nearly 200%. It is this Private Confidence Wave that peaked in 1929 that ended with the Great Depression.

The high degree of instability in 1937 was due to the fresh memories of the Great Depression. The press was filled with negative comments and the fear was that there would be another Depression. The fact that we can see the reflection of that degree of instability in 1937, illustrates that there was a deeply seated lack of confidence. This is the beginning of a Public wave where the Private wave peaked with 1929. Therefore, the growing lack of confidence in the private sector is reflected in the sharp volatility seen in 1937 compared to the previous panics.

The next 51.6 year cycle reached its peak 1981.35 marking the high in interest rates once again as the Government began to battle inflation due to its collapse of the Gold Standard in 1971. Hence, that Public Confidence wave peaked in 1981 giving rise to a new Private Wave.

Dow Jones Industrials Weekly 1929 - 1932Even when we look at a weekly chart of the decline and fall of the Dow Jones Industrials during the Great Depression, although this was about a 90% decline in three years, it was still very orderly from a technical analysis perspective. From the initial low that was made from the September 1929 high, there was about a 50% recovery as the Dow rose from about 200 to about 300. We do not see even this degree of strength in the current trend. To match that reaction rally, the Dow would have had to rally to 11,000. The first decline from the 1929 high was about 48%. So far, the decline from 14,198 to about 7,400 was also about 47.8%. Yet the recovery is nowhere in sight. Even the election of Obama has had virtually no impact upon the whole world economy.

Waterfall Effect Dow JonesIf we look at the current monthly chart of the Dow Jones Industrials, we see a very different sort of pattern from 1929. The main panic decline in 1929 took place in 3 months from the major high, with a 5 month reaction recovery from about 200 to 300. What we are confronted with currently, is what I have throughout the years defined as the "Waterfall Effect" that is a complete type of collapse from what you might call Exhaustion following a curved decline. Penetrating the Nov. low, could lead to a drop to 4,000 by June 2009 or September 2009.

Throughout the years of research covering all major economies and civilizations back to the beginning of recorded time, what has always distinguished the end of an era is how the decline unfolds. Sharp spike drops are indicative of corrections within a long-term trend that ultimately survives. When we see the “Waterfall Effect" the decline tends to mark the end of that organized state as we once knew it. 

We are confronted with a major shift that could lead to the same mistakes that caused the fall of Byzantium and destroyed individual liberty and capitalism. We are in a battle that may be far greater than anyone dares to think. The fall of China and Russia was phase one of the collapse of Marxism. We may be facing the fall of Socialism in a battle to the end.

In building databases of all civilizations and using computers to correlate both global interactions and domestic trends, there are certainties that do emerge. It is clear that civilization emerges time and again because mankind is a social animal and seeks the benefit of banning together in sort of a tribe of nations. But there is also the downside, and that is that civilization creates leaders and the self-interest of those in power always is pitted against its own people to exercise and extend its own powers.

Civilization is destroyed by the inability of all governments no matter the form it may assume, to spend only what it earns. Every state in history has fallen into a Debt Crisis and that has always led ultimately to higher taxes. In the Byzantine Empire, the taxes became so outrageous, they forced the average person to become serfs seeking shelter and to retain a portion of their crops for protection from the state. It was taxation that created feudalism, drove people from the cities to the suburbs, and just led to the Waterfall Effect whereby the state became so weak, it could no longer defend itself or sustain its economy. Taxation destroyed civilization and capitalism.

This "Waterfall Effect" was evident also in the Roman economy going into the full collapse that took place between 253 and 266 AD in just 13 years out of 1,000. The economic decline that changes the face of society forever, takes place in the shortest amount of time. The likelihood of Western Society listening before it is too late, is nil!

The End Of Real Estate

This economy peaked with real estate precisely at 2007.15. The stock market made a brief tally thereafter, but it was not sustained. However, American real estate has been an unrealistic market funded purely by debt that strangely produces no real national wealth. Purchasing a house creates dead capital. It does not create jobs after its construction, yet consumes capital through financing. Because mortgages have been available for 30 years, the price of a home is significantly higher than in other nations where there is no such a deep market available for borrowing.

Real Estate has been hailed as the greatest investment of all time – at least post-World War II. But the wealth created by real estate is mainly an illusion created by currency movements.  During the 1970s, a Porsche 924 cost as little as $10,000. By 1980, a Porsche was going for more than $50,000. People saw foreign cars as a good "investment” because you could drive them around for two years, and still get your money back. The same thing took place in England in 1985. A Ferrari that was $50,000 in the US, could suddenly be purchased for $30,000 in Britain when the Pound fell nearly to par with the dollar – $1.03. Because Ferrari could not afford to sell their cars in England at a substantial discount, they raised the price of the car to 40,000 pounds. However, the pound then rallied back to nearly $2 as the G-5, formed in 1985, manipulated the dollar lower by 40% to increase trade. Suddenly, that same Ferrari was now selling for nearly $80,000.

The point I am illustrating with the European sports car example is that the fluctuations in currency of 30-40% in a short time period, created the illusion that the cars were the real investment. However, the value of the car was related to the indirect swings in the value of currency. The rise in foreign car values throughout the 1978 instilled the image in American minds that a good German car held its value and was thus better than an American car. This image, created by the decline in the dollar after 1971, produced the age of inflation added to by OPEC. This period in time also created the "brand" image for foreign cars.  This did more to destroy the American car industry than any other event.

What we must also come face-to-face with, is that the same source of capital appreciation in foreign cars caused by the decline in the value of the dollar, has been the steadfast momentum behind Real Estate. A home purchased in 1955 for $14,000 at the peak in 2007 rose to $300,000 on average.  The question becomes, after excessive property taxes, does real estate really provide a good long-term investment? Most would just answer yes. But you are being paid with dollars that have far less in purchasing value. Add up the taxes paid, and you find out in real net terms, the same fluctuations in currency that make cars appear to be investments, do the same to housing.

Of course, there are segments of the real estate market which outperform the drop in currency and exceed other areas by 50% or more in "capital appreciation."  This is the natural business cycle that takes place. You will notice that the rise in real estate after a setback, starts typically in the City. It spreads from that center to the less central portions of the city, and then to the suburbs. As the suburbs are still rising, you will begin to see the core city district peak. That will be the first sign that the cycle is over. This manner in how real estate rises and falls was something that emerged from our studies at Princeton Economics monitoring real estate trend from Europe, America, Asia, and Australia. It always was the same pattern.

But what if the current economic decline is running much deeper and is along the lines of the Great Depression insofar as the total collapse in real estate values? Today, the cycle is far more volatile because of the widespread loans on real estate that did not exist during the Great Depression. The length of debt on mortgages post-World war II is far greater than what existed in anytime during the past. As banks were willing to lend for 30 years, it drove the price of housing up to meet the available cash. If there were no mortgages and property could trade only for cash, the value would drop substantially. So it has been the availability of money that has also accelerated the rise and fall in the value of real estate.

It was the S&P Real Estate Index that peaked with the Economic Confidence Model on 2007.15. This is the target market that will see the greatest fall. We are now facing a very serious possibility that the decline in real estate may not be over for at least 4.3 years into 2011, but the more likely scenario of a minimum of 10 years with the outside shot it will never again be an "investment" as we know it.

How could real estate decline for so long? The two contracting factors that are conspiring against real estate are (1) the Debt Crisis cutting off available capital to keep the bubble expanding, and more importantly, (2) the collapse in state revenues. The states and municipal districts rely upon property taxes. The greater the mortgage crisis, the greater the foreclosures, and that suspends the tax revenues as well. This causes the collapse in state and local revenues forcing states to raise taxes even higher and this is precisely the combination of a debt crisis that ends societies and has been the destroyer of civilization. When it goes to extremes as it did in Byzantium, it even destroyed capitalism reducing the average worker into a peasant who was forced to sell himself, his family, and future children into servitude just to survive.

Is Gold Trying To Speak?

Gold Monthly 2009 Gold has been the best performing investment on the board. It has continued to make new highs in all currencies but the dollar, but even there it is holding on like a politician in his right to control the lives of others. While production of gold was expanding dramatically going into the 1980 high of $875, today, South African production has been dropping like a stone. South Africa is no longer the leading producer in gold and just as demand is rising, the production is falling.  

From a pure technical view, the breakout line from the 1999 low stood precisely at $718 last October, and provided the closing support. Once exceeded, it was penetrated 601 y during Sept/Oct of 2006 on a monthly closing basis and has held nicely for this '08 reaction low. This technical line moves up to about $810 by the end of 2010. Near-term, if we see a real Waterfall Effect in the Dow Jones Industrials going into June 2009 where a collapse takes place back to the 4,000 area, we may see a corresponding high or a major key turning point in gold also for June 2009. This does not appear to be the major or high, but we may see a shocking punch upward with a next thrust. If gold breaks out to new highs going into June 2009 as the now makes a major low, there could be a 5 month reaction low forming by November 2009, with a rally thereafter into about April 2011 for the intraday high, but leaving 2010 as the highest close annually. Gold would then reverse perhaps, but this may be due to Government intervention at that point in time.

Gold still appears to be headed to at least the $2,500 level by 2011. Exceeding that area before the end of 2009, would open the door to a potential rally even up to the $5,000 level. Please keep in mind, this is a relative forecast. That means the dollar would be little of its former self. What we are honestly talking about is the collapse of our Governmental infrastructure not so different from Russia. In plain words, Russia could no longer sustain its control of the economy because it was broke. We are approaching the same problem. Just because we have been always able to borrow and never worry about what would happen when the day comes that the well is dry, does not mean we have bottomless pit. A very minor technical projection shows resistance for gold scaling in from the 1 ,100 to 1,200 level for 2009. Breaking through this technical resistance area will signal that we are in a very serious economic implosion.

The United States' Turn

The reverse side of the Seal of the United States has an interesting Latin saving that was part of our inheritance from the Founding Fathers. They recorded their belief in the history of man – Novus ordo seclorum. What they recorded there was what they believed they were creating – a new cycle of the ages. The men who had the courage to stand against the tyranny of Government, believed that the American Revolution was a dawn of a new age where the cycle of fortune had completed its revolution and it was now Just time to establish a new world order without kings. And what was the saying that more than any other reflected their wisdom?

No Taxation Without Representation!

Thomas Jefferson believed in cycles. He doubted that the United States would even survive beyond 100 years. He was correct. The dream the Founding Fathers created fell with the passage of the Income Tax in 1909 that required amending the Constitution to say, Jefferson, we disagree and it shall no longer be in our people and God that we believe, but in the self-interest of Government and Karl Marx. The prohibition against direct taxation was eliminated in 1913. With that came uncontrollable borrowing, spending that always exceeded revenues, and interest paid to foreign lands no different that Spain to its Italian bankers that wiped out both nations and shifted the core economy in Europe to the North, eagerly seized by the Dutch.  

Jefferson even believed that revolution was a necessary part of the long-term cycle for he wrote that the Tree of Liberty required to be fed with the blood of tyrants and patriots. We have so far avoided that outcome. But the cycle is still very young.

I am not trying to yell "fire" in a crowded theatre. I believe that our future remains ours. History repeats because we ignore the lessons it offers. If we understand the possibilities and how things fall apart, we can exercise a choice and correct them. To look into the flame and know that its power to burn exists, does not mean we have to stick our finger into it just to see.

We are standing on the edge of a cliff in the middle of nowhere. The hatred that spilled out of the mouth of Karl Marx has led to this battle between freedom and the control of individuals that is capitalism vs. Communism/Socialism. We must ask our politicians a very important question – Quo Vadis? (Where are you going?) To date, the answers have been more of a riddle, or in Latin – lucus a non lucendo. In other words, we get a paradoxical explanation that is of something that is the opposite of what it suggests. What we must fear the most, is also what the Romans called – lex talionis – the law of retribution. We must now also ask, quis eustodiet ipos custdes? (who shall guard the guardians?)

Laissez faire (doctrine that opposes government intervention) is dead in the current political discussion. We will not hear this again until Western Civilization collapses. The idea of smaller government and the dream of Thomas Jefferson, Benjamin Franklin, James Madison and others, has expired and vanished into the night suffering what Horace called – Pallida Moors – the pale death. Any solution that somehow excludes government, will never be even attempted. What Marx failed to realize was there was never a dramatic battle between the classes.  It has always been a battle between Government and the people. No matter what happens, Government will always blame the private sector and never admit mistakes. Out of self-interest, it will hunt down those in the private sector to sacrifice in the public square.

This Economic Depression is unstoppable, regardless what Government says. I remain nil admirari – unimpressed with the nonsense of the stimulus package. Even if it did work, by the time it had any effect, it would be election time. Jobs are not created out of thin air. It requires something different than the private sector working for government. It requires a demand and confidence that increasing production will find a willing buyer. Government policy is to hire, but the quality of the work means nothing.

Unless we start to get sane people with real live experience outside of the governmental bubbles, we may see the total meltdown of western civilization. Everyone will then blame the next guy which will lead to war. Already both Russia and China blame the global meltdown on the United States. This is perhaps rightly so since the legal system is so corrupt, regulators like the SEC and CFTC can be bought easily since the people they were to regulate, can hire them as well. No politician can act in such an unethical manner. Yet this is why we have the problems we do now because those Investment Bankers, not Wall Street brokers, have been manipulating the system. It worked so long, we forgot what real "free" market was all about. Just look back at how many Secretaries of the Treasury were ex-Goldman Sachs chairmen.

Unless we restructure the taxes and restore our international competitiveness, jobs will continue to leave. Unless tort reform is imposed, there will never be an affordable national healthcare service. Even corporations can no longer afford to pay the benefits. States and cities are starting to implode because they have promised much to workers, but always ran their own Ponzi schemes taking money currently to pay past obligations. We are facing a harsh reality that governments have expanded assuming resources would always be there, but that day has now arrived. Horace also once said:

naturam expellas furca, tamen usque recurret
(Horace 65-8 BCe)

Horace said though you may drive nature out with a pitchfork, she will keep caning back. The same can be said of the nature of mankind. We can cling to Marxism for it points the fingers at the so called rich who are always defined as the neighbors who just have a little more than me. Socialism is a form of Marxism that Western politicians have used to further their own power.  Socialism created the illusion that we can create the benefits of civilization and cooperative alliances without destroying our liberty.

We are on the edge where the way of life may be altered forever. We must open the door to all solutions and judge our future without bias and prejudice. It is time we recognize Marxism for what it is – the most dangerous theory of all time that may destroy now western Civilization. The more Byzantium could not cover its debts, the more it became aggressive against its own people that in the end, destroyed capitalism and freedom itself. Marx gave us the only alternative to capitalism, and that he called Communism that was just a false dream of Utopia - everyone works for the government, the government takes care of everyone, and in the process, you not merely sell your soul, you give up your right to be an individual. The Western culture has flirted with Marxism because politicians see the power belongs to them. Socialism is no different, for it is trying to be just a little-bit pregnant. It still involves centralized planning of the economy that cannot be done by people who have never worked in the real world.

We must stop the bullshit!  We must open our minds and understand the nature of mankind cannot be altered by passing laws. Marx is dead, and his ideas have to be allowed to die. The class-warfare must stop.

Ironically, China has no debt, nor does it have an income tax. Yet China has been exploding in economic growth rising to the second largest economy faster that the United states ever did. This is part of the cycle of volatility. The very design of the Founding Fathers is by default alive and well. All China has to do, is pay attention on domestic growth and expansion, and it is ready to replace the West and assume its historic moment to emerge as the center of the world economy. China has rejected Marx. It is now our turn to learn the same lesson.

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Martin Armstrong: The Collapse of Socialism

Martin Armstrong takes the kids to school in this wide ranging essay that provides historical background for the situation we are facing today. The historical comparisons he draws are profound and frightening.


I have taken the liberty to edit the essay to streamline its core points because I believe the topic is that important and the arguments are very persuasive. Martin Armstrong is a incredibly learned man and sometimes his writings drift from the main point. I want to make sure the majority of readers can get through this essay without too much trouble. I have made the best efforts not to distort any of Martin’s ideas or alter his basic writing style. However, I have re-arranged part of the essay to make its points clearer. If you would like to read the full, un-edited version of the essay, I have provided a link here to the PDF file


Armstrong Economics


The Collapse of Capitalism or is it Socialism?


What does this mean for Government?


There have been plenty of articles asking whether Capitalism is now dead. The problem is the question already presumes an outcome and fails to realize that we are still in the middle of the greatest Economic Transformation in the history of mankind. We are in fact not seeing the collapse of capitalism, but are in the final stage of the death of Socialism.


Governments will rail against the collapse of Socialism because it has been the source of their power – “vote for me and you get something for nothing.”  We are in the final phase – a transition which is taking the form of a “tsunami of spending” to try to make it all better. What we must be concerned about will be who gets blamed when it fails?


Lifting this rock allows the scorpions to surface. It is more akin to opening Pandora’s Box and allowing a swarm of evils to escape and torment mankind. We have no choice but to speak very frankly, for unless we truly understand the nature of events, there is no way to close the box and make it all better. As Saint Jerome said of Rare: “When Rome fell, the Romans were still laughing.” They had no idea of what was taking place and just assumed Rome was impregnable. We can only stop an event if we recognize it is happening.


If we are afraid to ask the correct question, then perhaps we are too biased to comprehend what we have done and take responsibility for our own actions? To paraphrase Edward Gibbon in his memorable epitaph on Rome: We were the capitol of democracy, the citadel of the earth, the terror of tyrants, illustrated by the footsteps of so many triumphs, enriched by the leadership in economic freedom that was the beacon to so many nations. This spectacle, how is it fallen?


The Greatest Economic Transformation


It may seem strange, but we have been undergoing a battle of economic philosophy that transcends so many concepts that unless we step back, we will have difficulty understanding the trend. This battle has often been laced with efforts to control mankind. For within this battle, we will fight religion, politics, scientific innovation and progress spanning technology in all areas, but also issues that include both slavery and labor that all create what has become known as our economy.


Sometimes we are too close to a problem that it is just impossible to see. When man landed on the moon and sent the first pictures of Earth rising, only then could we see what our world truly looked like. We are facing the very same problem. The change that we now see and are debating, is still from the view of a fly on an elephant’s back. We do not know we are even on an elephant or what is an elephant.


Our society is still growing and changing. We are going through puberty where the youth rebels against the parent. The profound change, the Great Economic Transformation, became bluntly visible back in 1989 where the world economy began to change with the fall of Communism. That fundamental change was truly an Economic Transformation wave which is now causing the collapse of socialism in the Western nations. What we are facing is confusing. Nevertheless, if we want to see the elephant, it is time to take flight.


There is a very core structure to the economic society of man. The Industrial Revolution was not just a slogan. It is hard for modern man to look back from where he now stands and comprehend the meaning of “revolution” as it was truly expressed. The way of life prior to the Industrial Revolution remained essentially the same from Greek times, Rome, middle-ages, and the birth of the United States. The word “Economics” was an English translation of a book written by a great mind and a diversified man of tremendous experience – Xenophon (ea 431-350 BC). Xenophon was a brilliant, practical man. He began life early on as the commander of the elite Greek force known as the “Ten Thousand.” Xenophon admired Socrates profoundly, and developed a dislike for extreme democracy for the very crime it had committed by ordering Socrates to be executed for his ideas. Xenophon wrote three works on the subject casting Socrates in a different light than that of Plato – the “Apology” – “Symposium” – “Memorabilia.” Yet in the field of finance and economics, his political work is what the powerful committee on Capital Hill is named after – “Ways and Means” written around 351 BC advocating peace rather than war between the Greek states. But we owe the very word “Economics” to the title of his truly master work – “Oeconanicus” that simply meant in ancient Greek – how to regulate the household. It was a How-To Book for Gentlemen Dummies that explained how to manage your estate from growing crops, managing slaves, and your wife.


What does this have to do with the Industrial Revolution? Everything! Life as society knew it was completely different before the 19th century. The same economic model had existed for thousands of years around a self contained farm-like enclave. The Romans called them “villa” and we call them “plantations.” This is how society operated. Villa were independent estates that were virtually self-sufficient. The work force was composed of slaves purchased after battle in ancient times, or serfs in the middle-ages, or imported African slaves. The King of England had even used the criminal laws to create labor. Any misdemeanor allowed the King to sell someone as a laborer for a certain period. Instead of prison, you were sent, at first, to America. When the American Revolution began, the destination changed to Australia.


During the 3rd century AD, money became rare following a hyper-inflation. This caused tremendous hoarding and an economic contraction strengthening the villa model. The Roman Emperor Diocletion (284-305 AD) tried, to revive the empire like Ronald Reagan & Margaret Thatcher, and created many of the practices still employed today. To be able to collect taxes, passports were created and people could not move without permission. To tackle inflation, he substituted wage and price controls as did Richard Nixon. He redesigned the entire monetary system, i.e. Bretton Woods 1944.


When Rome fell after 476 AD, the concept of the villa prevailed. Life survived because of this self-contained economic model. This evolved into feudalism during the 9th and 15th centuries due to the increase in population and the inability to acquire wealth to establish a villa. Towns would form and the landlord became the nobility. Castles were constructed because of the lack of security. Charlemagne (742-814) began to reconstruct the old Roman Empire. This economic model received its first major shock that not even the fall of Rome had inflicted. The Black Plague in the 13th-14th Centuries killed about 1/3rd of the population making labor scarce and causing landlords to start to pay wages in addition to a percentage of the crop and free housing. Yet, predominantly, the economy was still agrarian and the model was still the villa.


In Russia, the seeds of the 1917 Revolution were sowed during the reign of Ivan IV (the Terrible)(1530-84), when he confiscated lands of his enemies to give to his supporters. Ivan found the lands worthless once the serfs fled. He then decreed that the serfs would be bound to the land for life in order to maintain its value. He essentially made all Russians living on farms slaves of the state. This eventually created the pool of discontent that fueled into the bonfire of Revolution years later.


Of course in the United States, the slavery issue was recognized as wrong and a real problem, especially after the language written by Thomas Jefferson in the Declaration of Independence. This issue dominated early politics, and perhaps came to a head when the Supreme Court showed it was indeed, as Judge Posner refers to it, the “Political Court.” In 1857, the Supreme Court held that blacks were just property in the case of Dread Scott, who sued for his freedom when his master traveled to a state that did not allow slavery. The Civil War was not fought over racism. It was fought over the collapse of the economic system of labor. Racism emerged more so as a bitter response by the South attaching blame for their demise to the freedom of the slaves.


We can see that slavery was a very ancient practice as outlined by Xenophon in “Oeconanicus.” It was how the villa model maintained its economic viability for thousands of years. In Roman & Greek times, the economy was 90% agrarian. However, that declined to 70% in the 1870s, 40% in 1929, and finally 3% by 1980. It has been this villa model that was undergoing the Great Economic Transformation to the Industrial Revolution.


The Great Economic Transformation has been the growth of society through progress and technologies. We have been evolving even in our understanding of economics, since the nature of the economy is in fact changing with each passing year. We must look at this transformation and understand that as the changes in labor have taken place, everything else in our world also changes. Had it not been for the Black Death, there would never have been a shortage in labor giving birth to wages that led to payroll taxes.


The Battle Lines


Before we wage further, we have to explore what caused the battle between communism and capitalism. We can attribute this to Karl Marx (1818-1883) but this does not explain why Marx came to the conclusions that he did and set in motion decades of geopolitical conflicts that has cost the lives of countless millions! 


We must understand that from the school of Physiocrats, who believed that all wealth was created only by nature, we end up with the runaway idea that man can create utopia – the imaginary world where man could live indefinitely under the perfect plan. This idea was sparked by Sir Thomas More in 1516 that created a whole class of thinkers who believed in this Utopian world was possible. Sir Thomas More (1478-1535) was a major influence and contributed to what we now face today under Socialism.


Marx railed against the change from the agrarian society to the industrial revolution. He did not see the State as the issue. What he saw was that this new economic model would lead to paid workers in factories who would be exploited to make a profit for the employer. Marx saw this “new” economic model as changing the world taking people from the traditional farm and turning them into consumers of products manufactured. However, he believed that their employers would be so greedy, they would decline to pay the worker. Eventually this new system would collapse because the greed of the employer would suppress the income of the laborer, and that would result in the collapse of this new evil experiment – industrial capitalism.


The battle begun by Marx between his Utopian ideal of communism vs. capitalism is not over. The Communistic system transfers power to the state, as does Socialism. This has sanctioned the power of a central government at the expense of the economic freedom of Capitalism. What we are really saying when we ask whether Capitalism is dead, is should we abandon freedom and run behind the walls of the castle since the state is the modern day landlord? Do we reverse this Great Economic Transformation, or understand what is going on for just once?


American Labor


Marx began a class-warfare that could yet tare the very fabric of our society to shreds. The beginning of the end of the labor union movement was marked seventy two years after the first real labor riot that took place on May 4th, 1886 known as the Haymarket Riot. The Taft-Hartley Labor Act of 1947 was designed to take away the power of the unions. By the 1960s, the unions were cast in the light as being evil and controlled by organized crime after the Jimmy Hoffa incident. This critical shift in perception curtailed the union movement after just one 72 year political cycle.


The collapse of General Motors is the collapse of the last vestige of Marxism – the labor unions. The foreign auto-manufacturers have set up shop in the South where the labor laws were far more favorable to create non-union work forces that have been quite successful. The foreign car manufacturers have demonstrated that unions are a bad idea. The union movements had their points from the outset. But working conditions should have been attacked in a political context (democracy). Unions assumed the mantle of communism creating confrontation and transferred the power from management to labor. It did not solve the problems and only became like a drunk who then had the keys to the liquor store – self-destructive.


The reason why unions were a bad experiment was because they merely turned the employer into a slave and altered the free markets that was contrary to the nature of mankind. Historically, when the crops failed in an agrarian model, people simply migrated. The Philistines of the Bible were most likely Greeks who migrated due to crop failures at the First Heroic Age. Invasions of the Goths, Germans, and even Attila the Hun were all caused by the “grass is greener” on the other-side belief. Unions just promoted increased wages rather than increased skills, diminishing the individual motivation to learn new skills and migrate between jobs. This is the same reason why communism died. Creating a system where one-size-fits-all, promotes a decline in human growth that is then manifest within the economic decline.


We have to understand, that the fatal flaw in Communism was to diminish the essence of mankind. They say necessity is the mother of all invention. That is so true. If we try to create utopia, we destroy the very engine that creates progress.  Do not for one minute think that a labor union is any different that the communistic model. It is not. Where in a normal economic model, to earn more one improves his skills, the Communistic model promotes advances income without improvement in skills.


This union labor system stymied natural economic progress and created much damage to the benefits of the Industrial Revolution. This is the fatal flaw that had led to the destruction of American jobs. It froze the natural economic evolution and began a trend toward transferring jobs overseas. The trend was only accelerated by the imposition of the payroll tax that essentially increased the cost of labor. Historically, mankind migrated in an agrarian society. This very same trend still takes place today. However, instead of the work force migrating to better lands, the communistic model reversed the roles and caused the employer to migrate. What government did not notice, was this trend was not caused by the “greed” of the employer, but by the Invisible Hand of Adam Smith. Labor demanded the highest wages with the lowest productivity, and consumers demanded the lowest price with the highest reliability. The employer migrated to survive. Throughout history, human nature has never migrated for no reason. Migrations take place when prodded by the fickle finger of necessity.


Communism, when implemented as a government policy, lasted only one 72 year political cycle. In 1917, we find the Russian Revolution and Sun Yat-sen set up the rival government in China at Guangzhou as the Nationalists. Seventy-two years later, Tinennamins Square in 1989 was followed about five months later by the fall of the Berlin Wall. These changes were economically driven. The stagnation of the human spirit led to the steady decline in productivity. This is the same trend we have seen in the American labor unions.


What we must understand is that only when people lose their security, then and only then do we see political unrest. Just as humans did not migrate without reason, all political unrest is unleashed following economic implosions. As we shall see, the collapse of the Mississippi Bubble set in motion a irresponsible government policy regarding the money supply – the invention of paper money. This collapse of a European-wide speculative boom in 1720, set the stage for the great wave of revolutions that toppled the last vestige of Feudalism – Monarchy. It was not just the American Revolution, with its slogan, “No Taxation Without Representation,” but also 72 years later we come to 1792 and the overthrow of the French monarchy.


Understanding the Mississippi Bubble and the French Bailout that set in motion the Age of Revolution


At first, you might ask: Why look at something from 1720? Well, the answer is simple. The French Government was in part responsible for the Mississippi Bubble and contributed to its exponential rise at the end. The Government had to then bailout the mess and, to pay for it, implemented higher taxes. This is not so different from current events.


The Mississippi Bubble was a financial scheme not so different from the wild un-backed derivatives created by AIG and others. The scheme was at first engineered by John Law, an early economic theorist, who was friend with the Duke d’Orleans. In 1716, John Law founded Banque Generale, with the authority to issue notes that were the earliest form of paper currency. The following year, he founded Compagnie d’Occident (“Company of the West”) with the exclusive deal to develop the new French territories in the Mississippi River valley. This enterprise began to monopolize the tobacco and African slave trade as well. By 1719, he then formed the “Compagnie des Indes” that was essentially just renaming the “Company of the West” with a complete monopoly over all French trade. This new entity also assumed the powers as if it were a Roman governorship, with the power to both collect taxes and to coin money. This operation in essence assumed control of both the trade and finances of the French government.


It was this link and exclusive power with the French government and the vast expansion of unlimited profits in the New world, that created the image of the best possible investment. The public was naive. But they were also exploring how capital could be used to actually work and make more money. This was a novel idea for since the fall of Rome, during the Middle-Ages, there was no national organized state that promoted international investment. It was akin to the fall of Communism and the interest in investing in a new world of private investment in China and Russia.


It was this expectation of potential profits that created perhaps what may still remain as the wildest speculative boom in history. Between the discovery of America in 1492 and 1700, the majority of investment was professional or solely by the state. There was no opportunity for the public to get involved on a speculative nature. So this was the first true experience of allowing the public to participate is the new frontier. As this cycle unfolded, its duration would be 224 years from the discovery to the bust that set in motion Revolution. The shares of the lead enterprise, Companie de Indes, rose from 500 livres to 18,000. By 1719, 625,000 shares had been issued. This boom gave rise to the term “millionaire.” The boom was so profound, Compagnie de Indes was merged thereafter with Banque GeIlerale and the scheme was expanded to retire the national debt of France by exchanging shares for the bonds.


This led to a monumental speculative bubble that spread throughout Europe. A similar theme played out in England with the South Sea Company. The The South Sea Bubble transformed into a scheme to retire the national debt of England in return for shares. That entire incident occurred between late 1711 and late August 1720.  The last stages of the speculative boom saw the shares rise from 128 1/2 pence to 1,000 between January and August 1720.


Back in France, the “Compagnie de Indes” was so successful without really producing profits that the French government began to get involved. The French government began to issue paper money itself. This was a form of derivative for the money was widely accepted only because it was convertible into shares of this new company. The vast economic expansion was fueled by the unlimited issue of paper currency between late 1719 and the fateful time of the year – September/October 1720.


The linkage between the speculative shares and the government finances created a bust that became the closest thing to a financial mushroom cloud. The bear market collapse was so significant, that by December 1720, John Law had to flee France. The collapse was fierce because there were no market-makers, middle-men, or a mature two-sided market. The concept of puts and calls had developed in the earlier speculative bubble known as the Tulipmania (1634-1637) in Netherlands. But that panic did not involve a debt crisis or the government issuing derivative forms of money convertible into stock shares. The lack of sophisticated market functions led to a one-sided collapse in both the South Sea Bubble and the Mississippi Bubble within three months. The English shares collapsed from 1,000 to 124 by December 1720 though the company did survive until 1853.


It was the collapse in debt that devastated the economy. The French government was forced into a bailout assuming all the debts of the company, and then, to pay for their own folly, began to raise taxes. That set in motion the resentment that led to the French Revolution.


The French Bailout The Revolution (The Bonfire of Discontent)


The involvement of the French government in the speculative boom, also placed the focus of responsibility for it upon the King. The raising of taxes to pay for the bailout set in motion the French Revolution fueling the bonfire of discontent. The Revolution began with the storming of the jail, Bastille Day (7/14/1789) as it is remembered today. This led the king to flee to his palace at Versailles in October 1789, which the people later stormed on June 20th, 1792. At trial, they referred to the King now as “Citizen Capet” and tried him for treason on December 1792. He was executed on January 21, 1793 followed later that year by his wife, Marie-Antoinette. The First Republic was declared on September 21, 1792. This citizen government simply failed until Napoleon took power in 1799 and eventually crowned himself emperor in 1804.


Consequently, it was the direct involvement of the French Crown and its very costly bailout that resulted in raising taxes and oppressing the people that led to the collapse of the French economy and ended with a Revolution.  Looking at government to bailout the follies of the Investment Banks is a dangerous course of action. It shifts the burden to the Government and raises the risk of political instability in the long-run should the Government fail to reverse the trend.  What if we end in hyper-inflation? The massive monetary printing and funding of debts could drive interest rates higher, which will compete with the common man and destroy his ability to survive economically. If we then turn to higher taxes to make those who did not cause the crisis pay for it (letting the investment bankers off the hook once again), how can we justify this vast transfer of wealth?


It Is Always Debt That Destroys The Best Plans and Foundations of Mankind!


The debt crisis is always distinguished from the mere speculative bubble. The Tulipmania did not change the course of history as did the Bubble of 1720. Likewise, the excessive borrowing by Spain and the desperate attempt to invade England to payoff those debts with its Armada in 1588, resulted in the collapse of Spain taking with it Italy, who was its banker. In the end, Spain and Italy lost their ability to be any sort of a world power. It is always debt that destroys a nation. It destroyed even Rome.


What we must understand is that we have been evolving as an economy for a very long time. Communism and Socialism are a mere blip on a screen. Governments’ stepping up to bailout the crisis raises concern.  For had we just let the Investment Bankers fail and stood behind the public deposits 100% in Commercial Banks, we would have been better-off. Sometimes, it is honestly best to let the free markets sort out the weak from the strong, because it is quite frankly, far too complicated to anticipate correctly – this is why Communism also failed.


Marx railed against the coming of the Industrial Revolution. He saw evil and was blind to the evolution of the economy as a whole. We are still caught-up in the philosophy of Marx. Phase One was the collapse of Communism. Phase Two, will be the collapse of socialism – state promises that are unfunded yet seek to still create the world of Marxism to a lesser degree. There is not much difference between the state taking title to the land, or allowing you to keep the title but dictate how it is to be used. Labor can no longer migrate, only capital.


The Communistic/Socialistic theory of Marx is collapsing. Our socialistic life may be coming to an end because our promises exceed our resources. This bailout is likely to push the government over the edge. If we cannot see how we make the same mistakes over and over again, what hope do we have? We can survive as a society only when we open our eyes. If we cannot do that, then we may be headed into a new dark age of feudalism with the break-up of organized states. We have to stop the debt and insane taxes before it is too late once again. We are in the last death throes of Marx’s ideas of Communism/Socialism. He railed against the Great Economic Transformation, because he remained just a fly on an elephant’s back. We can survive if we are rational and objective. We need to restructure or we will lose it all.


Martin A. Armstrong December 11th 2008


You may send comments directly to Martin Armstrong at ArmstrongEconomics@GMail.com

Martin Armstrong: The Coming Great Depression

 

Armstrong Economics
The Coming Great Depression
Why Government Is Powerless

1929_panic_on_wall_street It is frustrating to read so many comparisons of our current situation with 1929 while watching policy be set-in-motion to create spending on infrastructure. Everyone has their hand out looking for a bailout like a bunch of street burns pleading for money so they can get drunk or stay drunk. Almost nothing of what I have read is close to being accurate.  The scary part is depressions are inevitably caused by politicians who may be paving the road with good intentions, but are relying upon analysis so biased, we do not stand a chance.

The stock market by no means predicts the economy. A stock market crash does not cause a Depression. The Crash of 1903 was properly titled – “The Rich Man's Panic." What has always distinguished a recession from a Depression is the stock market drop may signal a recession, but the collapse in debt signals a Depression. This Depression was set in motion by (1) excessive leverage by the banks once more, but (2) the lifting of usury laws back in 1980 to fight inflation that opened the door to the highest consumer interest rates in thousands of years and shifted spending that created jobs into the banks as interest on things like credit cards.  As a percent of GDP, household debt doubled since 1980 making the banks rich and now the clear and present danger to our economic survival. A greater proportion of spending by the consumer that use to go to savings and creating jobs, goes to interest and that has undermined the ability to avoid a major economic melt-down.

The crisis in banking has distinguished depression from recession. The very term "Black Friday" comes from the Panic of 1869 when the mob was dragging bankers out of their offices and hanging them in New York. They had to send in troops to stop the riot. A banking collapse destroys the capital formation of a nation and that is what creates the Depression. The stock market is not the problem despite the fact it is visible and measurable and may decline 40%, 60% or even 89% like in 1929-32. But the stock market decline is normally measured in months (30-37) whereas the economic decline is measured in years (23-26). Beware of schizophrenic analysis that is often mutually contradictory or often antagonistic in part or in quality for far too often people think they have to offer a reason for every daily movement.

Our fate will not be determined by the stock market performance. Neither can we stimulate the economy by increasing spending on infrastructure any more than buying your wife a mink coat, will improve the grades of your child in school. We are facing a Depression that will last 23-26 years. The response of government is going to seal our fate because they cannot learn from the past and will make the same mistakes that every politician has made before them. Even if the Dow Industrials make new highs next week (impossible), the Depression is unstoppable with current models and tools.

Stocks & Consumers vs. Investment Banks

Let us set the record straight. The Stock Market is a mere reflection of the economy like looking at yourself in a mirror. It is not the economy and does not even provide a reliable forecasting tool of what is to come economically. We are headed into the debt tsunami that is of historical proportions unheard-of in history. There have been the big debt crisis incidents that have hobbled nations, toppled kings, and set in motion economic dark ages. It is so critical to understand the difference between the economy and the stock market, for unless you comprehend this basic and root distinction between the two, survival may be impossible.

Economic Confidence Model Close UP 010909 To the left I have provided the Economic Confidence Model for the immediate decline. You will notice I did not call this the "stock market model" nor a model for gold, oil, or commodities. I used the word "economic" with distinct and clear purpose. I have stressed it does not forecast the fate, of a particular market or even a particular economy. It is the global economic cycle some may call even a business cycle. Please note that what does line-up and peaks precisely with this model often even to the specific day that was calculated decades advance is the area of primary focus. Yet the US stock market reached a high precisely with this model and then rallied to a new high price 8.6 months later. In Japan, the NIKKEI 225 peaked precisely on February 26th, 2007. This is not a very good omen. But there was something profound that turned down with the February 27th, 2007 target – the S&P Case-Shiller index of housing prices in 20 cities. February 2007 was the peak for this cycle in the debt markets – not the US stock market. 
 

The stock market always bottoms in advance of the economic low. In fact, we will see new highs in the now even in the middle of a Great Depression. At least the 1929 cycle was more of a bubble top in stocks than what we have in place currently in the US stock market.  We still had the bubble top in the NASDAQ back in 2000, but this illustrates the point. There was a major explosive speculative boom. The bubble burst in 2000 and there was a moderate investment recession into 2002, but there was no appreciable economic decline that was set in motion because of that crash. Currently, we have a major high in 2007, but it was not a bubble top because it was not the focus of speculation. The real concentration of capital that created the bubble top, took place in the debt markets. This is the origin of the economic depression – not stocks and not the displacement of farmers because of a 7 year drought created by the Dust Bowl that invoked the response of the Works Progress Administration (WPA) in 1935. Keep in mind the stock market bottomed in the mid summer of 1932 when unemployment was not excessive from a historical perspective.
 
The 25% level of unemployment came after the major 1932 stock market low that was followed by both the banking crisis after the election of FDR and before his fateful inauguration. The Banking Crisis came about because of rumors that Roosevelt was going to confiscate gold. Herbert Hoover published his memoirs showing letters written to Roosevelt pleading with him to make a statement that the rumors were false. He did not.

It’s the Debt Level Stupid

In 1907, the excessive debt was in the stock market. Call Money Rates (the level of interest paid to support broker loans) reached 125%. Even 1929 never came close to such levels. This also illustrates that the capital markets do not have enough money to invest equally on all levels in all segments of a domestic economy or in particular nations. To create the boom-bust, it requires the concentration of capital. A bubble top is formed when the majority of those seeking to employ money to make money are focused in a particular market or even country. The 1907 Crash was a bubble top because capital invested on a highly concentrated basis in railroad stocks. The bubble top in Japan back in 1989 was caused by a concentration of both domestic and international capital that had made Japan the number one market in the World. It is this concentration of capital that creates the boom and bust cycle. If money was evenly disbursed like the socialistic & communistic philosophies argue, we would be back to the dark ages where there was no concentration of capital and no economy beyond the walls of the castle so to speak. That is why communism failed.

It is the overall level of debt that has reached a bubble top in almost every possible area. For example, in 1980, household debt was about 50% of GDP. Going into the February 2007 high, it reached about 100% of GDP. We must also realize that something profound took place back in 1980. Americans would on the first blush seem to be living it up, buying everything they can on credit and have piles of tangible assets to show for it. That is like looking at the statistics for carrots and arguing that they are lethal because every person who has ever eaten a carrot is dead or in the process of a gradual slow death. This absurd example illustrates the bias that can produce the schizophrenic analysis.

There were, once upon a time, usury laws that generally held any interest rate greater than 10% was illegal. The Federal Reserve under Paul Volker believed that interest rates needed to be raised to insane levels to stop the runaway inflation, which  was the first stone that hit the water sending the shock waves that we are having to pay for today. Once the usury laws were altered so the Fed could fight inflation, it set in motion the doubling of household debt, not to mention the national debt. At 8%, the principle is doubled through interest in less than 10 years. The national debt exploded from $1 to about $10 trillion in 25 years and household debt has doubled.  Some states now consider usury to be 26%. Historically, these are the interest rates paid by the very worst of all debtors – the bankrupts. In fact, in China, the worst creditors historically paid at best 10%. What we have done is the lifting of usury to fight inflation back in 1980, has resulted in usury now being so high, a larger portion of income of the common worker is spent on interest, not buying goods & services that even create jobs. This is one primary reason why jobs have been leaving as well. The consumer needs the lowest possible price and labor wants the highest wages, and to stay competitive, producers leave taking manufacturing jobs as well as service jobs. The extraordinary rise in interest rates that are historical highs since at least pre-Roman times, could not have been possible but for the lifting of usury laws back in 1980 to fight inflation. This amounted to setting a fire to try to stop a brush fire that failed. Consumers pay the highest rates in thousands of years that feed the banks at the expense of economic growth. Even the National Debt rose from $2. 1 to $8.5 trillion between 1 986 and 2006 with $6. 1 trillion being interest. We are funding the nation on a credit card and destroying the economy simultaneously.

This has been enhanced by the tremendous leverage and false position that were created in the derivative markets causing the banks to just implode.  Indeed, this is the origin of the economic Depression we are facing. The $700 billion bailout might have worked if Paulson did what he said he would – buy the debt and take it out of the banks. Had the debt been segregated into a pool and managed independently by a hedge fund manager not an investment banker, we could have mitigated the problem. But that is now too late. The credit implosion is taking place on a wholesale basis around the world. The more the economy declines in housing prices, the greater the defaults, the greater the foreclosures, and the lower the economy will move. We are now in a downward spiral that cannot be fixed by indirect schemes. As I said, you cannot get your kid's test scores up by purchasing a mink coat for your wife. Everyone will have their hand out begging for infrastructure money. But the theory of just spending money that will somehow make things better, it is like handing Mexico a trillion dollars and arguing that they will buy US goods that will somehow reverse the economy.

The leveraging of debt by the Investment Banks in particular has undermined the global economy. Where household debt has doubled since 1980, the professional financial service sector has seen a rise from 21% of GDP in 1980 to 116% by February 2007. Now consider the debt that they created with the mortgages is already down by 50% and falling, the bailouts will keep coming. To help correct the problem, the commercial banks will tighten credit to make their exposure less, and in fact, their solvency ratios will require it anyway. This we can expect to see not just in business, but housing and car loans that will contract the economy as well.

The Great Depression is not the perfect model for today. It was a complete capital contraction. The stock market basis the now Dow Jones Industrials fell 89% between September 3rd, 1929 and July 1932. The contraction in debt was quite massive. Then too, the leverage in banks collapsed that reduces the velocity of money and therefore the money supply. The banks were the first real widespread failures with 608 in 1930. Between February and August 1931, the commercial banks began to bleed profusely as bank deposits fell almost $3 billion or about 9% of all deposits. As 1932 began, the number of bank failures reached 1,860. The massive amount of bank failures in the thousands took place with the rumor of Roosevelt's intention to confiscate gold. Although he denied that was his policy the night of the elections, he remained silent refusing to discuss the issue until he was sworn in. on March 6, 1933 just 2 days after taking office, Roosevelt called a bank "holiday" closing the banks from which at least another 2,500 never reopened.

All of these events are contrasted by the collapse in national debts in Europe. Other than Herbert Hoover’s memoirs, I have yet to read any analysis of the Great Depression attribute anything internationally other than the infamous US Smoot-Hawley Act setting in motion the age of protectionism in June 1930. It was the financial war between European nations attacking each other's bond markets openly shorting them that led to all of Europe defaulting on their debt. Even Britain went into a moratorium suspending debt payments. This is what put the pressure on capital flows sending waves of capital to the United States that to sane degree was kind of like the capital flow to Japan into 1989. This put tremendous pressure upon the dollar driving it to new record highs that were misread by the politicians who did not understand capital flow. They responded with Smoot-Hawley misreading the entire set of facts. (see Greatest Bull Market In History) (Herbert Hoover's memoirs).

It is true that today we have Keynesian and Monetarist theories to manage the crisis. Sad to say, neither one will now work. Bernanke has responded in force dropping the federal funds rate from 5.25% to .25%. He has also opened the Fed Window and thrown out more than $1 trillion in 13 months. However, as admirable as this may be, he has no tool that will do the job. Milton Friedman was correct! The Great Depression was not caused by the decline in the stock market. The event was set in motion by the credit and banking crisis that resulted in a one-third contraction in the money supply.

Interest rates will do nothing. The flight to quality always takes place so what happens is a two-fold punch. (1) Interest rates collapse because capital seeks preservation not yield and will accept during such times virtually a zero rate of return, and (2) the flight to quality takes more available cash from the private sector because government debt truly does compete with the private sector. We are seeing this even now. Federal debt becomes the place to go so we see higher yields in both state am municipal bonds because they are not quality and could default like any bank. This contracts the money supply.  Opening the window and just throwing buckets of money into the system will never have any impact to reverse the trend.

Furthermore, we are now in a Floating-Exchange Rate system that has made the global economy far more complex than it was in 1929. We all know that China is one of the biggest holders of US government debt. With the contagion spreading to Russia, South America, and China aside from Europe, we see a steeper decline in the China stock market than we do in the United States because that is where capital had concentrated domestically. If China needs money to stimulate its own economy when exports appear to be collapsing by about 50%, then we can see that the Keynesian model is worthless. If the Fed tries to pump money into the system through buying bonds from the private sector, those bonds may be held by aliens who take the money back to their own economies. The Fed cannot be sure it is even capable of stimulating the purely domestic economy. Lower interest rates to virtually zero like Japan did during the 19905, then if capital finds a better place to invest, it can leave for a higher rate of interest as capital did from Japan to the United states, which is why their domestic economy was never stimulated by the' lower interest rates.
Leverage during the Great Depression was not even remotely close to what we have to face today. The credit-default swaps are alone worth about $60 trillion. This was a stupid product for it has so tangled the world there may be no way out. This product created the false illusion that you did not have to worry about the quality of the loan because it was insured. We have no way of covering this level of implosion. Add the unfunded entitlements and then the state and local debts who cannot print money to cover their shortfall s, and we are looking at a contraction of debt that is simply beyond all contemplation.

So What Now?

So now that we see it is not Wall Street, again, but the banks, perhaps we can separate the facts from the fantasy. We can now see that there are two separate and distinct forecasts to be made – (1) economy and (2) stock market. Economic Depressions have a duration unfortunately of generally 23 years with an outside potential of 26 years. The 1873 Panic led to a economic depression of really 23 years into 1896. There were bouts with high volatility and injection of major waves of inflation following the major silver discoveries. It was the age of the Silver Democrats who tried to create inflation by over-valuing silver relative to gold. This created a wave of European-American arbitrage where silver flowed into the US exchanging it for gold, which then flowed back to Europe. By 1896, the US Treasury was broke.

The Panic of 1873 marked the collapse of J. Cook & Co, the huge investment bank that was the 19th Century version of Goldman Sachs. They went bust because of excessive leverage in railroad stocks. It matters not what the instrument may be, it is always the leverage, which set the tone for a economic depression that lasted into 1896 where JP Morgan became famous for leading a bailout of the us Treasury organizing a loan of gold bullion. The stock market rallied and made new highs with plenty of panics between 1873 and 1896. The point is, The Panic of 1893 was quite a horrible one. The point is, the stock market is not a reflection of the economy. It often trades up in anticipation of better times, and trades down on those same perceptions of bad times. In both cases, new highs or lows unfold even contrary to economic trends.

We will see new highs in the now long before we see the final low in the economy. The ideal lows on a timing basis for the stock market will be as soon as April 2009 or by June of 2009. The more pronounced lows would be due on a timing basis between December 2009 and April 2010. The most extreme target would seem to be August 2010. The shorter the resolution to the stock market low, the sooner we will start to see much higher volatility.

The low for the Dow would be indicated by reaching the 3,500-4,000 area. A 2008 closing below 12,000 in the cash now Jones Industrials will signal that the bear market is underway into at least 2009 if not 2010. A year-end closing for 2008 below the 9,700-9,800 level, will signal higher volatility as well. The real critical level for the closing of 2008 will be the 7,200 area generally. A year-end closing beneath this general level will signal that we could see the sharp decline to test the extremes support at 3,600-4,000 by as early as April 19th, 2009 going into May /June 2009. If we were to drop so quickly into those targets, this would be most likely the major low with a significant rally into at least April 16th, 2010.

The less volatile outcome would be a prolonged decline into the December 2009 target to about April 16th, 2010. A low at that late date would tend to project out for a high as early as June 2011 or into late 2012.  Nevertheless, volatility appears to be very high. Those who were at the 1985 Economic conference in Princeton, may want to review those video tapes. The volatility we were looking at 20-30 years into the future is now. As 3 of the 5 major investment bankers failed, Merrill, Lehman and Bear, the liquidity has evaporated so the swings are going to be much more dramatic.

The major support is 3,600 on the now Industrials. During '09, the support area appears to be 6,600, 5,000, and 4,000-3,600. Clearly, resistance is shaping up at 9,700-9,800. It would take a monthly close back above the 12,400 level to signal new highs are likely. If we saw a complete collapse into a low by April 2009 or June 2009 reaching the 4,000 general area, this would be the major low with most likely a hyper-inflationary spiral developing thereafter. In that case, the now Jones Industrials could be back at even new highs as early as mid 2011 or going into late 2012.

Gold has decoupled from oil as it should and has been rising on an ounce-to-barrel ratio. Here, the pivot area for 2009 seems to be the $730-$760 area with the key support being still at the $525-$540 zone. The major high intraday was on March 17th, 2008. A weekly closing below $800 warns of consolidation. Only a monthly closing below the $535 area would signal a major high is in place. The more critical support appears to be at about $680 – $705. A weekly closing beneath this area will also warn of a potential consolidation. A major high is possible as early as 2010-2011 with the potential for an exponential rally into 2015 if there is any kind of a low going into 2011.45. The key to watch will be crude Oil. The collapse of Investment Banks has removed the speculation that exaggerated the trend. A year-end close below $40 for 2008 would signal a major high and serious economic decline ahead.

There Are No Tools Left!  The Emperor Has No Clothes

It is hard to explain to someone who believe he has power, that he really has nothing of any significance. This becomes the story of the Emperor Has No Clothes. No one will tell him, and if you do, it may be off-with-your-head. This is akin to the man behind the curtain in the Wizard of OZ trying to keep up the whole illusion. After all, why do we vote for people unless we believe that will somehow change our lives?

Interest Rates

When an economy is rising and the stock market is exploding, interest rates always rise because the demand for money is rising because people believe that they can make a profit. Government pretend to be raising interest rates to stop inflation, but they do not create a trend contrary to the free markets. What happened in 1980 was merely that the government over-shoots the differential between expectations and the rate of interest. If you believe the stock market will double, you will pay 20% interest. A rising interest rate does not create a bear market. Only when the rate of interest exceeds expectations of potential profit offering almost a fixed secured return, will capital leave the speculative market and run to the bond market.
In a bear market, interest rates always decline because of the flight to quality. When there is a risk of a .banking crisis as well, then the flight to quality shows that capital is willing to accept virtually zero in return for the privilege to park itself is a secure manner to preserve the future.

In both cases, the government may accelerate the trend, but by no means can they create the trend or alter the trend. Lowering interest rates to zero right now will not reverse the economic decline. People will look out the window and until they feel confident again, they will not come out from behind the castle walls. Japan lowered interest rates to virtually zero for nearly a decade. All it did was fuel the carry trade whereby yen was borrowed at 0.1 % and invested in dollars at 5-8%. There was little opportunity to invest domestically in Japan and the stock market languished in a broad consolidation with flurries the upside every-now-and-again.

Monetary Theory

The Fed has already put into the system about $1 trillion in 13 months. The real problem is they are buying back US government debt injecting cash into the system. But if those bonds are sold to the Fed by foreign holders, there can be no injection of cash into the domestic economy. This amounts to the monetization of our debt in any event. Clearly, buying bonds from the market is not a guaranteed increase in domestic money supply especially when the velocity of money is itself collapsing. Borrowing heavily all these years and depending on foreign investors to buy that debt, altered the course of economics.  Of course there has always been the foreign investor, but there has not been the floating exchange rate system. The rise and fall of the dollar itself can now either attract foreign capital with an advance or repel capital with its decline. Like we needed another new variable.

Infrastructure Spending

There really is nothing left in the tool bag that can help even to mitigate the coming Economic Depression. The unemployment rate at the end of 1930 was only about 8.9% – similar to the 1975 recession. Things were very slow back then. Even housing was not moving and people took whatever offers came their way. It was the Dust Bowl that began in 1934 that sent the unemployment rising after the 1932 low in the stock market. About 40% of the work force was agrarian. Hence, Congress could not pass a law to make it rain. The real devastation was that this presented a huge portion of the work force that had to be retrained into skilled labor. It was the Great Depression that finally by force of necessity, created an industrial work force that may have taken another 200 years to unfold by gradual transformation.

The WPA was formed in 1935, 3 years after the low in the stock market (1932). It had a slow and marginal success. At best, if we attribute all improvement to this one program, very unlikely, unemployment was only reduced by about 20%. 

1935 20.3% 

1936 16.9%

1937 14.3%

1938 19.0%

1939 17.2% 

1940 14.6%

Even if we attribute everything to the WPA, all the way into 1940, the most the unemployment declines was by 30%. However, at the end of World War II, we see an Unemployment rate of 1.9% by 1945. Any ideas that we can spend trillions on infrastructure and make it all better, forget it.

Turning to infrastructure in the middle of a debt crisis makes no sense. The idea of just spending money will somehow stimulate the economy, will not work. This is like trying to fight in the desert of Iraq using the same tactics as in Vietnam. There has to be sane connection to what we are doing. Just because FDR instituted the WPA when we had a huge displacement issue in the work force, almost 6 years after the crash began, makes no sense at all for our current problems. As I said, this is like buying your wife a mink coat to somehow influence your kid to get their grades up. The connection is tenuous at best and nonexistent in all reality.

Summary

Unless we attack the debt structure directly, there is no point in counting upon any government to help mitigate the problem and more-likely-than-not, our very future may be recast in so many ways, the level of frustration will rise, and that leads to war because war distracts the people from hanging their own politicians. The oldest trick in the book is to blame the guy next-door down.  Unless we are honestly prepared to truly 1) reorganize the structure of government, 2) reorganize the entire debt structure both private and public, 3) regulate leverage,  4) restore usury laws that will free up personal income, and 5) look at just eliminating the federal income tax in combination with 6) establishing a new national heathcare system that will restructure all pension plans public and private, there is not much hope for the future from government. Our definition of money (M1) does not include bonds so we can fool ourselves by issuing $10 trillion in bonds is different than printing the cash. It is still money. Taxes are needed in a gold standard where money cannot be created. Stop competing with the states, control the budget as a percent of GDP, increase the money supply to that degree, and stop the taxing when money is created by leverage and velocity anyway. This will restore jobs and inject huge confidence as in 1964 when the payroll tax was cut permanently. One-offs never work. People save the rebates for a rainy day. We need real honest reform since the states will go broke and seek handouts as well. So, it is time to get real. It is time we restructure the entire system including the banks which always cause the problem. We don't need excessive regulation of things that did not create the problem when the real culprits always escape.

You may send comments directly to Martin Armstrong at ArmstrongEconomics@GMail.com.

Martin Armstrong: We Need A Shock To The System

A new essay by Martin Armstrong:

The Only Viable Solution!

Both Europe and Japan have now formally admitted they are in a recession.  The truth is, we are headed into the deepest economic depression perhaps in history. There are those who are trying desperately to compare current events to 1929 focusing on how unemployment went to 25% back then. We hear plans that we should re-establish the Works Progress Administration (WPA).

It is time to set a few facts straight. It is true that unemployment hi t 25% during the Great Depression. That is irrelevant. America was still about 40% agrarian back then so when the great dust storms hit and lasted for 7 years in true biblical fashion, there was no possible way to work. The bright silver lining to the Great Depression is that it forced unskilled labor to acquire skills. This is why the WPA made sense and it worked. But it is also why they wrongly say that war is good for the economy. It was World War II that absorbed excess labor and forced unskilled labor to become skilled. By 1980, the American work force was only about 3% agrarian.

The other misnomer is that the Great Depression was caused by the “greed" of Wall Street. True there was excessive leverage in stocks and there was a shortage of stocks also because of foreign investors. But the American history books were very parochial and ignored the real events overseas. The debt bubble burst in Europe and the contagion spread to the United States. Almost all of Europe defaulted on public debt. The proposal was to allow Germany and Austria to merge their economies. The French disagreed and began shorting the Austrian bonds. When Germany tried to support Austria, the French sold the German bonds short. Britain tried to aid Germany, the French turn on Britain. Most of Europe defaulted. Britain adopted a moratorium. This sent capital fleeing to America driving the dollar to record highs cutting off trade to which we then adopted protectionism with Smoot-Hawley Act. The crisis today is again rising from the leverage in debt, not stocks. We cannot ignore international events. We cannot create enough money to offset the contraction in leverage. We do not need more regulation of Wall Street; we need some regulation of leverage and banks. That has historically been the source of all major economic declines. A pure stock market crash does not alter the course of nations unless coupled with a banking crisis.
 
Our greatest danger is always ourselves. If our politicians once again down¬play reality and misunderstand what is taking place, then you better fill up the car to make sure you have heat and a radio to camp-out in after you lose your home. What we need is courage, wisdom, and foresight based upon hard core facts. It is time to charge the paddles to maximum. We must understand the global economy, not just our own. It is the leverage created by the Investment Bankers that was at least 50:1 who now want to become commercial bankers to get longer-term deposits to play with. Combine their collapsing leverage with unfunded entitlements federal and state (as well as cities), even doubling the money supply or lowering interest rates to zero will not save the day.

It is the Investment Bankers that are to be blamed, not Wall Street in general, or corporate officers.  It is not the salaries paid to a CEO any more than it is the equally high paying salaries to a sports figure.  If every CEO gave back every penny they earned, that would do nothing.  It is the 50:1 leverage (or more) used by the Investment Bankers and their thirst to rig the markets to create that “riskless” trade.  Orange County, Long-Term Capital Management, and now the Great Financial Implosion of 2008, all have the same origin – leverage!  When the system is built upon leverage that is 50 times the actual underlying value, it is like having a house worth $100,000 but the banks lends you $5 million. Even doubling the money supply to say $200,000. will not stop the contraction of leverage. This is what we are really facing. The cost of this bailout is not $700 billion; it will be measured in trillions. Add to this the domino effect that is also pushing over corporations like GM, and states as well as cities, the collapse in is spreading to all areas of the economy. The tsunami of entitlements is moving our way. Hoover said: "Prosperity is around the corner." There was no bounce because of the collapse of the debt-structure in 1930s. Unless we understand the true nature of the crisis, history will repeat.

We need the shock to the system that will reverse course. Let go of prejudices and Marxist theories. Eliminate federal income tax, monetize expenditure as per cent of GDP, those with the most will be naturally taxes through steady inflation. We need competitive labor that is exportable. Jobs will pour into the nation. We will then eliminate the competition with the states for tax revenue forcing them to also compete with each other. The only way we can save the entitlements and pension plans public and private. Stop the nonsense and bring in "real" tort reform that is blocking health care. Once a national system is in place, we can save General Motors, cities, and all industries declining due to such costs.
The stock market did not cause this problem. It was not Wall Street. It was the investment hanks with their models that they knew did not function in a real world as those created for ATG. We will destroy our economy if we regulate areas there were not the cause. We need to fold all agencies into one. It has been the turf-war between the SEC & CFTC that caused the creation of hedge funds offshore because if you obeyed the CFTC rules, you went to jail under the SEC. This was not a result of deregulation it was the result of too much regulation by too many agencies that left gaps between them that were unregulated. The stock exchanges did not cause this problem. It was the unregulated derivative market created by the banks with no regulation. We need one agency. not many. We also need ethical rules that prevent the investment bankers and others from hiring government attorneys to gain inside protection from prosecution and regulation. This is not allowed in any other field. It has to stop among the regulators as well.

Enough is enough.  We cannot fix the problem until we face the truth.  Consumers want the lowest prices and labor wants the highest prices. Manufactures leave for survival not greed.  We are also losing service jobs to India, Philippines and even Mexico.  Why? The benefit costs on top of taxes are doubling wages. Eliminate the taxes, create real national health care, and we will recreate jobs in America when we need them really bad right now.  Even John Maynard Keynes advocated fiscal policy to manipulate the economy during such contractions.  He pointed out that both interest rates and taxes were tools.  Interest rates do nothing.  The decline in confidence will drive interest rates lower any way as does the flight to quality. We can lower interest rates to 0.1% like Japan and still watch grass grow faster than the economy.  It is time to stop the Marxism. Our future depends upon this very point. Human nature cannot be changed.  Marx was dead wrong.  Politicians never seem to learn from history when it goes against their own self-interest. Only Confidence will alter this economic implosion. Without a restoration of Confidence urgently, keep the car gassed up!

Martin Armstrong: SEC, CTFC, FED, Treasury – Too Many Agencies

Too many Agencies Destroy the Economy

Thomas Jefferson (1743-1816) was one of the three great minds that established the United States – the other two being James Madison (1751-1336) and tl1.e world renown Benjamin Franklin (1706-17ql). Jefferson accomplished much including being President of the United States. Yet of all of his accomplish¬ments, he regarded those he recorded for his own epitaph to be most significant.

Here was buried Thomas Jefferson
Author of the Declaration of American Independence
of Statute of Virginia for religious freedom
and Father of the University of Virginia

Of all the accomplishments of this great man, the first among his deeds he always considered the drafting of the Declaration of Independence. Jefferson shocked many for he declared rights that he viewed as "self-evident" truths. "All men are created are created equal…they are endowed by their creator with certain inalienable rights." He also proclaimed that ''Governments are instituted among men, deriving their just powers from the consent of the governed; that whenever any form of government becomes destructive of these ends, it is the right of the people to alter or abolish it and to institute new government." These were the words that set this nation into motion.

But we must not forget, that government once established, will always seek greater power than it was granted. This is the "hydraulic" pressure of which the Supreme Court once admitted quite candidly. Jefferson established another great evil of government we cannot lose sight of in this dark hour. He listed among the tyrannies of the King:

He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance

These are not my words. They are the words of one of the greatest minds in history. If we do not listen to him now, then we will continue down a path that will lead to revolution. Do not think for one minute that as Americans we are above revolutionary violence. Take the ability to earn income away from the people through economic collapse, and you will suddenly see the short-temper of the mob. Both Russia and China collapsed because a communistic state that owns everything, controls everything. That is where over-regulation leads. It is the collapse of money supply and progress taking society back to the dark ages after the fall of Rome.

When capital will not freely invest, the velocity of money collapses and there is no self-interest that creates the economy.  There can be no central planning.  Governments cannot determine what would be good or had. The same is t.rue in the corporate world. Just look and you will see that large companies will buy smaller innovative companies to gain progress.  Why? Because the board of directors in major companies want no risk, they have no vision and rarely will further great economic advances. All innovation usually comes from the small firm that has the idea, the courage and conviction to implement it, and thus profit by its development.  The big firms, lacking that same entrepreneurship, merely acquire the smaller firms to gain new technology and market share. Innovation rarely comes from the big corporation and never comes from government. This is why the theories of Karl Marx were wrong both in communism and socialism government’s self-interest. Will always be merely to increase its own power. It is this "hydraulic pressure inherent within each of the branches to exceed the outer limits of its power," Bowsher v Synar 478 US 714, 727 (1986), that is the reality of government. Just like we need checks and balances against the excessive leverage of Investment Bankers, we likewise need the checks and balances against this "hydraulic" pressure within government.

To make sure we do not shoot ourselves in the foot and destroy more of our economy wiping out Wall Street entirely, we must consolidate everything into one coherent agency. We cannot make the same tyrannical mistake of which Jefferson listed among the injuries that justified revolt. We do not need 5 agencies all competing over the same turf and pointing fingers when the next collapse takes place because we failed to do the job right again.
 
We need one agency, not a multitude. Why are hedge funds all offshore? Because they cannot exist onshore for when they obey the CFTC regulations, they will go to jail for life under the SEC regulations. It has been our multiplicity of agencies that has destroyed our financial industry and this competition feeds the Investment Bankers who create their derivative market outside the regulation of both. If you manage money in stocks and know that the stock market will collapse, you cannot use futures to hedge that risk because the CFTC says that makes you a commodity fund subject to their regulation. This was one reason I refused to manage money. The regulations would not allow me to do the job clients expected. Why are there so many different types of funds onshore from junk-bonds, T-bill funds, high risk funds, commodity funds, stock funds and so on? Because you cannot as a fund manager do everything in a single fund because of so many competing regulations.

London is now the financial capital of the world. If the rest or the world is smart, they will recognize that the regulated markets did not cause this nightmare. It was the unregulated Investment Banks. Correct what is wrong; don’t create a multitude of new agencies making it impossible to do anything so everyone leaves. Americans are always their worst enemy.  The rest of the world should look closely and learn.

Martin Armstrong: Don’t Forget To Turn Out The Lights

It’s no surprise to me I am my own worst enemy


‘Cause every now and then I kick the living shit out of me The smoke alarm is going off, and there’s a cigarette


Still burning


Still burning


– Lit – “My Own Worst Enemy”

A new essay from Martin Armstrong:


Will We Commit Economic Suicide by Regulation?


Americans have the amazing inherent ability to shoot themselves in the foot.  Just look at the World Trade Center attack. America passed the “Patriot Act” that did more to destroy the Bill of Rights than any other legislation or foreign act could possibly have done.  What standing armies could not do, we did to ourselves. Then there were the ENRON and WorldCom cases. The legislation that emerged to make corporate officers responsible was so Draconian, where the United States was the financial capital of the world with a 50% share of all IPOs (new stock offerings) in 2000, we managed to once again shoot ourselves in the foot sending the business to London. Now, the US has lost its standing as the Financial Capital of the world and our share of the global IPO market is less than 5%. All the rest of the world has to do is stand on the sidelines like a vulture waiting for ourselves to gnaw off our own legs.


The debate we will now hear is the blame will be placed upon the Republicans and their deregulation policies that caused the collapse of the world economy. This is simply not true!  The problem is over-regulation of small firm and no regulation to speak of for the big firms.  Unless we examine the reality of what took place and consolidate the regulation into a single agency, we will destroy jobs, our economy, and our future. This is not a time for partisan politics. This is a time to rise above the political economic chaff. The Republican Party has self-destructed abandoning its economic conservatives for the religious right. The Republican Party may be a non-entity in the future to be replaced by most likely a new Third Party divorced of the religious agendas. But that we may not see until the next Presidential election. What we must look at is the truth. This is our country we are talking about and the future we leave to our children.


This latest financial collapse caused not by Wall Street, but by the Investment Bankers, could no doubt become the final nail in the coffin destroying American capitalism and whatever is left of the Bill of Rights after the Patriot Act that gave rise to the phrase “Papers please!” Instead of understanding the real problem, we will no doubt create a new “leverage” czar agency who will have no clue what really to do. This may leave the Securit.ies Exchange Commission, the Commodity Futures Trading Commission (“CFTC”), and the Federal Reserve not to mention the Treasury all with regulatory turf-rights that will destroy the economy.  If such regulatory reform comes out of this, all we will do is create a vast reservoir of jobs for more government workers, perpetuate a host of new jobs for worthless lawyers to interpret the new regulations, and most likely a whole new repertoire of statutes that will get you that tax-free living in jail for life. To enforce it, we will no doubt add an army of former prosecutors masquerading as federal judges that basically click their heels under the bench and say “zieg heil” under their breath before just ruling in favor of the Government no matter what they ask for What no standing army could ever have done to America, we will do to ourselves.


The economic depression we now face has been in part caused by the regulators SEC & CFTC. We are going to wipe out our economy and send it back to the Stone Age. Just as our forefathers left the over-regulated European systems of the day for freedom, it may soon become time to return home. The last rational person to leave, don’t forget to turn out the lights!

A Modest Proposal From Martin Armstrong: Abolish The Income Tax

I have recieved a follow-up essay from Martin Armstrong.  He sets forth a modest proposal for reversing the economic slide in the United States: abolishing the income tax.  Nothing would return our manufacturing and investment base faster than implementing his proposal.  However, in all reality, it's a completely unworkable solution in the near term.  Martin doesn't provide many specifics on how to implement a plan and I would expect every legislature is currently trying to figure out how to raise taxes, not lower them.  But it's food for thought nonetheless. 

Can we save our Economy by Eliminating the Income Tax?

Martin Armstrong

    The maxim is that the only two certainties in life are death and taxes. Today, we are standing on the edge of a cliff with no net below and we better just for once take a look at what we are doing. The Investment Bankers once again have blown their businesses up more profoundly than any terrorist could have conceived. There is no bottomless pit to bailouts. Letting the Investment Bankers manage their own mess pouring in what may be more than $2 trillion before we see light, is like handing a drunk a bottle of whiskey and hope he can drink himself sober. The more we borrow the higher the interest rates will move because we are competing with the private sector and we will make it harder for the homeowners. It is not just capitalism that is on the line, it is our freedom. The investment banks were trying to rig the game; they were not investing for sound economic advantages.

    We are living in a fantasy world of economic theories that no longer work. Once we abandoned the gold standard, everything changed. Money, once created only by the king, can now be created by the private sector. Leverage alone has always increased actual money supply through the velocity of money. But derivatives have increased the leverage factor at least 50:1 and foreign exchange can alter the money supply leaving the government merely an observer. John Maynard Keynes (1883-1946) argued that fiscal policy could be manipulated to offset a collapse in demand during an economic decline. He advocated the manipulation of interest rates and taxes to affect indirectly the economy. But money is no longer gold, the economy is an open system, and his ideas are now antiquated. Taxes have become a barbaric relic from the ancient past, no longer necessary since money is now electronic, not physical gold or silver that can be created only by God. Even the Euro was created by a mere gentlemen's agreement to keep spending within a specific percent of GDP. The class warfare instigated by the hatred of Karl Marx, is time to be retired with communism.

 

    The income tax has outlived its usefulness and today it diminishes our ability to create jobs and to further economic growth. Back in 1997, I testified before the House Ways & Means Committee on this very subject. The Committee asked me why European companies were getting all the contracts in China. I explained that the US income tax was based on worldwide income. Europeans were taxing only the earnings within their respective nations. Therefore, if a German company bid on the same project, they were already 33% less in cost compared to an American firm. America still treats its people as if we were the property of the state – slaves in reality. If you live in another country, do not use any services in America, you still owe income tax because you were born here. Even in England, you pay taxes on income only earned there because you are using the services like paying rent. But if you are British, live in Hong Kong, you do not pay taxes as if you were property. America cannot compete internationally. We are no different from any Marxist state except we claim you can be all you can be, but if you are born here, the state owns you, all your productive ability, for life. You are just property.

    Talk about eliminating the income tax will bring a reaction from the Marxists who live among us in drag. They will point to the "rich" the same as Marx did using the term "bourgeoisie" and portray them as the "evil doers" who must be punished as in Ayn Rand for their daring to make more than the next guy. Since money is now created by the private sector in a floating exchange rate system unlike it was in a gold standard, taxation is costing our economy more than it is worth. In 1986 the national debt stood at $2.1 trillion that rose to $8.5 trillion in 2006. If we add all the interest payments during this period you will be shocked to see this was $6.1 trillion. If we had taken just 25% of the money spent on interest, we could have funded national healthcare and sent every child to college. Our taxes are destroying our economy. Yes jobs are leaving, but because of two main factors: (1) high taxes, and (2) high benefit costs. General Motors is collapsing for it cannot compete when burdened with taxes on worldwide income, benefits it can no longer fund, and healthcare costs that appear to have taken the last ride on the space shuttle because no one will create real tort reform.

 

    We blame the "greed" of corporations, but we tax them on worldwide income depriving Americans of the same ability to export our labor. We ignore the fact that labor wants the highest salary, but consumers want the lowest prices. We blame the manufacturer for trying to walk between these two competing forces. Eliminate the taxation and you will see jobs come pouring back to America like it was the Gold Rush of 1849. China emerged from communism where there was no income tax because you were the property of the state. In the Chinese "controlled capitalism" experiment, they exploded in economic growth because there was no income tax. China itself made a fortune off of indirect taxation as Thomas Jefferson and James Madison designed. It was the ideas of Karl Marx that led to the adoption of the income tax in 1909 that was ratified in 1913 as the 16th Amendment to the Constitution. The popularity of Marx in America pre-Russian Revolution was widespread. The income tax that was to extract wealth only from the evil "rich" was applied with the payroll tax after World War II. Suddenly, everyone became rich and we then began to borrow from the poorest without interest, and pretended we gave them a gift with a refund.

 

    It makes no sense to tax our people and corporations at huge costs to even to administer such a system when the private sector creates money today electronically anyway.  If someone calls a bank and wants to buy $1 trillion exchanging Euros, they do not call the Treasury to ask permission. Inflation is no longer the rise in the prices of goods and services; it is the depreciation in the purchasing power of the dollar. International capital can alter the money supply at will. Do we still need taxes when money is no longer tangible? If a building is sold from one American to another, nothing happens to the money supply. But if a Japanese buys the building, they convert their yen to dollars. There is now an increase in money supply. Why tax when we can create money annually in a disciplined manner tied to a percent of GDP? This would end the political-class warfare, create jobs making our work force both competitive internationally, and for the first time make our labor exportable.

 

    It is time to think out of the box. If we try to bailout everything that is going to collapse, the current system will cause us to issue bonds that will compete with the private sector driving interest rates higher, not lower. If the contagion spreads worldwide, the foreign buying of our debt will decline and our money supply will implode anyway. The more we borrow internationally, the more we pay in interest that now will never stimulate the domestic economy at all. The Investment banks always blow-up because they use excessive leverage. The call money rates in 1907 hit 125%.  It was the Investment Bank of Jay Cooke & Co that blew-up in 1873 because of their speculation in railroad stocks. In 1932, Mr. Sachs testified before the Senate where he was asked at what price they sold their shares in Goldman Sachs Trading Corporation He replied $104. When Senator Couzens asked where it was that day? He replied $1.75. The Long-Term Capital Collapse of 1998 was again excessive leverage against what they believed was a guaranteed trade in Russia with IMF loans. Stop helping the Investment banks. They will object because they rely on selling government debt to make a fortune in commissions. The accounting industry will complain because no one will need to file federal income taxes. The money is already created in the form of bonds. Redeem them and we will save more than $6 trillion in the next 10 years in interest alone. That would rebuild our infrastructure and revitalize our economy.

 

    Start helping America. It is time now not only to think out of the box Karl Marx created, but it is time to step out of the box and look carefully at what kind of box we even live in. The Euro is a basic gentlemen's agreement between nations. A controlled monetization of the cost of government is a day that is now our only viable alternative. When the investment bank of Jay Cooke collapsed in 1673, the economic decline set in motion was like that of Japan but worse, it lasted for about 26 years. We owe our children a better life than that!