Martin has proven to have an uncanny ability to predict major changes in not just the markets, but society as a whole. For example, in 1986 he published his prediction that the Nikkei Index would peak for over a generation AND that the Soviet Union would collapse in December, 1989. He was correct on both counts. In fact, he predicted the precise day that the Nikkei topped out.
There are so many other examples that I don't have time to list but all that changed in 1999 when he was arrested for securities violations, where upon he became the longest held prisoner without trial in American history. You note I did not use the phrase "American Justice" because in Mr. Armstrong's case there was none but more on that at a later date.
In the last two years Mr. Armstrong has taken to writing from prison and below we present his latest work. He is without computer or his extensive personal research library but still his thoughts make for compelling reading - and as usual a fascinating perspective - Michael Campbell from Hawaii 01/13/11
Martin Armstrong On The Fed, QE2, Bernanke, Buffett & Goldman Sachs
EVERY ONCE IN A WHILE, we end up with a catastrophic event I call a PANIC CYCLE. The silver thread that ties all economies and markets together; the Pandora's Box of economic contagion. Nothing, but nothing can ever be analyzed in isolation. Everything is interlinked to everything else. Only once you see the world in such a light, will you see the face of this amazing process. Like looking at the clouds when suddenly you see the face that the sum of the patterns combine to form.
I have been conservative in what is possible for the years ahead. I have given a number of $5,000 gold that is VERY CONSERVATIVE. If we take the USA gold reserve 262 million ounces and we divide that into the national debt at $14 trillion, that yields a staggering price of $53,639 per ounce. Even taking the whole world official gold reserves and dividing that into the US National Debt of $14 trillion, we still end up with $15,873 per ounce. If gold matched the Dow Industrial gain from 1,000 in 1980 to 14,000 we come up with the number $12,250 per ounce. So why are we trading at $1,400? As always, it is a matter of both time and perception. We are on the verge of watching Western Civilization crumble into dust because the politicians will not listen and the bankers are too greedy to save the nation while licking their lips at going short government bonds.
Comparison like these are what gave birth to the absurd "Efficient Market Theory". The Theory upon which the SEC and others went around criminally charging people for defrauding the markets by either overpricing or under-pricing some stock. These types of prosecutions are no different than the Witch Trials at Salem.
I investigated the markets manipulated by the NY Bankers very closely. It became clear that they were able to accelerate the trend in motion but they could not turn a bear market into a bull market. They could get a rally, tell everyone silver would rise to $10, and then dump it at $7 as the buyers came in. There was the silver manipulation where Warren Buffet came out and admitted he bought $1 billion worth of silver, yet it still fell to new lows.
When we look at gold, we are truly looking at just one facet of the whole diamond. It is not a single market in isolation. It is connected to everything else. The symbol of Chaos Theory was if a butterfly flapped its wings at the right time in Asia, he could set in motion a combination of events that culminated in a hurricane that smashes the East Coast of the USA. It may be an extreme example, but what it is trying to reveal is that tiny subtle changes in one market can filter through the silver thread that binds everything together.
During the 1980s and 1990s, the amount of gold sold by Central Banks was 4,500 metric tonnes (144.6 million troy ounces). This helped to make the 1999 low in gold 19 years after the intraday high at $875 on January 21, 1980. Those days are now gone. The central banks do not have enough gold to create a bear market.
China deregulated gold in 2008 and that opened another vast consumer market. The gold reserves of China have risen from 17 tonnes in 2008 to 143 tonnes in 2010. If China were smart, it should take half of its Foreign Exchange Reserves of $2.4 trillion and buy gold IN NEW YORK! This would help them in two ways.
(1) It would reduce their trade surplus helping to politically sterilize criticism
(2) It would help transform China into the new financial capital of the world.
The way I helped the Japanese ease trade friction with the USA, was to advise them to buy gold. It does not matter what you buy, the current account tracks dollars, not the object. China buying gold in NYC will then reduce the trade surplus and the American politicians will be so proud that they had lowered the trade surplus they will be pounding their chests and yelling - SEE! VOTE FOR ME! I BEAT CHINA!
Unfortunately, all governments die by their own hand aside from those who fall by invasion. The best way to collapse a government is to let it run its course. Without fail, the structure of government is so bad that the self interest for WEALTH and POWER leads to the inability to function in any rational manner ensuring it dies by suicide. This was true of Communism, for centralized planning will NEVER allow any government to respond in a coherent manner to the evolutionary process of its society and economy.
Adam Smith is hated by socialist's because he warned that governments are always the greatest spendthrifts. That they should leave private people alone. The socialist claims he can manipulate the economy into anything he desires, and hates the idea of any free market theory. That means the socialist can no more manipulate the economy than the NY Bankers can perpetually turn a bear market into a bull market. The free markets will prevent both from succeeding.
Government wants to believe that by occupying an office of power, it gives them the power to regulate everything, no matter what. THEY ARE DEAD WRONG!
Everything is collapsing, Europe is in turmoil. In the United States, we suddenly see a debt commission recommending:
- $100 billion cut in defense
- A raise in the gas tax
- A raise social security to age 69
- Lowering the corporate tax rate to encourage hiring
- A repeal the alternative minimum tax
- Eliminating the deductions on mortgages over $500,000
- A cut in farm subsidies by $3 bil
- And a cut the federal work force by 10%!
By the time my children retire, social security would probably be available starting at age 90.
The collapse of SOCIALISM is widely felt everywhere. The view of US debt by others is taking on the mantle of junk bonds. Many world governments see and feel the CONTAGION effect from the USA because it is the world RESERVE currency. This means that whatever the USA does to further its domestic policy, it will effect all other nations.
The Fed buying back government debt on the premise that they will stimulate the economy is ABSOLUTELY DEAD WRONG! The Fed has lost control of the economy BECAUSE THEY NEVER HAD CONTROL! The bond markets have defied the Fed and its harebrained idea of stimulating. The brilliant idea of buying government debt, putting cash into the system to try to inflate the economy just as ROOSEVELT did by devaluing the dollar, confiscating gold, FORCED INFLATION.
However, Bernanke may not be stating why he is inflating. He is a limited student of the Great Depression, and he does understand the US reaction at that time. Yet he may not see the bigger picture that today it is China in the same role as the USA was in 1932. The inflation move worked back then marginally and only for one cycle into 1937. The economy collapsed again and fell right back into 1942. It was World War II that did more than INFLATE, it distracted Americans and helped to shift the glut of unemployed from agriculture into the army and then into a skilled work force. These conditions do not exist today. The reason stimulation will fail is because the problem is debt and you cannot buy back what you desperately need to sell more to keep the game afloat.
The one thing that is true in every economic collapse, the bond holders lose ABSOLUTELY EVERYTHING! Just as government workers are on the alert that the new Republicans are going to attack their dreams of milk & honey. There is far too much resistance that exists and we are going to go down with the ship. Nobody will yield. The government unions will fight. They were promised pensions that are now far more lucrative than anyone's in the private sector. We will see protests rise in the USA just as we saw in Greece, France and England. This is all typical of the collapse, and in fact causes the collapse because people want what they were promised.
Be very careful about the advice that now bubbles-up from New York. Did you notice that Goldman Sachs predicted $2 trillion in buy backs of the 30yr? Then Goldman was offering to the RETAIL PUBLIC 50 year bonds. Well, the buy back came out at $600 billion and it would be short-term, not long-term. Was Goldman that WRONG? Or was Goldman talking its own book to fool the public again into buying Goldman paper for 50 years when in fact no Investment Bank has ever lasted that long. If Goldman is around to pay-off those bonds, it would be defying the laws of nature.
DO NOT TRUST what comes out of NYC right now. They are not stupid. They can smell the blood waiting to gush forth from this debt bubble. Whatever they say, you will see it is designed to talk up the bonds to create a sucker rally so they can sell precisely as they did in real estate. There is no difference. It may have once been beware of Greeks bearing gifts, today it is beware of New Yorkers offering bonds! They blew up the country selling foreign debt to the retail public so when the debt crisis of 1931 hit they succeeded in wiping out everyone who was missed by the stock market.
Insofar as Bernanke is trying to inflate the way out of this mess, he has has said "I grasp the mantle of Milton Friedman." I spoke with Milton and he believed in the Free Markets FIRST, and he would NEVER have advocated massive debt. Bernanke has no power over anything important. He cannot cut the debt. For whatever he buys back, Congress will just replace.
In truth, the Fed has no clothes. It is a pumpkin hollowed out, its face carved to make it look like something it is not - a defender of the economy. The Fed did not regulate AIG nor Bear Stearns, so Obama's financial reform in July extended the Fed's reach to cover all important financial institutions, not just big banks. We are so far away from what the Fed was in fact designed to do, to replace J.P. Morgan's efforts to stave-off the Panic of 1907. Instead of Morgan mustering bankers to save the industry as a whole, the Fed was intended to play that role, yet it failed in 1930-1933.
The Fed was politically controlled by the Executive until 1951, since then its role has been turned-upside-down. When it began, it stimulated by purchasing CORPORATE PAPER - not government bonds. Because of World War II AND the inflation policies of Roosevelt, the Fed was directed to buy US government bonds to support them at par while abandoning the entire design of supporting the economy.
We then have the Monetarist Theory that inflation is created by an increase in the money supply. Therefore, Congress put two and two together and came up with THREE! If inflation was caused by a rise in money supply, it was the Fed's problem so they were then expected to sterilize the deficit spending of Congress despite having no such direct control mechanism.
The Fed was incapable of preventing what was perceived as the Vietnam War era inflation into 1969. Yet they did not see the global effect of creating more money in the promised land of gold backing. The Vietnam War became the visible inflation agent, but in fact it was accumulative from the start of Roosevelt and his then artificial suppression of the bond market until 1951. Vietnam was the stimulus that broke the camel's back but it was NOT the sole agent of doom. This culminated in the closing of the gold window in 1971 and the birth of the floating exchange rate system.
Volker went nuts going into 1981 with the harebrained idea that interest rates can effect demand. He raised the discount rate to 17% and SLEW the inflation dragon. At the huge cost of altering the usury laws and setting in motion the multiplying factor of the national debt. Issuing bonds at such high rates of interest succeeded in raising the growth rate in the debt from 245% between 1970 and 1980 to 356% between 1980 and 1990. Since Volker could in no way isolate the US government, he also forced the Treasury to pay higher rates of interest which escalated the national debt much more rapidly. Thus, today, 68% of the total national debt is accumulated interest. This is why we have nothing to show for anything and we are exporting about 40% of interest paid to other lands. This has become the GREATEST transfer of wealth that should have gotten the Marxist/Socialists mad as hell. Alas, they don't understand it!
The track record of the Fed is dismal at best. It failed to save the many banks between 1930 and 1933. The NY Fed was too wrapped up in trying to play ball with the Europeans. It may be true that the Fed's mandate is to stimulate inflation in order to try and bring down unemployment, but that is a concept devised by Congress, not the reality of the markets.
For the conspiracy theorists who see this as one giant scheme to dominate the world, sorry, but they give these people far too much credit for understanding what they are doing. In truth, there will be no ONE WORLD GOVERNMENT because they can't agree in Congress no less the rest of the world. Even if they did create such a monster, its life span would be only a few years. There is too many cultures and ideas to ever reach agreement.
These are people who want to play king of the hill and boss everyone else around. But they will not be capable of doing anything for they don't have anymore understanding of the economy than the communists did. Central planning DOES NOT WORK! These people have destroyed our future. To those who think the mortgage crisis could have been avoided had the Fed had more power, you had better change the pipe you are smoking. When Robert Rubin broke down the walls between insurance, stocks, and banking he returned everything to where it was prior to the big crash in 1929. He also opened the door for his beloved Goldman Sachs and wiped out the economy. He became an advisor to Citibank, and that worked out just as well for them. This is NEVER about doing the right thing. It is about grabbing what you can for as long as you can and to hell with the country. To Hell with the world for that matter. It is that moment of ecstasy where they will say anything to reach their immediate goals. The morning after? Well that's a different story for a new day.
If the Fed truly wanted to stimulate the economy BUY CORPORATE PAPER NOT GOVERNMENT, for the government paper may be owned by foreign investors and the money is just exported. Buying CORPORATE paper would be a direct stimulus to restart the economy.
We do everything indirectly and clearly ass-backwards. We pour money into the banks and expect that they will lend to corporate clients rather than speculate. The banks have always gotten us into a mess for centuries. The bankers in Ireland have wiped out national savings. Their losses exceed the staggering amount of $50,000 per household. Did they lend that much money into the real domestic economy? ABSOLUTELY NO WAY! They bought what they thought was a quick buck with no risk. They wiped out the country.
We still try to influence demand with raising and lowering interest rates. That assumes the banks will pass on the effect and we are again back to INDIRECT stimulation. The bankers are speculators and we cannot place our country in the hands of the banks for all we will get is pain and suffering in return. If not war. STOP the indirect stimulus. Buying back government bonds expecting to increase the supply of money is a system that is porous! There is NO guarantee that the money will stay in the country. There is no guarantee that the banks will lend that money rather than speculate with it. So the Fed has absolutely no control over any thing whatsoever.
I come not from academic nor from the commercial banking sector, but from the real world of international corporate advisory and finance. I have had a front row seat for decades to watch what really takes place. What is believed is simply DEAD WRONG!
We NEED DIRECT management, not INDIRECT. I would not have given 10¢ to the bankers. I would have gathered the deposits and then ensure 100% would be returned, but let the bankers fail. To let those high-flying banks dig their way out of a hole with public money while leaving the economy behind, was something you would expect from dumb and dummer.
This is the problem when the banks run government. They look out for themselves at the expense of the nation. Stimulating only by direct means, securing actual deposits and not the leveraged derivative profits would have been the prudent way. You buy corporate paper as the Fed was supposed to do originally, NOT BANK PAPER that fuels speculations. The non-trading banks who are the core of traditional commercial banking are the only banks worth saving. Those who want to be high-flying hedge funds should have failed with bad trades. That is part of trading. You learn from your mistakes. But the NY Bankers want to rig the game so they keep all the profits and share the losses with the people.
Buying corporate paper would also have been the first step in attacking unemployment directly. Then again, that is why the government keeps me where I am (In prison-ED) to stop rocking the boat. Sorry! The boat has holes and the captain is naked.
We stand at the end of a long and dark road. All that remains is a cliff before us. Keep interest rates down, help the banks now become trillionares, and pray for divine in tervention. Because that's all you have left!
Keep track of Martin Armstrong's writings HERE
Disclosure: I am long GLD, SLV.