Skip to comments.Financial Armageddon
Posted on 11/05/2011 8:18:27 PM PDT by Razzz42
EVERYONE knows that something is wrong. What they do not
realize is that this has ALWAYS been a global game. What are the implications of a global economy? As bizarre as this may sound, everything in economic theory that supports government manipulation and intervention into the domestic economy rests upon theories that the economy is exclusively domestic and takes NOTHING into consideration affecting local events from an external source. Why is this important to understand? The Sovereign Debt Crisis began in Austria in 1931. Once one country goes, capital looks around and then attacks the next country perceived to be weak. Thus, the collapse need NOT be some local event. Hence, if the catalyst can be external, that means we may NOT be able to prevent the spill- over of GLOBAL CONTAGION. The bottom line we are NOT in control of the domestic economy as economists and politicians presume. Government presumes this recession is no different than any other, perhaps a tad deeper. Thus, they sit back and presume we will grow our way out of it and hence there is absolutely no contingency plan for what if they are wrong!
The mainstream economic theories have long supported government manipulation and intervention to control the economy from a DEMAND-SIDE view. People turned SUPPLY-SIDE economics into dirty word under President Reagan. However, there is something more to SUPPLY-SIDE ECONOMICS that nobody seems to pay much attention. The Fed raises interest rates to AFFECT consumers and to discourage them from buying, while increasing the profit margins for banks. This is in THEORY managing DEMAND rather than curtailing lending by banks changing their ratios affecting SUPPLY. Everything the government does is designed to influence the PEOPLE/DEMAND by affecting them to indirectly
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steer the economy. Directly restricting how much a bank can lend would be SUPPLY-SIDE intervention rather than raising rates and affecting consumers causing them harm is DEMAND-SIDE economics.
The whole theory base in economics is seriously messed up. DEMAND-SIDE affects the people placing the burdens upon them directly to influence their spending to indirectly drive the economy in the direction economists and politicians BELIEVE it should go. Strangely the so called Marxist politicians argue that SUPPLY-SIDE ECONOMICS benefits the rich at the expense of the poor. Yet DEMAND-SIDE ECONOMICS advocates targeting demand (the consumer) manipulating that group to affect the rich. Nobody seems to ever think these things through.
The theories are all domestically focused assuming raising and lowering interest rates and increasing or decreasing the supply of money will influence demand. But this completely ignores both the inadequate theory of DEMAND-SIDE whereby lowering interest rates to virtually zero wipes out the income of the elderly reducing their DEMAND while diminishing the value of their cash SUPPLY. This fails to understand that when CONFIDENCE is low, people will HOARD (increasing SUPPLY) and not borrow when their expectations of the future remain questionable. The spread between the cost of a car loan at 3.9% and a 3 year CD-Rate at 0.7% is almost a 560% profit margin for the banks. Thus, the lower interest rates have dropped the cost of money for banks while increasing the cost to borrow fails utterly to stimulate DEMAND. There is NO consideration regarding the cost of SUPPLY. The consumer gets the worst of both ends of the stick simultaneously. Low interest rates does NOT stimulate the economy, it only benefits the banks. As always, SUPPLY-SIDE ECONOMICS is never considered.
SUPPLY-SIDE ECONOMICS is generally presented as a school of macroeconomic thought that argues that economic growth can be most effectively manipulated by lowering the regulation and barriers to allow people to produce more goods and services thereby increasing the SUPPLY and in theory stimulate the economy by lowering costs. This is normally argued that lowering income tax and capital gains tax rates creates more incentives to produce creating more jobs. Under this theory of SUPPLY-SIDE ECONOMICS, consumers will then benefit from a greater supply of goods and services at lower prices increasing the standard of living. Opponents argue this is trickle-down largely because they see this as only benefiting the rich. However, constantly raising taxes lowers growth and chases the rich out of the economy. One of the great Democrats, Grover Cleveland (1837- 1908), spoke to a special session of Congress on August 8th, 1893 before there was an income tax on how capital acted without taxes during the Panic of 1893 and the ugly effect upon the wage earner.
"At times like the present, when the evils of unsound finance threaten us, the speculator may anticipate a harvest gathered from the misfortune of others, the capitalist may protect himself by hoarding or may even find profit in the fluctuations of values; but the wage earner - the first to be injured by a depreciated currency - is practically defenseless. He relies for work upon the ventures of confident and contented capital. This failing him, his condition is without alleviation, for he can neither prey on the misfortunes of others nor hoard his labour."
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Not only do we lower the cost of savings destroying income to entice the rich to borrow, who do not because consumers reduce spending, but we ignore the global economy altogether. There is no global economic theory at all because economists and politicians can only regulate domestically under the Marxist-Keynesian agenda. In 1931 it was Austria. Today, it will be the first nation to default, which will NOT be the United States. Then, if we look at the current global economy, the catalyst for the immediate debt crisis began with the abuse of credit which emerged from the New York Investment Banks that were primarily regulated NOT by the Federal Reserve, but by the SEC and CFTC! The SEC and CFTC are directly responsible for everything instead of merging and reforming them, they are handed more power to abuse. They regulated the Investment Banks and derivatives. They were supposed to be the first line of defense. Yet, they have NEVER managed to ever prevent a single crisis or scandal from Madoff to the collapse of Lehman and Bear Stearns not to mention the quick and dirty sale of Merrill Lynch to prevent that from going into oblivion. They have served no purpose and protected the very people that created the economic crisis. Even the Pro-NY Banks mouthpiece Bloomberg News reported on October 28th, 2011: The U.S. Securities and Exchange Commissions internal watchdog has
castigated the agency for missing the Bernard Madoff fraud, spotlighted employees who viewed online pornography and called for a criminal probe into the ethics of the SECs former top lawyer. http://www.bloomberg.com/news/2011-10-28/sec-enforcers-frozen-as-watchdog-unleashes-chilling-probes.html
Everyone knows something is wrong. Not everyone can put their finger on it, but they just instinctively know something aint right. One participant of the Occupy Wall Street movement across the street from me in Philadelphia holds up a sign saying too many grievances to list. Others just assume we have a White Knight in shining armor ready to charge in and save the day. There is certainly no shortage of optimists that just want to believe everything will be alright. They argue we will grow our way out of trouble like we always have done. This group stands in contrast with those calling for the end of the world turning gold into a religion and get angry if you say there will be even just a brief pause in the price advance. Gold is the perfect hedge against a Sovereign Debt Crisis. However, it is a matter of TIME and the majority does not see it that way. Nonetheless, this is what makes the Business Cycle function. It requires two opposite extremes that refuse to consider any other alternative. In this sense, these two extremes are like the optimist who falls off of the top of the Empire State Building and as he passes the 4th floor says: Well so far so good. Both are entrenched in their ideas beyond discussion. On the one
side, some refuse to think that civilization can ever collapse as it has done many times in the past. At the other extreme the Gold advocates who argue only gold is money and all fiat is evil without any realization that to create a world with absolutely no fiat is to return to the Dark Ages when there were no banks, no financial markets, no leveraging, no credit, and no jobs just serfdom. If M3 shows a money supply of $6 trillion and the total market cap of NYSE stocks is $15 trillion, guess stocks by law should not be allowed to trade above the total money supply since this too would be fiat! According to
Wilshire Associates, the total U.S. market cap of US stocks was about $15.35 trillion at the peak in
2007 compared to the world at $51.23 trillion. The only time that existed without some sort of fiat system in 6000 years was the Dark Ages when money itself was rare and you were most likely a serf. Then there is the academic crowd who only focus on the domestic economy and ignore the global economy. While everyone screams at each other, the real economic nuclear bomb keeps ticking away on a global scale with a countdown to an international Financial Armageddon - debt.
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The greatest danger we face is the polarization of everything. Investing to many is turning into a political debate. I was invited to Capitol Hill this past week and after several meetings the number one problem everyone was complaining about was the lack of substance on the Hill. I met with the good guys who know we have a serious problem, but the vast majority on the Hill are consumed with control for the sake of control void of any vision of what to do with anything other than fight to keep it. There is no middle ground anymore. Because of this, there is no immediate solution that we can expect from the political arena. The best we can hope for is to redsign the monetary system and have a plan ready to go when it all turns to dust and falls down. Most members on the Hill moreorless turn to the Fed and basically throw their hands in the air and expect the Fed to just deal with the economy. There is little appreciation for the inability to deal with the problems at the Fed. While the Democrats yell get the rich and the Republicans yell get the freeloaders, the two sides are so entrenched in dogma, there is no compromise nor discussion of the real issues. If we confiscate ALL the wealth of the rich, this will not pay off the debt. If we eliminate ALL social programs, the interest on the debt will eventually consume 100% of all expenditure so even a balanced budget fails. We see the same in financial advice. Either invest in gold or go to hell. The opposite side just cheers when gold declines and the two sides often seem to be at each others throats. As the LEFT and RIGHT argue over philosophical issues, we are facing a collapse in Western Civilzation as we know it that is on par with the collapse of Rome the Financial Armagedon. Why? It is NOT that because of fiat money. We should wish it was just that. We are in the final throws of a Sovereign Debt Crisis upon which the entire future hinges. Pension funds depend upon government bonds. Once one sovereign nation defaults, capital will respond as it historically has it will look at the financial landscape and ask the only question worth asking Who is next? We are cascading toward a choice of MONETIZATION or DEFAULT.
Steering Down the Middle is not an easy task. There is a escalating hatred rising on both sides where in politics it prevents resolution without a Financial Armageddon. In the investment world, the same extreme is developing where there is such hatred of anyone who dares to say something is wrong and refuse to listen to anything that warns of the future.The just want good news. Both extremes, as in the academic field of economics, are so busy trying to further their own agenda, they remain ignorant of what is coming down the track. The performance of the Euro further demonstrates the optimist disease hoping and praying a miracle will appear. Yet, because of the polarization in the investment field that is mirroring the political field, the USA is continually bashed without any comprehension of the global economic trends are far worse in Japan and Europe as China begin to pause.
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Herbert Hoovers Memoirs are available free online. He opens Chapter 7 concerning the Sovereign Debt Crisis of 1931 explaining:
In the spring of 1931, just as we had begun to entertain well founded hopes that we were on the way out of the depression, our latent fears of Europe were realized in a gigantic explosion which shook the whole foundations of the world's economic, political, and social structure. At last the malign forces arising from economic consequences of the war, the Versailles Treaty, the postwar military alliances with their double prewar armament, their frantic public works programs to meet unemployment, their unbalanced budgets and the inflations, all tore their systems asunder.
Chapter 7, pg 61
While both sides yell at each other be it in politics or investment, they fail to comprehend that the problem cannot be solved by arguing about what is money, about deficit spending, or who is getting a free ride be it the rich or the poor. This is a SOVEREIGN DEBT CRISIS and that negates all the issues being thrown around. This is not a problem that can be solved with making money gold. It cannot be solved by confiscating ALL the wealth of the rich or raising taxes. It cannot be solved by shutting down ALL social spending. For no matter what we try to do, this has been allowed to go too far. We have crossed the point of no return. We are on the edge of complete collapse of the Western Financial System that threatens to destablize everything and obliterate our future. Pension funds depend upon SOVEREIGN DEBT. We are in a position where there MUST be a complete structural reform, or everything goes bust and civil unrest will destroy what is left.
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Even a balanced budget will no longer work because the proportion of interest within total expenditure will continue to rise until it consumes 100% of the whole budget. Interest is like the Energizer Pink Bunny that keeps on going until you default or monetize the debt. If we eliminated all banking, credit, leverage, and could create a one-for-one gold standard with ABSOLUTELY no fiat money at all, what will that accomplish? The proponents will argue that this will create a discipline and stop inflation. Aside from creating the worst economic collapse in history eliminating credit, it would be no different than a balanced budget and the interest expenditires would eventually still consume everything. It is the unrelenting DEBT that keeps growting. If you only printed money to cover the spending, that would have been FAR LESS inflationary! As of 2010, the national debt stood at $13,561.60 billion while the total accumulative interest expenditures were $8,575.5 billion. In other words, had we just printed the money and spent it, the debt would be only $4,986 billion. Total interest is about 63% of the debt. So a gold standard will do nothing but collapse the economy and a balanced budget will probably create a civil war and ALL social spending would have to be cut to pay the interest on the debt. The ONLY resolution is MONETIZE the debt and STOP borrowing unless in time of war ONLY, or we DEFAULT and wipe out all pension funds, which would probably spark civil war. So let
us stop the peripheral nonsense dancing around the real problem its the DEBT, not what is
MONEY or a BALANCED BUDGET!
The problem we have is a SOVEREIGN DEBT CRISIS that is at ALL levels of government, local, state, federal, on a WORLDWIDE basis meaning this is out of control of any one nation. There will be only two
possible solutions; (1) MONETIZE the debt or (2) DEFAULT on the debt. There is going to be no other choice. We cannot borrow forever regardless of what we call money. How can we return to a gold standard now? Everything previously spent would become payable in gold. Your mortgaged would now be payable in gold. Some lick their lips for they think gold would be $10,000+ an ounce and they see themselves as rich. What they overlook becomes like the guy who is frozen for 50 years and then is revived. He calls his stock broker firm and the $1 million he deposited is now $100 million. He jumps for joy until the operator says that will be $1 million for the next 3 minutes. Gold cannot rise in value disproportionately to everything else on a sustained basis. It is undervalued no doubt and is playing catch-up. But under a complete monetary system collapse, everything is revalued. INFLATION is when a storm wipes out the organge crop. MONETARY INFLATION is different. That is the COLLAPSE in the purchasing power of MONEY that is seen in EVERY sector, not just one commodity. When you talk about revising the MONETARY SYSTEM, we are in the category of a wholesale change in the value of absolutely everything.
As of October 22, 2011, the gross US Federal debt was $14.94 trillion, of which $4.74 trillion was intragovernmental holdings leaving $10.20 trillion was held privately as well as by world central banks with slightly more than 40% of total interest payments being exported to foreign holdings. The annual
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gross domestic product (GDP) at the end of June 2011 was $15.003 trillion (July 29, 2011 estimate), with total public debt outstanding at a ratio of 99.6% of GDP, with debt held by the public at 68% of GDP. The state and local debt outstanding at the end of June 2011 was almost $2.5 trillion compared to the mortgage market being $9.9 trillion.This illustrates why the collapse of the mortgage backed market pools was so devastating to the entire debt market array. Consumer debt at the end of June 2011 was about $13.3 trillion with business debt at about $11 trillion. This brings the total debt picture to about $36.5 trillion in the USA. www.federalreserve.gov/releases/z1/current/z1.pdf
When we compare this debt figure to the total capitalization of ALL world stock markets at the peak in 2007 which stood at about US$51.2 trillion, we can get a sense of the seriousness of the debt crisis as a whole. That number is now down to about $36.6 trillion. Therefore, the total debt just in the USA both private and public is about equal to the value of the entire world share markets. The TOTAL world derivatives market has been estimated at about $790 trillion on a face or nominal value perspective, which is about 11 times the size of the entire world economy. The Economist publishes the Total World Public Debt Clock which stands at almost $41 trillion. However, this is seriously understated for it includes federal debt and it assumed the normal debt growth. That means the US National Debt is in this figure at only slightly less than just $9 trillion when we are approaching $15 trillion at this point in time. http://www.economist.com/content/global_debt_clock
The primary reason why formal economic theories have been a complete failure has been directly the result of Marxian influence furthered by Keynes. In both avenues of thought, there is a common denominator government is capable of managing the economy and as such it can manipulate it at will by regulations, criminal enforcement, and authoritarian control of interest rates to affect the demand of the people themselves. Two results have emerged. First, there is a bias to look ONLY at domestic events within control of government setting us up for the big economic tsunami that manifests in GLOBAL CONTAGIONS as we saw in 2007-2009. Secondly, because of this anti-laissez-faire economic policy where people are treated as cattle to be steered, manipulated, tempered and controlled, we have an economic philosophy of dictatorship where government assumes the Divine Right of Kings to do as its pleases with human behavior.
This anti-laissez-faire attitude in economics has seriously caused more harm than good. Keynes himself published a paper in 1926 declaring that laissez-faire was dead. He admitted that government was too corrupt and incompetent during the 17th through 19th centuries, but in the 20th century, somehow
government acquired the knowledge, expertise and ethics. How many people in Britain lost their homes when their mortgage payments skyrocketed because the government was fighting inflation it saw in another economic sector? Where mortgages are NOT fixed for 30 years and credit cards are the means of financing, the presumption of the RIGHT to manipulate interest rates in an indirect approach to managing the economy targeting the people rather than the banks, has caused serious economic disruptions. Instead of directly regulating banks to curtail their lending, governments, championed by economists drowning in theory, choose to raise rates to force people to STOP borrowing and spending in other areas because a greater proportion of their income now goes to interest on previous debt. It is this focus on DEMAND rather than SUPPLY (lenders) which constantly creates more harm than good.
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If we look closely at the events and market action during the Great Depression, we can draw a line dividing the 1929 high with the crash that bottomed in 3 months followed by the rally into early 1931 and the start of the Sovereign Debt Crisis in 1931. We can see the normal decline between 29 and 31. It was the second hammer that hit with the Sovereign Debt Crisis in 1931 that sent the market tumbling down into the July 1932 by nearly 90%. The decline was finished within 3 years. The percentage decline was greater, but the time duration was normal. Previously, there were 7 year bear markets only three times following the highs of 1835, 1853, and 1889. Most other periods of panics tended to produce lows generally within just two to three years.
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These three panic periods that were the longest in duration amounting to 7 years in the United States following the peaks of 1835, 1853, and 1889, all involved banking and unsound finance and warn a cycle inversion with a 2014 economic low cannot be ruled out and that the downside between 2015.75 and 2020.05 may be a monetary crisis of untold proportions (inflation). The first is famous in the USA as the Panic of 1837 for the Bank War of Andrew Jackson. The Panic of 1857 is the first financial crisis that is formally recognized as a global event. Nonetheless, there was an over-expansion of the money supply between 1848-1857, that caused by the 1849 California Gold Rush discoveries which set in motion an inflationary bubble setting the tone for the Panic of 1857. Inflation had moved substantially higher as gold flooded the US economy. By 1857, gold's purchasing power had declined from 1849 steadily to the point that it purchased at best half as much as it had just 10 years prior. The vast discoveries of gold affected the trading partners of the USA strengthening the interconnectedness of the world economy. The financial crisis began during the autumn of 1857. In Britain, the Palmerston government circumvented the requirements of the Peel Banking Act of 1844 reducing the requirement to back the currency with precious metals as they had declined in value, which set off the Panic in Britain. However, this inflationary boom was stimulated not just by the California Gold Rush, but in 1851 there was also the Australian Gold Rush . The money supply was dramatically increased by chance.
The investigation that always follows produced the Report of the Clearinghouse Committee, which stated: "A financial panic has been likened to a malignant epidemic, which kills more by terror than by real disease." It was the failure of the Ohio Life Insurance & Trust Company on August 24th, 1857 at the end of the month, a time where most often panics begin. As the public's faith in the soundness of financial institutions continued to plummet from that point forward, the US banks
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began to collapse. Although the East Coast was hardest hitwith bank closures in New York, Philadelphia, Baltimore, and elsewhere, bank failures also spread across the Missouri River to cities such as Omaha. The British withdrew capital from United States banks as did most other Europeans.
On September 3rd, 1857, the SS Central America,
a wooden-hulled steamship which had transported about one-third of all the gold discovered in California valued then at $150 million between 1852 and 1857, set sail from San Francisco transporting millions of dollars in gold intended to create a reserve for eastern United States banks. The ship was caught in a hurricane and sunk in mid-September with 581 persons aboard carrying great personal wealth, more than $1 million in commercial gold, and a secret shipment of 15 tons of federal gold, valued at $20 per ounce, intended for the eastern banks. What became known as the Gold Ship sank off Cape Hatteras, North Carolina, drowning a total of 426 passengers and crew, including Captain William Lewis Herndon. The loss of gold set in motion a cash shortage and New York banks began to fail and stores and factories began to close, touching off a financial crash known as the Panic of 1857. The climax was reached on October 14th which became known as Suspension Day, when banking was suspended in
New York and throughout New England.
A very severe depression followed in which nearly 5,000 American businesses ended in bankruptcy. From this point, gold began to rise in purchasing power as cash (gold) became scarce following the over- leveraged good times. People always hoard their cash curtailing their expenditures as uncertainty swirls around them. The depression which followed was relieved to some extent when Gold was found in Colorado in 1858 and 100,000 rushed out to Pike's Peak in search of their fortune. The silver Comstock Lode was discovered shortly thereafter in 1859, which yielded $397 million over the course of the next several decades by 1882. However, like the Great Depression of the 1930s, this too was largely relieved by the subsequent Civil War that eliminated the unemployment.
The Report of the Clearinghouse Committee also noted the fall in grain prices that was also present in the 1930s. Russia had undersold American cotton on the open market further weakening the economy that had been largely agrarian at that time, about 70% in total. Manufactured goods lay in surplus and the economy turned down as people hoarded cash. Land prices soared due to the expansion of railroads that instantly collapsed with the railroad boom. The railroads had overbuilt with money supply expansion thanks to the California Gold Rush and some began to default on their debts, although they expanded once again between 1863 and 1869 finally joining the First Transcontinental Railroad on May 10th, 1869. It took one week from Omaha to San Francisco by train at a cost of $65 per adult.
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Major Financial Panics have always been international events yet economics ignores them. The French Panic of 1882 involved a serious share market crash that was the most significant crisis in France during the 19th century. It was Frances 1929 boom
time when Paris was the place to invest. The crash was precipitated by the collapse of lUnion Générale in January of that year. About 25% of the stock brokers on the bourse were pushed to the brink of collapse. The Banque de France stepped in and a closure of the exchange was prevented by a loan to boost liquidity to support settlement at the institution. Shares in lUnion Générale rose from 500 francs a share in 1879 to over 3,000 francs at its peak in 1882. It was a real concentration of capital in France and investors were attracted by the sharp price gains as always expecting a continued rally. As the market grew, interest rates began to rise and lenders began demanding a premium as was the case in every bull market. The price of l'Union Générale shares soared and as everyone who ever thought of buying was now in, the crop of fresh buyers was diminishing. The bank failed to sell all its capital and engaged in falsified public reports to cover it up. The crash led to the typical recession as confidence evaporated. The recession lasted until the end of the decade. The founder of l'Union Générale blamed its downfall on Jewish-German banks and Freemasons who were trying to destroy French financial institutions that backed conservative Catholic political agendas bringing into the crisis the wounds of the Protestant Reformation. No direct evidence has ever surfaced to support that conspiracy theory to destroy the French banks. Traditional economists focusing purely on domestic considerations have never been able to explain why the collapse of the l'Union Générale was so devastating. They failed as always to realize that capital migrates and at this point in history, it was France that was the main stage for international capital. The conspiracy theory was in part grounded in this concentration of capital in France and that they were taking business away from Germany. However, the Banque de France was dominated by the Haute Banque whose leading members included the Rothschilds who were originally German based.
This was an era before there was deposit insurance for banks or brokers. During the French Panic of 1882, 14 of 60 stock brokers were in trouble 7 of which were bankrupt. This was the celebrated crash that turned Paul Gauguin (1848-1903) from a stock broker into a famous artist. The French share market did not return to the highs of 1882 until 1897. The French banking industry became divided into two main groups being large limited liability banks known as deposit banks engaging in commercial and investment banking activities, which included Crédit Lyonnais and Société générale among their
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ranks. The second group was the private banks that focused on merchant and investment banking that were financed by capital rather than deposits. Within this group was of course the Haute Banque. The Banque de Paris et des Pays-Bas (Paribas), was the exception playing in both fields primarily as an investment bank that had limited liability but also some deposits.
In 1882, Banque de France did not intervene to save l'Union Générale, which went bankrupt. The Banque de France was not entirely an independent central bank, but actually had a dual role as a central bank as well as a private bank. In this respect, there was a conflict of interest just as it appears Hank Paulson refused to assist Lehman Brothers and Bear Stearns who were competitors of Goldman Sachs that gained market share with their demise. In 1882 it was the Haute Banque (Rothschild) who was the major shareholder in Banque de France that dominated its board of directors, despite the fact that the government appointed the Governor and the Deputy Governors of the bank. The Banque de France had a monopoly on currency issue and retained a vast gold reserve. It made a lucrative profit from discounting bank paper. Its gold reserves gave it the ability to provide liquidity in times of crisis not only to French banks but even the Bank of England. France had to lend gold to the Bank of England in 1907.
The role of a central bank has long been in conflict with politics which seems nearly impossible to resolve. Either bankers abuse the position to get rid of rivals or politicians tinker with it for political gain. The process of just renewing charters proved highly destructive in the United States and it equally resulted in changes in bank policy in both England and France to guard against political interference. Like the Bank of England, the Banque de France struggled in this dual role as a private bank on one hand and a central bank of last resort on the other. Its strategy and operations were affected by the need to renew its charter periodically, for this is when the government could exert more influence over the
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banks policy extracting political favors and more revenue. This political influence resulted in the Bank of England keeping relatively small reserves against potential losses out of fear that the politicians would see that reserves as a treasure to be taxed for political agendas. Banque de France kept large gold reserves at the time and this led it to maintain a much more stable lending rate compared to England where politicians we tempted to seize what it believed to be excess reserves. The Banque de France had excessive gold reserves and was able to maintain a constant discount rate after the Crash of 1882.
The Second French Empire was the Imperial Bonapartist regime of Napoleon III, between the Second Republic and the Third Republic. Louis-Napoléon Bonaparte (b, 1808; 1848-1870; d, 1873) was the President of the French Second Republic and by coup took the throne as Napoleon III, the ruler of the Second French Empire from 1852 to 1870. He was the nephew and heir of Napoleon I, christened as Charles Louis Napoléon Bonaparte. Elected President by popular vote in 1848, he initiated a coup d'état in 1851, before ascending the throne as Napoleon III on December 2nd, 1852. He ruled as Emperor until September 4th, 1870 when his government was overthrown three days after Napoleon's disastrous
st surrender at the Battle of Sedan in 1870, fought during the Franco-Prussian War. On September 1 , 1870 the Prussians captured Emperor Napoleon III and large numbers of his troops which effectively ended the war in Prussias favor, although fighting continued under a new French government. The cession of the territory of Alsace-Lorraine to Prussia largely resulted in both the proclamation of the French Third Republic and the overthrow of Napoleon III.
In the European world that was still under monarchies, the Third Republic once again stood out in the political landscape. Truly republican leaders had governed only since 1876, and threats by Monarchists and Bonapartists remained ever present in France. Consequently, as most Republics seem to descend into corruption, the Third Republic of France was engulfed in a series of financial and political scandals that shook the confidence in the government. On May 16th, 1877, the President of the Republic, Patrice
de Mac-Mahon, who was a monarchist, made one last desperate attempt to retrieve the monarchical form of government by dismissing the republican Prime Minister Jules Simon and appointing the monarchist leader the Duc de Broglie to office. He then dissolved parliament and called a general election for that October expecting a victory for monarchy, but the perception was that he staged a constitutional coup d'état. Republicans won an overwhelming victory at the polls. The republicans gained control of the Senate on January 5th, 1879. Nonetheless, it was this perceived freedom from
monarchy that contributed to the boom times that caused capital to concentrate in France at this time. It was perceived to be the new beginning or a new age that culminated in the Panic of 1882 with its stock market crash and financial crisis that was the worst in French history.
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We cannot escape a global perspective. We must understand that the United States was still very much an emerging market during the 19th century. The turmoil of the late 19th century was greatly
enhanced by government mismanagement and a disastrous Financial Panic of 1882 that hit France and infected the United States which also entered into a recession that began in 1882 and culminated in the Panic of 1884 on May 14th. The lack of an elastic money supply and reliance upon gold reserves, led to a knee-jerk reaction in the United States because of hoarding of gold in Europe that depleted their gold reserves. The New York City national banks, with tacit approval of the United States Treasury Department, followed suit and cut-off lending halting investments in the rest of the United States. They also began calling in outstanding loans trying to increase their own gold reserves. The investment firm of Grant & Ward, Marine Bank of New York, and Penn Bank of Pittsburgh along with more than 10,000 small firms all failed due to the cash shortage. Perhaps a broader crisis was averted when New York Clearing House bailed out banks in risk of failure in New York.
The French Panic of 1889 had its origins in the efforts of Pierre-Eugène Secrétan (1836-1899), who was head of the Société industrielle et commerciale des métaux (SM) to create a market manipulation to control the worldwide supply of copper. Secrétan bought up existing copper supplies and controlled a large part of the open interest in contracts for future delivery in copper around the world. This led to yet another Financial Panic of 1889 when the Banque de France was forced to quickly intervene to prevent a run on leading French banks to prevent a general panic. Like the US Federal Reserve 1998 intervention, this too was not in the traditional lender of last resort sense, but rather a contested intervention that was an indirect bailout of the banks by looking at the debtor. Indeed, the Long Term Capital Management in 1998 was concerned about what they owed to the banks. Similarly, the Baer Stearns crisis of 2008 likewise was an investment bank regulated by the SEC, not the Fed. The French Panic of 1889 and unusual bailout approach taken by the central bank that arguably also involved then the issue of moral hazard to quote Hank Paulson Ex-Goldman Sachs/US Treasurer, however, instead of rewarding the friends of the Treasury as took place in the USA, in France there was a purge of officials involved. It is true that the Banque de France also had conflicts of interests permitting the crisis to develop not unlike the conflicts that have surrounded the US Treasury and the Federal Reserve.
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We have been living in a global economy for a very long time. The earliest global investment was the birth of the Mississippi Bubble in France and the South Sea Bubble in England during 1720 that focused upon emerging markets from the European perspective. Panics have often been GLOBAL CONTAGIONS such as the Panic of 1857. Yet despite this, economists have confined their theories to domestic policy within their control while ignoring the global external influences. Herbert Hoover recounts the events in the 1931 Sovereign Debt Crisis that took place under a gold standard as well.
The interlocked functions for which gold was usedcurrency, deposit reserves, and settlement of international balanceswere, at the time of this 1931 crisis, thrown into utter confusion by interferences of frantic governments. The Central European states, trying to attract to themselves a movement of gold and capital, raised interest rates. That failed, however, and then they tried to stop by law the flight of capital and the outward movement of gold to pay debts or to buy imports. Then they restricted imports and devised stimulants to exports, in order to create a surplus of foreign exchange in their favor. Although not initially acknowledged, this was in effect an abandonment of the gold standard, beginning in Central Europe, which was to disturb the world, including ourselves, with shocks for many a year to come. The whole process was a terrible destruction of world trade. No merchant could know what he might receive in payment by the time his goods were delivered. Risks, thus multiplied, further hampered trade.
At this time June, 1931 the European press cried out that by our economic policies the United States was sucking up the world's gold, thereby undermining exchanges, currencies, and their gold standards. This was not only untrue, but it was the usual Europeans' practice of blaming Uncle Sam for their own failures. When questioned by the press on this, I replied that our gold stock in two years had been increased by about $600,000,000 to its present volume of about $5,000,000,000, but that this increase had come from domestic and foreign sources other than Europefrom which, on balance, we had received very little. In the same period the European gold stocks had increased by $1,500,000,000. I stated that some flight of capital had now started from Eur ope to us because of the citizens' lack of confidence in the currencies of their own countries. This flight
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of capital and the movements of gold from one country to another were subsequently to give us great anxiety. Gold coming into the United States was absorbed at once into our currency and credit structure. When it was withdrawn, it tended to cause a shrinkage in the volume of credit or even endanger our currency coverage. We were especially pregnable to such movement because of the large foreign deposits in our banks: deposits not only those of foreign individuals and banks, but also of foreign governments. During the years prior to 1931, our banks had accumulated a good deal of gold from many smaller nations who sent the reserves behind their currencies with confidence that dollars were as good as gold. By this device they earned interest on their currency reserves.
We were later to see our own citizens yielding to spasms of fright and exporting their capital, which moved gold from under our currency and credit structure. To stop gold exports would be in effect a refusal to pay our debts in gold and thus would amount to a repudiation of the gold standard.
During this new stage of the depression, the refugee gold and the foreign government reserve deposits were constantly driven by fear hither and yon over the world. We were to see currencies demoralized and governments embarrassed as fear drove the gold from one country to another. In fact, there was a mass of gold and short-term credit which behaved like a loose cannon on the deck of the world in a tempest-tossed era.
Memoirs of Herbert Hoover, pages 66-67.
Things have been global for a very long time. The academic community is still captivated by this obsession with trying to manipulate and control the behavior of the people (DEMAND) domestically without any perspective whatsoever for the GLOBAL ECONOMY or the SUPPLY-SIDE of the economy thanks to Marx and Keynes and the harm they are causing the people. They have advocated taxation on a worldwide basis and have justified the principle of economic servitude. To be born American is to be born a slave for if your parents lived in London and you never came to the United States, they still deem you OWE the U.S. government taxes even when you are never here. All other nations tax their people BECAUSE they use services. America does not limit its taxation territorially and forces business to move offshore just to do business internationally all at the expense of American citizens and jobs.
Until economics catches up with the real world economy, we will suffer greatly under this presumption that government has the power, knowledge, expertise, and ethics to actually steer the economy down the middle course. We are headed straight for a Financial Armageddon because as Hoover points out from experience, once nations begin to default, capital will begin to look around and see who should be next. Once that takes place, the GLOBAL CONTAGION will then spread to Sovereign Debt on a global scale, federal, state, and local. No single nation will be able to do a damn thing. No committee could be formed fast enough to investigate no less solve the problem. They will typically turn to either domestic bankers or academics and neither will have a clue what to do lacking global trading experience.
The SUPER COMMITTEE we need now must NOT be composed of academics and politicians, but people with real live trading experience who have witnessed HOW capital moves and will see the cracks in the global economy that they themselves would trade. We are looking at the entire debt game coming to an end. We have to begin to look at a strategic revision of the World Monetary System Bretton Woods II. In the process, there is likely to be great pain as people try to trade this game for it will all be about TIMING.
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Jon Corzine MF Global appears to have lost over $6 billion on a big directional bet on the Sovereign Debt Crisis in Europe, but what has been exposed is far more than that. He has revealed how there is NO oversight on the big NY firms at all. The regulators, CFTC and SEC, delegated their duties to the Exchanges who simply look the other way as obvious. Using clients money in New York and failing to segregate that from the firms seems to be common practice since that is the same precise thing that was done to Princeton Economics by Republic National Bank and HSBC. Who the hell is regulating New York? Nobody it seems! The latest trend is some American citizens are now shifting their money from the big banks to small regionals.
This entire affair illustrates the real guts of the Sovereign Debt Crisis. European leaders are out of their minds. All they are interested in seems to prevent the people from voting on anything. However, there is a far greater danger than a mere Greek default. In Germany, two thirds of Germans surveyed in recent polls believe that their parliament should NOT ratify more money for the euro-zone bailout fund and agree with former chancellor Helmut Kohl that Angela Merkel's government is undermining Germany's influence abroad. Chancellor Merkel is facing a revolt in her own party within parliament over a September 29 vote to ratify more money and powers for the euro rescue fund. She is being publicly criticized even by her ex-mentor Helmut Kohl who was the architect of German reunification. The real danger is that Merkels refusal to restructure the euro-debt threatens far more than Greece. The German people cannot be suppressed forever. They will get to vote one day and Merkel will be kicked out the back door. Germany will turn inward and far more isolationist and the trade barriers will rise in Europe. A problem that could have been solved so gracefully is demonstrating to the entire world that politicians simply are incompetent to understand the economy, are a danger to our very survival, and will bring us to the brink of war rather than just for once consider that they may be wrong. The bureaucrats that run government have NO experience and NO contingency plans if this whole thing blows up in everyones face. You would NEVER run a corporation like government is being run today. It is far too corrupt and the think tanks produce no thought whatsoever. All they do is have their hand out and will produce a study to say whatever government wants. This is becoming checkmate.
Understanding HOW to trade this mess is critical as MF Global has shown. Working at name institutions DOES NOT create the expertise for this is just not going to be trading as usual. This is why I agreed to do an Analytical Conference to include HOW TO TRADE A PANIC. You can be right long-term, but lose your shirt and pants short-term. This will be determined by TIMING more than anything. In 1869, the government deliberately stated they would sell more gold than they had to stop the buying panic. Government will not be able to save the day. However, that does not mean they will do nothing. They will lie and pretend to have an accord. There will be plenty of promises and because people want to believe they can do something, the swings in the markets back and forth will do their best to wipe out both sides before reaching the end game. To survive, you have to understand the difference in trading a PANIC v TREND and TIME. Greece is the first domino. But the collapse of a Merkel government may bring down the entire house of cards!The US, Japan, and China will have no place to run!
Yeah, and in 2008 when various members of Congress wanted to talk to Martin, the prison threw him into solitaire confinement because someone didn’t want that, it appears.
Very interesting guy.
Thanks for the post.
Armstrong is an incredibly perceptive economist with decades of experience and a deep knowledge of history.
However, I disagree with his contention that the only options are default or monetizing the debt.
We need to WIPE OUT MOST OF THE DEBT USING BANKRUPTCY.
The federal government has massive obligations from debt and entitlements. It is obvious that these obligations will not be paid. We are bankrupt. So our country needs to declare Chapter 11.
Pass a bill in Congress by simple majority. Appoint an all-powerful Bankruptcy Judge to kill all the sacred cows.
1. Eliminate agencies, departments, and programs. Lay off at least 80% of federal workers.
2. Adjust federal retirement payouts. For example, cut Congressional and Presidential retirements to ZERO since they got us into this mess. Raise the age for Social Security and Medicare to the point where those programs are solvent again. Seniors will just have to keep working.
3. SELL FEDERAL ASSETS TO PAY DOWN THE NATIONAL DEBT! BLM land, some national forests, offshore mineral rights, federal buildings, any non-classified technology at government labs, etc.
4. Return as many federal responsibilities to the states as possible.
We don’t need to default. Let the bankruptcy process work.
Ditto with TBTF banks, companies, etc. Let them go bankrupt. The Prudent will prosper.
I am not calling for stiffing ANYONE, including the Chicoms.
The Bankruptcy Court SELLS fedgov assets and raises the trillions needed to PAY OFF A MAJOR PORTION OF THE NATIONAL DEBT if not ALL of it. No debt, no interest compounding.
How much are the mineral rights worth for ALL of the offshore properties? I’ll bet that’s a few trillion right there. The fedgov owns HALF of the land West of the Mississippi. Sell most of that. Cut expenditures and sell assets until we get the fedgov debt to ZERO.
A lot of foreign and corporate capital would flood into the USA. Imagine the growth possible as all that land and resources are developed.
We need for the wealthy of the world to MOVE HERE.
We need a growing population and economy.
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