QUESTION: Marty; You have emphasized how you track world capital flows and conducted your research even in the flows of capital and disparity of interest rates between regions in the Roman Empire. You have mentioned that liquidity has collapsed and that capital has fled from emerging markets that is also putting pressure on Russia before the sanctions. Is this part of the crisis you foresee and explains simultaneously the rise in corporate cash to record levels. It seems what you taught us at the conference appears to be on point connecting these dots. Do I have this correct?
Thanks for your enlightenment in the middle of a very dark age.
ANSWER: Yes. You are seeing everything around you and connecting the dots correctly. The rise in corporate cash is a reflection of the collapse in capital flows that is now even being accelerated by FATCA. Liquidity has also collapsed and this is all reflected in the failure of conventional fundamental analysis to understand that the game has changed entirely.
Those who seriously think that the dollar will be impacted by oil or China will unseat the dollar as the reserve currency are simply living in a world of delusion. Such statements made by people display they have no clue about the depth of international capital flows remaining clueless to the FIRST Golden Rule - international capital flows that dictate why the dollar is even the reserve currency. This is the golden rule of a reserve currency always attributes to the most powerful and largest economy throughout history
The SECOND Gold Rule is that of finance over trade in the modern age that has been really accelerated globalization of the world economy since the fall of Bretton Woods. People fail to even comprehend why Bretton Woods collapsed. It had little to do with trade – it was a current account deficit of the USA caused by the global expansion of the military. Even John F. Kennedy understood this and stated bluntly that the US could end its current account deficit any time it desired. I personally believe Kennedy was assassinated because he wanted to curtail the military to support the dollar. That was the real economic issue that he understood.
This globalization of the world economy is best illustrated by trading in foreign exchange markets. Daily foreign exchange trading has reached over $4 trillion, including spot and forward markets and other foreign exchange derivatives that feature prominently in carry trades (cross currency swaps based upon interest rates). While still in the teens in the late 1970s, the ratio of yearly foreign exchange market turnover over merchandise exports had reached about 50:1 in the 1980s, and has doubled again since that time. The current ratio of around 100:1 implies that only about 1% of foreign exchange trading is actually related to merchandise trade. The bulk of money flowing around the world is INVESTMENT. So just how can China or Russia displace the dollar if trade is a tiny fraction of the world economy?
The conspicuous rise of derivatives has provided yet another indicator and symptom of the fragility of unfettered global finance, including credit derivatives such as credit default swaps and collateralized debt obligations. These instrument have been celebrated as welcome innovations in a new era of cherishing beliefs in self-regulation thanks to bank lobbying and the repeal of Glass Steagal. These products have only proved to be the most lethally destructive instruments ever contemplated far beyond their centers of origin in the developed world. What they have done is leveraged the entire game into a realm that few even contemplate the potential impact.
This is the real state of affairs and it is why in 2032 we could be facing a profound change in our political-social-economy. If we have leveraged the entire system far beyond our rational understanding of our management capabilities, then the correction will be equally leveraged on the downside. This is the danger we face for I cannot rule out a Dark Age as long as we over leverage the entire global economy.
The current economic crisis is truly an unprecedented collapse in international capital flows that has followed years of rising financial globalization since the fall of Bretton Woods. This collapse began with the 2007 turning point on the ECM from which we have witnessed a collapse in liquidity that is coupled with a major retrenchment in international capital flows. This amazingly alarming phenomenon has only been accelerated by the hunt for taxation by governments and their refusal to reform or even comprehend what they are doing. Across time, this astonishingly dramatic collapse in capital flows began in the wake of the Lehman Brothers’ failure. We saw this collapse in flows become manifest in banking flows being the hardest hit due to their sensitivity of risk perception. The collapse in capital flows has impacted emerging markets as capital has been recalled and that has also been accelerated by Russia’s aggressive posture. Therefore, across regional indicators such as emerging economies has been devastating. The retrenchment in developed economies has been the rise in risk in banks, investment, bonds, and escalating taxation.
A clear econometric analysis warns that the magnitude of the retrenchment in capital flows across countries has been linked to the extent of international financial integration and countries reporting to one-another what everyone is doing for tax purposes. Domestic macroeconomic conditions and their connection to world capital flows has been dramatic.
The US is now harassing even our people flying in for meetings from other countries all concerned about taxes and are they being paid in the USA. They are no longer harassing tourists for taxes on trinkets. They are harassing business people looking for money. This is highly destruction of international business and such discretion in the hands of low-level border officers who fail to understand anything is proving massively destructive to the world economy.