Proposed Monetary Reform in Switzerland would Destroy the Country

Posted Mar 26, 2018 by Martin Armstrong

In Switzerland, we have the perfect example of the old saying – a little bit of knowledge is dangerous. We have activists who are clearly living in a world they comprehend no less than the financial system. These people have managed to get a referendum on changing in the financial system with the same promises of Karl Marx that this willend all financial crisis to come forever. The referendum is scheduled for June 10th, 2018 after they got 100,000 signatures. The organizers are calling this the Full-Money Initiative. They understand that the bulk of the money is actually created by banks through lending. Their solution is to bar private banks from lending on any leveraged basis by setting limits on lending. They will be unable to lend money beyond what they actually have on deposit. They cannot create money by new loans. This is the most stupid Idea I think I have ever heard. They have no idea what the Full-Ramifications will be of such a proposal.

The promoters are advertising this will make the monetary system more secure and preventing financial crises. “Now we are stepping up our efforts to explain to people where their money really comes from and what the risks are in the old system,” said Emma Dawnay, a member of the organizing team, according to Reuters. They are promoting thisSovereign Money Initiative to stop the financial crisis cycle that they have no idea of how such events are even created.

According to their plan, banks will only grant loans to the extent that they have previously received funds from savers, other institutions or the central bank. For the creation of money then only the central bank would be responsible. However, she rejects that their initiative will create an economic upheaval introducing tremendous uncertainties. Clearly, she is qualified for government service because this is the precise attitude which creates the very thing she is pretending to prevent.

Obviously, she may have a Ph.D. in other fields, but that does not qualify her for anything else. She thinks that banks lending money which leverages the system is the CAUSE of a financial crisis so she wants to hand the power to create all money to the government – the very people who are incapable of balancing a budget or managing even a bubblegum machine. When they are out of bubblegum, they just go steal some more and open shop again since they spent all the money they took in before.

Government is the single biggest borrower in society. So how will they sell their debt without creating more money?  Then we have the problem that if the government has to create the money and approve all loans, then politics will enter the scene and you will be unable to borrow if you are part of the opposition. Andrew Jackson destroyed the Bank of the United States BECAUSE they lent money to the opposite political party to defeat him. There was no magnanimous effort to save the country.

Then this idea shows truly their underlying ignorance for if you cut off lending, well guess what! They will be unable to sell their homes and the value will crash because the only buyer will be someone with cash. The town I grew up in,Maple Shade, New Jersey, was once the suburb of Philadelphia. The real estate developer was Barlow who built his mansion (pictured here) in town where my parents met before World War I.

One of my father’s friends had cash during the Great Depression. He bought most of Main Street back then for pennies on the dollar for there was a shortage of money with no bank lending. This is precisely the outcome of this Sovereign Money Initiative if it actually passed. Switzerland would be the greatest short of all time. No bank would survive and the government would suddenly find NO BIDfor its new debt.

These people are dangerous for they are just like those who want to shut down the Federal Reserve with simply stupid ideas that demonstrate they too fail to understand even how the world economy functions. The first world financial crisis took place in the Panic of 1857. This was the first Panic to appear as a global contagion. The 1720 collapse of the Mississippi Bubble in France and Southsea Bubble in England was a contagion set in motion within Europe. However, the 1857 Panic was set in motion by the declining international economy because of the interconnectedness of the world economy during the 1850s. The financial Panic began in late 1857 in Britain when the Palmerston government circumvented the requirements of the Peel Banking Act of 1844, which required gold and silver reserves to back up the amount of money in circulation. In that instance, the government lifted restrictions because the banks were in trouble.

Of course, then there is the example of the Silver Democrats. They thought that they could raise the price of silver about world levels thanks to the silver miners who bribed them. They soon discovered that people were bringing their silver to the States where it was over-valued and used it to buy gold and export it back home. They kept this arbitrage up and then the Panic of 1893 began and by 1896, J.P. Morgan organized British banks to lend the USA $100 million to prevent it from complete bankruptcy in 1896. President Cleveland was a Democrat and he warned that his own party had imposed unsound finance. The same type of people who could not understand the world monetary system accused Morgan of making a profit on the deal. They refused to see that their ideas were brain-dead back then as well. They preferred to blame Morgan for their own stupidity.

Financial Panics are global contagions. This movement is Switzerland would destroy the country and the depth of the depression would be far worse than the Great Depression. There was such a shortage of money back during the 1930s, that cities began to issue their own scrip to try to save the economy and allow people to economically carry on, which they could not due to the contraction in the money supply. Contracting the money supply as these people propose, would send asset values to virtually zero in Switzerland. They reject any such criticism because they just do not want to believe this solution is completely brain-dead.

History proves one thing – stupid people really mess up the world and then blame others. I keep warning, we are all connected. No country can move counter-trend for their will rapidly find their crisis comes from a contagion outside their control. Even communism failed despite its attempt to maintain isolation. Economics wins at the end of the day. Both Keynes and Marx have seriously inflected the world.

The Creature from Jekyll Island – Unprofessional Propaganda Book

Posted Mar 9, 2018 by Martin Armstrong

QUESTION: Martin. Have you read the book Creature of Jekyll Island by Edward Griffin it is about the Feds and how they control? Many years ago I thought it was fiction but after reading it again it is true. My Question what can we do money will be what they want it to be the control?

ST

ANSWER: The book you refer to is propaganda. There are quotes in there that he simply made up about the Rothschilds. Go ahead and try and find the source. I have written about this before. That book is highly dangerous for it completely misrepresents and fails to understand that elastic money began in the 1850s and was created privately by clearing houses. It worked perfectly fine and it was not economically disastrous but BENEFICIAL!

The ability to create money by the Federal Reserve is essential. However, that design was directly beneficial for it would buy ONLY short-term corporate paper in a crisis when banks could not lend. Buying in corporate paper saved jobs. The key was a simple fact it was corporate and NOT the government. Corporates have to pay back – the government does not.

It was not that the Fed was evil, it was that the Fed was usurped by Congress during World War I and directed to buy only the paper of the government. It was that aspect that has altered the role of the central bank and is demonstrated who the ECB in Europe now own 40% of all government debt and they cannot stop without creating a crisis.

The Creature of Jekyll Island advocates what Jackson did, and that will lead to a massive Sovereign Debt Crisis among the States and undermined the entire economy both domestically as well as internationally. That is by no means the answer. The answer lies in the curtailment of politicians. The banks owned the Fed BECAUSE it was a bailout system that they paid into. It was never intended that taxpayer money would be used to bail out banks. Once the banks became the seller of government debt, they then had a grip on government and with the Fed only buying government debt, the entire system is nothing like the intended design.

Fractional v Relationship/Transactional Banking

Martin Armstrong
April 8, 2015

QUESTION: Marty, in your piece about banking are you suggesting that fractional banking is not the issue it is the shift from relationship banking to transactional that is causing the greatest damage?

Thanks

Bob

ANSWER: Absolutely. The difference between a Dark Age and Capitalism is the very fact that banks exist. The Dark Age after Rome was marked by the end of banking and private ownership. People sold themselves as serfs to gain protection. We can see without banking there was no real economy. What coins were produced during this people were not only just silver since gold vanished from the coinage by 500AD until the 13th century for about 600 years – the same 600 year gap we see in Japan. Nonetheless, the silver coins produced during this people are few and are rarely discovered more than 30 miles from where they were struck.

The hard-money people want fractional banking to end and harp about lending creates more money. They want to send society back into the Dark Ages and end everything from mortgages and credit cards and so we would return to walking around in sack cloth. I seriously doubt they even understand what they are preaching.

The panic does not take place because of fraction banking alone. Panics are the byproduct of everything combined from human nature to weather that causes crop failures and REAL inflation to develop driven by a shortage compared to demand. When there has been a crop failure, prices soar, yet money supply did not change. Wages returned from the Dark Ages because of the Black Death in the 14th century. With about 50% of the population reduced, suddenly there was a shortage of land and lords offered to now pay people to work their land. Of course, with wages came taxes.

There are panics caused by the concentration of capital into one sector which then accelerates the prices of that instrument, but this is wrongly attributed to banking. This error in attribution assumes a one-dimensional world as always that money is created by fractional banking. This is just not true. If a building is $10 million, and two local citizens are involved in the sale and purchase, it is actually neutral to the domestic economy with the exception of some monetization of the appreciated value assuming it is being sold at a profit. However, if a foreign investor purchases that same building, they bring money into the domestic economy directly increasing the supply by the total amount.

Global capital flows are the concentration of capital from different countries into a single country just as the USA for 1929 and Japan for 1989. Sure there are those who blamed too much credit on the part of the local banks, but this does not hold true when you trace the capital flows. Attributing everything to merely fractional banking is rather myopic.The USA ended up with 76% or the world’s gold supply by the end of 1945 thanks to two world wars. That had nothing to do with fractional banking.

The danger that the New York bankers have introduced was changing the entire banking system from RELATIONSHIP to TRANSACTIONAL. Under the first, they lent you money but monitored your business and ability to repay. This imposed some rational constraints. Under the new TRANSACTIONAL banking model the NY Boys sold to repeal Glass Steagall, they became brokers, packaged loans, and resold them. They no longer cared about the borrower – it was driven simply by could they sell it.

There is the famous story of Andrew Mellon Areas where a man tried to borrow money to produce his invention of aluminum. He had no collateral and no bank would lend him a dime. He walked into Mellon’s bank and Mellon told him legally he could not lend him money from the bank on just an idea. Mellon said he believed in him and backed Charles Martin Hall, whose refinery grew into the Aluminum Company of America (Alcoa). Banking has allowed the efficient concentration of capital to further society. It is not all evil. Without banking we would still be serfs. Those who demonize fractional banking harp on money much be tangible because they cannot figure out the business cycle so they just want their money to always be worth the same, yet then want their wages to increase and their investments to appreciate simultaneously. You cannot have it both ways.

Far too many people blame banking and argue to end fractional banking as if they would somehow stop the business cycle yet the world would amazingly continue. This was the same goal of Karl Marx – defeat the business cycle.  Sorry, a huge component of this is human nature. People will NOT BORROW without confidence. The stock market has NEVER peaked with the same interest rate twice. We get different highs and lows because people will borrow at 25% if they believe they will double their money. They will not pay 1% if they cannot see making even 2%. Hence, lower interest rates will not stimulate the economy and has never reversed a downtrend before its time.

There was only one politician who ever understood the swing between the value of money and the value of assets. That was Julius Caesar – (see Anatomy of a Debt Crisis).

Musical Chair Banking

               

QUESTION: 

Hi Martin,

I read the Iceland proposal before you posted your comment about it.  I knew intuitively it wouldn’t work because they were putting government in charge of credit creation – like placing the wolf in charge of the hen house.  (I believe my conclusion came from your Education – thank you.)

I listened to your ‘Solution’ conference and you confirmed what I was thinking, which was government spending should be no more 5-10% of GDP (with tax revenue exceeding that amount so there is NEVER a deficit).

As you suggest, government is necessary in society as it fills a critical role, but that role should be clearly defined.  Credit creation by a bank fills a critical role in a society, so long as that role is clearly defined.

When I read that for every dollar deposited, banks can create 90 cents of loans with it, it strikes me as too much leverage.  Just as you defined that government spending should be no more than 5-10% of GDP, what leverage do you feel is appropriate for banks?  Is the current system too much or would it serve just fine as long as the credit went to loans that bettered the economy (as you state it, so long as the credit goes to relationship banking and not transactional).

Thanks again for all you do.

D
ANSWER: There are several problems with the whole credit picture. The reason we have banking crisis is because banks borrow short-term and lend long-term and that was the traditional relationship banking model. So they lent on property with mortgages and they held that on their books monitoring you and/or your business. That was the relationship banking model.
The transactional banking model was they securitized the loans and sold them. Under this model they became just brokers. They could care less if you paid off the loan – that was not their problem. It changed the entire incentive from conservative to just write the loans because they had people willing to buy.

 

 

Great Depression Land Auctions

The fractional banking people criticize was exaggerated by FDR during the Great Depression. Real Estate collapsed and he tried to revive the market. Without banks lending, that meant property fell to at best 10 cents on the dollar. ONLY people with cash could buy. FDR created the 30 year mortgage. By extending the time horizon, he was effectively bringing forward someone’s earning capacity to 30 years to spend now (leverage). It was government who extended that model – not the bankers.

The 30 year mortgage became the norm. In good times, it leveraged the entire real estate market. If you now eliminate that lending and say government will be now be in charge rather than the free market – OMG. You know who will get first dibs – their families.





The fractional banking is not the issue as much as manipulating the yield curve. Because governments are the largest single debtor, they drive the interest rates while they are stupid in still assuming they can raise interest rates to fight inflation. It has the exact opposite impact for the government spending will now automatically escalate to cover interest costs. Inverted yield curves wipe out the banking model and the current collapse in short-term rates expand the profits of bankers tremendously.

The NY Boys argued to drop Glass-Steagall so they could trade rather than keep loans on their books would reduce THEIR risk and strengthen the banking system. The blew up the world like Iceland, took no responsibility, and then told Congress if they were not bailed out then government could not sell its debt. The 2007-2009 Crash illustrated this model does not work and now they bribed Congress to repeal Dodd-Frank so it is back to the wild and crazy times. Politicians are not there to protect society, they are simply there to line their pockets with few exceptions who are the freshman typically since the longer they are there, the more corrupt they become.

The issue is not to hand banking to bureaucrats nor is it plausible to terminate banking. What is plausible is to restore Glass-Steagall, outlaw proprietary trading and restore relationship banking. The big money center banks are controlling government with effective bribes in form of campaign contributions to both parties and they have become traders, not bankers. Let them raise money and be hedge fund managers but not to trade with other people’s money where they keep the profits and hand the losses to government.
The wild times have come from the trading side and the collapse of relationship banking. Deal with the problem directly. Somehow we seem to just be dancing around in circles. This is like musical chairs. When the music stops, we are in trouble. We have to define the problem looking at every aspect, not just one. If we do not stop transactional banking, we are in for another crash that may be worse than the last one.

Comment from Iceland

Posted on April 3, 2015 by Martin Armstrong

QUESTION: Mr. Armstrong; Thank you for paying attention to Iceland. You are absolutely correct. The banks failed because of Lehman paper. The bankers harmed the people by selling mortgages in foreign currency because the local money supply was insufficient. I have read much about Iceland and it appears that those who preach against banks outside the country are [clueless] as to the reality.

The word is you are coming to Iceland for meetings and to lecture. Do you have any dates yet?

Thank you so much

guð vera með þér

M

ANSWER: Yes I am aware of the problems in Iceland. This has been the same issue constantly that I have run into for decades around the world. Ironically, it was not the creation of money, but the misappropriation of money investing in paper that did not benefit Iceland domestically and selling foreign loans to citizens. It stems from the simple fact that not even the bankers understand foreign exchange. They sold these mortgages not understanding the risks they are selling to people who are unaware of the market movements and capital flows.

It is beyond me when government is so corrupt and police even in London and France are now robbing people for profit that you really think handing the decision to lend someone money to more bureaucrats will prevent the business cycle? When will people ever learn.

Yes, I have been asked to appear in Iceland. Nothing is final yet.

Iceland’s Radical Reform – Another Braindead Idea

Posted on April 3, 2015 by Martin Armstrong

Far too often people fail to understand banking and credit merely making superficial judgments that lack any real in-depth understanding of the world financial system. The common assumption is that the greatest curse of mankind is that commercial banks create money through lending and then securitize such loans selling them into the marketplace illustrates the childish view of finance and the difference between a Dark Age and Capitalism.

It was after the fall of Rome when all banking did not exist and neither did wages or private ownership. They simply blame ALL of banking and fail to grasp the difference between relationship banking and transactional. On top of that, they completely are blind to the fact that the issue is proprietary trading not the entire banking system. Eliminate lending, which they seem to demonize as the creation of money, and the real estate market would crash into dust, credit cards would vanish, education, medicine, an business loans would collapse, and effectively you would end up with a MadMax Dark Age. All because they want to stop what they think is the creation of money.

This extreme uneducated assumption that money should be tangible with a constant value has NEVER existed in history since even when there were gold coins they fluctuated in purchasing power value and suffered debasement. No matter what evidence you present, no they are right and history does not matter. These people argue banks are the entire cause of the boom-bust cycle and they want to destroy them like Andrew Jackson. This is of course at the heart of the problem. This is the dangerous Marxist view where they cannot understand the business cycle so they want to destroy it and flat-line the economy. This very idea has killed millions of people, yet there are those who constantly preach the same nonsense. It seems to be closet-Communists preaching eliminate all banks rather than bother to understand relationship v transactional banking and the business cycle.

Iceland seriously lacks this in-depth understanding of how the economy works and their radical proposal will certainly destroy their economy faster than anyone suspects. This effort looking to end the boom-bust cycle with uneducated view of money and banking and putting bureaucrats in charge is the worst idea imaginable. Iceland will become the new land of April Fools who also existed because of their uneducated bias.

Back in 1582, the original goal of the Gregorian calendar was to change the date of Easter. When Pope Gregory XIII introduced his Gregorian calendar, Europe adhered to the Julian calendar, first implemented by Julius Caesar in 46 BC. Because groups of people hated Catholics, they refused to change and celebrated New Years on April 1st instead of January 1st. They were mocked and called “April Fools”. These people who yell money must be tangible and wrongly assume it always has been backed by gold, are probably “Financial Fools” for no matter what you show them from history, they will never abandon that belief.

Keep in mind this is proposal is highly Marxist and eliminating the leverage effect of lending by the free market will ripple through the entire economy causing a deflationary collapse of just about everything from home prices to wages. Is it the creation of money by lending, or is it the lack of relationship banking that has been replaced with transactional banking?

Icelandic government suggests removing the power of commercial banks to create money and handing it to the central bank is some sort of solution. This is anti-free markets and if there is anything we have learned from history, government is incapable of managing whatever has to do with money. In Iceland, as in other modern market economies, the central bank controls the creation of banknotes and coins but not the creation of all money through credit. You deposit money in a bank and your statement saw you have 100 whatever and the bank lends 95 of that to someone else so you both have about 100 in book entries. This is the great evil these people are targeting without the first historical concept of what they are fighting against. They mix up proprietary trading in their mind with banking and do not distinguish between them.

Iceland’s government is now considering a revolutionary monetary proposal – removing the power of commercial banks to create money by making loans and handing it to the central bank. The proposal was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled “A better monetary system for Iceland”. He obviously does not understand finance at all. Just amazing.

This whole effort is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008 whereby they do not understand the causing of the business cycle very much like Marx himself. Mr Sigurjonsson amazingly claims the problem each time arose from ballooning credit during a strong economic cycle. He totally fails to grasp that historically this is the swing between Public and Private confidence. At times, people want private assets and then swing back and want cash. In this proposal, not even gold could rise – everything must be flat lined, which is the very objective of Communism – kill the business cycle.

Sigurjonsson argued the central bank was unable to contain the credit boom, allowing inflation to rise and sparking exaggerated risk-taking and speculation, the threat of bank collapse and costly state interventions. He is proposing that since the creation of money, which occurs as soon as a commercial bank offers a line of credit, is the entire problem.  He has ignored human nature and assumes he can just turn everyone into drones eliminating human emotion. This is precisely what Communism was all about.

He argues that the central bank can only try to influence the money supply with its monetary policy tools. Under the so-called Sovereign Money proposal, the country’s central bank would become the only creator of money. Then you will have bureaucrats eventually bribed to provide loans to friends. The banking crisis of ancient Athens in 354BC was precisely that. The government controlled the money deposited in the temple and it was being secretly lent out to friends to speculate in real estate.

Sigurjonsson wrote that “Crucially, the power to create money is kept separate from the power to decide how that new money is used”.

“As with the state budget, the parliament will debate the government’s proposal for allocation of new money,” he wrote.

Sigurjonsson’s proposal is that Banks would continue to manage accounts and payments, and would serve as intermediaries between savers and lenders. What he misses entirely, is that the banks were influenced by the NY boys who sold this idea of transactional banking to Europe, which has blown up in the face of bankers everywhere. But the NY Boys are back at it again. This is NOT relationship banking and they sold products in Iceland that buried the people saddling them with risk they did not understand. In Iceland, foreign capital poured in to lend money on inflation-indexed mortgages signed before the 2008 financial crisis typically denominated in foreign currency. Greeks borrowed in Swiss francs to save interest and lost when the Swiss went up 30%. I saw the same thing during the 1980s in Australia. This is bankers selling loans in foreign currency as a scheme to save money, yet this does not increase the domestic money supply for it is still denominated in another currency. So this proposal misses the entire problem. Regulate that loans domestically CANNOT be offered by banks in any currency other than the local currency for local transactions and we would be getting closer to the mark. This is the two-tier monetary system I have been talking about.

Iceland was hit hard as the crash of US investment bank Lehman Brothers caused the collapse of its three largest banks. The NY Boys let Lehman go to get a monopoly. Bear Stearns refused to participate in the Long-Term Capital Management bailout back in 1998 so letting Lehman and Bear collapse was NY politics. They rushed to save AIG ONLYbecause Goldman Sachs would have collapsed and they were protected since they stuffed their people in government everywhere based upon all the information and belief running around so many sources.

Iceland then became the first western European nation in 25 years to appeal to the International Monetary Fund to save its battered economy all because the NY Boys blew them up. This was not the fact that they create money through lending.

But as always, the analysis is shallow and they do not understand the world of international finance. It is not the creation of money by lending. This is the proprietary products and trading inspired by the NY Boys sold to the world.

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