1929 - The Great Depression

Sorry – Its Just Gibberish

Posted on June 15, 2013 by Armstrong Economics

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QUESTION: The economist Robert Wiedemer, author of the New York Times best-selling book Aftershock, has forecasted that unemployment will rise to 50%, the stock market will crash by 90%, and the annual inflation will hit 100% starting in 2013. What is your view on this scenario?
ANSWER: Gibberish. Pure insanity. This is the same thing as the 1929 Great Depression and it reflects the domestic understanding of the economy EXCLUSIVELY. They do not comprehend what they are forecasting and merely regurgitate the events of 1929-1932 over and over assuming history repeats exactly the same. Lightening never strikes twice in the same sport identically.

Look, I grow tired on answering the same question over and over again. Th crash between 1929 and 1930 was a NORMAL correction. What took place in 1931 was the Sovereign debt crisis where Europe defaulted, China and South American on their sovereign debt creating MASSIVE deflation in the form of a total destruction of wealth. You see the rally into early 1931. Once debt was being wiped out, over 3,000 banks failed and the market crashed. the value of MONEY rose in value and that is why FDR seized gold and devalued the dollar in 1934. There was no INFLATION but the total absence of inflation. So how do you get the stock market to crash with inflation? Impossible!!!! Even the Nikkei rallied with the declin in the yen, and then fell as the yen rose in value.



I have stated many times that unemployment rose to 25% during the Great Depression BECAUSE of the Dust Bowl and 40% of employment was agriculture. That is why unemployment went so high NOT because of industry failure. Today, unemployment will rise because of state and local government will be forced to reduce their labor forces driving unemployment higher.
The relationship spouted out by so many calling for the Dow to fall by 90% means capital would have to flee to the safety of government meaning the dollar would rise in value and bond yields decline. To accomplish those ends today, interest rates would have to go NEGATIVE and then how do you get the 100% inflation?
I am sorry. Our computer is THE BEST at correlations. The nonsense of this scenario is simply impossible and would be on par with instead of Obama getting his wife pregnant, he becomes pregnant. Just cannot happen

Real estate during economic declines

City Dwellers At Greatest Risk

Posted on June 12, 2013 by Armstrong Economics

History stands as witness that those who live in cities are at the greatest risk as we move forward. This is why we see population increases in cities as the economy expands and then it contracts as the economy declines. City living becomes the most dangerous because everything has to be imported from water to food. As the economy declines and civil unrest rises, the worst place to live will be living in a city. That is also where real estate will collapse the most when economic stability declines.

The population of Rome is indicative of the entire crisis. We are moving toward the break-up of cities as taxes rise and the chase out people who take their wealth leaving behind the least intelligent who end up losing everything.

Weimar Republic

Wiemar Republic & Gresham’s Law

Posted on June 7, 2013 by Armstrong Economics

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QUESTION: Hello Mr. Armstrong,
Thank you for taking the time to address the questions that I and many others who follow your work have asked.
In your most recent answer to a readers question, you state, “Therefore, it was the complete lack of CONFIDENCE in the government that (1) caused the hoarding, and…..”
From what I have read about The Weimar Republic, as soon as people would have fiat in hand they would rush out and spend it before prices would increase, often requesting a bill at the start of a meal to prevent having to pay a higher price upon completion.
How does hoarding play a role where people could not get rid of fiat fast enough?
When you say, “Because people were hoarding real money so there was none to be deposited in banks…”, by “real money”, are you referring to fiat or some other form of capital?
Your clarification would be mush appreciated.
ANSWER: The Wiemar Republic was a 1918 communistic revolution following the 1917 Russian Revolution. The extremists even wanted to invite their fellow communists in Russia to come take Germany.

Whenever you have war, wealth is hoarded. In the case of the WWI and WWII, the gold fled Europe and moved to USA so the US that was broke and needed J.P. Morgan to bail it out in 1896 emerged with 76% of the world gold reserved by the end of WWII, which is why the dollar became the reserve currency.
In Germany, wealth was hoarded because of WWI to start with. Therefore, the German banks were cash poor by the end of the war. With the communists seizing control, that wealth remained hidden. With gold and silver hoarded, there was nothing to create money to restart the nation. This is why the Wiemar Republic went into hyperinflation. (1) real wealth was hoarded (meaning gold and silver coin both domestic and foreign), and (2) nobody in their right might would lend to a communist government that defaulted on all bonds anyway. This resulted in the total collapse in CONFIDENCE in the government and hence all they could do was to print money. They were crazy revolutionaries with no respect for capital or assets.

Gresham’s Law thus applied. Bad money drives out Good Money. So the inflationary notes took place because nobody would hold those and they spent that as fast as they could hoarding anything of international value. The Japanese government did a similar thing where nobody trusted the money of the state and refused to accept it. Hence, Japan recognized coins from China as well as rice. But the Japanese government had with each new issue of coins valued them at 10 times what was in circulation. That meant you could not SAVE money for it was constantly being devalued. This eventually led to the people not accepting the coinage and it thus vanished for 600 years.

The money hoarded in Germany were gold and silver coins of Germany and foreign nations. As the prospects of the war began to look quite dim for Germany, people hoarded foreign coin as well. This is why there was hyperinflation – the complete collapse in CONFIDENCE in government. This is precisely what followed the fall of Rome where gold vanished and was not coined again in Europe until the 13th century. Japan also experience the complete collapse in trust of government and this is essential to creating a dark age.
This is also why I say those buying gold or silver for a hedge, should buy coins rather than bars. With government on the prow and these people willing to do anything, this time they have the data to come knocking on your door asking for the ten 1 ounce coins you bought from the Mint or some dealer they seized all his records. They couldn’t do that in 1934.

You should also understand the reason FDR made an exception for collector coins is because Teddy Roosevelt was a big ancient coin collector. It was Teddy who wanted the mint to strike coins as beautiful as the Greek in high relief. They minted the 1907 $20 St Gaudens in high relief, but they could not in large quantity. So FDR understood that aspect of collecting since it was in his family. Will government respect that again? Who knows? They seem to respect absolutely nothing right now.

It’s Always A Confidence Game

 

Posted on June 6, 2013 by Armstrong Economics

QUESTION: I don’t understand the page 11 comments about German Hyperinflation and that it took place because capital was being hoarded and there was no lending?????
Can you clarify how price hyperinflation occurs if no one is spending or lending.
RESPONSE:
Because people were hoarding real money so there was none to be deposited in banks and thus there was a shortage of internationally accepted money. The Wiemar Republic was a communist revolutionary government that did not have the ability to borrow for who would lend anything to a government that was rejecting capitalism? Therefore, it was the complete lack of CONFIDENCE in the government that (1) caused the hoarding, and (2) caused the complete lack of credit preventing any bond issues. Consequently, the government could ONLY print money.
But the KEY that is overlooked is CONFIDENCE. All we hear is how the US will go into hyperinflation because of the Fed’s monetization. That is gibberish. Ask the average American if they trust government and the answer is still YES! Hyperinflation requires the wholesale collapse in the CONFIDENCE of government. That is not likely. We must crash and burn before that will happen. It is not what YOU believe, it is what the MAJORITY believe and they are NOT on board yet with the full collapse in CONFIDENCE in government.

Interest rates and stock markets

A Normal Market

Posted on June 1, 2013 by Armstrong Economics

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In the normal world of capital flows, bonds decline when stocks rise. The talking heads that claim lower interest rates are bullish for stocks once again try to reduce everything to a single cause and effect that applies to a single frame in a long movie. Here we can see that bonds declined when stocks rallied into 1929 as interest rates ROSE not declined!!!!!!! The explanations that the Dow is rising because of Fed Monetization and the bonds are rising because of a mismatch in quality, sorry, but that just does not cut it. It is capital inflows into the dollar both bonds and stocks as the dollar is being thrust into the single world currency thanks to the brain-dead decisions of Europe.

The capital inflows to the US were creating a cash shortage in Europe during the 1920s. The Fed in 1927 tried to lower rates to deflect capital inflows back to Europe. This led to hindsight blame being hurled at the Fed claiming the lowering of rates created the Bubble. FALSE!!!! The attempted manipulation of the capital flows CONFIRMED there was a problem in Europe, which eventually manifested in the wholesale defaults in 1931 where even Britain was forced into a moratorium on debt payments.

The capital flows were pouring into the USA for World War I and then invested in the USA helping to create the Bubble in 1929 precisely what we saw in Japan for 1989. At Princeton Economics, we invented capital flow analysis. Simply put – follow the money!
The whole idea of raising and lowering interest rates is again domestic myopic attempts to manipulate the markets. It never works. It is more than a single one dimensional relationship. It also includes the currency. If the currency is rising with stocks, you get international capital inflows for it will be profitable for the foreign investors. If the stocks are rising and the currency is falling, that is purely a domestic movement absent international capital inflows as the stocks will rise in proportion to the fall in the currency. We just saw this in the Nikkei in Japan – yen down stocks up.