The British Pound & the FX Crisis

Posted Sep 26, 2022 by Martin Armstrong

REPLY: The problem with most people forecasting is they do it as “I think” and then try to pound their chest as if their reasoning is better than someone else. People try to criticize me when they disagree with what they assume is my personal “reasoning” when in fact I have said many times, Socrates has taught me, as well as all my clients worldwide.

You cannot forecast such things from a personal opinion perspective. It also requires centuries of data. Most people have no idea that the British Pound had ever reached $9.97 in 1864. The collapse of the British pound itself still going into 2026/2027. It’s like the gods are selecting the worst possible world leaders in human history.

Once the pound broke the uptrend line, even technically it was in trouble. Then the support was at 129 & 127. When that gave way, the free-fall began. Technically, the real support begins at the 89 level. This is not over. We will not see a straight decline into 2026/2027, but that is where this is headed. The ideal support will be at the 72 to 76 level by then. Breaking the 1985 low of $1.03 will then point to the 89 area.

Keep in mind, that all roads lead to the dollar because of the geopolitical mess world leaders have created in Ukraine, and even in Taiwan. They either want war or are living a dream and expect that Russia and China are afraid of the West and somehow they are all-powerful. There are no peacemakers anywhere! People who try to argue against me with their personal reasoning are fools. This is not me and my personal opinion. Nobody has ever beaten Socrates – and that includes me.

Schwab’s NWO will fail as did Marx. However, these people “think” that they can hide their sovereign default with war and win against both China and Russia to create this global one-world economy. There is no way this will work and the climate zealots are insane. They think that they can end fossil fuels and then come up with alternatives. They know damn well that what they are doing will cause the death of millions worldwide. They also want to reduce the population.

In the process, the rise in the dollar will kill US exports and start the economic decline in the USA as the rise in the dollar also did during the Great Depression. This will create deflation and the rising interest rates may make some people think that the Fed is achieving its goal, but we have also shortages which are the opposite of the Great Depression.

It was the sharp rise in the dollar that led to Protectionism because the politicians did not understand what was taking place. This rise in the dollar was also the reason Roosevelt confiscated gold and raise its value from $20 to $35 to devalue the dollar.

Thereafter, the US had a two-tier monetary system. Gold for international transactions and silver domestically precisely as what took place back in Florence under the Medicis.

Gold – Dollar – Inflation

 

Posted Jun 6, 2022 by Martin Armstrong

The American view during the 70s was more concerned about gold rather than the value of the dollar against world currencies. Most Americans never traveled to Europe so their impression of currencies was the Canadian dollar which was about par with the dollar that Americans would encounter when visiting Niagra Falls. I remember as a kid the family would drive up there and we would cross the border for the best view from the Canadian side. That was probably my first experience with a foreign currency other than ancient Roman coins when I bought my first one for $10 when I was probably 10 years old.

The other hot spot outside the United States was crossing the border to visit Tijuana in Mexico. That was a real hot spot largely promoted due to the Prohibition Days during the Roaring 20s. The Mexican peso was just this cheap thing that nobody really understood and they never understood how to count their change.

It was Roosevelt who confiscated gold from the banks and created a two-tier system whereby gold was used for international transactions, but silver was used for domestic currency backing until Kennedy ended the silver standard in 1965. Because gold was illegal to own except in coins dated 1947 or before, Americans really had little exposure to foreign currencies. They did not see the foreign exchange rate of the dollar during the 70s and 80s, it was all about gold. I even had a conversation with Paul Volcker who was focused not on the inflation rate as much as he too was obsessed with the rise in the price of gold from $35 in 1971 to $875 on January 21st, 1980 which he saw as the real inflation measurement.

As for the Europeans, they were focused on the dollar and the collapse of Bretton Woods. They were all buying gold after  March 1968 when the first crack in Bretton Woods took place allowing a parallel free market in gold in Europe. That was the birth of a two-tier monetary system. Overall, the Europeans were pushing the price of gold up in terms of dollars.

 

It was a wild time during the 70s. Because I was in New Jersey, the three major gold refineries were there. I was dealing with Englehard which ended up being Phibro post-1975 which took over Solomon Brothers. Before 1975, Americans could buy gold in coin form as long as it bore a date of 1947 and before. Austria, Hungary, and Mexico were the big sellers of gold. They were restricting coins with old dates so Americans could buy gold before 1975.

So I was in the thick of things back then insofar as trading was concerned. I had European clients in Gold and I dealt with all the Swiss banks at the time. By sheer fate, being a market maker in gold, taught me a lot. Gold was the first financial instrument for futures trading beyond currencies. The US bonds began trading in 1977 and S&P500 futures came in during 1985.

Gold rallied into 1974 on ANTICIPATION of Americans were going to run out and buy gold. They were expecting a gold rush. Being in the business, I never got one phone call about buying gold because it would be legal. Everyone who believed in gold had been buying gold coins all along.

The talk of the town was that gold would go to $500 as soon as the Americans were allowed to buy on January 1st, 1975. I sold gold short at the top mainly on a fundamental basis. I did not see any new demand. My Economic Confidence Model said it was a high. But I traded based on my observations.

I watched gold collapse back down to about $100 going into 1976. This is when after watching the ECM for 6 years, I went with it. I opened a new store in the Quakerbride mall and I signed a 10-year lease with a personal guarantee and I got them to eliminate the CPI clause. After all, the talk then was about another depression.

I watched 1968 was the first crack in Bretton Woods and the birth of the two-tier monetary system. The Organization of the Petroleum Exporting Countries (OPEC) oil embargo was a decision to stop exporting oil to the United States. Then-president Richard Nixon appeared particularly concerned that Arab nations might impose a selective embargo on the United States for its pro-Israel policy. He was correct. Oct. 19, 1973, was the official start of the embargo when the Middle East countries announced a 5% production cut per month in response to the Yom Kippur war between Egypt and Israel. They saw Israel’s victory in that war, was because of aid from the United States. The embargoing nations then threatened that the cuts would be restored once Israel withdrew from Palestine and Jerusalem. Obviously, that never happened.

As always, we MUST look at the CONTEXT of the period. First, the climate consensus was that we were heading to a new Ice Age – not global warming. That meant there would be a higher demand for oil to stay warm in winter. In 1971 and 1972, fears began to grow in the developed world that if we were not already running out of energy supplies, we would soon as additional nations adopt western industrial structures.

Thomas Malthus (1766-1834) warned the population would outgrow the food production so we needed to curtail the growth of the population and advocated deliberately creating a plague among the poor to reduce their number. If you ever really read Malthus, you can see the influence he has still had on people like Bill Gates,  George Soros, and Klaus Schwab.

Thus, in 1976 I went with the ECM. That was the wild wave of inflation and the very top of the next wave turned out to be 1981.35 which was the day of the high in interest rates.

What I learned was that none of the fundamentals mattered in the end. Gold would decline with inflation at times and rally at other times. It was more complex than that. The final rally from the $400 level to $875 had nothing to do with inflation, that was the invasion of Russia into Afghanistan.

The reliable was simply the objective analysis.

Back ONLY the domestic Ruble with gold to restore confidence among the Russian people, but leave the Ruble float for international transactions

 Putin puts Biden’s King in Check

Posted Mar 23, 2022 by Martin Armstrong

The absolute stupidity of those in the Biden Administration will go down in history as probably the dumbest ever in the history of the world, not just the United States. Besides disrupting energy supplies, and subjecting the world to a shortage of wheat when Russia and Ukraine represent 30% of the world exports, Biden’s sheer stupidity in just reading what his staff of climate zealots tell him is beyond belief. There is a crisis unfolding even in base metals like nickel.

Removing Russian banks from SWIFT but leaving the energy intact so Europe has power, was so brilliant they obviously never played chess. Putin just put Biden’s king in check by ordering Europe to pay for gas now in Rubles. That will provide support for the Ruble, and undermine Europe and its Euro as well as the dollar in the long run.

First of all, when Biden freezes all of Russia’s reserves, why would you continue to get paid in dollars that Biden could freeze? That makes no sense. This is why I warned that using SWIFT as a political tool would destroy the world economy. There is no putting this back together again. The foundation of TRUST has been lost.

What I would do if I were Putin is to create a two-tier monetary system like South Africa once had with the Financial Rand and Domestic Rand. What I would do to put Biden in Checkmate would be to back ONLY the domestic Ruble with gold to restore confidence among the Russian people, but leave the Ruble float for international transactions – the opposite of what FDR did in 1934.

Biden has destroyed the world economy. This is so devastating going forward, that what comes post-2032 when the world economy finally crashes and burns because of these idiots, there will be a whole new regime change on a global scale.

2 tier currency

The International Unit of Account

Posted Jun 6, 2019 by Martin Armstrong

QUESTION: I only recently learned of your material and am still digesting it. I appreciate that you encourage critical thinking. I hope you find my questions of the same spirit.

In your recent article “Are Two-Tier Monetary Systems a Possible Tool?”, you illustrated how South Africa’s experience could provide an example for nations wanting to untangle their domestic currency from global obligations (i.e., US dollar, presumably others too).
Would you mind elaborating on this concept in relation to the following questions?

My questions:
1) For this 2-tier approach to work, must every nation have a 2-tier money system, or would it suffice to have only the major players do so (i.e., USA, EU, etc)?
2) If every nation had a 2-tier money system, then how would that compare and contrast to a “global SDR” or some other global, non-national currency acting the reserve currency?

I suppose what I am really asking is: Imagine a collection of nations and each nation has a 2-tier system. The nations agree to use each other’s “external” tier when dealing with each other and keep the “internal” tier for solely domestic purposes. Instead, now imagine that same collection of nations decided they would each use a global, non-national currency (SDR or otherwise) as the global reserve currency.

What similarities and differences would these 2 different approaches yield? Are there certain conditions where 1 approach would be desirable over the other approach?

I find this subject both intriguing and very relevant, so I would like to hear your insight.

Thank you for the new (to me) material.

C

ANSWER: During the 19th century, it was common to issue a “trade dollar” with China who used the silver standard initially by using the Spanish 8 reals known also as pillar dollars. The US issued trade silver dollars and domestic silver dollars of different weight. All of these nations were issuing a two-tier currency to facilitate trade with China.

During the 14th century, there was also a two-tier monetary system. Florence used the gold florin for trade, but domestically, wages and commerce took place in silver. Companies were required to keep two sets of books by regulation.

A two-tier system can be used to isolate foreign capital inflows. Switzerland was suffering and that eventually broke the peg. The foreign capital was not looking to buy assets in Switzerland, they were just converting euro to Swiss and parking the money. Therefore, a two-tier system would have allowed the flow of capital to concentrate in what we would call the Financial Swiss Franc (FSF). This peg would have not been necessary and they could have even imposed negative interest rates or zero rates to deposits in the FSF. Any trade for produces could have then been delegated to the Swiss franc and the peg would not have been necessary.

We would not need a system where everyone had a two-tier currency and traded against each other. The new International Unit of Account (IUA) would be a basket of currencies and your local currency would then trade against that. You would need to allow contracts and debts to be contracted in this IUA freely, as takes place today in US dollars. This would by no means eliminate FOREX risk.

Insofar as a global SDR, the problem would be the calculation and then the IMF has been notorious for corruption. Would some nations put pressure to alter the formula because of a financial crisis?

I would say that the formula must be fixed and based on the total percentage of international trade a given nation wields. It should be subject to revision only once every 5 or 10 years at fixed terms.

The primary reason I would design the system in this manner is that the Federal Reserve has already become the central bank of the world. The Fed has lost the ability to manage its own economy because the IMF and others lobby it not to raise rates because that would adversely impact their currencies. There should be an IUA so that a central bank can manage its own economy without impacting others because they will be prohibited from issuing debt (public or private) in a foreign currency — only in an IUA. There would be no sovereign debt issued by the agency controlling the formula. The reserves of central banks would then be only in IUA terms.

Already, capital flows globally when it sees opportunity, and in this manner, it acts as an arbitrage tool. If real estate looks cheap in one country, the capital will flow in. Australia, New Zealand, and particularly Vancouver are fighting this trend. There will be a natural cycle to it and there is no need for changing laws to try to stop it. The Japanese were big buyers during the 1980s, even buying Rockefeller Plaza in New York. As their economy turned down, they resold it and exited.