Gresham’s Law “Bad money drives out good“

 Are Markets Irrational or or Analysts?Gresham, 

Posted Mar 27, 2023 by Martin Armstrong

QUESTION: Mr. Armstrong; Who is being irrational? The markets or the analysts?

KE

ANSWER: That’s simple. It is the analysts. The markets are ALWAYS correct. When you have bank failures unfolding, people will withdraw money out of caution. It is the very same reason there are ancient hoards of coins. You find coins in times of economic stress and uncertainty. This is a purely RATIONAL human response to uncertainty. It consistent for thousands of years. For any analyst to claim the markets are acting “irrationally” only proves they should look for another profession.

Sir Thomas Gresham began his career in 1543 working at Mercers’ Company at the age of 24 years old. He left England for Antwerp/Amsterdam which was the financial center of the day much like Wall Street. That was where he became a merchant businessman which was where banking existed in those days. He became an agent for King Henry VIII in the Antwerp/Amsterdam market. He became a trader and in so doing, he began to observe how capital moved.

 

The interesting aspect was that he was called in as a sort of crisis manager as I have been during financial upheavals. In 1551, Sir William Dansell, who was King’s Merchant there in the markets, ended up putting the English Government into a financial crisis thanks to his mismanagement.  The English turned to Gresham for advice since he became quite astute at trading. They adopted his proposals. It was then that Gresham proposed a very ingenious tact. He advocated a FOREX intervention to push the pound higher on the Antwerp change. His intervention proved so successful that in just a few years King Edward VI had discharged almost all of his debts. By pushing the pound higher, he was able to repay the previous debts by devaluing them.

Therefore, the English Crown sought Gresham’s advice in all their finances until Mary came to the throne in 1553. Gresham was instantly pushed aside for  Alderman William Dauntsey, who lacked trading experience and quickly sent the Crown into financial stress. Gresham was called back to deal with the mess once again.

Under Queen Elizabeth’s reign (1558–1603), he continued as a financial agent of the Crown and also became the Ambassador Plenipotentiary to the Governor of the Netherlands. This was the period of civil unrest in Antwerp which compelled him to return to England in 1567. This is also when the English had the founding of the Royal Exchange to compete with the Netherlands. It was Gresham who made the proposal to build, at his own expense, a bourse or exchange. This demonstrated that Gresham was a trader and understood how capital flowed.
Apart from some small sums to various charities, Gresham bequeathed the bulk of his property (consisting of estates in London and around England giving an income of more than 2,300 pounds a year) to his widow and her heirs, with the stipulation that after her death his own house in Bishopsgate Street and the rents from the Royal Exchange should be vested in the Corporation of London and the Mercers Company, for the purpose of instituting a college in which seven professors should read lectures, one each day of the week, in astronomy, geometry, physic, law, divinity, rhetoric and music.[1] Thus, Gresham College, the first institution of higher learning in London, came to be established in 1597.

Gresham’s Law (stated simply as: “Bad money drives out good“). He concluded this from his observations that foreign exchange back then was based on the metal content and weight of the coinage. Therefore, as debasement took place, people would hoard the old coinage of higher quality and spend the debased.  Thus, the bad money drove out the good and actually shrunk the money supply in circulation.

He urged Queen Elizabeth to restore the debased currency of England. In so doing, you got to repay old debts with debased currency. Governments to this day practice that same trick. Repaying a 30-year bond today the bondholder cannot buy what the money was once worth 30 years ago. The interest does not really compensate for the loss of purchasing power over long periods of time.

It’s the capital flows that are the key – not trade.

Will China take over US as the top Superpower

Posted Oct 3, 2017 by Martin Armstrong

QUESTION: I read a credible theory recently about China taking over US as the top superpower via economic pressures. Namely by replacing the US dollar with the Yuan as the standard currency for international trade. This shift is (supposedly) being enacted through 1) increased control over Developing countries through international lending from the New Development Bank, 2) increasing control over global oil via financial ties to Saudi Aramco and Russia’s Rosneft, 3) trying to denominate global oil transactions in Yuan through the Shanghai oil futures market & backing up the Yuan value with the massive gold reserves China has been accumulating.

My question is whether you see this strategy unfolding as a credible threat to usurping United States’ global domination by China and if so – what might the investment world look like during such a massive upheaval?

Thanks – love your blogs & insights!!

WM

ANSWER: China is on the rise and it will become the financial capital of the world after 2032. However, it has a long way to go. China can price every commodity in yuan and demand all trade deals are in yuan. That still will not displace the dollar. The center core issue behind the dollar ironically in the US National Debt. For now, this is the place institutions can park their money. You can trade in any currency, but where do you park you profits?

China will displace the USA as the financial capital of the world when (1) people begin to trust China as a place to park money. Bitcoin exploded because the Chinese were using it to get money out of China, which had reach 98% of trading. China has been steeping in against BitCoin to stop the capital outflow.

It’s the capital flows that are the key – not trade. The daily trading volume in FOREX alone has exceeded $5 trillion. Most investors are familiar with the stock market, yet they are unaware how small in volume share trading is compared to foreign exchange. The Forex market dwarfs the trading in equities and futures markets.

FOREX trade and investment capital flows DWARF trade flows. Absolutely nothing compares to the Foreign Exchange Markets.

Anyone can write a contract in dollars. You cannot do that in Japanese yen. If you issue a bond in yen you have to apply for permission back in Tokyo. All these argument are made up by the dollar-haters who are so desperate to find an excuse that the dollar will crash. It’s time will come. Just not yet.

Fundamentals, Reserves, Balance sheets

Do the Reserves of a Nation Matter Anymore?

Posted on January 9, 2016 by Martin Armstrong

The gold bugs spun the tail that China was going to save them by making gold $50,000-$100,000 an ounce because money, in their minds, has to be tangible. However, China’s $3 trillion-plus in foreign currency reserves was the biggest stockpile in the world, They had no such intention of swapping it all for gold. As a percentage of global capital flow, China’s reserves reached 31% of total world reserves which dwarfs everyone else. Nevertheless, it still does not match the USA in 1950 after two World Wars. What made the dollar THE DOLLAR was the fact that by the end of World War II, the USA held 76% of total global reserves among nations. Nobody has ever reached that level again.

The argument that money must be TANGIBLE and backed by something has been exposed as false. One would have assumed that China’s massive foreign exchange reserves were as good as gold, providing an insurance policy against the country’s decline. However, the yuan has been a depreciating currency as a torrent of capital leaves the country. Indeed, Japan and Germany rose from the ashes without gold following the war. China also followed the same path, which proves that the wealth of a nation is its people and their total productive capacity.

The crisis brewing in China is the same pattern that unfolded after the concentration of capital within the USA following World War II. It was the migration of capital out of the USA that rebuilt the world. The Chinese are off doing the very same thing that the Japanese and Americans did after capital concentrated into their countries. Some are shocked at the alarming rate of dollars fleeing the country from the People’s Bank of China. China’s stockpile of foreign exchange reserves plunged by $513 billion (13.4%) during 2015 when it fell to $3.33 trillion as the nation’s central bank tried to manage a weakening yuan. This resulted in American politicians calling it “currency manipulation”, which reveals how stupid they truly are when it comes to international capital flows and the global economy. An estimated $843 billion in total capital left China between February and November last year alone.

Historically, this pattern is standard and ALWAYS unfolds no matter what country we are looking at. I wrote about the ancient Wall Street of the Roman Empire in its day, known as the Via Sacra (Sacred Road). Cicero (106-43 BC) wrote that anytime there was news of a disaster in Asia Minor (modern Turkey), a financial panic would be unleashed in the Roman Forum on this very street. Why? Because the Romans followed the same pattern. As they conquered new lands, they turned them into emerging markets for investment. Cicero tells us that the infamous traitor Brutus (85-42 BC) had lent money to the King of Cappadocia (Turkey) and to the city of Salamis at a 48% rate of interest.

Capital flow has been the key to understanding the world economy. Money has ALWAYS moved for international investment. “Money” is really anything as long as it becomes an agreed unit of account. During the 5th Century AD, Saint Patrick, upon his arrival in Ireland, found that money was expressed in human slave girls. He wrote in his “Confession”, “I think that I have given away to them no less than the price of fifteen humans.” This passage shows something very important. First, money is not defined as a medium of exchange exclusively. Second, it serves the purpose of a unit of account. One did not go shopping dragging a bunch of slave girls; it was simply the unit of account, just as $1 million is a unit of account that does not physically exist as a single bank note. Money has moved around the world for prices in the outer-rim are always cheaper than in the core. Like New York City vs. Kansas or London vs. Manchester or Liverpool. This is what has been behind the rise and fall of nations for recorded history.

The historical battle has not been gold against intangible forms of money. It has always been private v public. Even if a nation declared gold to be $100,000 an ounce, that is stillFIAT which is anything declared by a government against the free market. A currency peg is FIAT. VALUE of assets rise against whatever is money so money declines in terms of purchasing power. Deflation is when assets decline against money. The two areALWAYS on opposite sides.

Gold declined in purchasing power when it was money during the 19th century which proves the point. Money and assets are always on opposite sides. When even gold was money it was not this miracle stability within an economic sea of chaos. The problem has NEVER been what is money – the real problem has ALWAYS been government mismanagement. So returning to a gold standard would never make politicians honest since we had Bretton Woods and they blew that gold standard up as well. Let’s stop focusing on what is money and pay attention to who really causes the wild swings in the business cycle and creates war – they are one group which always want to rule the world.

Right now, even Brazil is way above most countries holding 3% of world global reserves and Saudi Arabia has 6% while Switzerland comes in at 4%. Algeria has 1% as does Canada, Denmark, France, whereas Germany stands at 2% along with Mexico and Hong Kong beats that at 3% as does India, Russia and the USA. Japan has 10% of world reserves and it is not helping them at all. Looking at RESERVES, reveals that even reaching 31% does not provide security against an economic decline any more than the USA reaching 76% of world gold reserves following World War II.

The proof that government is INCAPABLE of managing the economy is the mere fact they keep raising taxes.  If I managed your money and each month I lost and kept coming back asking for more because this time it’s different, how long would you keep handing me more money when I never provide any return?

Welcome to the way government manages our economy. They always run out of your money and constantly raise taxes blaming the rich for making too much.