Plaza Accord - force the dollar down by 40% to reduce the trade deficit- would cause a crash

 It’s Always the Currency vs Investment

Posted Jan 18, 2025 By Martin Armstrong

QUESTION: On Friday, the UK FTSE and DAX closed at new all-time highs, so clearly money is flowing into these indices yet euros and Pounds seem to be flying out the door as they prepare for lower lows and thus this seem confusing.  Added to the confusion is that Europe is where the sovereign debt crisis SDC) is likely to begin, so why is capital flowing into these markets?  I suppose better to hold UK or German equities vs. their sovereign debt and thus will those equity markets continue to rally during the SDC?

SR

ANSWER: A number of questions have been coming in about the European markets. Keep in mind that we are in the throes of geopolitical and political upheavals, not to mention the entry of Trump and his old-school nonsense about lowering the dollar to sell more stuff overseas and imposing tariffs. Those ideas I have dealt with constantly over the course of the past few decades. It is confusing without question. The press does not understand currency, not even those in government. Absolutely everything has an international value, and this has led to the overwhelming majority getting things wrong. Many ask why mainstream media will not interview me on such important topics as this. The reason is simply – it is too confusing for them as well.

I have told the story at conferences about my Ferarri Trade and how I bought a 308 Ferrari when I lived in London in 1985 when the British pound fell to $1.03. The Italians were getting $60,000 for the car in the States back then. It was still priced in pounds when the pound used to be $2.40. I bought the car for about $35,000 when converted. The Italians could no longer sell these Ferarris for such a price in London. Hence, they doubled the price in British pounds based on $1.03.

Over the course of the next couple of years, the pound rallied and went to $1.90 again by 1988. I drove the car for 2 years, sold it used for £40,000, and virtually doubled my money. Then, people were buying Ferraris as an investment, thinking it was the car that appreciated when, in fact, it was just a currency play. If you did not look at the currency, you missed the whole point.

In fact, I was buying German cars throughout the 1970s as the dollar was declining. A Porsche was $8,600 in 1970, and by 1980, it was $27,700. I would drive the cars for 2 years and then trade them in and get my money back, so cars never cost me a dime throughout the 1970s. I understood it was all just currency – not the cars themselves. My father took the family to Europe for the summer of 1964, which taught me about currency as we traveled from Sweden to Italy and all around. We had to change currency every time we crossed a border. I learned that CURRENCY was actually a mental language. I would listen to the price in Italian lira and convert that back to dollars in my mind to asses if the value was a fair price.

I was really the only true foreign exchange analyst. I was dealing in billions in the early 1980s. Clients would even put me on a speak in the middle of an OPEC meeting. I was being called in around the world all on currency crises. That’s how I became friends with Margaret Thatcher. I was being touted as the highest-paid analyst in the world, all for currency. When I was opening an office in Geneva in 1985, I was going to use some European names to blend in. I went to lunch with the head of one of the top main banks in Switzerland, who was a client and asked his opinion of what European name to use. He asked me to name one European FOREX analyst. I was embarrassed for I could not. He then explained why everyone was using my firm. He said there were no European analysts because they each would tout their own currency because it was a political issue. He explained everyone was using my firm because I did not care if the dollar went down or up. I said it was just a trade.

By 1985, I was summoned to the US. They were arguing to force the dollar down by 40% to reduce the trade deficit as that theory today is espoused by Trump. That was the Plaza Accord, and I wrote to President Reagan and warned that they would cause a crash within two years, and that became the 1987 Crash. The Presidential Commission then called me in for that one. They just do not teach this stuff in school and that seems to be the problem.

 

In 1997, Robert Rubin, former head of Goldman Sachs, was also trying to talk the dollar down for trade. Again, he did not really understand currency and its impact on markets. The Asian currency Crisis unfolded weeks later. He may have been at Goldman, but that was more related to debt. To one person, a stock rally can look like a bull market, and to another, a bear market. When you get into currency swings of 10%-40%, it alters the perception of value because they still do not teach this stuff in school. We are clinging to old theories like Keynesian economics from the period of fixed exchange rates. Politicians are making the wrong decisions and investors are confused because these concepts are never taught.

 

As the greenback rallies, then the European share prices will appear cheap, just as Ferarri did in 1985 when the pound fell to $1.03. You will have domestic movement away from public assets as we have seen corporate rates move below that of government rates in France. Here is the FTSE in pounds and then in dollars. While you see new highs in pounds, the FTSE has not made new highs in dollars and has backed off, showing that the rally in the FTSE is not keeping pace with the decline in the pound.

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This is why, in Socrates, you can plot any instrument in a host of various currencies. The definition of a bull market is something that rallies in terms of all the key currencies. When it is rising only in terms of the local currency, it is simply a domestic shift and not international.

We do NOT see a major Crash on the horizon in shares, commodities, gold, silver, etc.

The greatest risk of a crash will be in government debt.

Every Administration has wanted a lower dollar to increase exports.

Shari’ah Standard on Gold to Replace the Dollar? Really?

Posted May 29, 2017 by Martin Armstrong

QUESTION: Mr. Armstrong; I have read where some people are claiming this “Shari’ah Standard on Gold” will become the new “reserve currency” and this seems really just nuts. I understand there are 2 billion Muslims in the world, but they seem to forget that this is once again wild speculation. Any thoughts?

OP

ANSWER: No. This is really rather absurd. First of all, not even the Euro could displace the dollar now the Japanese yen, Chinese yuan and yet some meager 2 million average citizens will do so? I really hate to burst these people’s bubble in La-La-Land, but I have been in meeting and there are people in Washington who are trying to figure out how to get the dollar to be replaced somehow. The last failed attempt was the Plaza Accord in 1985 intended to push the dollar down and the Euro was born there and then. This is when James Baker encouraged Europe to create a single currency to “PLEASE”compete with the dollar. Every Administration has wanted a lower dollar to increase exports. Trump is no different. Sorry – they ALL HAVE FAILED!!!!!!!!!!!!!!!!!!!

Secondly, this is really nuts and the very same hype I recall from 1975 when Americans were for the first time legally going to be able to buy gold starting January 1st and that is when gold futures began as well in New York. What happened? The hype drove the price of gold up to nearly $200 and on January 1st, 1975, it began a crash by almost 50% into 1976 for 21 months. They said the same thing about China and how the Chinese demand would make gold soar. Then they said the same thing about India and now its the Muslims. They keep switching groups to sell people gold like some used car salesman. In any other field it’s called consumer fraud.

Gold will rally ONLY when people begin to see that governments are failing. I am not talking about my readers. We all see what is coming. I am talking about the AVERAGE person on the street. Then you will see the gold breakout. We are getting closing. Patience is required when it comes to gold.

The first opportunity for a major dollar high is 2018 and after that comes 2020/2021.

The Dollar Remains King

Posted May 8, 2017 by Martin Armstrong

QUESTION:  Hi, I’ve read your blog for a couple of months now and it clearly opened my eyes. But I’m wondering if I’m getting crazy now.. I can see a pattern between rising Chinese yields (despite weaker growth), parked Chinese money in the Canadian & Australian housing bubble, plunging commodities (very bad for Australian and Canadian people who have to pay of their massive mortgages) and why all this will lead to a rising dollar. Am I looking in the right direction? A.S.

ANSWER: Yes. The only way to reach the economic crisis that forces political change is to put on the maximum amount of pressure. It does not even require that what people BELIEVE will happen, happens. Human nature is such that we all act in anticipation of events. Sure the Euro has bounced on belief that BREXIT is a passing phase. But the election of Macron was the worst possible outcome as it should have been for it in the Euro that will crumble as Brussels now tried to federalize everything to secure it own survival against the people of Europe.

The dollar rose between 1980 and 1985 on the fears that the USA would default creating a two-tier monetary system with red dollars externally and green dollars internally. The US national debt hit $907.7 billion in 1980 and the Eurodollar market was about the same. The Europeans were convinced that the US would default by adopting a two-tier dollar. Consequently, between 1980 and 1985, Eurodollar deposits fell by about 50% and the Europeans moved their accounts to the USA where they thought they would get green dollars. That was the number one question I would get at seminars and conferences in Europe between 1980 and 1985. It never happened. Yet the “belief” it might moved capital to USA and that sent even the British pound to $1.03 in 1985.

Only the dollar moving to all time record highs in 1985 sparked the Plaza Accord. However, that is where the whole idea of the Euro was born. Jim Baker saw THE PROBLEM AS THERE WAS NO CURRENCY TO COMPLETE AGAINST THE DOLLAR. Baker urged Europe to create a single currency to prevent the dollar from rising, which then reduced US exports.

The national debt continued to rise reaching $2.125 trillion by 1986 and $3.2 trillion by 1990 and now we are at $20 trillion by 2017. The Dow Jones Industrial average was 1,000 in 1980. So exactly how is 21,000 on the Dow today out of like from just the expansion in debt?

You can see the correlation below. Our number remains 23,000 on the Dow where things begin to get interesting. So far, it is just keeping pace with international value. The first opportunity for a major dollar high is 2018 and after that comes 2020/2021.

Idea of federalizing Europe came, not from the United States, but from France.

Is the CIA Responsible for Creating the EU?

Posted Jan 31, 2017 by Martin Armstrong

The new conspiracy theory running around claims that the European Union was a CIA project. This serious misconception misses the entire point. It is very true that the idea of the EU was supported by the United States since World War II. However, the U.S. supported the idea of the EU as a trade union that could support NATO during the Cold War. However, the idea of federalizing Europe came, not from the United States, but from France. It was de Gaulle who blocked Britain from joining the EU because he wanted France to dominate Europe. It was de Gaulle who broke Bretton Woods by buying up dollars and redeeming them for gold to make France the economic power of Europe. Britain was only allowed to join the EU upon de Gaulle’s death.

The idea of federalizing Europe was a dream inspired by de Gaulle. This is the origin of the idea that war could be eliminated if there were only one government. That never could have been spoken in real public settings because the differences within Europe ran deep and bitter following two world wars. The Treaty of Rome was to prevent a third European war.

The idea of transforming the EU from a trade union to an economic union was given birth at the Plaza Accord in 1985. That was the brainchild of James Baker to create a viable alternative to the US dollar. That is when the euro was born. The commission attended our WEC in London and I spoke directly with them at the time. I warned this would result in the collapse of the euro system unless they consolidated the debts. I was told they could not sell that to the European people so they would push for the currency first and later deal with the debt problem. Of course, phase two never came. The euro cannot survive with such a structure. You have people like Martin Schultz now pleading that the problem is not a central power, but Europe needs to surrender all sovereignty to Brussels.

By 1990, Maggie Thatcher was warning that “a single currency is about the politics of Europe. It is about a federal Europe by the back door.” (November 22, 1990). As everyone knows, I was friends with Maggie. I was there through all these machinations. This was BY NO MEANS a CIA plot. The desire for NATO and an EU was in the interests of the United States following World War II — absolutely! But do not mix that with the state of the EU today and the attempt to federalized Europe. That is exactly the opposite of U.S. interests for it will lead to the risk of another European war.

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Capital Flow

Martin Armstrong
14th January, 2015

Opinion v Capital Flow Analysis

Over the past three years, I have received countless emails about how I am wrong and if it were not for me commodities would rise. These nasty comments are typical from someone who wishes to live in denial and pretend that their OPINION is correct and that the world is wrong – never them. My warning that the dollar was the biggest short in history and would rise NOT FALL left me virtually alone in the analytical world. Because of quantitative easing, the standard expectation was that as the supply of money increased, the dollar must fall and commodities must rise. This has been the mantra of virtually 100% of the hard-sell newsletters out there with the herd of countless “analysts” who simply regurgitate the standard economic thought.

There is a video out Princes of the Yen: Central Banks and the Transformation of the Economy, which is again a great propaganda piece well done. However, this is once more not analysis because it begins with the very same theory of money and sets out to prove that theory rather with selecting specific facts ignoring anything that disagrees with that idea. The film blames everything on the central bank creating money following the reform in 1986. There is no global analysis and everything is based purely on the same assumption of money supply.


The film makes the TRADITIONAL mistake and focuses the entire analysis upon the domestic actions of the Bank of Japan. Here is a chart of the capital flows of that period for the 1987 Crash. The cause had NOTHING to do with Japan increasing money supply, it had to do with international capital flows. The Plaza Accord in 1985 that began G5 insisted on the reforms in Japan to reduce the trade surplus with the USA and thus expand its domestic economy. The problem was clear. The USA raised interest rates to crazy levels 17%+ in 1981 to fight inflation that attracted capital into the dollar from around the world. But as always, it was government trying to manipulate society to achieve something they do not even understand.

The USA shot itself in the foot raising rates to crazy levels. These insane high rates drove the dollar to record highs moving into 1985 and set the stage for the creation of G5. The Plaza Accord openly came out and publicly stated that they wanted to see the dollar DOWN by 40%. They ASSUMED this would reverse the trade deficit and create jobs in the USA. They overlooked that almost 40% of the US national debt was held by Japanese.


I wrote to the White House in 1985 warning that G5 would lead to higher volatility. The White House responded that we were the only firm with such a model and effectively no one else warned about volatility. Of course when the Crash came in 1987 on the precise day of the ECM, yes our firm became famous for calling the Crash of 1987, but now our research was requested by the Presidential Commission.


Friends in the industry lobbied me to provide the research for my first reaction was it was pointless because they would never understand with a domestic focus. Well, we provided the research and yelled and screamed it was G5 and currency manipulation. The final BRADY REPORT- (Full text of _Report of the Presidential Task Force on Market Mechanisms) at the end stated they thought it had to do with foreign exchange, yet of course there was no mention that G5 instigated the whole mess.


We were also famous for calling the high in Japan in December 1989. This was in line with the ECM 1989.95, capital flows, and the market peaked at 38,957 against our technical projection of 39,314 at the time. The movie the FORECASTER has a member of the press from Canada stating I called him the day of the high and said this is the peak for Japan that we will not see in our lifetime again.
All of this has NOTHING to do with my personal OPINION. When the Nikkei crashed, I had two central banks on the phone at the same time – USA and Canada. Both wanted to know what the COMPUTER had to say – should they intervene. I responded, no. This was a capital concentration in Japan – not North America or Europe.


I have warned that capital flows are the key. China has come out and stated that they now use Capital Flow Analysis, which we invented. Everything is interconnected and you cannot analyze Japan in an isolated manner blaming everything on simply the change in the supply of money. That is really primitive analysis caught in a one-dimensional world concept.
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In our special report on the metals, we wrote that a year-end closing for 2014 below $2.99 would warn of a yearly sell signal. Copper closed at $2.8255, Then this week, copper for delivery in March dropped nearly 5% to a low of $2.5860 per pound in New York after falling below the psychologically important $6,000 a tonne level on the London Metal Exchange earlier in the day. Major technical support does not arrive until the $2.01 area.

The price of crude oil fell again on Tuesday, bringing year to date losses to 20%, following a near halving in the price last year. Copper is already down 8.7% in 2015 after a 14% retreat last year.
The fall in the price of the two raw materials is a central point confirming our warning that the global economy in moving into a major deflationary crash. We have warned that commodities peaked in 1919 and bottomed 13 years later in 1932 with the low in the bonds and stocks. The decline in commodities is a confirming leading indicator of a collapse in the world economic growth that is being driven by the aggressive rise in taxation and enforcement, which is destroying the world economy. Liquidity is still at 50% or 2007 levels.


OPINION means absolutely nothing. It gets you a job appearing on TV – that’s it. A simple unbiased look at the share markets of even China illustrates that the world economy has been shifting since 2007. This alone confirmed the decline in commodities, which copper and crude are raw indicators of economic growth.


As long as people keep touting money supply and the only factor, they will NEVER understand the real movement of the economy. OPINION will just not cut it. It is time to wake up and see the world in a whole new light. If we cannot move in that direction, we will remain lost in a maze unable to advance because we cannot identify even the cause of our travails.