QUESTION: Mr. Armstrong, Out of my utmost respect, you do stand-alone where all these analysts are calling for the collapse of debt and equity because of fiat currency. They may claim to have been there for the dot.com and 2008 bubbles, but you have been there for all of them. The blame they lay on the federal reserve and the creation of money and without that the stock market would not have risen. My question is that since you have the longest track record of anyone and you have forecasted every boom and bust, I would just like to hear the full explanation that sets you apart from all of these analysts.
With my deepest respect
PZ
ANSWER: First of all, the world economy has changed. It evolves like a child and it is nothing like it was when Gresham made his observations of the value of money as representing England in the Amsterdam market during the reign of Henry VIII. Because of this, the entire foundation of Austrian Economics has been rendered irrelevant – a throwback to a monetary system that no longer exists. What you MUST understand is that coming out of the Dark Ages, there really was no currency that represented the reserve currency of the world for there were not even central banks.
The value of a currency was solely the metal content. There was no premium to a currency based upon the economic and military power of one country compared to another. That is what distinguished not just Rome, but the currency of Alexander the Great as well as that of Athens. All of their currencies were imitated by other states BECAUSE they carried a premium over the metal content. This is an example of an Indian Immitation of a Roman aureus of Septimus Severus where it actually contained more gold than the official currency.
Here we have Egypt, which never issued coins until it was conquered by Alexander the Great, issued imitation of Athenian Owls with the same silver content just to be able to deal in international trade. There are plenty of examples where a currency was worth more than its metal content. This clearly establishes an exception to Gresham’s Law and Austrian Economics.
The question which arises from studying ancient coinage, is why was the coinage of Athens imitated but not in places like Aegina, Corinth, or Thebes? The answer lies in the military and economic power of Athens and then later by Macedonia.
Here is an imitation by the Helvetii (Swiss) tribes of Philip II gold stater – the father of Alexander the Great. As Macedonia rose to issue gold coins, which Athens did not issue except during its fall to Sparta, once more we see that there was recognition and value attached to the coins of a central power over and above the metal content.
This disputes the entire theory of any currency being fiat. The value of a currency is NOT any backing by gold, silver, oil, or diamonds no less its land because of agriculture. The true WEALTH OF A NATION is its people!. When Adam Smith wrote his Wealth of Nations, here was arguing against the Physiocrats who claimed that the only wealth was agriculture and this led to the days of empire building. The more land you occupied that was supposed to be the wealth of a nation. Smith argued that a blacksmith making a saddle in England selling it to a Frenchman still returned with gold as would a farmer. Hence, all produce was the wealth of a nation. This still contributed to the idea that money was to be backed by gold or silver.
China, Japan, and Germany all rose from the economic ashes of war to become major economies while they lacked gold reserves. Russia has all the reserves that should have made it the #1 currency in the world – gold, silver, platinum, diamonds, and oil. Nevertheless, Russia could not get off the ground because of its political-economic philosophy. Without freedom, no economy will ever prosper regardless of its landmass or resources without the freedom that allows economic innovation from the private sector – not the government.
That is what the entire 1959 Kitchen Debate was all about. The Soviets lived in squalor. Capitalistic freedom allowed people to dream and innovate. Hence, it was the free society that created all the innovations from a washing machine for clothes and then dishes to refrigerators. The only innovation that ever came from communism was nuclear weapons.
So I look at all of history – not just a narrow patch when there was no currency that ruled for power. They all traded in Amsterdam based solely on their metal content. Those days are long gone. The world moved from there to agriculture was wealth that produced the age of imperialism and empire-building. Today, we have seen the US dollar as the reserve currency. It is hoard overseas where 70% of the paper money circulates.
Yes, we are in a debt crisis. The debt bubble will collapse. But that is NOT because of quantitative easing or central banks. Central banks have NO control over the fiscal side of the creation of money. The QE is even debatable if that creates inflation. They are buying in debt and replacing it with cash – that is true. But that theory is also ancient history when you could not borrow against government debt before 1971. Now you trade futures and you post collateral using T-Bills. Borrowing is no longer less inflation than printing for there is no distinction between the two other than the bonds are cash that pays interest.
The wheel of history has returned full circle. When paper money was introduced during the Civil War, it paid interest according to how long it remained in circulation. Hence, it truth, money was effectively circulated bearer bonds.
The abandonment of currency that paid interest is what led to the term “greenback” meaning that there was no interest table on the back – only green ink.
Thus, once more debt is acceptable as collateral and is used by the banks as their reserve at the central bank. Thus, the theory of fiat and assuming money must be back by some commodity are long gone. The value of a currency is the total productivity of its people. Hence, China will become the new financial capital of the world based upon productivity as the climate change agenda seeks to crush our Western Economics and the value of the productivity of our people exactly as was the case in the Soviet Union.
