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What Gives Value to a Currency?

QUESTION: Hello Martin, can you explain to me how a currency would sustain value for international trade if a country, like Canada (where I live), did what you suggested and stopped issuing debt and just printed money to level that was 5% – 10% of national GDP? would it depend on the attractiveness of what a country exports eg: Canada exports oil, lumber, crops like wheat/soy/canola, minerals – both precious and functional? What would happen to a country that didn’t have exports as a significant portion of it’s GDP? I am curious about how currencies would react to your restructuring plan that eliminated the need for a country to issue debt. Thanks for all your insights and theories. Very helpful.

Trapped in Canada with an egoistic misguided Prime Minister who doesn’t appear to like Canada (he keeps telling us how awful we are) or Canadians, he prefers spending time with global elites and is following their plan even though it damages Canada pretty significantly.
MB

ANSWER: Right now, every country spends more than it takes in. The deficits are funded by selling debt, which then competes against the private sector. The interest rates rise and fall on sovereign debt based upon the confidence from one week to the next. If they stopped borrowing, then the capital investment would turn to the private sector, creating more economic growth. If income taxes were eliminated, the economy would grow based upon innovation which is what it should be driven by.

The confidence in the currency would simply depend upon the strength of the economy, as was the case for Athens and Rome in ancient times. Their coinage was imitated because they were the dominant economies of their time. The value of a currency is the strength of its economy…

…click on the above link to read the rest of the article…

currency, currency value, money, martin armstrong, armstrong economics, money printing, debt,

US Dollar’s Status as Dominant “Global Reserve Currency” Drops to 25-Year Low

US Dollar’s Status as Dominant “Global Reserve Currency” Drops to 25-Year Low

Central banks getting nervous about the Fed’s drunken Money Printing and the US Government’s gigantic debt? But still leery of the Chinese renminbi.

The global share of US-dollar-denominated exchange reserves dropped to 59.0% in the fourth quarter, according to the IMF’s COFER data released today. This matched the 25-year low of 1995. These foreign exchange reserves are Treasury securities, US corporate bonds, US mortgage-backed securities, US Commercial Mortgage Backed Securities, etc. held by foreign central banks.

Since 2014, the dollar’s share has dropped by 7 full percentage points, from 66% to 59%, on average 1 percentage point per year. At this rate, the dollar’s share would fall below 50% over the next decade:

Not included in global foreign exchange reserves are the Fed’s own holdings of dollar-denominated assets, its $4.9 trillion in Treasury securities and $2.2 trillion in mortgage-backed securities, that it amassed as part of its QE.

The US dollar’s status as the dominant global reserve currency is a crucial enabler for the US government to keep ballooning its public debt, and for Corporate America’s relentless efforts to create the vast trade deficits by offshoring production to cheap countries, most prominently China and Mexico. They’re all counting on the willingness of other central banks to hold large amounts of dollar-denominated debt.

But it seems, central banks have been getting just a tad nervous and want to diversify their holdings – but ever so slowly, and not all of a sudden, given the magnitude of this thing, which, if mishandled, could blow over everyone’s house of cards.

20 years of decline.

…click on the above link to read the rest of the article…

wolfstreet, wolf richter, us dollar, world reserve currency, central banks, money printing, fed, us federal reserve, money, us debt, debt, united states

Do You Believe in Magic?


The people pretending to run the world’s financial affairs do. The more layers of abstract game-playing they add to the existing armatures of unreality they’ve already constructed, the more certain it becomes that they will blow up all the support systems of a sunsetting hyper-tech economy that now has no safe lane to continue running in.

Virtually all the big nations are doing this now in desperation because they don’t understand that the hyper-tech economy is hostage to the deteriorating economics of energy, basically fossil fuels, and oil especially. The macro mega-system can’t grow anymore. We’re now in the de-growth phase of a dynamic that pulsates through history, as everything in the universe pulsates. We attempted to compensate for de-growth with debt, borrowing from the future.

But debt only works in the youthful growth phases of economic pulsation, when the prospect of being paid back is statistically favorable. Now in the elder de-growth phase, the prospect of paying back debts, or even servicing the interest, is statistically dismal. The amount of racked-up debt worldwide has entered the realm of the laughable. So, the roughly twenty-year experiment in Central Bank credit magic, as a replacement for true capital formation, has come to its grievous end.

Hence, America under the pretend leadership of Joe Biden ventures into the final act of this melodrama, which will end badly and probably pretty quickly. They are about to call in the financial four horsemen of apocalypse: 1) Modern Monetary Theory (MMT), 2) a command economy, 3) Universal Basic Income (UBI, “helicopter” money for the people), and 4) the “Build Back Better” infrastructure scheme.

…click on the above link to read the rest of the article…

money, monetary theory, modern monetary theory, debt, money printing, james howard kunstler, clusterfuck nation, magic, degrowth, growth

Japan’s Economy Is Again Struggling

Japan’s Economy Is Again Struggling

Japan. the world’s third-largest economy is highly dependent on exports and the reality it is still struggling even after a great deal of America’s stimulus money leaked into buying imported goods speaks volumes. While it feels a bit like ancient history, Japan’s GDP contracted at an annualized rate of 28.8 percent in Q2 of 2020, the biggest decline on record. Even after bouncing back 21.4 percent quarter-on-quarter in Q3 and 12.7 percent in Q4 Japanese national accounts are still lagging behind mid-2019 levels. For all of 2020, spending by households with at least two people fell 5.3% due to the hit from the pandemic. It was down 6.5% for all households, the worst drop since comparable data became available in 2001.

https://cdn.statcdn.com/Infographic/images/normal/22583.jpeg

All in all, this means the country is still playing catch up, partly because Japan also experienced two additional quarters of negative growth in Q1 of 2020 and Q4 of 2019. Adding to the problem is Japan’s household spending fell for the first time in three months in December, in a sign consumer sentiment was weakening even before the government called a state of emergency to control a new wave of the coronavirus. Lower demand for services such as travel tours also weighed, as the pandemic forced the cancellation of domestic tourism promotions. Last year, spending on accommodations fell 43.7%, while overseas and domestic tour travel expenditure slumped 85.8% and 61.9%, respectively.Not only is Japan again struggling to stay out of recession, but it also faces a wall of debt that can only be addressed by printing more money and debasing its currency. This means they will be paying off their debt with worthless yen where possible and in many cases defaulting on the promises they have made. Japan currently has a debt/GDP ratio of about  240% which is the highest in the industrialized world. With the government financing almost 40 percent of its annual budget through debt it becomes easy to draw comparisons between Greece and Japan.

…click on the above link to read the rest of the article…

japan, bruce wilds, advancing time blog, exports, recession, currency debasement, debt,

The Losses are Hidden – Bill Holter

The Losses are Hidden – Bill Holter

Precious metals expert and financial writer Bill Holter has been predicting the financial system is going to go down sooner than later.  He says the signs are the lies being told to the public to try to hold the system together.  Holter explains, “If you look at everything, nothing is natural.  Everything is contrived.  We are lied to about pretty much everything 24/7. . . . They lied about everything regarding Covid.  They have lied about the election.  They are lying about the unemployment rate.  They are lying about inflation.  They are lying about the true amount of total debt outstanding.  They are lying about everything. And one other tidbit, 36% of all dollars outstanding have been created now, were created in the last 12 months.  Oh, and the Fed is no longer going to publish M2. . . . How can you make a business decision if you don’t know how much money is outstanding?”

This leads us to all the digital dollars sloshing around and Crypto currencies.  Holter says, “Crypto currencies are a perceived exit from the system.  They are perceived as a safe haven.  If Bitcoin, which is nothing but digital air, can become $65,000 per unit, what can something real become worth?  What these crypto currencies are doing is illustrating a debasement of all the fiat currencies.”

Bill Holter says big loses in the financial world are being hidden from the public.  Take real estate, for example.  Holter points out, “The average mall in the United States is appraised 60% lower than it was a year ago.  That’s a 60% drop.  It’s now worth 40%.  There is debt on these things they owe.  These malls were not bought, built and created out of cash…

…click on the above link to read the rest of the article…

greg hunter, usa watchdog, financial system, financial system collapse, bill holter, debt, fed, us federal reserve, money printing, credit expansion

Do We Really Think a Band-Aid Will Heal a Tumor?

Do We Really Think a Band-Aid Will Heal a Tumor?

Borrowing a quarter of the nation’s entire economic output every year to prop up an ineffective, corrupt status quo is putting a Band-Aid over a tumor.

If we misdiagnose the disease, our treatment won’t work. We’re all familiar with medical misdiagnoses, which lead to procedures and prescriptions that can’t possibly fix the patient’s illness because the source has been missed or misinterpreted.

Medical diagnoses are often tricky, as many general symptoms can arise from a variety of sources.

Social and economic ills can also be tricky to diagnose, and the diagnosis is hindered by political polarization and sacrosanct orthodoxies which make it difficult to have a rational discussion in public about many difficult issues.

If we can’t even discuss a problem, then that creates another problem, because problems that can’t be discussed openly cannot be solved.

There’s also a human tendency to choose the diagnosis with the easiest-at-hand solution. This allows us to quickly apply an approved solution and then declare the problem solved.

The current flood of financial stimulus is an example of this misdiagnosis and application of an easy solution which fails to address the underlying disorder.

The conventional diagnosis of the post-pandemic economy is that the only problem is people don’t have enough money, and so giving them money to spend will cure the financial damage the pandemic inflicted. (Never mind that the economy was rolling over in 2019 long before the pandemic, which served as a catalyst in a sick, unstable status quo.)

Creating $1.9 trillion out of thin air and distributing it is painless: who doesn’t like free money? But is a scarcity of cash the source of America’s economic malaise?

…click on the above link to read the rest of the article…

 

What Interest Rate Triggers The Next Crisis?

What Interest Rate Triggers The Next Crisis?

  • The Ten-year U.S. Treasury note yields 1.61%.
  • 10-year high-quality corporate bonds yield 2.09%.
  • The rate on a 30-year mortgage is 3.05%.

Despite recent increases, interest rates are hovering near historic lows.  We do not use the word “historic” lightly. By “historic,” we refer to the lowest levels since the nation’s birth in 1776.

The graph below, courtesy of the Visual Capitalist, highlights our point.

interest, What Interest Rate Triggers The Next Crisis?

Despite 300-year lows in interest rates, investors are becoming anxious because they are rising. Recent history shows they should worry. A review of the past 40 years reveals sudden spikes in interest rates and financial problems go hand in hand.

The question for all investors is how big a spike before the proverbial hits the fan again?

Debt-Driven Economy

Over the past 40 years, debt has increasingly driven economic growth.

That statement on its own tells us nothing about the health of the economy. To better quantify the benefits or consequences of debt, we need to understand how it was used.

When debt is used productively, the interest and principal are covered with higher profits and sustained economic activity. Even better, income beyond the cost of the debt makes the nation more prosperous.

Conversely, unproductive debt may provide a one-time spark of economic activity, but it yields little to no residual income to service it going forward. Ultimately it creates an economic headwind as servicing the debt in the future replaces productive investment and or consumption.

The graph below shows the steadily rising ratio of total outstanding debt to GDP. If debt, in aggregate, were productive, the ratio would be declining regardless of the amount of debt.

interest, What Interest Rate Triggers The Next Crisis?

…click on the above link to read the rest of the article…

 

Too Busy Frontrunning Inflation, Nobody Sees the Deflationary Tsunami

Too Busy Frontrunning Inflation, Nobody Sees the Deflationary Tsunami

Those looking up from their “free fish!” frolicking will see the tsunami too late to save themselves.

It’s an amazing sight to see the water recede from the bay, and watch the crowd frolic in the shallows, scooping up the flopping fish. In this case, the crowd doing the “so easy to catch, why not grab as much as we can?” scooping is frontrunning inflation, the universally expected result of the Great Reflation Trade.

You know the Great Reflation Trade: the world has saved up trillions, governments are spending trillions, it’s going to be the greatest boom since the stone masons partied at the Great Pyramid in Giza. It’s so obvious that everyone has jumped in the water to scoop up all the free fish (i.e. stock market gains). Only an idiot would hesitate to frontrun the Great Reflation’s guaranteed inflation.

Unless, of course, what we really have is a tale of reflation, told by an idiot, full of sound and fury, signifying nothing. Everyone frolicking in the shallows scooping up the obvious, easy, guaranteed gains is so busy frontrunning inflation that nobody sees the tsunami rushing in to extinguish the short-sighted frolickers. ( When Does This Travesty of a Mockery of a Sham Finally Implode? 3/3/21)

Gordon Long and I discuss The Deflationary Tsunami racing toward the frolickers in a new video program. It’s not that there aren’t inflationary dynamics in play; there are. The issue is that not all the dynamics in play are inflationary, and the deflationary dynamics have been building for the past two decades.

…click on the above link to read the rest of the article…

 

The Global Financial End-Game

The Global Financial End-Game

The over-indebted, overcapacity global economy an only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.

For those seeking a summary, here is the global financial endgame in fourteen points:

1. In the initial “boost phase” of credit expansion, credit-based capital ( i.e. debt-money) pours into expanding production and increasing productivity: new production facilities are built, new machine and software tools are purchased, etc. These investments greatly boost production of goods and services and are thus initially highly profitable.

2. As credit continues to expand, competitors can easily borrow the capital needed to push into every profitable sector. Expanding production leads to overcapacity, falling profit margins and stagnant wages across the entire economy.

Resources (oil, copper, etc.) may command higher prices, raising the input costs of production and the price the consumer pays. These higher prices are negative in that they reduce disposable income while creating no added value.

3. As investing in material production yields diminishing returns, capital flows into financial speculation, i.e. financialization, which generates profits from rapidly expanding credit and leverage that is backed by either phantom collateral or claims against risky counterparties or future productivity.

In other words, financialization is untethered from the real economy of producing goods and services.

4. Initially, financialization generates enormous profits as credit and leverage are extended first to the creditworthy borrowers and then to marginal borrowers.

5. The rapid expansion of credit and leverage far outpace the expansion of productive assets. Fast-expanding debt-money (i.e. borrowed money) must chase a limited pool of productive assets/income streams, inflating asset bubbles.

6. These asset bubbles create phantom collateral which is then leveraged into even greater credit expansion. The housing bubble and home-equity extraction are prime examples of these dynamic.

…click on the above link to read the rest of the article…

 

28 trillion reasons to have a Plan B

At the close of business on Monday March 1st, just a few days ago, the US national debt crossed $28 trillion for the first time in history.

To the penny, in fact, the national debt hit $28,004,376,276,999.35.

And bear in mind that figure doesn’t include the $1.9 trillion in ‘Covid stimulus’ that Uncle Sam is about to pass, let alone all the other deficit spending that they were already expecting for this current fiscal year.

So you can already see how the debt will quickly rocket past $30 trillion in no time at all.

It’s noteworthy that it took the United States more than two centuries to accumulate its first trillion dollars in debt– a milestone first reached on October 22, 1981.

In those two centuries (74,984 days, to be exact), the US fought two world wars, battled the Spanish Flu pandemic, dealt with the Great Depression, waged Cold War against the Soviet Union, fought the Civil War against itself, put a man on the moon, etc. before breaching $1 trillion in debt.

This most recent trillion of debt took a mere 152 days to accumulate.

Think about that: nearly 75,000 days for the first trillion, 152 days for the last trillion.

Even more startling, it was only September 2017 that the national debt first crossed the $20 trillion milestone.

So when the debt undoubtedly hits $30 trillion over the next few months, that means it will have grown $10 trillion in less than four years.

And there is absolutely no end in sight. The Treasury Department and the Federal Reserve are both in lockstep fanaticism: no amount of debt is too much, no amount of money printing is too much.

…click on the above link to read the rest of the article…

 

Oil and Debt: Why Our Financial System Is Unsustainable

Oil and Debt: Why Our Financial System Is Unsustainable

How much energy, water and food will the “money” created out of thin air in the future buy?

Finance is often cloaked in arcane terminology and math, but the one dynamic that governs the future is actually very simple.

Here it is: all debt is borrowed against future supplies of affordable hydrocarbons (oil, coal and natural gas). Since global economic activity is ultimately dependent on a continued abundance of affordable energy, it follows that all money borrowed against future income is actually being borrowed against future supplies of affordable energy.

Many people believe that alternative “green” energy will soon replace most or all hydrocarbon energy sources, but the chart below shows why this belief is not realistic: all the “renewable” energy sources are about 3% of all energy consumed, with hydropower providing another few percent.

There are unavoidable headwinds to this appealing fantasy:

1. All “renewable” energy is actually “replaceable” energy, per analyst Nate Hagens: every 15-25 years (or less) much or all of the alt-energy systems and structures have to be replaced, and little of the necessary mining, manufacturing and transport can be performed with the “renewable” electricity these sources generate. Virtually all the heavy lifting of these processes require hydrocarbons and especially oil.

2. Wind and solar “renewable” energy is intermittent and therefore requires changes in behavior (no clothes dryers or electric ovens used after dark, etc.) or battery storage on a scale that isn’t practical in terms of the materials required.

3. Batteries are also “replaceable” and don’t last very long. The percentage of lithium-ion batteries being recycled globally is near-zero, so all batteries end up as costly, toxic landfill.

4. Battery technologies are limited by the physics of energy storage and materials. Moving whiz-bang exotic technologies from the lab to global scales of production is non-trivial.

…click on the above link to read the rest of the article…

 

Hot Money

Hot Money

I watched the new documentary Hot Money by Susan Kucera tonight.

An intelligent world-wise father (General Wesley Clark) and his son discuss some of the problems we face with many smart participants. I don’t think they interviewed a single idiot, which was refreshing.

They know something is seriously wrong and make an honest attempt to connect the dots. They come tantalizingly close to a complete picture of reality, but miss the all important overshoot drivers of over population and declining returns from non-renewable energy.

Which of course means they understand everything, except what matters.

Nevertheless, Hot Money is excellent and worth watching because it has a lot of intelligent substance.

I also think it indicates a growing mainstream awareness of how close we are to collapsing, and I suspect herd awareness (coupled with denial of the real causes) may be the trigger.

Some of the important points made:

  • the financial system is a bomb waiting to explode, climate change may be the trigger
  • climate change is real and very serious
  • droughts, floods, and fires are a big problem now
  • it now takes more than 3 dollars of debt to create 1 dollar of growth, it used to take less than 1 dollar of debt to create 1 dollar of growth
  • farmers are struggling and failing due to climate change, debt, high input costs, and low crop prices
  • real incomes and living standards are falling despite lower taxes than the 50’s
  • some young couples are not having children because they see a terrible future
  • it was much easier to make a profit in the good old days, doubly so if you were early enough to steal land from the aboriginals
  • companies now invest more money in stock buy-backs than R&D
  • there is no such thing as trickle down economics

…click on the above link to read the rest of the article…

 

Who Bought the $4.5 Trillion Added in One Year to the Incredibly Spiking US National Debt, Now at $27.9 Trillion?

Who Bought the $4.5 Trillion Added in One Year to the Incredibly Spiking US National Debt, Now at $27.9 Trillion?

Someone had to buy every dollar of this monstrous debt. Here’s Who. The Fed isn’t the only one. But China continues to unwind its holdings.

Driven by stimulus and bailouts, and fired up by the tax cuts and by grease and pork, the Incredibly Spiking US National Debt has skyrocketed by $4.55 trillion in 12 months, to $27.86 trillion, after having already spiked by $1.4 trillion in the prior 12 months, which had been the Good Times. These trillions are all Treasury securities that form the US national debt, and someone had to buy every single one of these securities:

So we’ll piece together who bought those trillions of dollars in Treasury Securities that have whooshed by over the past 12 months.

Tuesday afternoon, the Treasury Department released the Treasury International Capital data through  December 31 which shows the foreign holders of the US debt. From the Fed’s balance sheet, we can see what the Fed bought. From the Federal Reserve Board of Governors bank balance-sheet data, we can see what the banks bought. And from the Treasury Department’s data on Treasury securities, we can see what US government entities bought.

Share of foreign holders falls to 25% for first time since 2007:

In the fourth quarter, foreign central banks, foreign government entities, and foreign private-sector entities such as companies, banks, bond funds, and individuals, reduced their holdings by $35 billion from the third quarter, to $7.04 trillion. This was still up from a year ago by $192 billion (blue line, right scale in the chart below). But their share of the Incredibly Spiking US National Debt fell to 25.4%, the lowest since 2007 (red line, right scale):

…click on the above link to read the rest of the article…

 

The Only Way Out of the Death Trap

The Only Way Out of the Death Trap

I’ve said the U.S. is caught in a debt death trap. Monetary policy won’t get us out because the velocity of money, the rate at which money changes hands, is dropping.

Printing more money alone will not change that.

Fiscal policy won’t work either because of high debt ratios. At current debt-to-GDP ratios, each additional dollar spent yields less than a dollar of growth. But because it must be borrowed, it does add a dollar to the debt. Debt becomes an actual drag on growth.

The ratio gets higher, and the situation grows more desperate. The economy barely grows at all while the debt mounts. You basically become Japan.

The national debt is $27.8 trillion. A $27.8 trillion debt would not be an issue if we had a $50 trillion economy.

But we don’t have a $50 trillion economy. We have about a $21 trillion economy, which means our debt is bigger than our economy.

The debt-to-GDP ratio is about 130%. Before the pandemic, it was about 105% (the policy response to the pandemic caused the spike).

Already in the Danger Zone

But even a ratio of 105% is in the danger zone.

Economists Ken Rogoff and Carmen Reinhart carried out a long historical survey going back 800 years, looking at individual countries, or empires in some cases, that have gone broke or defaulted on their debt.

They put the danger zone at a debt-to-GDP ratio of 90%. Once it reaches 90%, debt becomes a drag on growth.

Meanwhile, we’re looking at deficits of $1 trillion or more, long after the pandemic subsides.

In basic terms, the United States is going broke. We’re heading for a sovereign debt crisis.

I don’t say that for effect. I’m not looking to scare people or to make a splash. That’s just an honest assessment based on the numbers.

…click on the above link to read the rest of the article…

 

Update on Fed’s QE: The Crybabies on Wall Street, which Clamored for More, Are Disappointed

Update on Fed’s QE: The Crybabies on Wall Street, which Clamored for More, Are Disappointed

And five SPVs expired, including the one that bought corporate bonds and bond ETFs.

The Fed has now put on ice five of its SPVs (Special Purpose Vehicles) which had been designed back in March to bail out the bond market. It unwound its repo positions last June. Its foreign central bank liquidity swaps are now down to near-nothing except with the Swiss National Bank, which seems to have a need for dollars. The Fed has been adding to its pile of Treasury securities at the rate spelled out in its FOMC statements, thereby monetizing part of the US government debt. And it has been adding to its pile of Mortgage Backed Securities (MBS).

The result is that total assets on its weekly balance sheet through Wednesday, at $7.4 trillion, are roughly flat with the level in mid-December and are up by $200 billion from early June, with an average growth rate over the six-plus months of $30 billion a month.

And the crybabies on Wall Street that have for months been clamoring for more QE have been disappointed. It’s still a huge amount of QE, but for the crybabies on Wall Street, it’s never enough:

But the long-term chart shows just how hog-wild the Fed had gone, furiously trying to bail out and enrich the asset holders, which are concentrated at the very top, thereby creating in the shortest amount of time the largest wealth disparity the US has ever seen. From crisis to crisis, from bailout to bailout, and even when there is no crisis:

Repurchase Agreements (Repos) remained at near-zero:

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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