QUESTION: Dear Mr. Armstrong,
I have been reading your blog for over a year now. Your posts are a superb read and one of the first things I check every morning before leaving for work! Although I admire your work and writings a great deal, I’m sometimes surprised by the level of certainty you seem to have about how things will unfold in the future. You stated multiple times now that ‘only a rising dollar will break the world monetary system’, but with more and more countries trying to bypass the dollar system, how will the dollar ever get to the strength that is needed to do so? Will the world monetary system break for sure, or is there an alternative ‘softer’ transition possible on a global scale?
Thank you for your insights!
B (from Belgium)
All the governments of the entire world can try their best to create some new currency to dethrone the dollar. They will fail just as Europe has failed with the Euro, You can denominate oil to peanuts in some other currency but that still will never put a dent in the dollar. Why? It is capital flows than count and trade is minimal. When you cash out of your commodity, where do you put your profits? Oh back into dollar denominated instruments?
The failure of Europe was to create a single debt. Instead, capital must still pick and choose between the Eurozone members and who do they trust more to buy their bonds. Just look at the interest rate differentials. They are all denominating their debt in Euros, but their credit ratings differ just as they do among the States that compose the USA. Germany wanted a single currency for trade, but they did not want to consolidate all the debts in Europe. Hence, we ended up with a single currency that could never become a major currency with no central core.
China will replace the dollar but only AFTER 2032. Until then, they must still work on establishing the Rule of Law so that capital will park in yuan with confidence. Denominating oil in yuan or euro means nothing. Where will you park your cash? That remains dollars for major institutions. There is no alternative. Even the Japanese yen is not a free currency because the government retained control over anyone anywhere issuing and debt in yen without government approval.
In general, Europeans are still trapped in World War II thinking that a stronger currency means economic boom. When all the currencies were wiped out by the war, politicians used the currency value in Europe as a reason to prove they were doing a good job. So the historical bias in Europe has been dominated by the perspective. The USA was a third world country during the 19th century. It was the “emerging market” for European investors. It was virtually bankrupt in 1896 and it was World War I and II that raised the USA to the richest country in the world by 1950 holding 76% of the total world gold reserves. That was accomplished not by Marxism, political economic manipulation, or anything any politician enacted. It was create SOLELY and EXCLUSIVELY by capital inflows because of Europe running around destroying itself.
Above is a chart of the capital flows from 1960 to 1990. It was the US net investment that rebuilt Europe – not Marxism adopted by European Politicians in response to the Russian Revolution in 1917. The capital concentrated in the USA and then moves back to Europe as investment. It was the USA that rebuilt Europe – plain and simple.
We have reached a 5000 year low in interest rates. The ECB owns 40% of all Eurozone government debt. If any central bank is in danger of collapsing it is the ECB. Raising rates will create a huge whole in their balance sheet. Then the true cost of QE will be exposed. Why do you think Draghi is dragging his feet. He knows stopping to buy the debt will cause rates to rise because the governments will be forced to find real buyers. Only a complete fool would rush in where the ECB is withdrawing.
There is no one who wishes this forecast will be wrong than me. Then I can retire, say goodbye to the world and fade into the sunset. Everyone knows I do not need the money. We do not even sell advertising on this blog. We do not force you to register and then bombard you with endless emails trying to sell you something. I too have family. I fear for their future – not my own. I would much rather say it’s time to Beam Me Up Scottythan having to deal with nonsense I cannot prevent. This is not my personal opinion.
The ONLY time we get monetary reform is when the dollar RISES, not declines. Hey, if the dollar declines, then interest rates will continue to travel negative, gold will collapse, the stock market will implode, and Trump will emerge as the best president in history creating massive new American jobs exporting everything not just blue jeans, rock & roll, and US corrupt law. Emerging markets can keep borrowing dollars with no end, dumping commodities than are at excess supply, and everyone will be perpetually happy – the euro will be strong at last and magically the ECB can just keep European governments on life support without end.
Unfortunately, governments are broke. They are hunting people with any money at all and that creates a disincentive to invest, rising unemployment, and civil unrest turning the poor against the rich instead of the poor against the politicians who have created this mess. The negative interest rates harm the poor and middle class where the rich can export their money and invest outside their country to preserve wealth.
No, I am sad to say this is the net result of merging all global trends – not my opinion or preferred outcome. I am not even making this forecast just to scam you into buying some book by hyping the situation. My only incentive is to save my own family. As I said, if this was just for me, I would now go enjoy life while I am still in reasonable shape to explore the world.
....also from Martin: