Armstrong Economics TM

J Why Government Is Powerless!

I t i s f r u s t r a t i n g t o read so much on 1 929 and watch comparisons be made and now
p o l i c y set-in-motion t o create spending suddenly on i n f r a s t r u c t u r e while everyone
has t h e i r hand out looking f o r a b a i l o u t l i k e a bunch of s t r e e t bums pleading f o r
money so they can get drunk or stay drunk. Almost nothing of what I have read i s
c l o s e t o being accurate and the scary part i s depressions are i n e v i t a b l l y caused by
p o l i t i c i a n s who may be paving the road with good i n t e n t i o n s , but are r e l y i n g upon
a n a l y s i s so biased, we do not stand a chance.
The stock market by no means p r e d i c t s
the economy. A stock market crash does not
cause a Depression. The Crash of 1903 was
properly t i t l e d - "The Rich Man's Panic."
What has always d i s t i n g u i s h e d a recession
from a Depression i s the stock market drop
may s i g n a l a recession, but the c o l l a p s e i n
debt s i g n a l s Depression. This Depression
was set i n motion by (1) excessive leverage
by the banks once more, but (2) the l i f t i n g
of usury laws back i n 1980 t o f i g h t i n f l a t i o n ]
that opened the door t o the highest consumer
i n t e r e s t r a t e s i n thousands of years and
s h i f t e d spending that created jobs i n t o the
banks as i n t e r e s t on things l i k e c r e d i t c a r d s .
As a percent of GDP, household debt doubled
since 1980 making the banks r i c h and now the
c l e a r and present danger t o our economic s u r v i v a l . A greater proportion of spending
by the consumer that use t o go t o savings and c r e a t i n g j o b s , goes to i n t e r e s t and
that has undermined the a b i l i t y t o avoid a major economic melt-down.
The c r i s i s i n banking has d i s t i n g u i s h e d depression from recession. The very *
term "Black F r i d a y " comes from the Panic of 1869 when the mob was dragging bankers
out of t h e i r o f f i c e s and hanging them i n New York. They had t o send i n troops t o
stop the r i o t . A banking c o l l a p s e destroys the c a p i t a l formation of a n a t i o n and
that i s what creates the Depression. The stock market i s not the problem despite the
f a c t i t i s v i s i b l e and measurable and may d e c l i n e 40%, 60% o r even 89% l i k e i n 1929-32,
But the stock market d e c l i n e i s normally measured i n months (30-37) whereas the
economic d e c l i n e i s measured i n years (23-26). Beware of schizophrenic a n a l y s i s
that i s o f t e n mutually c o n t r a d i c t o r y or o f t e n antagonistic i n part or i n q u a l i t y f o r
f a r too o f t e n people t h i n k they have t o o f f e r a reason f o r every d a i l y movement.
Our f a t e w i l l not be determined by the stock market performance. Neither can
we stimulate the economy by i n c r e a s i n g spending on i n f r a s t r u c t u r e any more than
buying your wife a mink coat w i l l improve the grades of your c h i l d i n school. We
are f a c i n g a Depression that w i l l l a s t 23-26 years. The response of government i s
going to s e a l our f a t e because they cannot, l e a r n from the past and w i l l make the
same mistakes that every p o l i t i c a n has made before them. Even i f the Dow I n d u s t r i a l s
make new highs next week (impossible), the Depression i s unstoppable with current
models and t o o l s .
Copyright Martin A. Armstrong A l l Rights Reserved December 4th, 2008
Comments Welcome: ArrnstrongKconomic.s@CMail.COM I n t e r n a t i o n a l l y
Economic
Confidence Model
2007.15
(Feb. 27, 2007)

2009.3
(Apr. 19, 2009)
Let us s e t the record s t r a i g h t . The Stock Market i s a
mere r e f l e c t i o n of the economy l i k e looking a t yourself i n
a mirror. I t i s not the economy and does not even provide a
r e l i a b l e forecasting t o o l o f what i s t o come economically.
We are headed i n t o the debt tsunami that i s o f h i s t o r i c a l
proportions unheard-of i n h i s t o r y . There have been the b i g
debt c r i s i s incidents that have hobbled nations, toppled
kings, and s e t i n motion economic dark ages. I t i s so c r i t i c a l
to understand the d i f f e r e n c e between the economy and the
stock market, f o r unless you comprehend t h i s b a s i c and root
d i s t i n c t i o n between the two, s u r v i v a l may be impossible.

To the l e f t I have provided the Economic Confidence

Model f o r the immediate d e c l i n e . You w i l l n o t i c e I d i d not
c a l l t h i s the "stock market model" nor a model f o r gold, o i l ,
or commodities. I used the word "economic" with d i s t i n c t and
c l e a r purpose. I have stressed i t does not forecast the f a t e
of a p a r t i c u l a r market or even a p a r t i c u l a r economy. I t i s
the g l o b a l economic c y c l e some may c a l l even a business c y c l e
Please note, that what does line-up and peaks p r e c i s e l y with
Copyright 2008 t h i s model often even t o the s p e c i f i c day that was c a l c u l a t e d
Martin A. Armstrong decades i n advance, i s the area o f primary focus. Yet the
a l l r i g h t s reserved US stock market reached a high p r e c i s e l y w i t h t h i s model and
then r a l l i e d t o a new high p r i c e 8.6 months l a t e r . I n Japan,
the NIKKEI 225 peaked p r e c i s e l y on February 26th, 2007. This i s not a very good omen.
But there was something profound that peaked p r e c i s e l y with the February 27th, 2007
target - the S&P C a s e - S h i l l e r index o f housing p r i c e s i n 20 c i t i e s . February 2007
was the p r e c i s e peak f o r t h i s c y c l e i n the debt markets - not the US stock market.

The stock market always bottoms i n advance o f the economic low. I n f a c t , we

w i l l see new highs i n the Dow even i n the middle o f a Great Depression. At l e a s t the
1 929 cycle was more o f a bubble top i n stocks than what we have i n place i n the
US stock market as measured i n the Dow I n d u s t r i a l s o r the S&P 500. We s t i l l have
the bubble top i n the NASDAQ back i n 2000, but t h i s i l l u s t r a t e s the p o i n t . There was
a major explosive speculative boom. The bubble burst i n 2000 and there was a moderate
investment recession i n t o 2002, but there was no appreciable economic decline that
was set i n motion because of that crash. Currently, we have a major high i n 2007,
but i t was not a bubble top because i t was not the focus of speculation. The r e a l
concentration o f c a p i t a l that created the bubble top, took place i n the debt markets.
This i s the o r i g i n o f the economic depression - not stocks and not the displacement
of farmers because of a 7 year drought created by the Dust Bowl that invoked the
response of the WPA i n 1935. Keep i n mind the stock market bottomed i n the mid
summer of 1932 when unemployment was not excessive from a h i s t o r i c a l perspective.
The 25% l e v e l of unemployment came a f t e r themajor 1932 stock market low that was
followed by both the banking c r i s i s a f t e r the e l e c t i o n of FDR and before h i s f a t e f u l
inauguration. The Banking C r i s i s came about because of rumors that Roosevelt was
going to c o n f i s c a t e gold. Herbert Hoover published h i s memoirs showing l e t t e r s
w r i t t e n to Roosevelt pleadinq with him t o make a statement that the rumors were
f a l s e . He d i d not.
2
 In 1907, the excessive debt was i n the stock market. C a l l Money Rates (the
l e v e l o f i n t e r e s t paid t o support broker loans) reached 125%. Even 1929 never
came close t o such l e v e l s . This a l s o i l l u s t r a t e s that the c a p i t a l markets do
not have enough money t o invest equally on a l l l e v e l s i n a l l segments of a
domestic economy or i n p a r t i c u l a r nations. To create the boom bust, i t requires
the concentration o f c a p i t a l . A bubble top i s formed when the m a j o r i t y of those
seeking t o employ money t o make money are focused i n a p a r t i c u l a r market or even
country. The 1907 Crash was a bubble top because c a p i t a l invested on a highly
concentrated b a s i s i n r a i l r o a d stocks. The bubble top i n Japan back i n 1989
was caused by a concentration o f both domestic and i n t e r n a t i o n a l c a p i t a l tliat
had made Japan the number one market i n the world. I t i s t h i s concentration of
c a p i t a l that creates the boom and bust c y c l e . I f money was evenly disbursed l i k e
the s o c i a l i s t i c & communistic philosophies argue, we would be back t o the dark
ages where there was no concentration o f c a p i t a l and no economy beyond the w a l l s
of the c a s t l e so t o speak. That i s why communism f a i l e d .

I t i s the o v e r a l l l e v e l o f debt that has reached a bubble top i n almost

every p o s s i b l e area. For example, i n 1980, household debt was about 50% o f GDP.
Going i n t o the February 2007 high, i t reached about 100% o f GDP. We must a l s o
r e a l i z e that something profound took place back i n 1980. Americans would on
the f i r s t blush seem t o be l i v i n g i t up, buying everything they can on c r e d i t
and have p i l e s of tangible assets t o show f o r i t . That i s l i k e l o o k i n g a t the
s t a t i s t i c s f o r c a r o t s and arguing that they are l e t h a l because every person who
has ever eaten a c a r o t i s dead or i n the process of a gradual slow death. This
absurd example i l l u s t r a t e s the b i a s that can produce the schizophrenic a n a l y s i s .

There were, once upon a time, usury laws that generally held any i n t e r e s t
r a t e greater than 10% was i l l e g a l . Because the Federal Reserve under Paul Volker
believed that i n t e r e s t r a t e s needed t o be r a i s e d to insane l e v e l s t o stop the
runaway i n f l a t i o n , that was the f i r s t stone that h i t the water sending the shock
waves that we are having t o pay f o r today. Once the usury laws were a l t e r e d so
the Fed could f i g h t i n f l a t i o n , i t set i n motion the doubling of household debt
not t o mention the n a t i o n a l debt. At 8%, the p r i n c i p l e i s doubled through i n t e r e s t
i n less than 10 years. The national debt exploded from $1 t o about $10 t r i l l i o n
i n 25 years and household debt has doubled. Some states now consider usury t o
be 26%. H i s t o r i c a l l y , these are the i n t e r e s t rates paid by the very worst of a l l
debtors - the bankrupts. In f a c t , i n China, the worst c r e d i t o r s h i s t o r i c a l l y paid
at best 10%. What we have done i s the l i f t i n g of usury t o f i g h t i n f l a t i o n back
i n 1980, has r e s u l t e d i n usury now being so high, a l a r g e r proportion of income
of the common worker i s spent on i n t e r e s t , not buying goods & s e r v i c e s that even
create jobs. This i s one primary reason why jobs have been l e a v i n g as w e l l . The
consumer needs the lowest possible p r i c e and labor wants the highest wages, and t o
stay competitive, producers leave taking manufacturing jobs as w e l l as service
jobs. The extraordinary r i s e i n i n t e r e s t r a t e s that are h i s t o r i c a l highs since a t
l e a s t pre-Rcman times, would not have been possible but f o r the l i f t i n g of usury
laws back i n 1980 t o f i g h t i n f l a t i o n . This amounted to s e t t i n g a f i r e t o t r y t o
stop a brush f i r e that f a i l e d . Consumers pay the highest rates i n thousands of years
that feeds the banks a t the expense of economic growth. Even the National Debt rose
from $2.1 t o $8.5 t r i l l i o n between 1986 and 2006 with $6.1 t r i l l i o n being i n t e r e s t .
We are funding the n a t i o n on a c r e d i t c a r d and destxoying the economy simultaneously.
This has been enhanced by the tremendous leverage and f a l s e p o s i t i o n that were
created i n the d e r i v a t i v e markets causing the banks to j u s t implode. Tndeed, t h i s
3
 i s the o r i g i n of the economic Depression we are f a c i n g . The $700 b i l l i o n
bailout might have worked i f Paulson d i d what he s a i d he would - buy the debt
and take i t out of the banks. Had the debt been segregated i n t o a pool and
managed independently by a hedge fund manager not an investment banker, we
could have mitigated the problem. But that i s now too l a t e . The c r e d i t implosion
i s taking place on a wholesale basis and i s around the world. The more the
economy d e c l i n e s i n housing p r i c e s , the greater the d e f a u l t s , the greater the
foreclosures, and the lower the economy w i l l move. We are now i n a downward
s p i r a l that cannot be f i x e d by i n d i r e c t schemes. As I s a i d , you cannot get
your k i d ' s t e s t scores up by purcliasing a mink coat f o r your w i f e . Everyone
w i l l have t h e i r hand out begging f o r i n f r a s t r u c t u r e money. But the theory of
j u s t spend the money and that w i l l somehow make things b e t t e r , i t i s l i k e
handing Mexico a t r i l l i o n d o l l a r s and arguing that they w i l l buy US goods and
that w i l l somehow reverse the economy.

The leveraging of debt by the Investment Banks i n p a r t i c u l a r has under-

mined the g l o b a l , economy. Where household debt has doubled s i n c e 1980, the
professional f i n a n c i a l s e r v i c e sector has seen a r i s e from 21% of GDP i n 1980
to 116% by Fedruary 2007. Now consider the debt that they created with the
mortgages i s already down by 50% and f a l l i n g , the b a i l o u t s w i l l keep coming.
To help c o r r e c t the problem, the commercial banks w i l l t i g h t e n c r e d i t to make
t h e i r exposure l e s s , and i n f a c t , t h e i r solvency r a t i o s w i l l r e q u i r e i t anyway.
This we can expect t o see not j u s t i n business, but housing and car loans that
w i l l contract the economy as w e l l .

The Great Depression i s not the perfect model f o r today. I t was a complete
c a p i t a l c o n t r a c t i o n . The Stock market b a s i s the Dow Jones I n d u s t r i a l s f e l l 89%
between September 3rd, 1929 and J u l y 1932. The contraction i n debt was q u i t e
massive. Then too, the leverage i n banks collapsed that reduces the v e l o c i t y of
money and therefore the money supply. The banks were the f i r s t r e a l widespread
f a i l u r e s with 608 i n 1930. Between February and August 1931, the commercial banks
began to bleed profusely as bank deposits f e l l almost $3 b i l l i o n o r about 9% of
a l l d e p o s i t s . As 1932 began, the number of bank f a i l u r e s reached 1,860. The
massive amount of bank f a i l u r e s i n the thousands took place w i t h the rumor of
Roosevelt's i n t e n t i o n to confiscate gold. Although he denied that was h i s p o l i c y
the night of the e l e c t i o n s , he remained s i l e n t r e f u s i n g to discuss the issue u n t i l
he was sworn i n . On March 6, 1933 j u s t 2 days a f t e r taking o f f i c e , Roosevelt c a l l e d
a bank "holiday" c l o s i n g the banks from which a t l e a s t another 2,500 never reopened.

A l l of these events are contrasted by the collapse i n n a t i o n a l debts i n

Europe. Other than Herbert Hoover's memoirs, I have yet t o read any a n a l y s i s of
the Great Depression a t t r i b u t e anything i n t e r n a t i o n a l l y other than the infamous
Smoot-Hawley Act s e t t i n g i n motion the age of protectionism i n June 1930. I t was
the f i n a n c i a l war between European nations attacking each other's bond markets
openly s h o r t i n g them that l e d to a l l of Europe d e f a u l t i n g on t h e i r debt. Even
B r i t a i n went i n t o a moratorium suspending debt payments. This i s what put the
pressure on c a p i t a l flows sending waves of c a p i t a l to rise United States that
t o some degree was kind of l i k e the c a p i t a l flow t o Japan i n t o 1989. This put
tremendous pressure upon the d o l l a r d r i v i n g i t to new record highs that were
misread by the p o l i t i c i a n s who d i d not understand c a p i t a l flow. They responded
with Smoot-Hawley misreading the e n t i r e set of f a c t s . (See Greatest B u l l Market
In History)(Herbert Hoover's memoirs).

I t i s true that today we have Keynesian and Monetarist t h e o r i e s to manage

the c r i s i s . Sad to say, n e i t h e r one w i l l now work. Bernanke has responded i n
force dropping the fedearal funds r a t e from 5.25% to .25%. He has a l s o opened
4
the Fed Window and thrown out more than $1 t r i l l i o n i n 13 months. However,
as admirable as t h i s may be, he has no t o o l that w i l l do the job. M i l t o n
Friedman was c o r r e c t ! The Great Depression was not caused by the d e c l i n e i n the
the stock market. The event was set i n motion by the c r e d i t and banking c r i s i s
that r e s u l t e d i n a one-third c o n t r a c t i o n i n the money supply.

I n t e r e s t r a t e s do nothing. The f l i g h t t o q u a l i t y always takes place so

what happens i s a two-fold punch. (1) i n t e r e s t rates c o l l a p s e because c a p i t a l
seeks p r e s e r v a t i o n not y i e l d and w i l l accept during such times v i r t u a l l y a
zero r a t e of r e t u r n , and (2) the f l i g h t t o q u a l i t y takes more a v a i l a b l e cash
from the p r i v a t e sector because government debt t r u l y does compete with the
p r i v a t e s e c t o r . We are seeing t h i s even now. Federal debt becomes the place t o
go so we see higher y i e l d s i n both s t a t e and municipal bonds because they are
not q u a l i t y and could d e f a u l t l i k e any bank. This contracts the money supply
and opening the window and j u s t throwing buckets of money i n t o the system
w i l l never have any impact t o reverse the trend.

Furthermore, we are now i n a Floating-Exchange Rate system that has made

the g l o b a l economy f a r more complex than i t was i n 1929. We a l l know that China
i s one of the biggest holders of US government debt. With the contagion spreading
to Russia, South America, and China aside from Europe, we see a steeper d e c l i n e
i n the China stock market than we do i n the United States because that i s where
c a p i t a l had concentrated domestically. I f China needs money t o stimulate i t s own
economy when exports appear t o be c o l l a p s i n g by about 50%, then we can see that
the Keynesian model i s worthless. I f the Fed t r y s to pump money i n t o the system
through buying bonds from the p r i v a t e sector, those bonds may be held by a l i e n s
who take the money back t o t h e i r own economies. The Fed cannot be sure i t i s
even capable of s t i m u l a t i n g the purely domestic economy. Lower i n t e r e s t r a t e s
to v i r t u a l l y zero l i k e Japan d i d during the 1990s, then i f c a p i t a l f i n d s a
b e t t e r place t o i n v e s t , i t can leave f o r a higher r a t e of i n t e r e s t as c a p i t a l
did from Japan t o the United States, which i s why t h e i r domestic economy was
never stimulated by the' lower i n t e r e s t r a t e s .

Leverage during the Great Depression was not even remotely c l o s e to what we
have t o face today. The c r e d i t - d e f a u l t swaps are about $60 t r i l l i o n . This was
a s t u p i d product f o r i t has so tangled the world there may be no way out. This
product created the f a l s e i l l u s i o n that you d i d not have t o vrorry about the
q u a l i t y of the loan because i t was insured. We have no way of covering t h i s
l e v e l of implosion. Add the unfunded entitlements and then the s t a t e and l o c a l
debts who cannot p r i n t money t o cover t h e i r s h o r t f a l l s , and we are looking a t a
c o n t r a c t i o n of debt that i s simply beyond a l l contemplation.'

So now that we see i t i s not Wall S t r e e t , again, but the banks, perhaps
we can separate the f a c t s from the fantasy. We can now see that there are two
separate and d i s t i n c t forecasts t o be made - (1) economy and (2) stock market.
Economic Depressions have a duration unfortunately of g e n e r a l l y 23 years with
an outside p o t e n t i a l of 26 years. The 1873 Panic l e d t o a economic depression
of r e a l l y 23 years i n t o 1896. There was bouts with high v o l a t i l i t y and i n j e c t i o n
of major waves of i n f l a t i o n f o l l o w i n g the major s i l v e r d i s c o v e r i e s . I t was
the age of the S i l v e r Democrats who t r i e d t o create i n f l a t i o n by over-valuing
s i l v e r r e l a t ive t o gold. This created a wave of European-American a r b i t r a g e
where s i l v e r flowed i n t o the US exchanging i t f o r gold then flowed back t o
Europe. By 1896, the US Treasury was broke.
 The Panic of 1873 marked the collapse o f J . Cook & Co, the huge investment
bank that was the 19th Century version of Goldman Sachs. They went bust because
of excessive leverage i n r a i l r o a d stocks. I t matters not what the instrument
may be, i t i s always the leverage, which set the tone f o r a economic depression
that l a s t e d i n t o 1896 where J.P.Morgan oecame famous f o r leading a b a i l o u t of
the US Treasury organizing a loan of gold b u l l i o n . The stock market r a l l i e d
and made new highs with plenty o f panics between 1873 and 1896. The Panic of
1893 was q u i t e a memorable one. The point i s , the stock market i s not a r e f l e c t i o n
of the economy. I t often trades up i n a n t i c i p a t i o n o f b e t t e r times, and trades
down on those same perceptions of bad times. In both cases, new highs o r lows
unfold even contrary t o economic trends.

We w i l l see new highs i n the Dow long before we see the f i n a l low i n the
economy. The i d e a l lows on a timing basis f o r the stock market w i l l be as soon
as A p r i l 2009 o r by June o f 2009. The more pronounced lows would be due on
a timing b a s i s between December 2009 and A p r i l 2010. The most extreme target
would seem t o be August 2010. The shorter the r e s o l u t i o n t o the stock market
low, the sooner we w i l l s t a r t t o see much higher v o l a t i l i t y .

The low f o r the Dow would be indicated by reaching the 3,500-4,000 area.
A 2008 c l o s i n g below 12,000 i n the cash Dow Jones I n d u s t r i a l s w i l l s i g n a l that
the bear market i s underway i n t o a t l e a s t 2009 i f not 2010. A year-end c l o s i n g
f o r 2008 below the 9,700-9,800 l e v e l , w i l l s i g n a l higher v o l a t i l i t y as w e l l .
The r e a l c r i t i c a l l e v e l f o r the c l o s i n g of 2008 w i l l be the 7,200 area generally.
A year-end c l o s i n g beneath t h i s general l e v e l w i l l s i g n a l t h a t we could see the
sharp d e c l i n e t o t e s t the extreme support a t 3,600-4,000 by as e a r l y as A p r i l 19th,
2009 going i n t o May/June 2009. I f we were t o drop so q u i c k l y i n t o those targets,
t h i s would be most l i k e l y the major low with a s i g n i f i c a n t r a l l y i n t o a t l e a s t
A p r i l 16th, 2010.

The l e s s v o l a t i l e outcome would be a prolonged d e c l i n e i n t o the December 2009

target t o about A p r i l 16th, 2010. A low a t that l a t e date would tend to p r o j e c t out
f o r a high as e a r l y as June 2011 o r i n t o l a t e 2012. Nevertheless, v o l a t i l i t y appears
t o be very high. Those who were a t the 1985 Economic Conference i n Princeton, may
want to review those VIDEO tapes. The v o l a t i l i t y we were l o o k i n g a t 20-30 years i n t o
the future i s now. As 3 of the 5 major investment bankers f a i l e d . Merry 1, Leman and
Bear, the l i q u i d i t y has evaporated so the swings are going t o be much more dramatic.

The major support i s 3,600 on the Dow I n d u s t r i a l s . During '09, the support area
appears t o be 6,600, 5,000, and 4,000-3,600. C l e a r l y , r e s i s t a n c e i s shaping up a t
9,700-9,800. I t would take a monthly c l o s i n g back above the 12,400 l e v e l t o
s i g n a l new highs are l i k e l y . I f we saw a complete c o l l a p s e i n t o a low by A p r i l
2009 or June 2009.reaching the 4,000 general area, t h i s would be the major low
with most l i k e l y a h y p e r - i n f l a t i o n a r y s p i r a l developing t h e r e a f t e r . I n that case,
the Dow Jones I n d u s t r i a l s could be back a t even new highs as e a r l y as mid 2011 o r
going i n t o l a t e 2012.

Gold has decoupled from o i l as i t should and has been r i s i n g on an ounce-to-

b a r r e l r a t i o . Here, the pivot area f o r 2009 seems to be the $730-$760 area with
the key support being s t i l l a t the $525-$540 zone. The major high intraday was on
March 17th, 2008. A weekly c l o s i n g below $800 warns of c o n s o l i d a t i o n . Only a monthly
c l o s i n g below the $535 area would s i g n a l a major high i s i n place. The more c r i t i c a l
support appears t o be a t about $680-705. A weekly c l o s i n g beneath t h i s area w i l l a l s o
warn of a p o t e n t i a l c o n s o l i d a t i o n . A major high i s p o s s i b l e as e a r l y as 2010-2011
with the p o t e n t i a l f o r an exponential r a l l y i n t o 2015 i f there i s any kind of a low
going i n t o 2011 .45. The key to watch w i l l be Crude O i l . The c o l l a p s e o f Investment
Banks has removed the speculation that exaggerated the trend. A year-end c l o s i n g
below $40 f o r 2008 would s i g n a l a major high and serious economic decline ahead.
6
 t H e y fee T~U Ltft (
I t i s hard t o e x p l a i n to someone who b e l i e v e he has power, that he r e a l l y has
nothing of any s i g n i f i c a n c e . This becomes the s t o r y of the Emperor Has No Clothes.
No one w i l l t e l l him, and i f you do, i t may be off-with-your-head. This i s more
akin to the man behind the c u r t a i n i n the wizard of 02 t r y i n g to keep up the whole
i l l u s i o n . A f t e r a l l , why do we vote f o r people unless we b e l i e v e that w i l l somehow
change our l i v e s ?

Interest Rates

When an economy i s r i s i n g and the stock market i s exploding, i n t e r e s t rates

always r i s e because the demand f o r money i s r i s i n g because people b e l i e v e that they
can make a p r o f i t . Government pretend to be r a i s i n g i n t e r e s t r a t e s to stop i n f l a t i o n ,
but they do not create a trend contrary to the free markets. What happened i n 1980
was merely that the government over-shoots the d i f f e r e n t i a l between expectations and
the r a t e of i n t e r e s t . I f you believe the stock market w i l l double, you w i l l pay 20%
i n t e r e s t . A r i s i n g i n t e r e s t r a t e does not create a bear market. Only when the r a t e
of i n t e r e s t exceeds expectations of p o t e n t i a l p r o f i t o f f e r i n g almost a f i x e d secured
return, w i l l c a p i t a l leave the speculative market and run to the bond market.

I n a bear market, i n t e r e s t rates always decline because o f the f l i g h t to q u a l i t y .

When there i s a r i s k of a banking c r i s i s as w e l l , then the f l i g h t t o q u a l i t y shows
that c a p i t a l i s w i l l i n g to accept v i r t u a l l y zero i n return f o r the p r i v i l e g e to park
i t s e l f i s a secure manner to preserve the future.

In both cases, the government may accelerate the trend, but by no means can they
create the trend o r a l t e r the trend. Lowering i n t e r e s t rates t o zero r i g h t now w i l l
not reverse the economic d e c l i n e . People w i l l look out the window and u n t i l they
f e e l confident again, they w i l l not come out from behind the c a s t l e w a l l s . Japan
lowered i n t e r e s t rates t o v i r t u a l l y zero f o r nearly a decade. A l l i t d i d was f u e l
the c a r r y trade whereby yen was borrowed a t 0.1% and invested i n d o l l a r s at 5-8%.
There was l i t t l e opportunity to invest domestically i n Japan and the stock market
was nothing s p e c i a l but a broad downward c o n s o l i d a t i o n with f l u r i e s t o the upside
every-now-and-again.

Monetary Theory

The Fed has already put i n t o the system about $1 t r i l l i o n i n 13 months. The
r e a l problem i s they are buying back US government debt i n j e c t i n g cash i n t o the
system. But i f those bonds are s o l d to the Fed by foreign holders, there can bo no
i n j e c t i o n of cash i n t o the domestic economy. This amounts to the monetization of
our debt i n any event. C l e a r l y , buying bonds from the market i s not a guaranteed
increase i n domestic money supply e s p e c i a l l y when the v e l o c i t y of money i s i t s e l f
c o l l a p s i n g . Borrowing h e a v i l y a l l these years and depending on f o r e i g n investors
to buy that debt, a l t e r e d the course of economics. Of course there has always been
the foreign i n v e s t o r , but there has not been the f l o a t i n g exchange r a t e system.
The r i s e and f a l l of the d o l l a r i t s e l f can now e i t h e r a t t r a c t f o r e i g n c a p i t a l with
an advance or repel c a p i t a l with i t s decline. L i k e we needed another new v a r i a b l e .

7
I n f r a s t r u c t u r e Spending
There r e a l l y i s nothing l e f t i n the t o o l bag that can help even t o mitigate
the coming Economic Depression. The unemployment r a t e a t the end of 1930 was only
about 8.9% - s i m i l a r t o the 1975 recession. Things were very slow back then. Even
housing was not moving and people took whatever o f f e r s came t h e i r way. I t was the
Dust Bowl that began i n 1934 that sent the unemployment r i s i n g a f t e r the 1932 low
i n the stock market. About 40% of the work force was agrarian. Hence, Congress
could not pass a law t o make i t r a i n . The r e a l devastation was that t h i s presented
a huge portion o f the work force that had t o be r e t r a i n e d i n t o s k i l l e d labor. I t
was the Great Depression that f i n a l l y by f o r c e of necessity, created an i n d u s t r i a l
work force that may have taken another 200 years t o unfold by gradual transformation.

The WPA was formed i n 1935, 3 years a f t e r the low i n the stock market (1932).
I t had a slow and marginal success. At best, i f we a t t r i b u t e a l l improvement t o
t h i s one program, very u n l i k e l y , unemployment was only reduced by about 20%.

1935 1936 1937 1938 1939 1940

20.3% 16.9% 14.3% 19.0% 17.2% 14.6%

Even i f we a t t r i b u t e everything t o the WPA, a l l the way i n t o 1940, the most

the unemployment d e c l i n e s was by 30%. However, a t the end of World War I I , we
see an unemployment r a t e o f 1.9% by 1945. Any ideas that we can spend t r i l l i o n s
on i n f r a s t r u c t u r e and t h i s i s somehow going t o make i t a l l b e t t e r , forget i t .

Turning t o i n f r a s t r u c t u r e i n the middle o f a debt c r i s i s makes no sense. The

idea of j u s t spending money w i l l somehow stimulate the economy, w i l l not work. This
i s l i k e t r y i n g t o f i g h t i n the desert o f I r a q using the same t a c t i c s as i n Vietnam.
There has t o be some connection t o what we are doing. Just because FDR i n s t i t u t e d
the WPA when we had a huge displacement i s s u e i n the work f o r c e , almost 6 years
a f t e r the crash began, makes no sense a t a l l f o r our current problems. As I s a i d ,
t h i s i s l i k e buying your w i f e a mink coat t o somehow influence your k i d a t c o l l e g e
to get t h e i r grades up. The connection i s tenuous at best and nonexistent i n a l l
reality.

SUMMARY

Unless we attack the debt structure d i r e c t l y , there i s no point i n counting

upon any government t o help mitigate the problem and more-likely-than-not, our very
future may be recast i n so many ways, the l e v e l o f f r u s t r a t i o n w i l l r i s e , and that
leads t o war because war d i s t r a c t s the people from hanging t h e i r own p o l i t i c i a n s .
The oldest t r i c k i n the book, i s t o blame the guy next-door down. Unless we a r e
honestly prepared t o t r u l y reorganize the s t r u c t u r e of government and how we even
do business such as j u s t do a slow-bum and monetize the n a t i o n a l debt since 72%
i s going t o i n t e r e s t , reorganize the e n t i r e debt structure both p r i v a t e and p u b l i c ,
regulate leverage, r e s t o r e usury laws that w i l l free up personal income, and look
a t j u s t e l i m i n a t i n g the f e d e r a l income t a x i n combination with e s t a b l i s h i n g a new
national heathcare system that w i l l r e s t r u c t u r e a l l pension plans p u b l i c and p r i v a t e ,
there i s not much hope f o r the future from government. Our d e f i n i t i o n of money (M1)
does not include bonds so we can f o o l ourselves by i s s u i n g $10 t r i l l i o n i n bonds
i s d i f f e r e n t than p r i n t i n g the cash. I t i s s t i l l money. Taxes a r e needed i n a gold
standard where money cannot be created. Stop competing with the s t a t e s , c o n t r o l the
budget as a percent o f GDP, increase the money supply t o that degree, and stop the
taxing when money i s created by leverage and v e l o c i t y anyway. This w i l l restore jobs
and i n j e c t huge confidence as i n 1964 when the p a y r o l l tax was cut permanently. One-
o f f s never work. People save the r e l a t e s f o r a r a i n y day. We need r e a l honest reform
since the states w i l l go broke and seek handouts as w e l l . So, i t i s time t o get r e a l .
I t i s time we r e s t r u c t u r e the e n t i r e system i n c l u d i n g the banks who always cause
the problem. We don't need excessive r e g u l a t i o n of things that d i d not create the
problem when the real c u l p r i t s always escape.