by Martin Armstrong, Armstrong Economics:
QUESTION: Hello Mr Armstrong.
I understand the logic of the weakness / strength of currency that you outline from time to time in your modelling of the global crisis.
You omit to explain the importance in the pace of change in the value of a currency; for instance Venezuela and Argentina according to your explanation of the dollar weakness ought to have benefited from a free falling currency. They are both exporters of natural resources that receive foreign exchange for their exports. Can you please elaborate on this difference? The US dollar is of course not free-falling, but for the global reserve currency, it has fallen precipitously year to date.
My second question concerns the groundhog mentality of a lot of commentators about the dollar and its safe haven status. I wonder why it is that when a group of large countries decide to exclude the dollar from their transactions, it would have nothing to do with that currency’s weakness?
You say the US is an oil exporter; well it does export oil, and it also imports oil of the a different grade to the one it exports. In addition, is it just a coincidence that countless countries with oil assets have been invaded and/or sanctioned in the last 70 years? Persia, Iraq, Libya to name but a handful of energy nations, and let’s also throw in the case of the opium trade coming out of Afghanistan and which has the fingerprints of the US all over it.
I would appreciate not hearing an explanation about the need to spread democracy, human rights and being the honest broker as the reason the US holds 800 bases around the world and is currently the process of agitating to cause harm to the middle east, eastern europe and the south china seas.
Many thanks for your voluntary service to readers, especially the historic aspect of your memos, which are quite fascinating.
CAL from Switzerland
ANSWER: Your proposition that the “pace of change” in the value of a currency when it collapses in such places as Venezuela and Argentina ought to have benefited from a free falling currency, is an interesting question that truly reveals the importance of CONFIDENCE. True, Trump and his predecessors since Ronald Reagan have preferred a weaker currency to stimulate foreign sales and thus the theory is such a policy will increase jobs. This is seriously flawed as always because of this one-dimensional analysis attempt to always reduce everything to a single cause and effect.
The value of a currency at its base is constructed upon CONFIDENCE in the government. If you do not TRUST the government, you simply will not accept their currency. This has been the case throughout history. I have pointed out how the Emperor of Japan lost the CONFIDENCE of the people and as such they would no longer accept his coinage. Japan stopped issuing coins for nearly 600 years because each emperor devalued the outstanding coinage to be 10% of his new coins. Thus, people would not accept Japanese coins for they could become worthless on the whim of an emperor. They reverted to bags of rice and Chinese coins – not Japanese.
Therefore, a weak currency will stimulate foreign sales provided you TRUST the government. Lacking that, the currency simply goes into a free fall and becomes worthless. This was the fate of the hyperinflation in Germany. It was NOT the Quantity of Money theory, it was the fact that there was a 1918 Communist Revolution in Germany where they had even asked the Communist Russians to take over Germany. It was the collapse in CONFIDENCE that led to the hyperinflation. We saw the same thing in every instance of hyperinflation for that is the free-fall when people not longer trust government. It has never been the Quantity of Money and this is also why the Quantitative Easingpolicy of the ECB has failed.
Likewise, you will see the same impact in interest rates, which are the reflection of future inflation. Rising interest rates will attract capital inflows but only to a point where CONFIDENCE is maintained. If CONFIDENCE in government collapses, then interest rates soar reflecting the risk factor in the Survivability of government.
Consequently, all of these theories are not linear. They operate on a BELL CURVE. It is like my mother always said – too much of a good thing can be bad. A cookie or ice cream may taste great. But you cannot eat only cookies and ice cream. There is a limit to all things before the BELL CURVE comes into play.
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