The Collapse of a Country – This is What it Looks Like – CONFIDENCE
Argentina – The Blue Dollar
This notion that hyperinflation is how a nation collapses is very superficial. The real issue behind the collapse of a country is the collapse in the CONFIDENCE of the government. This is why we tend to see what people call “hyperinflation” in revolutionary and third world economies compared to the primary financial center economies. We have conducted extensive studies on this to investigate if there is some level of “inflation” that if crossed will cause hyperinflation. The answer in NO. These ideas have proven to be the same old problem of one-dimensional thinking that IF this THEN that.
One-dimensional thinking is the classic way to program a computer and it is how you design an Expert System. Take medicine for example. You can create a list of all disease and its symptom. Then create the interface for the question as to what the symptom the person is experiencing. With this input, the computer program uses the classic IF THEN ELSE method to arrive at the answer. IF this THEN the answer is or ELSE keep search down the list until you find the match.
When you enter the field of programming, you are confronted with how we actually THINK. You quickly realize the difference between this one-dimensional thinking and dynamic thinking. What is going on right now in Argentina is classic and it illustrates the problem with this notion of hyperinflation that assumes if you merely increase the money supply you will inflate. This one-for-one relationship does not exist in anything. We took interest rates and attempted this same one-dimensional thinking that IF interest rates reached a certain level THEN the stock market would crash. We found that the stock market has NEVER peaked with the same level of interest rates twice. Hence, that theory is equally bogus.
So what is the answer?
The brain actually thinks dynamically. You may have gone to dinner with a girlfriend you fell in love with. That event can be recalled through just a fragment of information on any of your senses. You can hear a song that was playing that you did not even pay attention to at the moment and you brain will match that sound to that event and you will amazingly have that memory retrieved from your mental archive. The same is true about the place, the food, or visually what she or you wore. The mind is fascinating for everything is connected dynamically – it is not a IF THEN ELSEflat model system. Yet strangely, our Conscious mind works linearly in this IF THEN ELSE manner. This is why we find it so difficult to function dynamically. Our consciousness seems to be linear in its function as a default always trying to use this flat model, yet the way the brain actually functions is dynamic.
What we are witnessing in Argentina is how the real world functions. This is the collapse in the confidence of government. The US dollar was traded in banks and markets 23.5 cents higher yesterday, its largest hike in 12 years, with a buying rate of 7.075 pesos and a selling rate of 7.125 pesos.
The Argentine currency has experienced a similarly sharp rise during yesterday’s trading, climbing five cents during the course of the day despite the Central Bank selling off 200 million dollars of reserves. The parallel ‘blue’ dollar, meanwhile, hit a new record as it flew up 29 cents, and closed in unofficial markets at 12.5 pesos (selling).
There is no magic formula that anything can be reduced to where we arrive at the simple one-dimensional logical conclusion. It is notIF THEN ELSE, but IF THIS THAT AND THE MULTITUDE OF THINGS OVER THERE BALANCE – THEN this.
Argentina confiscated pension funds just as the USA is seriously thinking of doing to also sustain itself. However, this is part of the process of undermining CONFIDENCE. It has nothing to do with a quantified amount of money in circulation for society seems to panic based upon a host of factors all coming together. Searching for that magic formula to support a one-dimensional thought, go ahead; keep trying to apply the IF THEN model. You will only continue to lose your shirt, pants, home, wife, family, kids, and the dog.
Argentina is doomed. The government will collapse. It has crossed the line of Public Confidence. The more Draconian it becomes to sustain its power, the further the collapse in public confidence. Look at Ukraine. It had nothing to do with the quantity of money – it was a crisis in politics and corruption. It is always an admixture.
Gold & The Cycles
A number of questions have come in from is the Cycle Inversion negating the low in 2014 Or is verdict still out? There is nothing yet that suggests the low is in place. Corrections are 2 to 3 units of time and that means a max of 3 years from the intraday high in 2011 gives us 2014 and from the highest annual closing 2015.
The target of 1150 was the MINIMUM and from a price objective, the model would be satisfied with that 1151 June low if the timing is right. That does not negate pressing lower to retest the 1980 high of $875. But just as we have a difference between the annual intraday high and annual closing, we have a significant difference between CASH and FUTURES. The Cash low is June 28th, but the futures on the actual COMEX floor is December 31st. This creates a difference in timing as well for the February target calculated from the CASH disagrees with the FUTURES that is April.
Nevertheless, the whole Cycle Inversion thing is critical. The 1987 Crash bottomed precisely on the model rather than producing a high. That was the Cycle Inversion that pointed to a high in 1989.
The 1980 high in gold took place with the ECM rising. Gold fell from 1974 into 1976 by about 50% as STAGFLATION emerged – cost-push inflation, which we are experiencing again right now but from rising taxes rather than oil prices.
Now look at gold took off with the decline in the ECM from 2007 and peaked at the bottom in 2011. This is showing that gold is inverting and will rally with the shift in assets from public to private. Because of this, even if the low is 2014, there will not be the blast off until the ECM peaks in 2015.75. During that decline in the ECM we should see the next rally and this is where we are likely to start to see more widespread government defaults at the state and local levels in Europe and the USA.
The Collapse of Socialism Driven by Political Corruption
The rise is Civil Unrest is precisely on time and it is being driven by economic decline in the standard of living and the opportunity to even survive thanks to socialism. Government is simply incapable of ever doing anything right or actually doing anything for society other than fill their pockets for self-interest. In Europe, when the EU Parliament was formed, the typical salary was less than 1,000 euros per month. They gave themselves a pay raise and now earn more that heads of their own countries booking more than 17,000 euros per month (214,000 euros per year) and guess what – theyexcepted themselves from TAXATION. So while they hunt the rich, the never include themselves. This level of inherent corruption is just the tip of the iceberg behind socialism where they “feel” your pain, and take pleasure in sucking out every drop of blood they can for themselves.
The civil unrest that is growing worldwide has a single common link – corruption. The fundamental foundation of the American Revolution never decreed that Congress was a full time job. It was expected that your main income was your business that in those days was the farm, The Constitution does not actually spell out how much time Congress needs to spend in Washington and today they are in recess about 3 months of the year. It was in Article I, Section 4, of the Constitution said that Congress had to meet at least once a year, with the meeting on the first Monday in December. That date was chosen for it matched state legislatures since it was after the harvest season when politicians had to be home to attend to their business. Not until the 20th Amendment was that date moved to January 3, or another day that Congress chose.
The rise in political corruption needs to be compared to when Congress had its salary level tied to the market price of wheat. That made sense since more than 80% of the economy was agrarian. This was one of the proposals the Constitution’s framers considered as they wrestled with the politically explosive issue of establishing political compensation. In the Congress under the Articles of Confederation, which served as the national legislature at the time the framers were meeting, members were paid at various rates that were established by the individual states they represented.
The Framers of the Constitution determined that they should be paid from the U.S. Treasury, but they left it up to Congress to set the actual amounts. It did not take very long for as soon as Congress convened in 1789, both houses addressed compensation for themselves and agreed to a constitutional amendment that would delay implementation of any congressional salary changes until after the next election for all House members. They never want to expose a reelection to personal greed or Draconian legislation. This delay naturally provided members with political cover, It actually took more than two centuries before the necessary number of states ever ratified this plan as the Constitution’s Twenty-seventh Amendment.
Therefore, politicians never change no matter what century you look at. The First Congress decided to play it safe at first and compensate senators and representatives at the same rate paid to the Constitution’s framers, which was $6 per day they attendeda session.
Therefore, politicians never change no matter what century you look at. The First Congress decided to play it safe at first and compensate senators and representatives at the same rate paid to the Constitution’s framers, which was $6 per day they attendeda session.
Of course, it did not take long before senators started to argue that they deserved a higher rate than House members under the theory they were not elected and were appointed by their states. That led to corruption where nominees paid kickbacks to be a senator. The free elections of senators began only in 1913 and was part of the reform process that created the Federal Reserve.
Senators argued that they were full-time politicians who had to set aside their customary livelihoods during the 6 year term in the Senate. They further argued that they presumed extra burdens of advising and consenting to treaties and nominations. The House initially refused to take the Senate proposal seriously, but eventually consented to a $7 Senate rate to take effect five years later and to last only one session.
Believe or not, it was the eruption of Mount Tambora on April 10th, 1815 that altered politics in America. The English governor of Indonesia, Sir Thomas Stamford Bingley Raffles (1781-1826), retold the story of one of the greatest explosions recorded in historic time, Lyell in his “Principles of Geology” of 1850 remembers the eruption of the Tambora reporting that the sound could be heard more than 900 miles away and out of a population of 12,000, only twenty-six individuals survived.
The explosion of Tambora produced the famous Year Without a Summer, which was a peculiar 19th century disaster, played out during 1816 when weather in Europe and North America took a bizarre turn that resulted in widespread crop failures, famine, and the starvation of livestock. The dust from Mount Tambora shrouded the globe. And with sunlight blocked, 1816 did not have a normal summer. The 300 year cycle in the energy output of the sun was still in a cold phase and almost the entire northern hemisphere experienced an ulterior temperatures drop that caused prices to soar.
The weather in 1816 was bizarre. Spring came but then everything seemed to turn backward, as cold temperatures returned caused by the eruption of Mount Tambora. The sky seemed permanently overcast and the sheer lack of sunlight became so severe that farmers lost their crops and food shortages were reported in Ireland, France, England, and the United States.
In Virginia, Thomas Jefferson, retired from the presidency and farming at Monticello, sustained crop failures that sent him further into debt. This was Jefferson’s difficult financial years. Thomas Jefferson Randolph, to whom Jefferson had entrusted his business affairs in 1817, was forced to admit that, after eight years, he was unable to stabilize Jefferson’s debts. Jefferson suffered greatly from the crop failures of 1816 and he thus put Randolph in charge of his financial affairs. His debt crisis became worse when the bankruptcy of Wilson Cary Nicholas took place, whose note Jefferson had endorsed in 1817 as a favor. Jefferson never recovered financially from the events of 1816 and his burden continued to rise into 1826.
The crop failures killed the economy that was predominantly agrarian. This inspired the change in how Congress would be paid. On March 19, 1816, Congress voted to abandon the $6 per day rate, which had amounted to about $900 a year for those who attended regularly. They gave themselves an annual salary or of $1,500. The argument was that an annual salary would make Congress more efficient because members would be less likely to prolong sessions to pile up more daily salary. The flip-side is then they got $1,500 and did not have any requirement to show up. The reason was simply the crop failures of 1816 and the financial crisis that inspired.
This pay increase created a real firestorm of public outrage. In Georgia, protesters were hanging their senators in effigy for the people were suffering from the impact of a collapse in revenue and a rise in prices. They did not have the option to simply dip into the Treasury as politicians were doing. During the elections, an exceptionally large percentage of incumbent House members lost their elections. Other refuse to run given the outrage that was brewing. During the next session, Congress repealed the pay raise and quietly returned to a daily rate.
It took some 40 years later before Congress once again dared to adopt a fixed annual salary. On December 3, 1855, Congress began to pay themselves a fixed annual salary with no attendance requirement for $3,000. It was raised to $5,000 on December 4, (1865 14 Stat. 323), $7,500 starting March 4, 1871 (17 Stat. 486), and it was reduced to $5,000 January 20, 1874 (18 Stat. 4) because of the Panic of 1873.
Congress restored the $7,500 salary on March 4, 1907 (34 Stat. 993) and raised it again to $10,000 for March 4, 1925 (43 Stat. 1301). Because of the Great Depression, Congress took a pay cut to $9,000 starting July 1, 1932 (47 Stat. 401) ahead of the November elections. Roosevelt had to keep up the image and instigated another pay cut to $8,500 on April 1, 1933 the following year (48 Stat. 14). However, in line with the devaluation of the dollar against gold in January 1934, Congress raised their salary back to $9,000 on February 1, 1934 (48 Stat. 521), and then again to $9,500 on July 1, 1934 (48 Stat. 521) a few months later. It is amazing how socialism always results in more pay for politicians for the next year they raised it to $10,000 on April 4, 1935 (49 Stat. 24) while unemployment continued to rise. Clearly, they were not giving themselves raises for a job well done.
It was after World War II when they raised their salary again to $12,500 on January 3, 1947 (60 Stat. 850). The jumped it dramatically to $22,500 on March 1, 1955 (69 Stat. 11) to compensate themselves for the recession. The raised it to $30,000 on January 3, 1965 (78 Stat. 415) and $42,500 about four years later on March 1, 1969 (81 Stat. 642). They raised it again during the Recession of 1974-1976 to $44,600 on October 1, 1975 (89 Stat. 421). Just two years later it was raised under Jimmy Carter to $57,500 on March 1, 1977 (81 Stat. 642). Just before gold peaked in January 1980, they raised their salaries again to $60,662.50 on October 1, 1979 (89 Stat. 421).
Curiously enough, the sharp economic deflation between 1981 and 1985 marked another dramatic rise in salaries to $69,800 on December 18, 1982. Here Volcker is fighting inflation and they raised their salaries 15%. They raise it again to $72,600 on January 1, 1984 (89 Stat. 421) before the recession was over. They were not done. Before the bottom of the recession in the summer of 1985, they raised their salaries again to $75,100 on January 1, 1985 (89 Stat. 421).
Strangely, the smaller increases took place during the recovery such as $77,400 on January 1, 1987 (89 Stat. 421). However, they raised it again to $89,500 the next month on February 4, 1987 (81 Stat. 642). They continued to raise their salaries but there seems to be a pattern of raising them when the economy declines dipping into the Treasury in their time of need. Curiously enough, during the worst economic decline in 2008 and 2009, they raised their salaries again to $169,300 on January 1, 2008 103 (Stat. 1769) and the following year to $174,000 on January 1, 2009 (103 Stat. 1769).
The salaries are just the tip of the iceberg. Once politicians paid themselves salaries rather than for attendance, the entire system has gotten far worse. Many do not even show up for votes. We do not need career politicians for they do not serve the best interests of society. They then act only in their own self-interest as Adam Smith’s Invisible Hand applies. We need to return to a government by the people with term limits that amounts to a direct democracy with any spending increases voted on by the people. Enough of these Republics masquerading as Democracies.
Sources: U.S. Congress. Senate. The Senate, 1789-1989, Vol. 2, by Robert C. Byrd. 100th Cong., 1st sess., 1991. S. Doc.100-20.
View PDF: Congressional Salaries
Global Market Watch January 22nd, 2014
The Global Market Watch has been posted for the close of January 22nd, 2014.