Hollande’s Marxist Agenda has led to his Collapse in Approval Rating to just 9%
Less than in two years Francois Hollande elected with great hope and expectations. He has wasted the public hope and trust given him by the voters. According to a poll, if the election was held today, only 9% of the French would vote for him. Leading in popularity is Interior Minister Manuel Valls famous for sounding the alarm about the Africanization of France and deporting Romas. As the economy turns down, you run the risk of class warfare, but also foreigners are looked upon with different eyes. Remember the Boxer Rebellion in China against Westerners? The economy determines everything.
Less than in two years Francois Hollande elected with great hope and expectations. He has wasted the public hope and trust given him by the voters. According to a poll, if the election was held today, only 9% of the French would vote for him. Leading in popularity is Interior Minister Manuel Valls famous for sounding the alarm about the Africanization of France and deporting Romas. As the economy turns down, you run the risk of class warfare, but also foreigners are looked upon with different eyes. Remember the Boxer Rebellion in China against Westerners? The economy determines everything.
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Interest Rates & the Bell Curve
QUESTION: Mr Armstrong,
Thank you for answering my question. Would l therefore be correct in thinking:
1) It is a casual (indirect) relationship between interest rates and inflation rather than direct (ie, the strengthening economy will result in short-term cost-push inflation)
2) The exploding government debt (on interest rate hikes) will weaken the dollar over the long run (generates long-term structural inflation (ie, price increases stemming from climbing import prices) and ironically deflation (as taxes must rise to meet the growing debt obligation)).
Yours faithfully,
JK
ANSWER: The one maxim your mother told you is all things in moderation. Red Wine is great for the blood and heart. However, drink too much and you will kill the liver. Years ago they studied two groups of mice. One they fed whatever they wanted and the second what was just necessary. The second group outlived the first by about 20%. They have discovered the Longevity Gene and this illustrates above all the bell curve phenomenon. Everything will have an effect up to a point and then reverse that effect. Interest rates will rise with DEMAND in a boom. However, they will rise exponentially when someone needs money desperately. This is the difference between a bank and a loan shark.
At the core of all assumptions is this linear expectation without even defining that as the starting point. It is good to observe this phenomenon so that you can avoid logical fallacies and traps. There isABSOLUTELY no relationship that is perfect and concrete remaining solid forever.
It is more than a simple casual relationship between interest rates and inflation that of course is not direct. There will be little impact upon inflation until the cycle gets underway and that will then create a feedback loop resulting in short-term cost-push inflation, which lags. People will start to buy and that increase in demand will eventually be observed and start the cost-push demand led inflation trend. Then at the top, the demand subsides yet prices then overshoot. There is a lagging relationship in general.
For example, inflation continued to rise into 1981.35 with our Economic Confidence Model right on point while nominal inflation peaked with commodities and gold January 21, 1980 more than one year before. Hence, rates and cost-push inflation far exceeded the nominal real demand inflation perceived by investors.
It is the interest rates that will cause the exploding government debt and not monetary easing by a central bank. The debt will rise on auto-pilot and they will have to scramble to deal with it. Likewise, the press will not pay attention to this trend until it is too late because it is on auto-pilot. The Fed is trapped between a rock and a hard place screaming at Congress they have to curtail spending behind closed doors because UNLESS they start to allow interest rates to rise, there will be a massive default of pension funds. This has the Democrats insisting on tax increases and Republicans demanding spending reduction.
Rising interest rates will NOT weaken the dollar until it passes the point of maximum entropy at the top of the Bell Curve. It was the raising of interest rates to fight inflation into 1981 that drove the dollar to new record highs (BP $1.03 in 1985) and led to the creation of G5 (now G20) to manipulate the dollar lower. WHY? Because the rising rates did NOT create a collapse in confidence to the point of any expectation that the US would never pay its debts. Hence, capital ran out about bought government bonds paying 17% and asked – got any more?
Over the long run higher interest rates creates long-term structural inflation because that is the cost of capital. People will not lend money BELOW what it will be worth upon repayment.
However, ironically deflation emerges because of government. raises taxes to meet the growing debt obligation as it tries to sustain itself. While coinage in Rome may have still been gold, the government imposed taxes either in kind (goods/food) or in bullion – not coin. In other words, they debased coinage and reduced the weights, but they imposed taxes based upon weight. Hence, they created deflation by (1) refusing to accept its own money in payment for taxes (denial of legal tender) and (2) raising taxes with a declining economy.
The population of Rome collapsed, but you cannot take real estate with you. This is why I have distinguished between MOVABLE assets and NON-MOVABLE. If taxes on real estate keep going higher and your income is declining as we are starting to see in the current Western world, this produces DEFLATION. Your disposable income will decline because the share taken by government rises. Consequently, this produces STAGFLATION as costs rise NOT due to demand but rising costs, but there is a decline in net velocity of money as it hoards refusing to invest and vanishes due to the collapsing disposable income.
This whole process is a BELL CURVE. Some taxes are not destructive. Obama and the Democrats are demanding significant increases in taxes and they intend to get rid of the Republicans in 2014 and will rape the economy thereafter setting the stage for a far worse economic contraction 2015-2020.
The vast majority of analysis is flat out wrong because it tries to create an established relationship that does not change. In analytical science, we are still dealing with prejudices and thinking process that assumes the world is flat. This will not change until it is forced to change. I will not say what university I met with. But in a private meeting I was asked if I would consider teaching. They admitted to me there and then what they taught in economics did not work. We are getting there – step by step. It will take a nasty crash to change this way of thinking.
QUESTION: Mr Armstrong,
Thank you for answering my question. Would l therefore be correct in thinking:
1) It is a casual (indirect) relationship between interest rates and inflation rather than direct (ie, the strengthening economy will result in short-term cost-push inflation)
2) The exploding government debt (on interest rate hikes) will weaken the dollar over the long run (generates long-term structural inflation (ie, price increases stemming from climbing import prices) and ironically deflation (as taxes must rise to meet the growing debt obligation)).
Yours faithfully,
JK
ANSWER: The one maxim your mother told you is all things in moderation. Red Wine is great for the blood and heart. However, drink too much and you will kill the liver. Years ago they studied two groups of mice. One they fed whatever they wanted and the second what was just necessary. The second group outlived the first by about 20%. They have discovered the Longevity Gene and this illustrates above all the bell curve phenomenon. Everything will have an effect up to a point and then reverse that effect. Interest rates will rise with DEMAND in a boom. However, they will rise exponentially when someone needs money desperately. This is the difference between a bank and a loan shark.
At the core of all assumptions is this linear expectation without even defining that as the starting point. It is good to observe this phenomenon so that you can avoid logical fallacies and traps. There isABSOLUTELY no relationship that is perfect and concrete remaining solid forever.
It is more than a simple casual relationship between interest rates and inflation that of course is not direct. There will be little impact upon inflation until the cycle gets underway and that will then create a feedback loop resulting in short-term cost-push inflation, which lags. People will start to buy and that increase in demand will eventually be observed and start the cost-push demand led inflation trend. Then at the top, the demand subsides yet prices then overshoot. There is a lagging relationship in general.
For example, inflation continued to rise into 1981.35 with our Economic Confidence Model right on point while nominal inflation peaked with commodities and gold January 21, 1980 more than one year before. Hence, rates and cost-push inflation far exceeded the nominal real demand inflation perceived by investors.
It is the interest rates that will cause the exploding government debt and not monetary easing by a central bank. The debt will rise on auto-pilot and they will have to scramble to deal with it. Likewise, the press will not pay attention to this trend until it is too late because it is on auto-pilot. The Fed is trapped between a rock and a hard place screaming at Congress they have to curtail spending behind closed doors because UNLESS they start to allow interest rates to rise, there will be a massive default of pension funds. This has the Democrats insisting on tax increases and Republicans demanding spending reduction.
Rising interest rates will NOT weaken the dollar until it passes the point of maximum entropy at the top of the Bell Curve. It was the raising of interest rates to fight inflation into 1981 that drove the dollar to new record highs (BP $1.03 in 1985) and led to the creation of G5 (now G20) to manipulate the dollar lower. WHY? Because the rising rates did NOT create a collapse in confidence to the point of any expectation that the US would never pay its debts. Hence, capital ran out about bought government bonds paying 17% and asked – got any more?
Over the long run higher interest rates creates long-term structural inflation because that is the cost of capital. People will not lend money BELOW what it will be worth upon repayment.
However, ironically deflation emerges because of government. raises taxes to meet the growing debt obligation as it tries to sustain itself. While coinage in Rome may have still been gold, the government imposed taxes either in kind (goods/food) or in bullion – not coin. In other words, they debased coinage and reduced the weights, but they imposed taxes based upon weight. Hence, they created deflation by (1) refusing to accept its own money in payment for taxes (denial of legal tender) and (2) raising taxes with a declining economy.
The population of Rome collapsed, but you cannot take real estate with you. This is why I have distinguished between MOVABLE assets and NON-MOVABLE. If taxes on real estate keep going higher and your income is declining as we are starting to see in the current Western world, this produces DEFLATION. Your disposable income will decline because the share taken by government rises. Consequently, this produces STAGFLATION as costs rise NOT due to demand but rising costs, but there is a decline in net velocity of money as it hoards refusing to invest and vanishes due to the collapsing disposable income.
This whole process is a BELL CURVE. Some taxes are not destructive. Obama and the Democrats are demanding significant increases in taxes and they intend to get rid of the Republicans in 2014 and will rape the economy thereafter setting the stage for a far worse economic contraction 2015-2020.
The vast majority of analysis is flat out wrong because it tries to create an established relationship that does not change. In analytical science, we are still dealing with prejudices and thinking process that assumes the world is flat. This will not change until it is forced to change. I will not say what university I met with. But in a private meeting I was asked if I would consider teaching. They admitted to me there and then what they taught in economics did not work. We are getting there – step by step. It will take a nasty crash to change this way of thinking.
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Rising Interest Rates are Bullish – Not Bearish
QUESTION:
Mr Armstrong,
Thanks for your awesome website and the vast amount of information that you are putting out there.
Could you please clarify the relationship between interest rates and inflation. Why would rising interest rates cause an uptick in inflation? I understand that a strengthening economy puts upward pressure on both yields and inflation, but how (on the absence of economic growth and ignoring forex rate changes) can interest rate hikes directly affect inflation? Help!
Thank you,
JK
ANSWER: The idea that rising interest rates will reduce demand perhaps might apply if the ONLY borrower was the private sector. But the biggest borrower that a rise in rates has ZERO impact on is government. When Volcker raised rates to insane level in 1981 to stop inflation, he succeeded in sending the US national debt from $1 trillion to $8 by the end of the decade. About 70% of the entire debt is past interest.
Rate hikes today cause the government deficits to rise and thus the national debt will explode. I will be publishing a book very soon that takes the newspaper accounts before 1929 and after demonstrating that it has been socialism that has altered our thinking. Before 1929 rates rose and that was seen as bullish because people were still borrowing and the economy expanding. Rates declined in recession and depressions.
After 1929, rates rose and people said “OH GOVERNMENT WANTS TO STOP US FROM BUYING!” Sorry, but rates decline in Japan for 23 years and it stimulated nothing. Rates decline with the lack of borrowing (demand) and rise with expansion (demand).
QUESTION:
Mr Armstrong,
Thanks for your awesome website and the vast amount of information that you are putting out there.
Could you please clarify the relationship between interest rates and inflation. Why would rising interest rates cause an uptick in inflation? I understand that a strengthening economy puts upward pressure on both yields and inflation, but how (on the absence of economic growth and ignoring forex rate changes) can interest rate hikes directly affect inflation? Help!
Thank you,
JK
ANSWER: The idea that rising interest rates will reduce demand perhaps might apply if the ONLY borrower was the private sector. But the biggest borrower that a rise in rates has ZERO impact on is government. When Volcker raised rates to insane level in 1981 to stop inflation, he succeeded in sending the US national debt from $1 trillion to $8 by the end of the decade. About 70% of the entire debt is past interest.
Rate hikes today cause the government deficits to rise and thus the national debt will explode. I will be publishing a book very soon that takes the newspaper accounts before 1929 and after demonstrating that it has been socialism that has altered our thinking. Before 1929 rates rose and that was seen as bullish because people were still borrowing and the economy expanding. Rates declined in recession and depressions.
After 1929, rates rose and people said “OH GOVERNMENT WANTS TO STOP US FROM BUYING!” Sorry, but rates decline in Japan for 23 years and it stimulated nothing. Rates decline with the lack of borrowing (demand) and rise with expansion (demand).
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Expat Haven
QUESTION: With all the changes in laws and hunt for capital, where are American expats welcome these days?
ANSWER: The best place in the world where you will not be treated with suspicion, hatred, or like some diseased entity nobody wants to do business with these days is China. They will embrace you and seem to have the guts and power to tell the USA to take a hike. They even have Starbucks – which is more than I can say for Italy.
QUESTION: With all the changes in laws and hunt for capital, where are American expats welcome these days?
ANSWER: The best place in the world where you will not be treated with suspicion, hatred, or like some diseased entity nobody wants to do business with these days is China. They will embrace you and seem to have the guts and power to tell the USA to take a hike. They even have Starbucks – which is more than I can say for Italy.
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The Beginning of The Rise in Interest Rates is Here
The one thing to emerge from the debt ceiling crisis has been to highlight the short-term debt focus. Every Thursday the US government has had to sell $100 billion of new debt rolling over short-term with 3 month bills. This may have helped to bring down long-term rates and it reduced the interest expenditures, but it has introduced extreme vulnerability to a sudden loss of lenders’ trust as lawmakers debate whether to raise a cap on public borrowing.
U.S. Treasury will unveil its new borrowing strategy that will signal the shift in interest rates has arrived. The extreme short-term debt can trigger default within days or weeks around one of these debt ceiling debates placing more power in the hands of the Tea Party. The Obama Administration is counter-acting with starting to shift the debt long-term to reduce Treasury need to raise $100 billion to repay short-term debts on a weekly basis.
The Treasury will now shift the U.S. government’s reliance on short-term debt, which increased dramatically ever since Clinton began to shift it to reduce interest expenditures to balance the budget. (see Op-Ed WSJ below), Under the new program, the Treasury plans to start selling 2-year floating-rate notes at regular auctions beginning in January. The yield on the new notes will float according to market conditions. Hence, we will begin to see longer-term rates start to rise.
The one thing to emerge from the debt ceiling crisis has been to highlight the short-term debt focus. Every Thursday the US government has had to sell $100 billion of new debt rolling over short-term with 3 month bills. This may have helped to bring down long-term rates and it reduced the interest expenditures, but it has introduced extreme vulnerability to a sudden loss of lenders’ trust as lawmakers debate whether to raise a cap on public borrowing.
U.S. Treasury will unveil its new borrowing strategy that will signal the shift in interest rates has arrived. The extreme short-term debt can trigger default within days or weeks around one of these debt ceiling debates placing more power in the hands of the Tea Party. The Obama Administration is counter-acting with starting to shift the debt long-term to reduce Treasury need to raise $100 billion to repay short-term debts on a weekly basis.
The Treasury will now shift the U.S. government’s reliance on short-term debt, which increased dramatically ever since Clinton began to shift it to reduce interest expenditures to balance the budget. (see Op-Ed WSJ below), Under the new program, the Treasury plans to start selling 2-year floating-rate notes at regular auctions beginning in January. The yield on the new notes will float according to market conditions. Hence, we will begin to see longer-term rates start to rise.
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When the people fear their government, there is tyranny; when the government fears the people, there is liberty
COMMENT: You and the people you represent are not making one dollar for the real economy, you are only stealing money from the real economy by taking money from production, mining and normal investors.
REPLY: Producers need to sell risk so they can produce on a guaranteed basis. Sorry, but without the free markets nothing would exist. Do not confuse that with over-leverage used by banks that blow everything up. They bought 30 year bonds and sold 10 year bonds and leveraged that to the hilt. The slightest up-tick in rates wiped out Orange County. This same scheme has been repeated time and time again. They blow up because they think they found the guaranteed trade and are routinely blown out of the water. Outlawing all futures markets will destroy society and eliminate all progress. That will be a Dark Age. If you are happy with the government telling you what to do and eliminating all freedom, then that is your dream world. It is not mine. There was such a world – it was Communism. Sorry that failed with free markets suppressed as you dream so do not try to force your views on the rest of us that cherish liberty when they have never worked even once.
Eliminate banks being able to trade with other people’s money. The banks should be regulated so that they are to lend on a prescribed basis and not TRADE. Stop government borrowing and you will eliminate the power of the banks. Deal with the abuses – do not pretend shutting down “paper” trading will solve your problems and make you suddenly rich over-night. Nice dreams. When you loose a tooth, don’t forget to put it under your pillow. I am sure the NSA will give you a quarter.
“When the people fear their government, there is tyranny; when the government fears the people, there is liberty.” Thomas Jefferson
Global Market Watch
Another Debt Showdown coming in Washington next year? Don’t bet on it.
Contributed by Glen Downs; From Capital Hill
Now that the federal debt and spending cans have been kicked down the road until after the first of the year, a number of people have contacted me to see if the recent showdown will be repeated when the next days of reckoning occur.
In this case, while history might rhyme, knowledgeable insiders are predicting that this fall’s walk up to the precipice is not likely to be duplicated. There will be a spending showdown of a kind – but the debt ceiling fight should be entirely different.
Some of the reasons this is the case are mundanely political. Others are more ominous.
The first inflection point will be expiration of the current spending bill on January 15, 2014. That date was not chosen at random. It’s the date that the next round of automatic “sequestration” spending cuts are due to kick in. Politicians of all stripes hate sequestration because so many categories of spending are protected from the cuts. Therefore its effects fall disproportionately on discretionary spending programs popular with interest groups of all stripes.
Republicans hope to use impending sequestration cuts as leverage to enact reductions in entitlement programs. You want spending for your favorite pet programs resorted? Fine – just replace the lost savings with cuts to mandatory spending programs.
Democrats, on the other hand, are looking to replace sequestration cuts with new revenues – or, less euphemistically, taxes. You don’t want blowback from another government shutdown (plus spending restored for Republican-favored programs like weapons systems) – then go along with ‘reasonable’ closing of tax loopholes.
That is likely to be the context of the next spending fight. When the dust clears, not much will have been fundamentally transformed. The fiscal vector that the country is on will, at best, only be steered a degree or two to the right or to the left. But there will be a fight over which direction those couple of degrees take.
On the other hand, indications are that the last debt fight may have had unseen ramifications far more ominous than generally known. While a segment of the GOP will angle for another debt-limit showdown, the more likely outcome is an increase tied to some gimmick, like “no budget, no pay” for congressmen. Politically the gimmick provides cover, but debt continues to escalate.
Don’t be surprised to see the debt ceiling lifted by a time limit, rather than a dollar limit (that is to say, effectively no dollar limit on amounts of public debt that can be incurred – but that authority to take on new debt would only be until some date-certain).
Another proposal being floated is (although less likely) is to give President Obama the authority to raise the debt ceiling at his discretion, subject to a resolution of disapproval that would have to pass both houses of congress. Such a resolution would be a kabuki dance, passing in the House and failing in the Senate.
Why the new-found willingness to acquiesce in new debt?
Credible sources here in Washington have shared a chilling back-story that took place involving the President and congressional leaders of both parties as the clock ticked down to the Treasury running out of cash earlier last month. It seems that more than one creditor nation, led by the Chinese, indirectly telegraphed a willingness to take very draconian measures in response to a ‘debt default’ – apparently even if coupon payments were made on outstanding debt owed to them. Those measures were set to go way beyond being financial, and were said to be credible in nature.
At least one senior Republican scoffed at the threat, but relented when briefed by (at least nominally) non-political figures in the national security community. That explains why, in part, the whole stand-off ended with a whimper and not a bang.
The implication? The country is far deeper down the rabbit hole of debt than most fathom. The current paradigm has moved one step closer to the end game. We are no longer masters of our own fate.
