Monday, January 9, 2012

Capital Controls Coming To America

Jim: Joining me as my special guest on the program today is Martin Armstrong from, and Martin, in December of 2010 the US passed the HIRE Act which increased reporting requirements for US citizens holding assets overseas. It would appear to me Martin that step by step the government is implementing programs of capital control. Do you see it that way?
Martin: Oh, Absolutely! I mean, we’re in a situation where the budget deficits are just blowing out, and its going to get much worse. And so what’s happening is that instead of dealing with the issues the government is going to be much more aggressive to tax people, chase them down, put them in prison. All kinds of crazy stuff. This new act that came in December 19th, effectively they are telling any foreign corporation that they must report any activity with an American overseas. And what they’re going to do to them is what they did to UBS. If they don’t comply, they will confiscate all their assets here. So, honestly, from an international perspective, the best advice I could tell people is that, is to get out. If you’re going to do business in the United States use an agent. Get your branches out of this country. It’s going to get far worse. 
Jim: It would almost appear, this is something that happened in Germany under the Nazi’s, where they began to collect and find out where the assets were, and eventually as we know in the case of the Jews, they confiscated them. But it seems like, whenever you have a government that is trying to keep tabs of what you’re doing, what you own, where it’s held…that’s a government that’s intent on taking some of it.
Martin: Yeah, I mean this is, you know the slogans tend to really mask the truth. And that is, “The rich don’t pay their fair share”, etc. What this is really about is that only the United States and Japan tax worldwide income. So, if you’re parents were American and you happen to be born in Kenya or something, and you never come back to this country, you still owe taxes to the United States. So, it’s not a question of paying your fair share. An American is basically, when he’s born, is an economic slave. And you owe money to this country, whether you’re here, whether you receive any of the benefits or not. Whereas Europeans, they pay if you use the services. If you’re going to stay in the country, then you pay taxes. A “Brit” who works in Hong Kong, doesn’t pay taxes back in Britain. He pays his taxes in Hong Kong. Americans have to pay in both places. So, it’s one of the primary reasons why also, US companies are forced offshore, which the government doesn’t like to talk about. 
But, for example, the Yellow River Dam in China, not one American company got any of the construction. Why? Because German companies were already 33% cheaper bidding on the same project than an American company. And, because they earn the money outside the country, it’s tax free. Americans don’t. So we really cannot compete on a global scale, which is one of the primary reasons why companies leave. And of course they don’t want to talk about that. You know, that’s the reality of what we’re facing here.
Jim: You know, throughout history, governments rarely reform themselves. In fact, when you look at the Roman Empire, England under Charles I, France during the French Revolution, it seems like the powers of the State, as the State’s debts expand, the powers of the State against the people also grow. Is this likely to happen here? I mean, it seems like, little by little, that’s what’s happening. Our rights, and the Constitution, the Bill of Rights, are being stripped away from us almost on an annual basis.
Martin: Well, essentially, the Bill of Rights is gutted already. There’s nothing left. If, you know, just take the very simple thing, the rights, Freedom of Speech and Freedom of Assembly. OK, I mean, you can look at what they did basically to the “Occupy Wall Street” people. Regardless if you agree or disagree with them. I mean they basically arrest them. They say “Oh, you’re walking on the grass”, or. They say “You’re violating…” “Well, we're really not violating your First Amendment Rights”, you violated some other minor statute over here. So, this is how they get around everything. Ah, they always, I think it was, I just saw on the internet that 40,000 new laws are being proposed for 2012 already. (Chuckle) I mean, this is crazy. We have, I mean, God did the Ten Commandments, man did about 10 billion laws. (Laugh) So, and we’re trying to say the same thing countless times. I mean over and over again. The Bill of Rights is gone. That’s completely finished. And there is no question that somebody can actually protest, permit, and all this other kind of stuff. Now that’s all out the window.
And, you can go pretty much down the line. Forth Amendment…gone. The Fifth Amendment…they basically have held that you’re right to remain silent, that’s only personal. If you work for a company, which basically 99% of the people do, you don’t have such a right because Corporations don’t have such rights. I mean, you go right down the line. You look at this new bill that they just put in, that the military can operate domestically; deny people counsel, lock them up – citizens now – alright. No right to go to court, no right to lawyers, no right to a trial. They can just hold you indefinitely until you die. And all under the pretense, "oh, it’s terrorism." Well, how do you know somebody is a terrorist? You know, you have to have a right to what its called, due process of law.
And due process of law actually comes from the Bible, and it comes from Genesis. When God basically says to Cain, “Where is your brother?” He already knows supposedly what happened. But He’s giving him the right. He’s summoning him and He’s giving him the right to be heard. That is the fundamental principle of due process of law. And this new bill says that you do not have that. That we can just lock you up; you have no right to lawyers, no right to a judge, no right to a public trial, no right to even find out what they say against you. Nothing. So, we’re about the closest we can get to Nazism.
Jim: Well, on another issue too, which is maybe why the government is doing this. We’re seeing world economies start to crumble under their burdens of debt, and yet the governments’ response is to expand government. And the US has gone from 18% of GDP on its’ way to 25%. We’ve seen increased regulations, and you just talked about numerous bills being proposed for this year. And as they increase these regs and the size of government, taxation and regulation are strangling the economies. So instead of lowering taxes and reducing the size of government, they’re going in the opposite direction. Government is getting more rapacious in terms of its demands on its citizens.
Martin: This is exactly how Rome collapsed. There was a Roman Emperor, Maximinus in 238 [AD], he simply declared all wealth in the Roman Empire to be his. That’s it. And, what happened, is that, and what you’re going to see over the next few years, as you attack the rich, as the Romans did, what happens is that, somebody now hoards their money. They no longer invest it, they hide it, and they don’t keep it in banks. And consequently, that reduces the velocity of money. And as it reduces the velocity that is what creates the economic decline. So that interest rates, even during the Great Depression, fell to 1%, nobody would borrow because they didn’t see an opportunity to make money. And every possible mistake that every government has made before us, we are following step by step.
I mean you take the 2007 crisis. There were over ten agencies regulating these CDOs. Not a single one was able to do anything. You look at MF Global. It’s blown up, they stole almost basically two billion dollars from people; the clearing exchange hasn’t honored it. Nobody will do anything about it. The FTC, I mean, we have all these regulators. What have they ever prevented? Nothing! Absolutely nothing! And it’s just a real giant joke. And the other problem that we are now facing and why government is rising exponentially is that as the baby boomers retire, this is also happening with government employees. So now they have to pay them virtually 100% of what they’ve been earning the last three years. Now they have to go out and hire somebody else to replace them. So the cost of government on the retirees is basically doubling. And there is no way out of this without some sort of honest reform. And government is not about to do it because, largely I think… Well, historically you’re asking them…they have to give up power which they are not going to do.
And additionally, we really don’t have a democracy, per se. You saw politicians stand up and say, “Oh Saddam Hussein was a dictator, and Gaddafi. Oh, they’ve been in power for thirty years.” Then you look at these senators and you say, “Well how long have you been down there?” About the same amount of time. You know, we really don’t have choices and whoever is sponsored by the party has to basically kowtow to the party. So, you know it’s very rare to find an individual like Ron Paul, for example, but the press tries to ignore him desperately. Why? Because he’s not really part of the mainstream.
So, I don’t see where we have any hope of doing anything, and because [of] the politicians. We need term limits desperately. It is unfortunately…I mean even if you want to, say a Congressman, increase the term to four years, fine. But one time – that’s it – out and gone!
I mean, I don’t care who you put in as president, Obama is already spending the last, almost half the term that he’s in for, preparing to get elected for the second time. So, you know, it should be one time only for everybody. And then, they're actually, maybe going to do something that they should be doing without having to say, “Well gee, I had better not vote on this because I am going to get elected and nobody likes that.”
 You know, without serious political reform, I mean we’re just really screwed. Totally!
Jim: This brings up the question of what has been referred to as the Fourth Estate. That would appear Martin that we no longer operate in this country with a free press. In fact I would probably call it the government media. Because its views, its readership is declining because of its bias and slant of how issues are presented to the public, or how issues are ignored. And that’s the tragedy here because our Founding Fathers always believed in a free press and the freedom of speech, that the media would be a check on government. Instead they’ve become another arm of government. Isn’t that another problem that we face here?
Martin: Yeah, there’s just… The press is absolutely terrible. Ah, I mean, it’s been going on for a while. When Michael Milken back in 1987, he was going to go to trial. Then they finally forced him into pleading. And not one American paper told the truth. The only paper that reported the full true story was the London Financial Times. Michael Milken, they first charged his brother, trying to force him to plead guilty. His brother said, “Don’t worry about it, let’s go to trial.” Then they went after his 90 year old grandfather, and said, “If you don’t plead guilty, we’re going to charge him.”
So, I mean not one of the American papers won’t ever tell the truth about anything here. I mean it’s an absolute joke. We have a conviction rate in this country that is 10% higher than Adolph Hitler. I mean that’s alarming. The only person we haven’t beaten is Stalin, and that’s only because he basically said, “Take everybody away.” But I mean the most notorious court of Adolph Hitler had a conviction rate of 90%. We’re at 99! I mean, what does that tell you? The federal government can never be wrong about anybody at any time. So it really gets to be scary.
Jim: I want to move on to another issue that is confronting the markets, not only last year, but looks like a carryover into this year. And that is the sovereign debt crisis. We’ve seen in Europe the December 9th agreement to cede sovereignty. I guess, as you look at this crisis unfold, do you believe that Germany will stick to its hard line or will the politicians and bureaucrats, in order to preserve the Euro, will Germany blink, if it means saving the Euro in the end?
Martin: According to very high sources I have in Germany, if the choice comes between the collapse of the Euro or blinking and letting inflation take place, they will take the latter. They have so much invested in this Euro its pathetic that, there too, they simply will not do the right thing.
I mean, as a trader, I warned them back in ’97. If you’re going to leave every country with its own individual bond, if you short the bond you basically have a virtual currency. Its just a derivative, that’s it. The only way to have actually created a single currency was, like the United States, you have to create a single national debt. Can you imagine what the national debt of this country would be if all fifty states had the right to issue federal debt? I mean it would be total chaos. But that’s what Europe has got. And largely because the politicians…I mean the two words that should have been divorced the minute they met are “political economy.” Because, they don’t know what they’re doing…most of them are lawyers. And they have done a fantastic job of always screwing up everything, every step of the way.
And Europe, unfortunately is in the same boat. And they… It’s gotten worse now. Where before you thought Greece was in bad shape you sold the currency. It actually devalued the debt. Now what happens is, because the currency is the Euro, you have to sell the bonds. So you sell the bonds, and what happens is the interest rates don’t go up. What we’re really facing this year is, and remarkably no one is talking about it yet, there is six hundred (600) billion Euros that have to be rolled, and that is just Spain and Italy this year. You’re rolling from interest rates that are 1.5% to 2%, to 7%. So everywhere we look the national debt of everyone around is going to go exponentially higher. So this is why the countries are getting very aggressive with their taxation. I believe that historically you’re gonna see more and more people hoard money and not really invest. It’s just everything they could possibly do wrong they are doing.
Jim: Well, you know we’ve seen Martin, a lot of protests. Whether we’ve seen it here in the states, Greece, the Middle East… And governments I would think would have to look with trepidation at events in the Middle East where a rebellion used social media to bring the rebellion together and to get organized. There is a recent bill that was introduced into the Senate by Senator Joseph Lieberman and Susan Collins; it’s called “protecting cyber space.”
Shouldn’t that also be a warning in terms of the steps government is taking? And it seems like, Martin, they sort of have a sense that this is coming. In other words, people will only sit back and be a slave for so long before the slaves revolt.
Martin: Oh, yeah, they know it. They proposed that within months of what happened in the Middle East. And I’m a programmer. You cannot attack every server in this country simultaneously. You can maybe attack one server; you know you can attack the government. You can unplug those, but you cannot unplug the entire internet. And this is what the president now… That’s what they want the power to do. Which will basically shut down all the social media. But it will also shut down where the free press is. Everybody turns to the internet for radio, for all these things. This will all be shut off in the blink of an eye if the government just doesn’t like it. And they can always now claim, “Oh, its some terrorist.” I mean these nineteen guys and a camel have taken away all our rights, where World War I, Korea, Vietnam…none of those standing armies could have done what nineteen guys and a camel did.
Jim: I want to move on to something that we’re seeing play out in the economy, and I’d like to get your explanation for our listeners.
On one hand we have two opposing forces at work. We have deleveraging taking place in the private sector, and we’ve seen that steadily since the crisis in 2007. And yet we have monetary and fiscal expansion on the side of the government which is inflationary. So it seems like, Martin, we have a battle between the forces of inflation and deflation occurring simultaneously. And looking at the economic numbers and even the inflation rate, what we’ve got in its place is stagflation.
Martin: Yes. Its hard to get a full bead on the full amount of deflation we’re going through. I would put it at a very bear minimum of 15 trillion dollars. And that is the lowering of asset values across the board. So, if you look at just the real estate market, the outstanding mortgages were about 15 trillion. So, if you really just want to look at that, there’s a third off of that, so you’re talking five trillion dollars. So the Feds increasing the monetary supply through its elastic facility, you’re talking about a little less than three trillion dollars. That’s why there was no real inflation. QE 1 and 2 really did not stimulate. They can’t pump in enough money to basically fix it the way they’ve done. What they should have done, which would have been much simpler, was to forget their friends and relatives in the banking industry. They should have just taken all the mortgages across the board and just said OK, fine, we’re chopping them by 25% and let the government pay up for that. That would have done a heck of a lot more for the economy because, number one, it would have prevented all these massive foreclosures, which essentially affects everybody.
Because what happens is so much housing comes on the market that your house, even if you are fully paid up, depreciates in value because of the supply that’s out there to be sold. And the banks have absolutely done a terrible job at this. They didn’t have…pay attention really to what they were doing. They started pooling all these mortgages together. And I can tell you that anybody that had any kind of a problem with not being able to pay their mortgage or whatever, all they really have to do is say, you want… If somebody tries to foreclose, “Give me the certified copy of the mortgage.” Because once they pooled these things and they sliced them and diced them, no one actually knew who actually owned what. So that’s why you have some people being able to stay in houses for three years. You know, they’re getting basically rent free and whatever, largely because they pooled these things together that should never have been done. And they go to the government with their hat in hand and ask for, you know, 700 billion dollars to bail themselves out. Not the economy. That hasn’t done anything for anybody, other than make the bankers rich again, that’s about it.
Jim: You know, as we look at these opposing forces that we’ve been talking about here, inflation, deflation. This leads me to gold and how it has performed. In September, Martin, it looked like…as it crossed over 1900 it was on its way to 2000. Instead, it ended the year below 1600. Now, you believe the market has the possibility, in the gold market, to retest the 1225 – 1325 area going into this year. What would be the catalyst for this move downward in your opinion?
Martin: It’s largely this battle between inflation and deflation. I don’t see the inflationary pressure currently. We’re still burdened more with a deflationary contraction still. But that will probably start to, I would think reverse, this summer. After the summer it will start to percolate back upward in the inflationary side. Largely because we have so much debt rolling over that the interest expenditures are going to go up in Europe and elsewhere. And I think that we’re going to see that a lot more capital tends to be hoarded, and if you’re going to be looking at hoarding cash at this time you certainly don’t want to do it in cash in a bank, per se. So I do think that people will tend to look a little bit more at the metals, particularly gold, later on in 2012. More in the second half.
So I think that we’re gonna have to really be concerned about how the government is moving in every single direction here with taxation, with cutting off the internet, with authorizing domestic activity with the military. All this is pointing in one direction that they know that they have trouble coming. And, historically, even with Fascism or whatever appears in Europe, it just takes one or two years for it to pop up over here.
So, the other thing that we really have a problem with, which is similar to the Great Depression, is that… people don’t realize is that you really have to pay attention to what was the unemployment at that point in time. Unemployment was really about what it is today. It really only went up to slightly under ten percent from the financial market side. What came in as a second punch and drove unemployment to 25 percent was largely after the lows were in place going into 1935, etc.
The reason for that was the Dust Bowl and 40% of the civil workforce at the time were farmers. And you could not pass a law to make it rain. So it was the final stage of the Industrial Revolution that forced people out of the agricultural sector and into becoming skilled labor. So by the time you get to 1980 the agricultural sector is only eight percent. We’re in the same similar situation today, except for that 40 percent figure of the civil workforce is employed by government. And this is a bit worse in the sense that they do not really contribute anything to economic growth. That’s why we call them public servants. It’s like hiring a maid in your house, that’s very nice, but she’s going to cost you money…she’s not making it so that you can earn more. And a public servant is basically the same thing. It’s a cost of living. Although the government doesn’t put it in the CPI indexes, it is part of our cost of living. And 40 per cent of the civil workforce is employed by the government.
So as government is rising in cost exponentially this is our great problem. Because the state and local governments are going to be forced into more and more layoffs, etc., because they can’t print money like the Feds can. So, you’re going to see more bankruptcies, etc. So, the unemployment we see going forward is largely going to be coming from the public sector rather than the private sector. And, uh, unemployment is going to go up rather significantly. And its a part of the process we have to go through. We have to get…reduce the size of government, make it more efficient again. I said, you had over ten agencies regulating the CDOs and nobody did the job. I mean, one would be, that actually functioned, would be far better than more than ten that do nothing.
Jim: You know one of the things that I’ve noticed in your writings Martin, is that you make a lot of references to the Roman Empire. And like yourself, I am a student of Roman history. If you were to recommend something on Rome that our listeners could read that would give them sort of some insights because we seem to be running parallel to many of the things that caused the eventual decline of the Roman Empire. What book would you read? Would you recommend Gibbons?
Martin: Well, Gibbons is probably one of the better ones. But it, it has maybe a bit of a bias in it as far as religion is concerned. He was fairly oppressed by religion, and when you read it, you have to keep in mind that this was also coming out of the period of the great religious wars in England between the Catholics and the Protestants. So, he tended to look at things a little bit more religiously, giving it much more credence that it was worth. I’m trying to finish a book on it to really bring it together from a lot of different sources. There is no one particular source that I could tell you. But I think what Gibbons missed on the religious side was that the real conversion to Christianity only came when the economy collapsed. So that people were praying to their various different gods and nothing happened. And that is really when they turned to Christianity, and that is in the third century. So that when you have Constantine basically in battle, he’s marching forward under the sign of the cross, etc. So that is really where the major persecutions took place and where the big shift in religious values take place. And that really was driven by the economy more than anything else at that stage. That’s where you get the big surge.
Prior to that, Christianity still very much, was a minor type sect. The persecutions began largely because Nero was the first one do to it, and he basically wanted to blame them (the Christians) instead of himself for setting fire to Rome.
Jim: So is there any, outside of Gibbons, outside that bias, is there any book that you’ve read personally that had an impact in your thinking?
Martin: Well, I would say, you know, Adam Smith really, his “Wealth of Nations.” I think really is probably the beginning and the end in economics. That it’s fairly simple and straightforward and that is that everybody operates under their own self interest. And that not only applies personally to various different individuals, but also to government. So, that’s why Communism failed, because it sounds nice, you create government and you hand them… you take all the toys away from the rich, but, so all you did was take them from one party and place them in the hands of another and then that was power, and they didn’t want to give that up. (Chuckle) You can’t get away from this self-interest. It doesn’t matter who it is. It’s our problem with government right now as we’ve been talking, and it’s going to get much more aggressive in taxation. Because its self-interest is to survive, it will not reform willingly at any point in time. It has just never happened. So when you get to these points in history where the debt is always what destroys every society going back to 6,000 BC.
And there were debt crises that Aristotle wrote about. So this is nothing new. It’s the same thing all the time. There were real estate speculations in Athens. He talked about how real estate collapsed. So it’s hard for me to point you to one particular book. I mean I’ve read so many different things, that I would say that the self-interest concept by Adam Smith is probably by far the best overview; and then there are a lot of different books that I’ve read on specific periods. So the one I’m trying to write now is to try and gather all that together and bring it into one place so that you can actually look at Athens, and etc., in comparison.
Jim: Well, when that book is complete, please, give me a heads up because I would love to have you on the program to discuss it.
Martin, as we close, give out your website, because you publish a lot of good information that you make available to the public free. And, but also, you are going to be cranking up the computer modeling in terms of forecasting, which will be a subscription service. Spend a moment if you would as we close and tell our listeners about that.
Martin: Well, we began as a public service providing information, historical comparisons and things of this nature, and details as to what is happening politically on a global scale. And just as we were talking about the press, our readership is now is over 500,000, and we provide it all free as a public service. And I mean the New York Times, to put it into comparison, has a circulation of 800,000. We’re pretty large on an international scale at this point. And it is mainly provided to give people the sources where to actually find a lot of these different things and what is actually truly happening. And that you can get at “” or “”, and they’re provided… You know you can go on there and pull down reports that are written for the last several years. That’s all provided for free. So we have a lot of students who are always using it…things of that nature. And it’s translated into different languages. So its been very very good for a lot of people over this chaotic period of time.
Jim: Well, keep up the good work Martin. As always it’s a pleasure to be speaking with you. I want to wish you a healthy and prosperous New Year. And once again if you want to follow Martin’s work, just go to “” that’s “” or “”
And we’ve been speaking with the head of Armstrong Economics, Martin Armstrong. Martin, thanks so much for joining us on the program.
Martin: Thank you very much for inviting me.

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