6 Nov, 2012

As A New World Order Emerges, Will the East-West Transition be Peaceful?

Imtiaz Muqbil

BANGKOK – A former U.S. market trader who spent five years in jail “for telling the truth” has forecast the continuing economic and financial decline of what he called a “brain-dead” United States, a shift towards Asia which will last for about 200 years, a second-term win for President Barack Obama and a “high probability” of an attack on Iran, partly in order to safeguard Israel but partly to “divert attention of the world from the financial crisis.”

Speaking at a November 2-3 conference in Bangkok, Mr. Martin Armstrong, former chairman of Princeton Economics International, said the world was on a “threshold of a new era” and due for a major “directional change” that would be driven by the nomadic shifts of capital movements and a desire to find safe havens. He also forecast global social unrest in 2014 and a war of some kind, but not necessarily a world war, in 2015.

All these forecasts, he said, were part of a normal cyclical shift in global history which, similar to the laws of physics and even the movement of radio waves, has always been marked by the rise and fall of empires and can now be fairly accurately predicted through computer models. He said the primary trigger of this rise and fall, in financial and economic terms, is an unsustainable build-up of sovereign debt and governments’ inability to repay it. Regardless, he said, those who had money always were looking for a place to park it, and Asia would be the place for the foreseeable future, with China becoming the dominant global economic power by 2020.

Travel Impact Newswire Executive Editor Imtiaz Muqbil was the only travel industry journalist in Asia to cover this conference, which was managed and promoted by Bangkok-based Midas-PR and ASEAN Affairs. Because Mr. Armstrong’s views and predictions tend to go against the grain and challenge conventional wisdoms, they are unlikely to get an audience in travel & tourism. However, that is precisely why they should be heard because he is providing what every potential looming crisis needs – an early warning system to prepare and if possible, prevent and pre-empt. Broadly speaking, he discussed three topics: 1) The rise of Asia as the financial and economic powerhouse of the world, 2) the decline of the West, especially the United States, and 3) the role of money-markets and capital movements.

He presented his views in a totally detached, matter-of-fact unemotional way – futuristic but realistic, not blindly optimistic like many of the “futurists” dominating travel industry events. The fact that he is an American is critically important. If the same comments are made by non-Americans, they would be quickly tagged anti-American. Mr. Armstrong indicated that labels were irrelevant. What is transpiring worldwide all boils down to “human nature.” He repeated the phrase “that’s just the way it is” about a dozen times during the presentation.

Although debatable, his conclusions were based on historical facts, starting with the rise and fall of empires such as the Ottoman, Greek and Roman, the monetary systems they used, and their links to modern day cycles of economic change. He discussed Marx, Adam Smith, Keynes as well as Einstein. He explained in detail but plain language how money markets work, what drives the decision-making process as markets move from bulls to bears, winners and losers, updrafts and downdrafts, booms to busts, confidence and panic.

According to his profile on Wikipedia, what is happening now and what potentially happens next can be pretty well predicted by his Economic Confidence Model, which he is credited with developing based on the business cycles and pi.^[3]. The Wikipedia profile says he is known for predicting the crash of 1987 to the very day.^[4] “Using his theory that boom-bust cycles occur precisely every 8.6 years, he correctly predicted the Nikkei‘s collapse in 1989 and Russia’s financial collapse in 1998.^[3][5]”

The computer models he showed offered a  look at the vast and complex ways to make and move money using nothing more than a keyboard. Traders can buy and sell currencies, commodities, utilities, energy, transport, metals, pharmaceuticals and much more. Under each category there are sub-categories: rice, wheat, soybeans coffee, lumber, land, real estate. These movements can be categorised by countries as well as by timing – daily, weekly, monthly or yearly. Everything is said to move by cycles which also have classifications: beta cycle, alpha cycle, panic cycle, trading cycle.

Mr. Armstrong’s objective was to help many of those who attended the conference to ride the next cycle, spot the opportunities in the market shifts, and understand when and where the pendulums are going to swing. According to him, there is a tremendous order within what may appear to be chaos. Creating databases helps identify patterns and track how empires decline, be it as a soft landing or an abrupt fall. Usually, he said, once the decline begins, it takes about 50 years for the change to be completed. In recent history, he cited the fall of the Berlin Wall as one transition. The need to analyse the past is imperative to predicting the future. Unfortunately, he said, the evidence indicates that most societies learn “absolutely nothing” from these cycles, have “no ability to retain knowledge and come up with the same stupid ideas every time.”

Here is a synopsis of what he said over two days. More details about him and his work are available here.

The decline of the West and the U.S.

He talked about how the U.S. system has amassed an “outrageous debt” and the consequences that await. “Every empire that collapses, it is because of debt. It’s always the same crisis. Governments spend more than what they have. Politicians all do the same thing. Collapse is inevitable.”

He explained why the real story never gets told — investigative journalists are muzzled, mainstream media bows to vested interests, court transcripts can be doctored, politicians often don’t read the bills they pass and rating agencies can be bribed to give Triple-A ratings. Given such a system, it was not surprising that companies like Lehman Brothers and Bear Stearns “could crash in 24 hours without the politicians having a clue as to what was going on,” followed by bailouts of other companies such as Goldman Sachs.

Today, he said, interest rates are now zero and the savings and incomes of the elderly people are being wiped out. “The U.S. is about as brain dead as it can possibly be,” Mr. Armstrong said. “About 40% of U.S. debt is held outside the country. I don’t see how the currency is going to survive. In times of war, you always try and undermine the value of your enemy’s currency. It’s standard operating procedure. Today that is very easy to do. it easier to do than in any other period of history.”

He noted that that the U.S. also went from being agrarian society to an industrialised society after the Great Depression, “so a wave of creative destruction is necessary. Without the Great Depression, the U.S. would have still been a farm country. Now, it is only 3% agrarian from an employment perspective. All countries go through the same cycle. As they industrialise, manufacturing moves to places where it is cheaper. That is human nature. You can follow it like a ballet. It cannot be prevented.” He said the U.S. “may break up into four regional sections.”

But he also criticised the highly polarised atmosphere and the “creation of an atmosphere of hatred against the rich” which will worsen the polarisation. He noted that the social unrest had already started in southern Europe and would eventually spread to the United States, facilitated and coordinated by the internet, similar to the Arab spring. That is why, he said, efforts are being made to put a “kill switch” into the Internet, even though it will be impossible to actually achieve.

He said that as the economic problems near, governments become much more draconian and start going after the rich and curbing civil liberties. “Each time there is a crisis, capital rushes around the world. It goes nuts, it creates confusion and anomalies. Then governments step in to deal with the situation and give themselves more power on the grounds that they could have prevented it if they had a more power. Then, all civil liberty vanishes.”

According to Mr. Armstrong, “the US government is doing everything it can do to grab more power. Security authorities can operate without search warrants and laws are being amended to allow them to put people away without lawyers or trial. It’s scary.” The more the West gets draconian, whether through taxation, chasing the rich out, or whatever, the worse it will get. He said he often talks to Russians who fled Russia and today see things happening that an American does not. “One guy fled to America and is now seeing things that he says he never saw even when he was in Russia.” Mr. Armstrong said the reality of what is going on cannot be fully appreciated “if you have not seen tanks driving down the street, as Americans have not.”

He said the assault on civil liberties will soon reach a stage where it will be “more than George Orwell by a factor of ten”. He asked: “Do you know how many people there are (being held without charge or trial) in jail whom no-one has ever heard of? The newspapers are not going tell you. It’s just part of the corruption. People in Congress are telling me to move to Ecuador – do you know why? Because its off the map. It’s located on the equator, located on highland plateau, the weather’s great all year around. There’s no surveillance and the phone calls are not swept.”

Mr. Armstrong said he did not favour bailing out Goldman Sachs or any other big company which fails. “If they go bust, many other banks are just waiting to take over. But as long as you continue to coddle them, they will continue to do it over and over again. Why should they do anything differently as long as they know they are covered? The corporations win both ways: the government subsidises their losses and pays them all their winnings.”

The Americans don’t want to admit what everybody knows, which is that they are losing power, he said. “You will see a major capitulation in the world financial system. This is not going to survive.” Asked about the military budget and wars, he said, wars, too, are cyclical and all are basically economically driven. Asked about Julian Assange and Wikileaks, he replied, “It’s all part of the same thing.”

He predicted that by August 2014 things will shift and a lot of civil unrest will emerge. By 2016, we will see political change and the emergence of a third party in the U.S. as people are getting fed up of the two parties. Overall, he forecast another 20 years of volatility. Sometimes when a government is enraged they burn down the barn in order to get the rat, he said, noting that even if the rich paid all the taxes, it would not pay off all the national U.S. debt.

Sovereign debt crisis will force changes in many countries, with the key indicators being capital flows and currency movements. He also warned that governments are trying to eliminate money. “They want everything to go electronic. Now you can pay over Google. That way they have absolute control over everything you do. It will get a lot worse before it gets better.”

The rise of Asia

He said because capital always needs a place to park, it now sees Asia as the next place to be. He noted that Asia by and large had learned the mistakes of the 1997 financial crisis and was now better placed to absorb the capital headed this way.

“Asia is moving at a completely different peak from the rest of the world. The whole region is going to be doing well, especially China and India and other countries that do not have a sovereign debt crisis problem. China will be the world’s financial capital and Number One economy by 2020.” He lauded the Australian move to become part of the Asian century as a recognition of this shift. He forecast that Singapore will be richest country on a per capita income basis in five years because it is doing everything correct. However, he expressed concern about what he called the growing anti-foreigner sentiment there.

To retain this advantage, he added, Asia will need to underpin its stability and rule of law. He again flagged a reminder of the perils of debt. It’s always debt, Mr. Armstrong noted, citing the role of debt in creating the 1997 financial crisis. He urged: “Do not get into debt. If you get into debt, you are in trouble.”

Role of money markets and capital shifts

Many of the same rules and law that apply in physics also apply in economics. In today’s globalised world, everything is interconnected, making it imperative for players to understand what is happening on the other side, Mr. Armstrong said. There is a tremendous reservoir of capital available and traders always have to look at where does it move.

“Why do people sell? Probably because they need money to cover the losses they are taking elsewhere. That’s when you get contagion. Even these panics, once you understand how to deal with them, you can make an absolute fortune.” He quoted Machiavelli as saying that ‘history repeats itself as the passions of man have never changed.’ It’s human nature. Sometimes when you are trading, your worst enemy is yourself. Indeed, one of his slides was headlined: “How to survive your own trading decisions.”

He noted that linear thinking reduces issues to a factor of “this caused that” whereas in fact it’s a combination of several different things. Dynamic thinking is required, Mr. Armstrong suggested. He added, “All your senses have to be involved in the trading process. There is something there that is hard to describe. It is important to get a feel for the market. When to trade, when to get involved, when to step back, where am I right and where am I wrong, where do you get out. Very often, it is boring, tedious work, requiring only two or three good trades a year to make real money. If they get it right, young traders can make a lot of money very quickly.”

Interestingly, Mr. Armstrong admitted, after being asked by this editor, that the money-market traders pay no attention the economic devastation and joblessness they can cause. The morality of their actions does not occur to them.

He claimed there is no truth to claims that those who own the capital are interested in controlling the world. “They are only interested in the next quarter and what they can get out of it….Both talent and money moves and there are core groups of very top brokers which move around the world. They just follow the capital flows.” The model will not change. Money will always swing from one side to the other, like a pendulum. It’s not the high or the low but the turning point that matters, Mr. Armstrong said.

Conclusion

In spite of what may appear to be his unorthodox views, Mr. Armstrong says he remains in demand by central bankers and political leaders around the world, “largely because I will tell them what I really think and will not kiss their ass.” In fact, he says, he often finds that government officials use him to say what they really think because they are constrained by political correctness from doing so.

The upcoming directional change on a global scale could well be accelerated by the unexpected consequences of natural disasters. He warned that the world will “have to make significant changes in how we manage society or we are going to land up in all kinds of wars. Somebody has to start this process.” The U.S. economist Milton Friedman had written a book calling for a check and balance system around the world. Mr. Armstrong said Mr. Friedman had attended one of his previous lectures and liked what he had heard, and encouraged him “to continue doing what I am doing now.”

One of Mr. Armstrong’s solutions is to create an international reserve currency that “won’t be a reserve currency for one particular country,” (as the dollar is to the United States). He also made some other suggestions related to the elimination of taxation and the power to borrow. He called for the piled up sovereign debt to be swapped for investment coupons and for term limits to be installed. As a non-economist, this editor couldn’t understand any of the above. His final suggestion was crystal clear, however: “Mandate democratic reforms where the people vote.”

Between the lines, however, Mr. Armstrong proved right those who see the entire system as being a form of casino capitalism, rife with traders who make devastating mistakes but only a few pay the price of causing immense damage to banks and financial institutions. Calls for systemic reform are echoing in many world forums because it’s become too risky and the price for failure is often paid by those at the lowest rung of the economic ladder. Indeed, there is too much money involved in the hands of too few people with too little accountability and too few checks and balances. It is what is driving the push to dismantle banking secrecy and the pursuit of tax evaders.

For the travel & tourism industry, Mr Armstrong’s message is clear: Be careful with future investments and be prepared for downturns, which are occurring with increasing frequency these days. If this year has proven to be good so far, it is largely because of the absence of any global crisis. But the winds of change are blowing furiously. Travel & tourism may be resilient but it’s not invincible. The full consequences of the “directional change” are yet to be prepared for.