QUESTION: Marty, Socrates is worth its weight in something far more valuable than gold. I want to congratulate you for you are the ONLY adviser who nailed not just the cryptocurrency bloodbath, but that the dollar would rise when everyone else kept predicting it would crumble to dust. Then you warned that emerging markets would move into crisis defaulting on their debt. You said even China was in the same crisis because many borrowed in dollars since the interest rates were cheaper.
Is the dollar behind the banking crisis in China and with all the AI systems claiming a new world order, why are they failing when Socrates succeeds?
I am so grateful. I cannot tell you how much.
ANSWER: I will answer the AI issue tomorrow. The dollar crisis is emerging because people do not understand capital flow analysis. They keep harping on the quantity theory of money. They assert that the more money the Fed creates, the more the dollar must decline, and typically gold must rise. They do not understand that capital flows like water. It will always move to the lowest risk.
Milton Friedman came to listen to my lecture on foreign exchange in Chicago. We became friends and he explained to me that I was doing what he had only dreamed about. Yes, it was Milton who had advised Nixon on shutting down Bretton Woods and adopting a floating exchange rate system.
While many criticize Milton, they did not really understand what he saw. In 1953, he saw that a floating exchange rate system would provide a natural check and balance against the government policies. That is why he came to listen to me. I had developed capital flow analysis which was what he envisioned would happen under a floating exchange rate system. He theorized that in 1953.
I have been called in on so many FX crises it is amazing. The bankers were selling Swiss loans to Australians in the 1980s/90s to save on interest rates. They never considered what would happen if the exchange rate changed and the Swiss franc rose against the A$.
Just look at these two charts. The A$ was crashing and the Swiss franc rose. The default rate on mortgages exploded and small businesses who listened to bankers pitching Swiss loans to save money lost a fortune. The same crisis took place following the Swiss/Euro Peg when that broke.
Once again, the bankers were selling mortgages in the Swiss franc in Europe to lower interest rates. I cannot tell you how many times we have been called in on major financial crises around the world all for the very same reason. People make a loan in a foreign currency to save money on the interest rate. They have NO CONCEPT that the currency can swing even 40% in a short period of time.
The Chinese Central Bank warned its provinces and corporations NOT to borrow in dollars. They understood our model and understood what happens under such a currency crisis. Nevertheless, provinces and private corporations did not listen. They succumbed to the lure of the cheap interest rate.
I had even spoken with a Chinese major company and warned them the dollar would rise and there was a serious risk in emerging markets. They were new and as you say, they listened to the majority of opinions that took the opposite forecast. Now we see bank runs in China and serious problems in emerging markets.
I have tried to explain, that the FIRST the dollar will rise. That will then lead to sovereign defaults in emerging markets, and that unfolds, the dollar lender loses capital, and that is the beginning of the eventual crisis. These people who just hate the dollar and forecast on an opinion do not understand the world economy. A lower dollar would NEVER result in a massive worldwide sovereign default. When the British power collapsed to $1.03 in 1985, Americans were buying everything in sight in London. That is what would happen if the dollar dropped FIRST – the foreign capital would pour in and buy everything like a sale at Macy’s.