Central Banks & the Absence of Tools

January 9. 2025 by Martin Armstrong

Central Bankers are trapped; Keynesian Economics remains the only tool in their quiver, and they are running out of arrows. The Fed Watchers are neck-deep in mainstream media propaganda spun by Marxist academics who lack any experience in even trading their own account, no less observing the real world outside of their ivory towers. Most of this dogma has not changed for centuries, and it stems from an era when the monetary system was in its infancy and based entirely upon the metal content of coinage lacking sufficient premiums for economic power.

As I have reported many times, the coinage of ancient times always carried a premium for the dominant economic power. The Swiss were imitating the gold coins of Philip II of Macedonia during the 4th century BC – the father of Alexander the Great.

Ancient Egypt never bothered to issue their own coinage, and they were conquered by Alexander the Great. Previously, the dominant economic power before Macedonia was Athens. The Egyptians imitated Athenian owls, which were recognized in international trade.

When Rome conquered Green and displayed the empire of Alexander the Great, we find that India was dominant in the trade of spices with the Romans. There was always a PREMIUM over the metal content of the coins of the dominant economy. Just as the dollar is really the reserve currency BECAUSE everyone needs to sell their products to Americans, the same was true in ancient times with Rome. That is, Rome lasted longer than anyone because it had a consumer-based economy, and thus, it was economically beneficial to stay within the Empire. That created the 1,000 years of peace, which our Neocons are only interested in imperial empire building, defeating Russia and China. It is free trade that creates world peace. They skipped that class in school and preferred death and destruction.

It was a trade that raised Florence to the top of the economic food chain by the 14th century. Their gold coin was the Florin, and once again, we see everyone imitating the Florin from Hungary to Spain.

By the 19th century, even Britain was issuing a silver coin still called the florin, equal to two shillings, demonstrating the long-term consequences of inflation over the centuries. The economic history is written in the coinage, not subject to fake news or opinion. It is there for everyone to see if they ever opened their eyes.

With the fall of Rome in Europe, there were no gold coins issued until the Brindisi Gold Augustalis in 1232 to facilitate trade with the Arab world. That inspired Florence to issue the Florin about 20 years later, in 1252, and the idea caught on with Genoa issuing their Gold Genovino the following year. Then, King Henry III issued a gold penny in 1257. From Florence to London, issuing gold coinage became prestigious, showing they were a prosperous empire.

The monetary system was entirely based on the metal content. By the 16th century, we begin to see competitive debasement between England and Spain. This has greatly influenced to this day how central bankers are dealing with old theories based on the quantity of money.

Sir Thomas Gresham was the agent for the English Crown on the Amsterdam Bourse, where government debt was starting to be traded. Because the exchange rates between nations did not have a premium at this time for economic power, the FX rates were based entirely on metal content. Thus, Gresham observed that debasement was a deterrence to selling government debt, for you would be repaid with debased coinage that had a lesser value on the FX markets. This led to Gresham’s Law – that bad money (debased) drives out the good.

As I have reported previously, once Emperor Valerian I (253-260AD) was captured by the Persians and remained in the prison of their king to be stuffed as a trophy on his death, the PUBLIC CONFIDENCE in Rome’s monetary system unfolded. Bankers were unsure about even accepting Roman coinage, demonstrating that there was a premium OVER AND ABOVE the metal content. The collapse in PUBLIC CONFIDENCE led to people hoarding the old coinage, for what took place was massive debasement due to the sudden shortage of silver. We see the debasement visually in just one 8.6-year wave. It was so bad that Emperor Aurelian sent troops against the Roman Mint because they were robbing the silver for themselves, and thousands died in the battle against the deep state bureaucracy.

A document from Egypt has survived, illustrating the unleashed financial crisis. It is from Aurelius Ptolemaeus, who is the strategus of the Oxyrhynchitenome. The public officials gathered and accused the bankers of closing their doors on account of their unwillingness to accept the divine coins of the Emperors. It became necessary that an order had to be issued to all the owners of the banks directing them to open and accept, and exchange all coins except the absolutely spurious and counterfeit. It was also directed that all who engaged in business transactions who refused to comply would be penalized. (POxy 1411 260AD, cited by Burnett 1987: p104). This confirmed what I have said throughout my career – it boils down to PUBLIC CONFIDENCE!

This lack of understanding of PUBLIC CONFIDENCE has confused economics and robbed the central banks of all their tools. They look at the debasement and Gresham’s Law and then articulate in the Austrian School that the chicken is confused with the egg, which comes first. They look at the increase in the money supply from debasement and ASSUME that is what causes hyperinflation, when in fact, it is the collapse in PUBLIC CONFIDENCE that takes place FIRST, and that causes the hoarding and that reduces the money supply circulating, and then this compels the government to create more money to service itself. It is NOT the other way around.

If these academic economists ever looked outside their own myopic field, they would understand that hoards of Roman coins are found from periods of political instability – especially wars. There was a series of over 20 emperors in a short time period during the collapse of the 3rd century AD. This is also where we find the greatest number of coin hoards throughout Europe. This is proof of what I am saying. Recessions occur because of public UNCERTAINTY regarding the future, so people spend less and save more. This is true no matter what century, and negative interest rates only compelled people in Europe to buy safes and take their cash out of the banks.

Over 200 American cities issued their own currencies during the Great Depression because the Fed was afraid of inflation and did not increase the money supply but contracted it when the public was also hoarding their money. This is why the ECB moved to negative interest rates in 2014 to try to punish people for hoarding and not spending. I warned the ECB back then that this was ass-backward, but of course, they did not listen. They tried to force people to spend when they had ZERO PUBLIC CONFIDENCE in the future – and rightly so. Thus, central banks kept interest rates excessively low for too long, which encouraged governments to explode their debts. Yes, it helped the stock market, but not as the press presents. People were wise enough to buy the stock with high dividends. Why did cash pay 0.5% when some stocks paid 5%+?

We need a new economic theory, and this nonsense of Modern Money Theory is absolute garbage because it is the chicken or the egg once again. They saw the increase in money supply with QE did not lead to inflation and concluded that the government is a monopoly and can create money at will without fear of inflation. What they totally screwed up is that (1) up to 70% of the money is held outside the domestic economy, (2) debt that pays interest is free to borrow against and has increased the money supply dramatically, and (3) increasing the money supply had no impact as did negative interest rates because people REFUSED to spend and hoarded lacking and PUBLIC CONFIDENCE in the economic future.

It is time we prevent academics who have ZERO real-world experience or have ever traded from coming up with theories that they are NOT qualified to do. This is like a man writing a book on how it feels to give birth. Come on! We elect politicians without any experience because they look nice. Without trading experience in economics, we end up with theories from people like Karl Marx and John Maynard Keynes.

We just had Federal Reserve Governor Lisa Cook this week make a blunt warning to the markets like Alan Greenspan did in December 1996. She said:

“Valuations are elevated in a number of asset classes, including equity and corporate debt markets, where estimated risk premia are near the bottom of their historical distributions, suggesting that markets may be priced to perfection and, therefore, susceptible to large declines, which could result from bad economic news or a change in investor sentiment.”

Greenspan’s remarks of “irrational exuberance” did cause a brief pullback. However, it was quickly forgotten because traders must deal with reality – not theory. Here are Greenspand’s remarks, and you can see that central bankers still do not understand market behavior because they ONLY listen to academics.

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FRB: Speech, Greenspan — Central banking in a democratic society — December 5, 1996

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.”