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November 27, 2023 | The Business Cycle & National Debt

Martin Armstrong

Martin Arthur Armstrong is current chairman and founder of Armstrong Economics. He is best known for his economic predictions based on the Economic Confidence Model, which he developed.

2023_May NYT Paul Krugman

The US national debt has exceeded $33 trillion and counting. For decades, people have predicted that the dollar will crumble to dust and gold will rise to the moon. They have applied to the Austrian School of Economics to no avail. Then you have the opposite side pushed by economists like Nobel Prize-winning economist Paul Krugman, who wrote a piece for the New York Times that argues effectively the debt can never be too big. Krugman goes to extreme lengths to justify perpetual deficit spending pointing out that government deficits don’t work the same as personal household debt. He contends in his May 13 opinion piece that the big debt number isn’t as scary as it seems.

“Governments aren’t like people,” he wrote. “[They] must service their debts — pay interest and repay principal when bonds come due — but they don’t necessarily have to pay them off; they can issue new bonds to pay principal on old bonds, and even borrow to pay interest as long as overall debt doesn’t rise too much faster than revenue.”

“So for all those whose instinct is to assume that a responsible government would, like a responsible individual, pay off its debts as soon as it can, again: Governments aren’t like people. If death and taxes are the only sure things in life, well, death isn’t an issue for governments, and taxes are an asset — a growing asset — rather than a liability.”

Krugman admits that governments are NOT immortal. “Nothing is, and no doubt someday America will, as Rudyard Kipling put it, be “one with Nineveh and Tyre.” But individuals face a more or less predictable life cycle in which their earnings will eventually dwindle.”

NYT Krugman How_Did_Economists_Get_It_So_Wrong

Paul Krugman also wrote for the New York Times back on September 2nd, 2009 that the economists all got it wrong. He admitted that reality and wrong:

“When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.”

Guardian Top_US_economists_are_often_wrong_should_we_trust_their_predictionsBBC_Why_economists_get_things_wrong_



The Notorious Larry Summers even admitted that economists have NEVER been able to forecast any recession since World War II. They refuse to accept that there is a business cycle and sell their profession to governments as all-seeing. If they listen to them, they will instruct governments how to manipulate the great unwashed below and eliminate the business cycle forever.

Keynes End of Lassez faire

Keynes quote on Invisible Hand

It was John Maynard Keynes (1883-1946) who in 1926 pronounced “The end of Laissez-Faire” and that economists could eliminate the business cycle and governments should enlist their profession. Yet, before he died, he admitted that everything he fought against, the business cycle, was simply wrong.

Burns Arthur

Even Arthur Burns, who was the head of the Federal Reserve when Bretton Woods collapsed, concluded that Keynesian economics had failed. The business cycle always defeated every theory economists devised to try to eliminate it.

Rediscovery Of Business Cycle

I had an interesting conversation with Paul Volcker back in 1999, where he admitted that the business cycle not only existed but was, in fact, about eight years in length. In 1978, the former Chairman of the Federal Reserve made it clear in a publication of the Charles C. Moskowitz Memorial Lectures stating:

volcker time“The Rediscovery of the Business Cycle – is a sign of the times. Not much more than a decade ago, in what now seems a more innocent age, the ‘New Economics’ had become orthodoxy. Its basic tenet, repeated in similar words in speech after speech, in article after article, was described by one of its leaders as ‘the conviction that business cycles were not inevitable, that government policy could and should keep the economy close to a path of steady real growth at a constant target rate of unemployment.’

“Of course, some minor fluctuations in economic activity were not ruled out. But the impression was conveyed that they were more the consequence of misguided political judgments, of practical men beguiled by the mythology of the old orthodoxy of balanced budgets, and of occasional errors in forecasting than of deficiency in our basic knowledge of how the economy worked, or in the adequacy of the tools of policy. The avant-garde of the profession began to look elsewhere – to problems of welfare economics and income distribution – for new challenges.

“Of course, the handling of the economic consequences of the Vietnam War was an obvious blot on the record – but that, after all, reflected more political than economic judgments. By the early 1970s, the persistence of inflationary pressures, even in the face of mild recession, began to flash some danger signals; the responses of the economy to the twisting of the dials of monetary and fiscal policy no longer seemed quite so predictable. But it was not until the events of 1974 and 1975, when a recession sprung on an unsuspecting world with an intensity unmatched in the post-World War II period, that the lessons of the ‘New Economics’ were seriously challenged.”

Marx v Smith

That was even Karl Marx’s goal of Communism. Seize all private assets, and that would terminate the business cycle. Well, even Communism failed, collapsing by its own weight. Only Adam Smith ever investigated the economy to discover how it functioned. Every major economist thereafter spent their lives trying to disprove Smith and nobody has ever succeeded.

Schwab Breaking Bonds of Civilization R

Now we have our modern-day Marx, Klaus Schwab, who is trying to force the entire world to adopt his version of economics which is a rehash of communism all over again. “You will own nothing and be happy” he proudly declares following the footsteps of Marx and Lenin. Schwab has failed to understand that ALL social-economic advancement comes EXCLUSIVELY from human nature and curiosity. If people have no incentive to dream, they will never advance. That is why communism fell, and Schwab does not get it because academics, more often than not, are still pursuing this dream of ultimate power to defeat the business cycle.

Boom Bust Credit Cycle by Martin Armstrong

Instead of investigating HOW the Business Cycle functions and WHY, they seek to eliminate it, and you cannot win a fight blindfolded. Krugman admits that governments are NOT immortal. However, if you have NEVER investigated how governments collapse, then you will certainly never see the collapse until it has unfolded.


It was the city of Mainz that provided a colorful example of the political decline caused by excessive debt and inadequate management of public finances that we face today. Financial difficulties had led to the trade guilds being involved in the government of the city from 1332 onwards, and taxation became the self-interest of those in power. A major political conflict was thus avoided until 1411, when the payment of debt annuities accounted for 48% of total expenditure.

In 1411, there was a popular uprising that forbade the sale of any more debt without the consent of the trade guilds. Yet, the financial conditions continued to worsen. By 1436-1437, about 75% of the total city expenditure was now consumed by interest. Interest rates began to rise as there were subtle fears that Mainz might be unable to pay its debts. The interest rates climbed as the city searched for buyers for its debt. The interest rates jumped from 3% to 5% during the 1430s.

In 1420, the citizens of Mainz drove the patricians out of the city in a tax revolt. A new city government emerged which forbade the sale of any more annuities without the consent of the trade guilds. Nevertheless, the city’s financial situation continued to decline as it effectively sent the “rich” fleeing and in the process, the tax revenues plunged. Clearly, with the “rich” gone, the city could not revive its economy, having effectively destroyed the foundation for investment. This led to the expelled “rich” families being recalled to Mainz in a desperate realization that without the “rich,” there is no economic growth – Atlas Shrugged.

The return of the patricians may have been predicated upon their buying debt of the city since, on January 16, 1430, Gutenberg’s mother arranged with the city of Mainz to purchase an annuity belonging to her son. This appears to be the reason for the recall of the expelled rich when the city cannot revive its economy without them.

Finally, in 1436-1437, 75% of the total expenditure of Mainz went to creditors, whose interest payments continued to increase crowding out all economic growth. The interest expenditures were draining the economic fortunes of Mainz and now there was an ever-increasing difficulty to find new subscribers to its loans. This escalated causing interest rates to rise further. During the 1430s, Mainz offered 5% for the perpetual annuities instead of the previous 3% or 4%. The total national debt of Mainz reached 373,184 gulden. It was in 1448, when the city of Mainz could find no buyer of its debt and was unable to raise 21,000 gulden that it declared itself bankrupt. Since 60% of the debt was purchased by foreign investors outside Mainz, the city was placed under an Imperial ban, and excommunicated by the Pope.


CALLMONY MA The default of the City of Mainz is a classic script for the decline and fall of any government. Taxing the rich is the nail in the coffin of every society that thinks they can just tax the rich without any economic impact. The unsound economics of the Silver Democrats, who inflated the economy by overvaluing silver at 16:1 and taking bribes from the silver miners, led to the Panic of 1893, and eventually, even the Call Money Rate touched 200% by 1899.

It was the Democratic President Grover Cleveland who broke with his own party over their reckless spending, as we see today under the Biden Administration. It was Cleveland who also recognized the flight of the “rich” during that period. He noted that during such periods of unsound finance, capital can be hoarded as people refuse to invest, and traders can profit from the volatility in the markets. However, he pointed out:

“but the wage earner – the first to be injured by a depreciated currency – is practically defenseless … for he can neither prey of the misfortunes of others nor hoard his labour.” 

Just look at Argentina. It was once the richest nation, and when Marxism was introduced to get those evil “rich” people, the nation declined for 100 years, and the living standards collapsed. Like the City of Mainz, they defaulted on their national debt as well. When the people say enough is enough, the press calls them the evil and dangerous far right.


US Total Int as Debt


This is what Krugman and most economists never understand because they do NOT investigate HOW empires, nations, and city-states collapse. If we look at the US National Debt, the total accumulative interest expenditures in 2001 reached 90% of the total debt. In other words, just like in the City of Mainz, the interest was going to foreign investors, so it never stimulated the domestic economy. Only lowering interest rates brought that level down to about 50%. But this recent rise in interest rates has brought it back to 70%.

German Debt Int

The US has the largest economy, so its serving of the debt is at the top of the food chain in economics. So it will be the last to fall. As we can see, this debt problem is NOT unique to the United States. Every country has been borrowing with no intention of paying back anything. They are all following the course of the City of Mainz, and we are looking at a major Sovereign Debt Default. The economists simply think this will never end, for their livelihood depends on that advice.

WEC_2023_Sovereign Debt Crisis 1

We will be releasing the timing for the Sovereign Debt Crisis next week

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November 27th, 2023

Posted In: Armstrong Economics

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