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Information-Please Send by MailMartin A. Armstrong#12518-050TCI Fort Dix CampPO Box 2000Fort Dix, NJ 08640

A C K N O W L E D G E M E N T S

I would like to thank all the former employees, associates, sources, and contactsfor their continued support and efforts to contribute to the writings I have b e e nable to continue through their great efforts. I would also like, to thank thosewho h ave looked after not just myself , but ray family, and shown them sup port andkindness.Everything at Princeton Economics that was our mission to gather information,and bring together the most widely covered global economic persp ective, has b e e n 1a effort that is now b c - i n g i n g us to that fateful crossroads in history. There arethose who are trapp ed by the past an d cannot see the dynam ic evolution that causeshistory to repeat, but like lightning, nev er quite precisely the same way twice.In 1914, Britain reached its peak as the center of the global economy. It passedthat torch to the United States who by 1929 became the leading world economy andwas also a CREDITOR nation just as China is today. There will be no 1930s styledepression, for the cards are nowhere near the s a m e i Yet China will become theleading world economy by 2016, and then suffer its 1929. The West is d o o m e d and itwill collapse from its own de bt. We borrow with no intent of ev er pa ying off thedebt, and somehow both Congress and the majority ignore this fact just as t h e y hadignored the problems in mortgages that violated common sense.No matter what country you live in, it is the d uty that falls upon the shoulders ofe v e r y reader to do what you can to get reality to manifest. Feel free to send thisr e p o r t to e v e r y 'government, friend , and mem ber of the press around the world. If wed o not get the debate started, we stand no chance of saving the future for ourselvesa n d our posterity. We can reach that next nev er in political-economic evolution onlythrough the hard work of everyone, For this reason, this is provided as a free service.There is a NEW DATABASE that will be used for special updates provided exclusivelyto those who register. I want to thank you all once more for your s upport and foryour contribution to try to help society survive the coming storm.

PLEASE REGISTER YOUR EMAIL ADDRESSFOR UPDATES & SPECIAL REPORTS WHEN CRITICALArmstrongEconomics. COM

YOU MAY FORWARD ANY REPORT TO A FRIEND OR TO ANYGOVERNMENT TO GET POLITICAL CHANGE MOVINGCopyright, Martin A. Anr!stux)ngz all_riqfats reserved ' ~This Report may be forwarded as you like without charge t o individuals or governments around theworld. It is provided as a Public Service at this time without cost because of the critical factsthat we now faced economically. The contents and designs of the systems are in fact copyrighted.A t a future date, a new edition of the 1986 The Greatest Bull flarkst In History will be releaseda n d a n e u i b o o k will soon be published on the model itself - The Geometry of Time. It is vital t h a twe do not forget this is a world economy and the arrogance that any nation can dictate to the worldi s just insanity. E v e r y n a t i o n effects a l l others no d i f f e r e n t t h a n i f o n e nation were to pc-jr a l lits toxic wa ste into the ocean. Everything is interlinked and solutions are never isolated events.

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THEI N F L A T I O N

D E F L A T I O N

By: Martin A. ArmstrongFormer Chairman of Princeton Economics International, Ltd.

and the Foundation For The Study of Cycles

th e samein a n e wdistant

NCE UPON A TIME there use to be def initive explanations of how the g lo b a le c on om y d e v e l o p e d . The world use to be simple. There was the chicken oregg rationale a n d e v er yt hi n g fit neatly into a some linear design. Th ewor l d m a d e sense like taking a walk, each foot progresses in a linearm a n n e r on e after the other. Then as the world economy began to d e v e l o p ,p e o p l e b e g a n to notice that things didn't a l w a y s m a k e sense. Somethingh ad c h a n g e d . But what? Th e hi g h fl yi n g schools merely kept regurgitating

ideas over and ove r aga in without testing to see if they honestly still workedglobal economy that w a s e m e r gin g m ore a s a com p l ex a d a pti v e s y ste m th at w a s a s

from economic theories as the latest discovery of the farthest galaxy.Nothin g is tru l y si m p l e . E v e n p eo p l e a s k

ca n there b e a deflationary trend simultane-ously with a inflationary trend ? The 1970ssaw the con v er g e n c e of these tw o tre n d s a ft erth e OPEC price shocks. In other words, therise in the price of oil w as clearly inflat-ion ar y , y et u n e m p lo y m e n t w a s risin g a n d t h eprices of ho m e s col l a p s e d . Th e period was thebirth o f t h e n e w term S T A G F L A T I O N !

W h a t w a s h a p p e n i n g w a s t h at th e ris e i nth e price of oil was in fact crea ting a surgein infla tion. Howe ve r, becau se the cost ofe n e r g y w a s a s t ru c tu r a l u n d e r l y i n g a s p e c t ,th e rise in inflation in the cost of p r o d u c t -ion b e c a m e offs et b y a re d u ction in other k e y

costs. Thus, there w a s a rise in inflationin energy that w a s displa cing other segme nby forcing the reduction in costs of othersectors. This had the e f f e ct of a l so sim p lcreating rising un em ploy men t that w a s a c uin l abor costs offset b y the rise in en ergcosts.

Th e a n s w er is YES! There can be twoopposing trends simultaneously so we c anh a v e d e f l ation in housing prices coexistinwith the rise in other sectors. This doesnot s u g g e st w e ar e f a cin g h y p e rin f l a tio ndue to the lack of a gold s t a n d a r d . It isn ot li k e l y t h at w e wi l l s e e h y p e rin f l a tio ninstead of just a d e f a u l t .

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This becomes a complicated subject in an dof itself. Suffice it to s a y , that DEFLATIONan d .INFLATION are at opposite ends of a seesawthat represents VELOCITY. To a l ar g e exte nt ,the rally into 1980 for gold w a s a localizedview that the dolla r would de cline in valu eand this was caused by a fiat currency. TheFe d itself mistakenl y viewed inflation in thee y e s of go l d . This was due to the fact thatgold had b e e n the so called link to which allcurrency was convertible until 1-71.

Howev er, unde rstand ing INFLATION that ismuch like ice cream and comes in a 1,000 diff-erent flavors, is not always easy.

(1) there can be the isolated rise ina specific commodity d u e to somecatastrophe, or to a manipulationas was the case with oil and OPEC.

(2) there ca n b e a broad inflationarya d v a n c e caused b y a decline in theconfidence of domestic citizens inth e currency itself'tied to thefinances of the nation

(3) there can be international inflationcaused by the swing in the currencyw h er e b y ALL imports rise in directproportion to the decline in thecurrency on world markets.

These are just th e three primary areasfrom which inflation can rise. This is why alabe l that inflation is the rise in the priceof goods and services is the official linebecause it shifts th e responsibility from th ego v er n m e nt to the pe ople. This is only oneform of inflation. There ca n be a hu ge stormthat wipes out the orange crop in Florida an dwill lead to a rise in the prices of all suchproducts related thereto.

The rise in oil prices by OPEC duringth e 1970s, was a greater shock because of itsbroa d er impact that infiltrated into ev erysector of the economy. Thus, there can bev aryi n g degrees of inflation caused by therise in the price of a particular comm odity.

E v e n the rise in interest rates is ainflationary tre n d . Interest rates will tracka b u l l m ar k et b e c a u s e w h e n t h e eco nom y i sdoing good , that is w h e n c on fi d e n c e is hi g ha n d peop le will borrow based upon their viewof the FUTURE! The w hole theory that risinginterest rates will be bearish for the stock

market is just nonsense. A g ai n , it is m yo picand focuses ONLY u po n speculation. It ignorethe entire economy and e ven d isturbs the trub a l a n c e d e mo gr a p h ica l l y . In oth er word s , t h eretired seg ment live off their savings andwill ben efit with rising interest rates. W h einterest rates decline, they drastically nowlower the income of the retired workers whoar e oft e n t h e o n l y p eo p l e s p e n di n g in a s h areconomic decline.

If you plot interest rates against th estock ma rket, you will f ind that they historically rise with bu ll markets and decline inbear markets. Th e theory that lowering th erate of interest will be bull ish is bas ed onth e nonsense that pe ople will n ow borrow morand thus th e market will rise since low ratewill lower ma rgins hel ping speculators. Theproblem with this whole theory is it looks ath e nominal rise and fall of interest ratesand ignores th e view of the economy. IT ISNOT THE NOMINAL LEVEL OF INTEREST RATES THATMATTER S, BUT THE SPREAD BETWEEN RATES AND THEXPECTATIONS OF PROFITS.

If you think gold will doub le in pricein 1 y e ar , you will pay 10%, 20%, or 25%rates of interest. It is the s pr e a d b et w e e nexpectations and the rate of interest thatmatters. Not the le ve l of interest rates, nothe direction.

Yet interest rates are raising th e costof borrowing. This also attributes to theinflation within the economy. A priva te corporation will be forced to pay more in ratesand offset that by reducing costs elsewhere.Thus, it is common to see u n e m p l o y m e n t risewith interest rates.

When we step into the pub lic sector, thesame trend appears. Rising interest rates wicause greater costs in local and state goverments. They, h owev er, can confiscate yourhouse if you don't pay taxes. So they hav e nincentive to run as a corporation. W h at theydo is raise taxes to comp en sa te for the risein the cost of mone y.

When w e look at the Fed era l l e v e l , t h e yprint the m o n e y a nd t h u s a rise in rates nowincreases dramatically th e cost of borrowingHen ce, raising interes t rates to 17% to fi g hinfla tion into 1981, cau sed the national d e bto rise from $1 trillion in 1980 to nearly$H trillion by the end of 26 years. Itwas like shooting yourself in the foot.

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R i g h t no w , w e are witnessing th e d e b tcrisis in its e arly stages in Greece. The rate:are rising b ecaus e of its d e p e n d e n c y u po n th eforeign sources to fund its budgets. Americais in the same b oat. Just as capital is scaredand is unwilling to invest in Greece even wh enits currency is the Euro, shows how externalforces of confidence impact domestic.

Howeve r, wha t is also reve al ed is thedifference b etween a gold standard a n d a purenonconvertible currency freely floating. TheEuro is acting very mu ch like gold d uri n g th e1930s. Greece is not abl e to de va lu e the E uroand thus the only other variable be comes therise in interest rates. Greece has a choiceb etw e e n p a yi n g up or d e f a u lti n g . This is howth e Great Depression was set in motion. Nationcould not sustain the gold standard and thusbroke creating the 1931 currency crisis. Thisis whe re we are with the Euro, although it isnot g o l d , its v a l u e is se t external to Greece.

The whole Euro zone becomes impacted asth e contagion spreads to Portugal , Spain andthen Italy. E ve n Britain is starting to nowspiral down into a de bt v ortex. Greece h a sno real v iabl e option. Had it control over itsow n curre nc y , it cou l d d e v a l u e . Bon d ho l d er slose, their inves tment in proportion to thedecline in the currency . That option is nowof f the table with the Euro. The crisis turnsto one of just default. Will Europe go downwith the s hip to sav e the Eu ro, or will itcu t th e umbilical cord and allow Greece togo its own?

Th e reason there w a s a DEFLATION in the1930s in the United States was due to thefact that the US held to the gold standard.W h e n m o n e y is g o l d , p e o p l e h o a r d e d m o n e y a n dthat redu ced VELOCITY. Wh en FDR confiscatedgold an d d e v a l u e d th e do l l ar , he was now infact injecting INFLATION. By removing th elink to gold for DOMESTIC convertibility, acitizen was left with only doll ars. Thu s, inlight of the stated policy of INFLATION, itthen became better to spend than to save. Th eUS did not go all the way toward the e xtremebeing HYPERINFLATION, b ut w e turned towardthat direction and thus VELOCITY increase d.It is a simple seesaw with DEFLATION on onee n d and INFLATION on the other w ith th e pivotbeing VELOCITY.

TO S A V E , OR NOT TO SA V E (HOARD)THAT IS THE QUESTION

Greece is im p a ct e d by the INTERNATIONAcapital forces. It cann ot live within itsmeans any more than the United States. Thusthe civil unrest could lead to a mas sive andserious revolution in Greece . This coul dspread to Southern E urope because the IMFand those sitting in the EU, failed to grasthe idea that there is a serious probl em .The sy stem is collapsing. We either face thmusic a n d d e a l with it, or we can hide withou r head in the sand and pretend nothing iswrong.

The e xamp le of Spain b etwee n 1883 and1913 is the answer. There was no gold standard. The currency floated. The annual rateof growth was 2% and the deficits were kep tin check b y responsible government. Th ewhole system is broke and is going to crashand burn. No one should be investing in an ygovernmen t bonds of any country right now.Nobody has any intention of ever paying of fthe debt. This system is insane!

W e n e e d to monetize the d e b t throu g hth e issue of a coup on that forces capital toinvest in that domestic e conomy . So ev erysmuck who had Greek bonds, now gets couponsto convert that to pri v at e i n v e st m e nt inGreece. That will spur a s ur g e in e m p l o y m e ndomestically. The b u d g e t is then taken toreduce government civil workers. Eliminateincome taxes, and the cost of gove rnme nt isthen f u n d e d by the growth in currency thatis limited constitutionally to 5% of GDP.Stop the borrowing. Interest rates will nowdrop and e mp loym en t will rise. People willflock to Greece as the new financial holyland and the g lory d a y s of Athens will atlast return.

Th e Great Depres sion e n d e d in eachnation once they ab and oned the gold standa rdin 1931. The nations that suffered the longest were USA and France. Retaining the goldstandard pro mote d ho ar di n g and reduced theVELOCITY. The same is taking place for theEuro is acting like gold to the a verageGre e k . W h y s p e n d , w h e n t h e fu t ur e is ju stuncertain? It is time to think out of theBO X b e f o r e it is n ai l e d s h ut. If we do NOTstart to think rationally, we are headedtoward civil wars and unrest that will onlyturn toward interna tional unres t and thethreat of war. ALL GOVE RNME NT DEBT WILL BEFORCED INTO DEFAULT. That is w h at is on thehorizon. It is time to face the rea lity andclose th e s h utt er s for the storm is h er e .

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