War & Capital Flows

QUESTION: If 2014 is a war year how can confidence in economy continue till 2015?

ANSWER: This cycle is the beginning of unrest. We expect this to begin manifesting in terms of civil unrest – not a worldwide war. That could come later as things develop. However, the civil unrest is most likely to begin where the economy began to crack first and that we will see in Europe.

1900$X-M 1931 Sovereign Debt

How can confidence rise when war erupts? That is easy. Capital seeks preservation. It flees from wherever there is a conflict. The USA was dead broke and J.P. Morgan had to lend the US $100 billion in 1896 to prevent bankruptcy. By 1914 it was the financial capital of the world. Why? Because of war in Europe. That is why the 1920s Roared. Capital fled to the USA. By the end of WWII, the USA held 76% of the entire world’s gold reserves. It is not always a pure CONFIDENCE that the good times will roll. It is also the lack of confidence elsewhere that causes capital to flee. Capital smelled a rat and indeed it was the 1931 Sovereign Debt Crisis where most of Europe permanently defaulted on all its debt.

So it is the old choice – the prettiest of the three ugly sisters as they say. The dollar was driven to record high during that capital inflow from Europe and it is why the dollar became the reserve currency of the world 52 years after being bankrupt in 1896.