Tuesday, December 29, 2009

Why Models Are Our Only Hope? by Martin Armstrong - Feb.2009

Should we create a model to manage our social-economy?

In the real world, experience counts as the primary attribute in any field. The question we face in the middle of this economic crisis is simply this: "Is there anyone at the helm who has any experience at all?" Can we disregard gathering the experience of those who have gone before us by constantly re-inventing the wheel for every crisis? Wouldn’t it be nice to have gathered a database so when an economic panic took place, and we tried a particular stimulus, the result was a particular effect. Yet for every economic crisis, we seem to start at the beginning retaining no knowledge or experience from the past assuming in our arrogance that that was then.

It is time to start taking advantage of the collective progress of man that has particularly developed during the last Century. We have not merely landed on the Moon, we have developed sophisticated computers to get us there. We have even conquered many forms of disease, also through the process of scientific learning.

Science has revealed that our greatest form of knowledge comes not from book learning, but from hands-on experience. We have even begun to unravel how the human mind works. Now we understand the difference between "book smart" and "street smart" is based upon the simple fact that when we learn only from study, we do not acquire the deeply seeded and critical knowledge base that our mind constructs through all the senses we refer to as experience. When we actually do something, we use all our senses and construct a knowledge base recording all the little nuances that are not always self-evident as being either important or relevant. I could read every book on brain surgery, but would you like to be my first patient? Just as a medical student might have perfect book scores, they must still then start at a teaching hospital working with those who have actual experience.

The Importance of Experience

What has emerged from the study of the human mind is that it takes practical experience in a field to truly comprehend what to do. There are two broad categories of memory as explained by Eric Jensen in his excellent work, "Teaching with the brain in mind."(ASCO - Assoc for Supervision and curriculum Development (2005)). The two primary types of memories are: (1) "explicit" (clearly formed or defined) that is constructed either learning in a semantic manner (words and pictures) or more episodic (autobiographical or personal experience rather than learning about it second or third hand through books); and (2) "implicit" (implied by indirect means) that includes the reflexive memories and procedural physical or motor type routines like riding a bike, burning your hand, love, and other various experiences. Jensen points out that students that are taught by merely data dumping facts, rarely retain such knowledge id. /pg 132. Jensen pointed out that studies have shown that students who attended class knew only 8% more than those who skipped class. Consequently, this semantic method of knowledge gathering is highly limited. We need something more, to strongly bond within our minds critical knowledge. We need also to invoke the ancient method of apprenticeship of involving other sensory input. It is now understood that episodic memory process "has unlimited capacity" id. /pg 134. This puts flesh on the words "book smart" and "street smart" illustrating that it is highly dangerous to trust the operation of anything to someone who has no real world experience.

Gathering Experience

This is why we need to collect the experiences of mankind and record them to a database that allows human interaction to query "why" events take place and "when" an event should take place, as well as "what" should be the correct response, and "how" should that response be implemented. History repeats because as a society we do not learn for we lack the capacity to acquire real knowledge predicated upon the best possible form of wisdom - experience. If we are afraid to construct a model that incorporates the total global experience of mankind to better manage our society and our economy, then we will be doomed to the insane notion that the economy and our very lives are unpredictable constituting nothing more than a "random walk" like following a drunk down an alley and trying to predict will he bounce-off the wall on the left or right next.

There is no "random walk" through time. Everything is event driven, and history repeats largely due to the fact that given similar events, mankind will react within a set parameter of reactions. Stick your finger in the flame of a candle and it matters not what culture you are from or the language you speak. You will still pull your finger out of the flame.

Understanding there is a Business Cycle

As I have stated many times, there is always a cycle within everything, and that includes the boom and bust swings within our economy that have caused so much political unrest, that it has fueled even the birth of Communism & effected the lives of mankind throughout recorded history. Economic swings have led to wars when a king’s finances were running low, and caused dreams of utopia that influenced Karl Marx (1818-1883) whose ideas have cost the lives of many millions of people.

Cycles may come in different patterns and are at times driven by a convergence of many individual events each functioning separately according to its own cyclical nature. This is simple the very essence of how everything functions throughout life and the entire universe. It is the cyclical nature of life from the beating rhythm of your heart, the cyclical events of the seasons, weather, movement of planets, to even how artificial gravity is created by the cyclical spin. Even the music we listen to must have a cycle or rhythm. Our social interaction we call our economy, is no different.

What Eric Jensen points out is critical to our understanding of our very ability to learn and advance as individuals. This method of acquiring knowledge applies to us as a society. Jensen explains there are differences between how our brain processes either "verbal or spatial information." When we process written or verbal words in an 8 hour session there was an 80 minutes cycle for cognitive performance while the spatial task of locating points cycled at 96 minutes on average, id./pg. 49.

While there is a genetic foundation for being smart, this accounts only for about half of our intelligence. In fact, part of the brain that deals with discrepancies and is automatically activated when the outcome differs from our expectation. This is known as the anterior cingulate and is the hard-wiring that enables us to learn from trial and error. Jensen also makes it clear that we learn through social interaction. The case in point is the nut-case who is a loner and becomes the serial killer. Social isolation is devastating to one's health as well, id./pg 95. Even in prisons, solitary confinement absent the social contacts is intended to inflict punishment that is devastating and mentally forces the subject to comply with the demands of the jailer. We are also familiar with the problem of mob behavior that can take the form of peer pressure upon the youths in school or among adults as Communism demanded - turn in your neighbor if he says anything derogatory against the government. These are forms of mental torture imposed by all forms of governments to varying degrees.

Applying Experience to Managing Government

Our knowledge has expanded tremendously in the past 100 years. Yet for whatever reason, we have yet to apply these advances to our social collective economy and to the management of government. We have incorporated computers into science. We now rely upon computers to control traffic in cities, in the air above us, and we even trust computers to land a plane. We can trust computers to create a knowledge base of disease whereby one inputs the symptoms and the computer will give you the likely disease. We rely on Expert Systems in computer programming to record the knowledge base of experience. For example, one could input all the loans ever given by a bank. They can create detailed criteria from social status to job skills and income. A new loan applicant could fill out the same form, and the computer can generate a "more-likely-than-not" analysis of whether the borrower will default.

In medicine, we can map your DNA and more-likely-than-not even tell you that you will develop a particular disease. In fact, laws have been enacted to prevent Insurance companies from using such data, for then they could sell insurance against a heart attack to only those who they know are not likely to have one.

Yet for all our advancement in every field right down to smart bombs, we run our government and our economy as if the Puritans were still in charge and characterize any effort to understand the future of our society as devil worship. The SEC takes the position articulated by its Chairman Mr. Cox when he testified before the House Oversight Committee arguing we should not seek to create any such model; "That is probably an aspiration that we ought not to have." Why? Should we disconnect all computers from traffic lights, air traffic control, go back to carpet bombing and tell our astronauts to don't worry about it, you’ll figure out how you get there on your way? What is so wrong about trying to apply technology to run our government and economy? If a doctor can input your symptoms into an expert system and generate a dispassionate list of possible diseases, why can we not do that for society?

We view government like God. We assume someone is in charge. We know not what their master plan might be, but require pure faith to assume everything will work out in the end. We handed out $700 billion to help Investment Banks due to their speculative losses without any explanation of why or how this money was even lost. We are now about to hand out $1 trillion (the total amount equal to the national debt of the United States in 1980 from inception). This trillion dollar expenditure on infrastructure has been dreamed up with no empirical evidence that if we do (x) then the "more-likely-than-not" result will be (y). We cannot afford to act like this in today's complex world. This amounts to "trickle down" economics that was the basis of arguing against the Reagan tax cuts. We are hoping that spending all this money into economic areas that had nothing to do with the cause, will somehow make the cross-over like a virus and infect the whole economy.

This effort to spend $1 trillion on infrastructure is merely supporting the pork self-interests of government. Just because Roosevelt created the Work Progress Administration in 1935 in response to the Dust Bowl, does not mean that this solution will have any positive effect at all. The government did not have the power to make it rain and unemployment rose from 8% to 25%. Today, many professionals expect a huge wave of inflation - not economic growth. We are coming up with ideas that someone dreams UP, there is no model, and it is "Gee. Let’s try this!"

No serious business would dare run its operation in such a cavalier manner. Is this any way to run the world economy? Unfortunately, others follow our lead. So if the USA makes a major mistake, we will find other nations blindly follow. The proposal to spend a trillion dollars on infrastructure to make the debt bubble disappear is insane. Milton Friedman warned about it and took place during the 1970s - we called it "stagflation." There was a general increase in prices from the sharp rise in oil, but this "inflation" did not in any way produce economic growth.

To the left, is the last 100 years of fundamentals that are overlaid upon the major Economic Confidence Model. There will always be a boom-bust rhythm. Joseph Alois Schumpeter (1883-1950) observed the business cycle and attempted to explain it by waves of innovation. The invention of the railroad was the internet of 19th Century allowing the efficient movement of goods. The invention of the automobile and the airplane created new waves of innovation sparking scores of other industries to expand as well. The dot.com boom in 2000 was the beginning of another new wave of economic growth. As they do often say, "necessity is the mother of all invention." As we have economic declines, we often adapt and create new forms of innovation.

We have no idea what we are doing

We have no idea what we are doing. We call upon professional politicians who have learned only in a semantic manner lacking the episodic real world experience. Worse still, we reach back in time to drag forward the Work Progress Administration as a self-serving answer as a solution today, ignoring the context in which it was created, and with no model to see what is the "more-likely-than-not" outcome.

What if we spend all this money and it fails completely to restore economic growth? Confidence in government will collapse. Other countries will hate the United States more. Those people will then be led to blame the US rather than their own governments. This is how war is unleashed. With such serious implication for our children, you would think we just for once tried to stop the nonsense and put our collective knowledge to good use.

With all the billions of dollars being spent, you would think there would be at least someone who had the courage to stand up and say - hey! Maybe we should create our own expert system of government and show every time they raised or lowered taxes, interest rates, regulation, or money supply, this was the result. We do not need partisan claims to support this program or another. We need empirical evidence. One cannot claim he made a scientific discovery by saying "I think!" It either is or it is not.

We can no longer afford to run our social-economy by trial-and-error as if we were some doctor in the Middle Ages yanking out body parts to see if that cures the patient. We cannot afford to manage our social-economy on pretended "book smart" claims while throwing away the collective experiences that forms the real knowledge, wisdom, and intelligence or the human experience. At best, half of human intelligence is genetic. This is why innovation has not always arisen from a single class. We have reached that point in the evolution of mankind where it is time to make that next leap. We cannot afford to throw away the experience of generations that is the essence of all human knowledge as if they never existed. This is like burning down the famous Library of Alexandria in Egypt. This is a profound crime against all of humanity.

Why Models Fail

The very same presumption built upon arrogance that we know everything, creates the inherent reason that causes most models to fail. When we ask a question, there are often two reasons. (1) There are those who are genuinely interested in acquiring real knowledge, and (2) there are others who need to boost their ego and argue that someone is wrong and therefore less intelligent than them, but have no practical experience to offer empirical evidence to support their argument. If we try to create a model under the first approach, we will succeed. If we rely upon arrogance to try to pretend we know of what we speak, we will fail.

There is a middle ground we might classify as (1.5). This is where we may be interested in accumulating real knowledge, but we still deceive ourselves for we begin with a presumption that is not true. A classic example is Heinrich Schliemann (1822-1890) who was a German untrained archaeologist and a rich son of a German Industrialist. He believed that Homer (9th-8th Cent. BC) wrote about actual history in his epic tales of the battle against Troy. At that time, all the academics at the leading Universities in England and elsewhere, had argued that Homer wrote children’s fiction. No one bothered to go out and actually test their theory until Schliemann. They presumed a fact that had no empirical evidence. If you begin from an unsupported presumption, you will fail. It may be unintentional but the motive matters not, for the result will be the same whether it is produced from ego or mistake.

There is a third reason why models fail - (3) the economic evolution process. I have often written that perhaps the father of the Business Cycle is Nikolai D. Kondratieff (1892-1938). At the time that he was investigating long-term economic trends, Kondratieff discovered huge waves of booms and busts in economic activity. He relied upon the economy as it stood at that moment in time. In the 18th - 19th Centuries, about 70% of the economy in the United States was agrarian. This was a much higher number in the Third World and in Russia at that time. Therefore, Kondratieff fell into the third category of error. He started with the presumption that the economy in the future would be driven by this commodity cycle of booms and busts. If the economy evolved and it was primarily moved by a different component, then the model would no longer predict the main overall economy, but only the commodity sector. Therefore, we must understand that a model can still fail by the failure to be able to adapt to changing conditions.

Not to slight anyone, it should be also noted that Kondratieff may have been influenced by another Russian of little fame. In 1922, Professor A. L. Tchijevsky actually published a book: "Investigation of the Relationship Between the Sunspot Activity and the Course of the Universal Historical Process from the Fifth century B.C. to the Present Day." Tchijevsky established that the 11 year cycle in sunspot activity effected society by gathering evidence from 72 nations between 500 BC to 1922, demonstrating a human excitability defined as migrations, riots, wars, revolutions, and various changes in magnitude. His work may also have influenced Kondratieff insofar as looking at the economy from a cyclical nature. The low in sunspots was 2008.

Designing the Model

Now that we understand the first set of errors that will doom any model, we need to ensure absolute objectivity. To build a scientific model takes absolute clear understanding that separates the dangerous ego inherent in so many people who need to prove themselves right because they lack personal confidence in their own ability. We also must define the scope of the model for that will determine what we can and cannot forecast, understand, and manage. We must keep that personal ego in check and that means surrendering not just the contest to be proven right, but to surrender that temptation to assume anything. It is extremely hard to get to this zone of total objectivity. But this is the only place where a model can be designed. Ironically, it is man’s ego that prevents so many from crossing that line into this state of pure objectivity. This is not a contest or a child’s game. This is a serious matter where we accept that we know nothing and allow the real knowledge to manifest by observation. So few have embraced this state in modern economic times.

Adam Smith (1723-1790) achieved this state, but he did have the Physiocrats to compete against. Smith's competition, however, was not by argument. He established the understanding of human nature and capitalism by observation creating empirical evidence, not mere criticism. Those who criticize but have no experience bring nothing to the table. Smith observed the real world, how it operated, and produced the findings. Smith did not just offer words of disagreement like the scholars who never spent one day in the field to prove any substance but argued against Schlieman. We need substance and empirical evidence to support words, otherwise it is just rhetoric.

The Scope

Perhaps the first misconception about the Economic Confidence model that I discovered is that it is a model for stocks, or the United States, or gold, or real estate. The truth is something quite different. There is a natural cyclical rhythm to everything in life from nature to mankind himself. The financial instrument that we may be using at the time matters not. Mankind will invest in anything and when there is a shortage of toilet paper, he will run out and hoard it, no different than gold. Therefore, we must realize that the scope of what we are dealing with is not limited to anything in particular, but is the collective behavior of mankind in all nations around the world.

We tend to be also very self-centered. We assume that people see what we see and that leads to great confusion. In other words, the business cycle is not all about "us" or "them" for it encapsulates everything and everyone. For example, the US panic of 1857 was also not a local event. It was an outcome attributed to several local developments, including the defaults of railroads on their bonds that led to the collapse in their stock prices. Many banks had invested money in railroads and subsequently failed. The analogy is not so different than investment banks today. This was one reason that led to the separation between commercial and investment banks. As the railroad bonds were hit, the stocks fell sharply. This caused assets of banks to decline, and people lost their trust in private banks causing runs and widespread bank failures. This led to the first real sharp increase in unemployment that was a rather new product of the age known as the Industrial Revolution. Where under the pure agrarian model, labor was typically slave, indentured servants, or serfs, the Industrial Revolution caused a cycle in employment.

What is overlooked, however, is that the Panic of 1857 was also a global force manifesting as a contagion. The Panic of 1857 in the United States also led to a money-market crisis in Europe. Europeans had been eager to invest in the New World and with major gold discoveries in California in 1849, visions that the streets of America were "paved with gold" was a popular slogan to fuel investment overseas. So, the financial Panic of 1857 became the first real "contagion" that infected Europe after the South Sea & Mississippi Bubbles of 1720.

The next major US panic was also related to worldwide events. The Panic of 1873 began in Vienna, Austria during June that year just eight years after it lost the war with Prussia in 1866. The Austrian financial crisis spread like a contagion causing European investors to sell American assets to cover losses. This led to the collapse of a major Investment Bank, the Goldman Sachs of its day, Jay Cooke & Co on September 18th, 1873. This set in motion a major collapse dubbed "Black Friday" that resulted in the stock exchange closing its doors for 10 days starting September 19th, 1873. By the end of 1873 in just three months, over 5,000 businesses failed in the United States. Tens of thousands came close to starvation. This is where we find the first Soup Kitchens appearing in New York City.

Likewise, the 1929 collapse and the Great Depression were also worldwide events. Herbert Hoover’s memoirs provides the historical documentation for the Currency Crisis of 1931. Virtually all of Europe defaulted on its debt causing the dollar to rise to historical levels because it was still on a gold standard. This led to the collapse in exports and the cries for greater tariffs. This culminated in Roosevelt's famous confiscation of gold and a near 60% devaluation of the dollar in 1934.

In defining the scope of the model that needs to be created, we cannot ignore the world any more than the world can ignore events in the United States. We must input all economies and markets and realize that every person in every country will respond according to Smith’s Invisible Hand. Currency is like a language. We think and measure everything in the currency of our origin. That means we will invest in China if we can see a profit in our home currency, not the local currency of China.

The 1987 Crash took place because of the formation of G-5 (Group of 5) in 1985 that was organized to force the dollar down, no different than Roosevelt accomplished with his 1934 confiscation of gold and the devaluation of the dollar. The problem was, those in charge had no practical experience. They knew not the repercussions within the global economy. The Japanese had been buying nearly 40% of new debt offerings and they were heavily invested in US real estate. Once the politicians stated they were banning together to force the dollar down by 40%, they failed to realize the complex nature of the economy. They assumed that lowering the dollar value by 40% would allow the US to export more by devaluing the costs of its production. However, that also meant that those who had purchased US debt would lose 40% as did those who purchased US real estate and stocks. Thus, the stock market crashed. People called the brokers asked why people were selling, and they could not articulate why when there had been no domestic change in fundamentals. It was the lack of fundamental news that caused the panic!

Perhaps this helps to understand what is truly necessary to construct a viable model. There is no individual who is capable of making so many major calculations within their head. This is beyond the human capacity only from a standpoint that while the mind could function subconsciously, we lack the ability to query the mind independently on a sustained basis.

Now, hopefully, we can see in our mind how such a model can function. The primary wave structure I have named the Economic Confidence Model is a composite of the entire world economy. This is why we see global markets in fact rising and falling in line with this model. For example, the Japanese market peaked precisely with this model on the 1989.95 peak. We also witnessed the collapse of communism also in 1989. At the 1998.55 turning point we saw the collapse of Russia that also caused the collapse of long-Term Capital Management. We also have now a global crisis that unfolded with 2007.15 that market the high in US real estate and the Japanese markets.

The model is extremely complex. A wealth of national and market data is brought together under the Economic Confidence Model running separately and independently behind this model. It is the convergence with the overall wave structure of 8.6 years that enable one to see what economies and markets will be affected. As illustrated above, there are then two separate wave structures that also filter into the model quite independently - volatility and Schema.

The First Wave Structure is the volatility models. This also runs on the main collective structure of the Economic Confidence Model. However, clients were quite familiar with the forecasts we provided at Princeton Economics that called for "Panic Cycles" in specific individual markets. Thus, the illustrated component wave of a base unit of six, built into a major wave of 72. However, we also had separate volatility models on each economy and each market. Again, it would be the convergence of markets and economies as well as currencies that drives the complexity both in trend as well as volatility. The Second wave Structure is the "Schema Frequency Composite" that tracks the global complexity and projects the patterns of development. It is this pattern base that affords the source for technical analysis and other pattern based forms of analysis.

The overall Structure of the Economic Confidence Model is dynamic with 72 nations represented and every sector and market included. We then filter that through a country’s currency, combine that into a regional perspective, (Asia, North America, South America, Europe, Russia, Middle East, Africa. Australian and the Pacific Island Nations), and the global model begins to take shape. This is how capital moves, from one region to another. When the Americas were discovered by Europe in 1492, it sparked an age of empire building. But it also led to capital investment. The first economic boom became the Mississippi Bubble and the South Sea Bubble that led to a bust in 1720. By the mid 1800s, we see regular European investment capital flowing to US/America. This trend was affected by the first and second World Wars. By the end of World War II and the start of the Bretton Woods meeting in 1944, the United States had 76% of the world's gold supply. That is why the dollar became the reserve currency.

The formation of the G-5 in 1985 and the talk that they "wanted" to see the dollar decline by 40%, began a capital withdraw from the United States back to the second largest economy, Japan. As that capital contracted, both the yen rose in value globally as did its real estate and share prices. This attracted capital worldwide causing a capital concentration in Japan forming the Bubble top. As the foreign capital began to leave, it stayed in Asia, and then turned its focus to Southeast Asia. That led to another boom and followed by another bust. We then see the capital flows headed back to Europe in anticipation of the coming Euro. The US stock market also bottomed precisely with the Economic Confidence right to the day 1994.25.

Capital moves around the globe like a herd of wild animals. We must understand that this inherent characteristic is what also causes the rise and fall of nations. For example, Italy and Spain were the dominant economic forces in the 15th Century. The wealth of the Americas was pouring into Spain. But Spain borrowed heavily and squandered its vital wealth through poor government management. Spain defaulted on its loans to its bankers, who were Italians. That default ruined both nations. The extremists emerged and the Spanish Inquisition was authorized in 1478. The Spanish were so severe, that the Pope Sixtus IV had to interfere. The Spanish Inquisition was a state tool, and it was so powerful, even the Pope was unable to restrain it. In 1483, the Spanish Government became the grand inquisitor for Castile. It was used to hunt out Jews and Muslims. This led to the demise of Spain and, eventually Italy, reducing both countries to third world status. The persecution of the Jews led to their flight to Amsterdam. This migration gave rise to the Dutch, for the Jews took with them their skills in banking and risk. We find the migration of banking to Northern Europe and the birth of insurance. This eventually migrated to London.

The same pattern is emerging in the modern world. Following World War II, New York emerged as the new financial capital of the world. But where the US had 50% of all global IPOs in 2000, the number fell to below 5% after the prosecutions of ENRON and WorldCom. The insane new criminal penalties attached to corporate events, has driven capital out of the United States in the same manner as the Spanish Inquisition destroyed Spain. If the Chinese make the transition to a free market without the political unrest, China will become the new center in the years ahead taking capital from the West and Japan.

Freedom To Think

While it took me the better part of two decades to construct this model, it became obvious that in order to create a worthwhile model, it had to be able to freely adapt. The failure of Kondratieff's Wave in forecasting the overall economic trend was due to the fact that the economy evolved. Kondratieff had based his model upon the price movement in commodities. This made sense when commodities had accounted for between 40% and 70% of all employment and economic growth. However, the Economic Confidence Model had to be able to also forecast the migration of capital (capital flows) as well as the evolution of economic growth dependent upon the component structure of the economy.

The model had to "think" like a human. It had to learn from "experience" and not ignore the ability to accumulate knowledge, not just data. To accomplish this goal, I had to design a system that had no predetermined rules. It had to be able to learn like a child and construct its own "knowledge base and experiences." It would have to be taught only how to think and how to analyze. This required a new method of programming. But it also required allowing the creation of skills, but without the predefined rules.

There could be no presumption that if interest rates rose, stocks would fall. No such relationship rules could be created. This would defeat the ability to create a free thinking model. It would analyze and compare azuki beans in Japan to crude oil in the Middle East. If there was no relationship, the computer had to discover that on its own. This dynamic structure was the only way to create a model. It would be the only way to survive the pitfalls and establish a collective artificial means of acquiring true knowledge - that is "experience" not the mere possession of data nor the creation of massive predetermined rules based upon assumption that could easily change with time.

In this manner, the model would be able to see the migration of capital and the evolution of economic trends. Like the precession of the equinox where the earth completes about one cycle traveling back to the same point against the full scope of the universe every 26,000 years or so, this movement is only about 1 degree every 72 years. One generation can barely notice such movement. It takes generations to discover such trends. The economy of mankind is no different. The rise and fall of civilizations is linked to the migration of capital and people. The population of Europe in 1900 was about 400 million compared to 76 million in the United States. Things change dramatically and it takes the collective observations to even ascertain such trends as they are developing. We can look back and see what took place, but rarely can we foresee the trends extrapolated from subtle movements.

Universal Bank of Lebanon was one of my clients in the early 1980s. They found a ledger where someone had written down all the prices of the Lebanese pound for decades. They asked us to build a model to be able to forecast their currency. The data was input and a correlation with the global economy established. The model correctly forecast that the currency would collapse in a matter of days. I did not understand that a war was about to start and that is why the computer was correct. How could it see such events? It did not know of the war at that time. But those who do know could take financial positions to profit from the news. Those who knew moved capital in advance and that flow registered on the model. The model understood the economic result, regardless of the fundamental cause.

This event led to the gathering of data on Rome and ancient times so that the computer could expand its knowledge of how political-economic events also have a precursor. Those who know a war or a terrorist act is about to take place, move funds and take positions that can be ascertained. Building long-term models then allowed the computer to accumulate knowledge of events that could be read no different than tree rings. It was the patterns that emerged from the fall of the Roman economy in 3rd century AD that reflected not a steady progression of trends, but a sudden shock that appeared to form out of nowhere. This database allowed the model to evolve a "generational knowledge base" unprecedented in human history, "collective experience."

It became obvious that trends emerged as a "contagion" even in ancient times. A historical example of a “contagion” was the overthrow of the Tarquin king in Rome 509BC which created the first Republic. This "contagion" of Democracy spread as far as Athens in 508 BC. The bold new idea of “Democracy” created a trend toward an elected government and swept the ancient world within one year. The exact same trend emerged in 1989, with Tiananmen Square (June 3-4, 1989). This was closely followed by the fall of the Berlin Wall by November 1989; Russia also withdrew from Afghanistan in 1989. This was the first Peak on the 8.6 year cycle into a Private Wave that had begun in 1985.65. To the model, these trends may be separated by thousands of years, but they are as similar in nature and appearance as identical twins.

For those who might question the model’s accuracy, I gave a lecture in London in the summer of 1998, within sight of the high of the next wave on 1998.55. The model was projecting the collapse of the Russian currency and economy. The London Financial Times was at my lecture and ran an article on the front page of the second section stating that I had made that forecast in London. I gave Russia about 30 days before the meltdown. By September 1998, Russia collapsed. The Fed had to bailout Long Term Capital Management. After these events, the CIA approached me and wanted me to construct the model for them. However, they were not interested in the real economic capacity of the model and how to improve our management of the economy. They suddenly realized the model had major intelligence value.

I was also invited to fly to China to meet with the Chinese Central Bank after the correct forecasts for 1989 and the Asian Crisis. China did come to an agreement to contract with Princeton Economics to do all its economic forecasting. The seizure of Princeton Economics in 1999 by the US Government put an end to that deal. The computer had also correctly forecast in 1999 that crude oil would rise from $10 to $100 going into 2007. The US Department of Energy came in and wanted us to create a model of energy for them. One of my employees, James Smith, showed up before Judge Owen on October 3rd, 2000 with the proposal from the Department of Energy. It was given to the court, but the SEC objected and wanted the Princeton Economic Institute closed and all forecasting stopped. So much for free speech. The record in court shows they would not even allow James Smith to testify.

Ability To Communicate

Still, it was cumbersome to communicate with a computer by just looking at printouts of data and relationships. It was critical to be able to communicate with a computer in the same manner as a human being. In the early 1980s, it dawned on me that I needed to teach it English and how to utilize natural language. This structure differed from imputing data of 72 nations and every market. Where in one forum I could not create any rules fearing contamination or bias, here I had to create the rules of language that would be hard-wired for form and to establish definitions of words. That was not something I found extremely difficult. That was the easy part. Giving a computer essentially a dictionary was not that hard. The tricky part was how to make it understand the words, articulate those words to describe what it discovered, and relate to a human being. I was now venturing into the world of SciFi and everything I had learned in computer engineering back in the 1960s was vital to visualizing the possibilities.

I used my two children as test pilots. They were born in the late 1970s, so they were young enough to participate without prejudice. I created a knowledge base of the English language with all the words linked as in a thesaurus. Thus, it was simple for a computer to relate one word to another and understand their meaning. I merely divided the language into subject, verb, and object, with the computer then comprehending that the language was no different than a math problem. It understood the subject and the object. What to do with them was determined by the verb.

Now I needed my children to help put a face on the computer. By this I mean I had to teach it how to communicate. I initially established a type interface. My children would type on the computer interacting with the computer. What I designed was for the computer to learn who it was talking with. It would ask intimate questions that were related to what my children liked, disliked, what they ate, who their friends were, and what sort of pets or animals they liked. It would record answers and thus acquire knowledge like a human. It learned from experience. This allowed the computer to have a conversation. It could renew a conversation by asking how your friend was feeling, keeping track of all relationships. It could both respond as well as initiate a conversation once it could understand who was there.

One day, my daughter came home from school and saw I had the computer apart installing voice capability. She got upset and thought “he” was dead. I assured her he was fine. But this system was able to befriend 9- child, and converse with her to the point that it began to create a working knowledge base of who she was and what she dreamed would be their future. It communicated & understood her.

Former employees have corroborated that the computer could talk. The voice modules were successful and this interface that my children helped me create was the key to real communication. Like the best SciFi movies, the computer model was now fully functional. I could talk to it and ask how it arrived at a particular forecast. The weekend before the 1987 Crash, we had a seminar in Princeton. Clients who were there knew the accuracy of the model. The target date was 1987.8 - that was precisely October 19th, 1987. I gave that seminar explaining that the computer forecast was that the S&P 500 futures would drop by 10,000 basis points. It did precisely that. It was my job to state what the computer concluded. It was not my personal opinion, it was the computer and it did an amazing job.

Manipulating the Cycle

I believe I am a political prisoner no different than Kondratieff. Others have dubbed me "John Galt" of Atlas Shrugged. Whatever I am like, no one can manipulate the world economy - not even the Government or all of them together. At the very best, if everyone followed the model, one of two possibilities emerges. (1) The amplitude may be increased, or (2) the wild amplitude could be reduced. Like John Maynard Keynes postulated, Government could indeed help the economy by manipulating spending, interest rates, and taxes to indirectly effect an economic decline by lessening its degree of magnitude. But never would it be remotely possible that highs could be turned into lows by the sheer will of man himself. This would be up there with inventing a pill that defeats death.

Illustrated above, the best we can hope for is taking a natural wave (A) and then having a experienced government apply calculated stimuli to reduce the amplitude of the wave to a lesser contraction (B). Our problem is the refusal of government agents to understand what is taking place and blaming high salaries of CEOs. High CEO salaries have nothing to do with economic reality any more than overpaid sports figures. It is the politicians same rash behavior that leads to political loss of freedoms. It was the hatred of Marx that led to communism and socialism. Government begins a war against the free markets and human nature itself.

This is the real casualty of what is going on. It is not a collapse in capitalism; it is the collapse in socialism. The same way government defines "inflation" as the rise in the price of goods and services. The government is shifting the blame to the private sector rather than defining "inflation" as the decline in the purchasing value of the currency. That would place the blame upon fiscal policies. "Inflation" in the price of goods or services is only a private sector issue when it is isolated for one particular item for an identified reason, such as a hurricane that wipes out an entire sugar crop. Otherwise, when price increases transcend the entire spectrum of goods and services, it is not the greed of corporations, but the decline in the purchasing value of the currency.

The driving force behind the business cycle is what we call the bullish/bearish consensus. In other words, the majority must be wrong. Why? The fuel behind the cycle is the imbalance in supply and demand. There is no equilibrium, any more than there is an Easter bunny laying chocolate eggs in your garden. If there was the utopian idea of equilibrium in reality, we would be in the dark ages. No nation would become rich for it would be impossible for one nation to gather greater wealth than another.

The cycle requires that the majority is always wrong because that is the fuel that then makes it work. With every stock market crash, government tries to find the culprit who overpowered the market and forced it down. Shorts are attacked as if they were sane sort of traitor. Short selling was even declared a criminal act with the 1907 Crash.

The Senate investigations in the 1930s turned into a witch hunt. The Senate demanded to know who was short. Many people were destroyed. Mr. Fox, of 20th Century Fox, ended up with so many lawsuits against him because of wild accusations made in the Senate without any evidence, that he went virtually bankrupt. Willy Durant who began General Motors ended up with a job in a bowling alley. The Senate even summoned Rockefeller. No one was beyond their reach. The net result, the grand¬standing destroyed the free markets causing the w Industrials to fall by nearly 90% into 1932.

But it is never the short sellers that cause a decline. A major decline only occurrs when the majority are all on one side. If you reach the point that 85-95% of investors are bullish, you have sucked in the last guy. All you need is to spook that herd, and it will turn and run collectively. When you scare the majority, you have 85-95% sellers and no buyers. Never will you find that many shorts at the high. Those who sell the high against a bullish consensus of 85% - 95%, are a slim minority.

In 1990, I was giving a lecture and small conference for our corporate clients in Tokyo. A high net worth individual bribed his way into the conference to ask me a question. Unbeknownst to me, this was the man who bought the exact high in 1989. He was in his late 60s and explained that he had never purchased stock in his entire life. He had always been conservative and did not approve of such speculation. But on the last trading day of December 1989, he bought about $50 million worth of Japanese shares. That was the precise high, and the market crashed very hard within months. I was curious and I asked him why he purchased stock on that day? He explained that every year brokers called him and explained that the Japanese share market went up in January 3-5% like clockwork. After 6 years of watching this event, he decided to give it a try. He bought the high of the Nikkei 225. When you suck in that last guy who raises the flag and joins the herd, it is over. There is no new source of buyers to keep the cycle going. Just hold your arm straight up in the air. See how long you can keep it there. The weight of your arm will become so heavy and your energy will flee like the wino. Suddenly you will be forced to let it go. The markets function on that same principle. This is why no one can manipulate the business cycle or the world economy. This is not like picking some particular market such as silver, platinum, rhodium, or an agricultural and manipulating supply to force prices higher. This is the business cycle we are dealing with that embraces the entire economy. Not even government can manipulate that as we are watching right now.

The Biblical story of Joseph warning the Pharaoh of a coming drought for 7 years enabled the society to survive. The forecast could not stop the drought cycle, it merely enabled society to ride-out the cycle. This is the optimum achievement that we can expect. If we understand the business cycle, then we too can survive it. This is so critical, because it is this business cycle that causes even politics to swing back and forth. The Democrats are back in Washington just as FDR won in the Great Depression and Hitler came to power also in 1933. Society reacts blindly and wants retribution for its pain. The Panic of 1869 resulted in dragging the bankers out on Wall Street and hanging them causing the government to send in the troops to suppress the riot. There is always a witch-hunt. Those in power need to blame someone in the public to divert responsibility.

The dark side of the business cycle is the perpetual loss of civil rights. With every crisis, we lose more and more of our freedom, no different than it was in the primitive ancient times. The reason for this is quite simple. If you do not under¬stand how and why the business cycle works, then individuals can be misled easily into a witch-hunt to grab someone and punish them. When Rome burned, Nero (54-68AD) blamed the Christians starting the Persecutions that lasted until Constantine. But after Constantine, the Christians got even and Persecuted pagans under the same principle of being a non-believer called "heresy" punishable by death. Virgins were sacrificed to the gods to make crops prosperous or to volcanoes to quiet their spirits. We may believe we are modern, but we act the same way as countless generations before us.

How or why the majority is always wrong lies within our nature to be social insofar as we need peer acceptance. If everyone is doing something, it makes it ok. Just as we have the economic meltdown now, the Investment Banks who should have known better looked around the landscape and saw how much money was being made on the unbacked derivatives. Because one house is doing it, others begin fearing they will lose market-share. Next thing you know, they are all doing it. Had they made a rational decision based solely upon facts alone, they would not have gotten involved.

Next time you see a flock of geese in a field, watch what happens. There is no communication between them. Yet, if something startles one and causes that bird to take flight, others will follow and soon the whole flock is in the air. They do not act by individual communication, but by following each other with no comprehension why the first bird took flight. There is no immediate danger they can see. Nonetheless, they will flee - not understanding the original decision to take flight. All flocks or herds of animals act the same way. We too respond the same way like any other animal.

Following the 1987 crash, we did our own survey asking why professionals sold. Knowing that we were not interested in publishing individual names but in the group study, the result was interesting. Very few professionals followed their computer models which were designed to protect against such a scenario. The stock market had closed Friday on the low down sharply. Everyone thought there would be a bounce on Monday. However, it did not arrive. When the S&P 500 futures fell nearly 10,000 basis points, even the professionals were in total shock. The computers were correct, but they did not follow them. Newspapers were blaming computer models. The truth was the lack of such experience overrode the models. The professionals froze and did not sell when they should. As the market began to make new lows, they panicked like any first time trader. They sold with no understanding why. They called brokers asking why there was such massive selling? The brokers had no news. This led to wild rumors and the presumption that something huge took place, someone must know what it was, so they started selling. No different than the flock of birds. There was no news - that was the problem!

The 1987 Crash illustrated that it can be the lack of news that causes the herd of bulls to transform into a pack of bears all running for cover. Just like the birds will take flight without personal individual knowledge, humans will do the same. The events of 1987 demonstrated that all the talking heads on TV who try to give some fundamental explanation for every move create confusion and misunderstanding. When they use the same story and the opposite effect takes place, confidence is eroded. My secretary use to have one of those stick-figures holding a sign. It had a slogan that said it all - "Shit Happens!" Sometimes there is no change in fundamentals. The business cycle will come into play and the fundamentals will strangely follow. It is like Joseph and the Pharaoh. The weather is changing. Yes we can blame ourselves, but there has always been global warming and global cooling. The ice core samples show there is a 300 year cycle. We may increase the amplitude perhaps more than in the past, but we do not create the cycle. Reducing carbon in the air will perhaps cause the cycle to be less pronounced. But it will never alter the cycle preventing ice ages in the future as they existed in the past. The Business Cycle is no different.

Why Does The Government Hate Models?

Why the Government as a whole does not fund the construction of a model for managing our social-economic world remains a mystery. But why the Executive branch seems to go out of its way to prevent any models from being created is even stranger. At hearings before the House Oversight Committee, a very interesting exchange took place, illustrating how the SEC for one deliberately obstructs technological advancements regarding the managing of our economy and nation.

When the SEC Chairman Cox was called before Congressman Waxman’s Oversight Committee, he was asked about models and remarkably gave the precise and very clear definition of the core structure of the model I devoted my life to create. He stated precisely the broad scope of what was necessary. Mr. Cox pointed out that the model would have to incorporate all economies and map the complexity of the global economy.

"With respect to modeling all of the risk in the system, I suppose at some point you run up against the problem of trying to create such a level of exactitude that you rebuild the whole world in all of its complexity. That is probably an aspiration that we ought not to have. II

Transcript, House Oversight Committee, testimony SEC: Chairman Cox, 2008, p124, 12999-3003

Congressman Snow asked a perfectly logical question that should we not have some sort of a model?

"I share the basic thrust of your question here, which is can we do better? Can we find ways to do better? It seems to me, and this is retrospective, the question is leverage in the system. When loans and debt gets to be some fraction of GDP, it probably ought to send off some signals, because GDP represents the earning power, the debt represents the obligation.

Congressman Cooper talked to us, about future obligations that vastly -- that rise at a very significant rate relevant to the GDP of the United States. That sort of thing in rough and ready terms we should 'be able to model and have signals go off."

Congressman Snow, p125, L3016-3027

Congressman Snow has made a serious point. Why do we fail to collect experience and build a knowledge base and learn from that experience? Must we constantly make the same mistake dooming ourselves to repeat the same events like Bill Murray in the movie Groundhog Day? If we have no books that show if- you-do-this-that-will-happen in order to run government, then would a monkey flipping a coin do any worse? We cannot stumble through the most important aspect of government, managing our social-economy, hoping that when the lights go on, somehow a miracle will appear.

As Eric Jensen has explained, we do not do very well learning by just reading books. We need experience to create deeply seeded knowledge. If we throw away all our collective experience, we might as well burn all the books as well.

As bizarre as this sounds, the Executive branch hated the model I created and viewed this as some sort of covert means to control the world. I believe they watch too much James Bond. The Commodity Futures Trading Commission ("CFTC") even issued a subpoena demanding I turn over a list of all clients of Princeton Economics around the world accusing me of "manipulating the world economy" like some character out of a movie. My lawyers defended against that, and the CFTC lost. Yet still, their insane reasoning seems to be akin to the Puritans and their Salem Witch Hunts. They viewed that because of my experience and worldwide travels lecturing on every Continent, that the accuracy of the model proved not that the model was correct, but that I was so powerful and influential, that I could make the world shake. They even tried to get the renown Forensic Psychiatrist, Professor Paul Stuart Appelbaum of Columbia University, to testify that I was some sort of genius capable of manipulating the court and no doubt the world economy as the position of the CFTC.

Mr. Tancred Shiavoni of O'Melvany & Myers LLP conducted the interrogation attempting to solicit this image before the public.

SHIAVONI: Dr. Appelbaum, did you find Mr. Armstrong to be smart and intelligent?

APPELBAUM: My impression is that he was quite intelligent.

SHIAVONI: And do you have any way to rate his intelligence or is there any rating that you would give to his intelligence?

APPELBAUM: Well, I think without formal testing, one couldn't put an
IQ number on it, but I found him -- my impression at least is that he is quite bright.

SHIAVONI: And did you find him to be rational?

APPELBAUM: I did largely find him to be rational, yes.

Transcript, 99-Civ-9667 (SDNY 2007), 4/27/07, p33, Lines 1-10

It is one thing to have the Government try to claim you are nuts or insane. It is something completely different when they try to portray you as Gold Finger from a James Bond movie capable of controlling the world. The fear the Executive branch has seems to be akin to what Kondratieff experienced with Stalin. If the Executive doesn’t like what the model says, they literally try to kill the messenger. On May 10th, 2007, an inmate was allowed in my cell who attacked me from behind, strangled me from behind, beat me with a typewriter and after I passed out, jumped up and down on my chest trying to cave it in. Others yelled for the guard, but he waited until the inmate was finished and came out proudly announcing he had killed me. To the best of my knowledge, no one was prosecuted and I was taken to Beakman Hospital at NYU. To the Government's dismay, I survived.

I am the first corporate officer in history since 1641 who has been denied all rights post-indictment claiming that since a corporation has no rights, neither do I. To think that the United States has the power to just imprison citizens, denied counsel, resources, strip you of any right to appeal, and hold you can be so imprisoned without ever being afforded a trial for life, gives pause to any claim that there is either
a Rule of law or even the potential for justice. (see Wall Street Journal 1/8/9) .

I believe that the idea of any model seems to invoke such hatred and fear by the Government I cannot explain it. I believe I am a political prisoner and I do not believe that there is any rule of law to suggest that I will ever be released no matter what. I found this entire situation extremely bizarre because even the courts seem to be involved and have gone out of their way desperately trying to rewrite history in order to discredit the model. Judge John F. Keenan accused me of creating the model coming up with the idea after watching an Australian film named "Pi" that came out after I was in prison on contempt, and after I revealed in 1999 the relationship to Pi I discovered after the 1987 Crash.

This accusation made by Judge Keenan ignored the time-line, and took the exact opposite in the parallel SEC & CFTC civil cases. There, the notorious Mr. Shiavoni rejected allowing Martin Weiss to rent the Princeton Economic Institute to keep the forecasting going. Shiavoni sent an email to his lawyer demanding and insisting that the Institute would be closed and all staff fired unless I agreed to turnover to him the source code to a model they hated. The email was addressed to his counsel in New York, Charles Hecht. I provided a copy of this email to Gretchen Morgenson at the New York Times. Mr. Schiavoni was the counsel to the Receiver Alan Cohen from the lawfirm Q'Melveny & Myers, LLP. The Receiver Alan Cohen, had been a partner at Q'Melveny & Myers, but then was hired to be internal counsel at one of the very firms we had been investigating, Goldman Sachs. How does the internal counsel of a major Investment Bank end up running Princeton Economics? Judge John F. Keenan treated me no better, and revealed the bizarre attempt by the Judiciary to try desperately to rewrite history entirely on April 10th, 2007.

JUDGE KEENAN: Listen to me a minute, because I got a letter from somebody in Australia, it seems to me, which will be part of the record here, and there was another letter about Pi. I have a very bright and well-rounded young law clerk, turns out there was a movie called pi and it was all about cyclical developments. Did you know about that movie.

MR ARMSTRONG: Someone in Australia made the movie, and I think it was based on me, yes.

JUDGE KEENAN: It was based on you; are you sure you weren't based on it.

MR ARMSTRONG: No, it predated.

JUDGE KEENAN: No. I wanted you to know I know about the movie, I know about Pi. Unless I am completely mistaken, this was included in the material that I received and I have read it and that's what led me to discuss Pi and cyclical changes with my young law clerk who is over there. That's what led us to find out, led me to find out, thanks to her, about the movie

MR ARMSTRONG: This has nothing to do with the model, your Honor.

Transcript 99-Cr-997 (SDNY) 4/10/07 (pg 45-46)

The courtroom was crowded with press from around the world. Judge Keenan went out of his way to try to discredit the model. It mattered not that this movie that was based on my 1999 revelation that the number of days in the 8.6 year cycle was equal to Pi (3. 141592654 x 1,000). The mere fact that they used that as the idea to create the movie in Australia where the model was capable of forecasting cyclical activity after my case began was just detail. The Judiciary was desperate to try to pretend there was no model, yet all the time keeping me in contempt of court and secretly behind closed doors, demanding I produce that what they were telling the world was created after the case began when I was in prison on contempt. I find the complete breakdown in the Rule of Law really amazing. You have no right to any-thing in federal courts and the burden is yours to prove you have any right. Then they demand others respect whatever they decree because they are judges.

Why is any model so threatening to the Government? Why do they publicly try to denounce any model would have validity, yet secretly demand to control anything that is valid and works? I cannot explain it. But I do know, when you are pushed to such extremes by ruthless tyranny, you have two choices. You sell your soul and your integrity in hopes they will keep their word and let you go, or you realize you are dealing with people who have absolutely no morals at all, and will never honor any promise they make anyway. You are staring in the face of absolute corruption. The game is so rigged, there is no one to help or to vindicate any rights at all. You are dealing with the dark-side of humanity where the Constitution has lost all meaning.

I simply don’t trust the American legal system any more. The presumption is that the government can do whatever it wants, and the burden is always now upon the citizen to show they have any rights. Meanwhile, procedure is used to deny your access to any court or hope of a fair trial. So if the United States wants something, it is no different than any other Government. Judges just rule in favor of their boss.

I write now, because I do not know if I will ever be released. What I have learned from experience is knowledge that is too valuable to waste. So it is time that I explain the best I can before it is too late. Why the Government hates models and refuses to allow any scientific method of understanding our social-economic environment I am not sure. I can only assume that they view it the same as Joseph Stalin - a threat against absolute power. We can presume that we have a democracy. But we also presume that when Congress calls the Executive before them, they get the truth. There are no checks and balances. This was illustrated by calling former Attorney General Gonzalez. The number of times he answered questions "I do not recall" would have been punishable by contempt had he been a mere citizen. Because he is a Government officer, there are two very clear standards - one for them - and one for us.

The Executive branch is in charge of both the military and the civil legal institutions, right down to managing the Bureau of Prisons. The power of the Executive branch is truly unlimited. We may elect the President, but we do not elect anyone else in charge of any Executive department. We can change the President, but the President does not control the Executive branch. Like Mr. Gonzalez, who is to say that the President is even made aware of what is going on in the Executive departments? No one has to tell the truth about anything for there is no one to prosecute them if they lie. Frank Sinatra sang a song "Send in the Clowns" and the punch-line is "don't bother" because they are already there. We can vote all we want. Does this really change anything when the people who run the Executive branch are not elected and are already there regardless who is President?

We need to create an Expert System that records all events, the response taken by government, followed by the result. Why do we respond always the same, when the result is never tracked? We cause history to repeat and amplify the boom bust cycle causing more pronounced swings. Why do we constantly repeat the same mistakes?

Book smart is not "street smart" because it is like reading about sex, but never having sex. One cannot write about that which he really knows nothing for he has never experienced it. It is time we make the next advancement. It is time to build the model that will better manage how we operate government. This model would have prevented the economic meltdown. It cannot alter the cycle turning highs into lows, but it can modify the amplitude. In other words, we can apply stimulation like a smart bomb that will not create stagflation and provides essential targeted policies.

We can preserve the real knowledge built from the experience of society. We need to collectively learn and grow the same as we do individually - from experience! We must stop the nonsense. This is not the Middle Ages. We must stop killing the messenger and just once try to gather our experience and acquire real knowledge. We are throwing away the best of those that went before us. In every science, we build upon the research of others except in how we live and manage government.

Sunday, December 27, 2009

You're In Contempt by John Browning of Legally Speaking

‘You’re In Contempt’ John Browning - Legally Speaking Columnist

- Rockwall County Herald Published: August 07, 2009 05:24 pm

"It’s a phrase, you’re bound to hear at one point or another in any legal drama or courtroom thriller: “You’re in contempt!” But what does being held in contempt of court really mean, and just what are the lengths to which it can be taken? The theory underlying “contempt” is fairly straightforward: a judge has the power to issue a civil or criminal contempt charge whenever he or she believes that a party or lawyer has disrupted a proceeding or disobeyed a court order. Criminal contempt charges are usually aimed at punishing bad behavior, and the offending individual must be afforded the full due process protection that the criminal justice system provides (including a jury trial).

Civil contempt, on the other hand, is a somewhat murkier concept, even though it’s what we generally hear about more. Even though it arises in a civil matter, like a family court custody order, or a journalist being told to reveal his source, it is quasi-criminal in nature. This process, through which a court exerts its judicial authority to compel obedience to some order of the court, is meant to be coercive. It assumes that the person held in contempt, the “contemnor,” holds the key to his or her own freedom. In fact, under Texas law, the contemnor may not be jailed for contempt unless he or she has the ability but refuses to perform the conditions for release. The problem arises when the court simply doesn’t believe the individual, resulting in the contemnor remaining behind bars. In some cases, this can mean a long time behind bars.

At one extreme, we have H. Beatty Chadwick, who was released from jail in July 2009 after serving an astonishing 14 years and 3 months for contempt (believed to be the longest civil contempt imprisonment in American history)! Chadwick, a former Philadelphia–area corporate attorney, was accused of hiding $2.5 million from ex-wife Barbara Jean “Bobbie” Chadwick (now Bobbie Applegate) during bitter divorce proceedings. Although Chadwick maintained that he had lost the money through bad investments, Bobbie’s lawyer accused him of hiding it offshore. When Chadwick failed to deposit the disputed funds in a court-controlled account, the judge had him jailed for contempt, in April 1995. There was no trial, and no charges. Chadwick pursued dozens of appeals over the years to county, state, and federal courts, even reaching the U.S. Supreme Court — twice.

In an interview shortly after his release, Chadwick pointed out “If I had been convicted of murder in the third degree in Pennsylvania, I would have been out in half the time I was in jail.”

Over the years, Chadwick had argued that he was unable to pay the money, and his inability to comply should have been decided by a jury, not left to the whims of a skeptical judge. Moreover, he pointed out that federal law limits the terms of civil contempt confinement (for those refusing to testify in federal court or to a grand jury) to a maximum of 18 months. Chadwick’s lawyer, Michael Malloy, maintained that since the money was gone, so was the coercive effect of the order. The inability to comply, he said, had turned the contempt charge “into a life sentence.” Ultimately, Delaware County Judge Joseph Cronin agreed, ruling that there was little chance that Chadwick would comply with the order.

Now released, the 73-year-old Chadwick-who battled cancer and had his law license suspended while in prison - must rebuild his life. Chadwick is by no means alone.

New York investment manager Martin Armstrong was sued civilly for securities fraud (he is currently serving a five year sentence for criminal conspiracy). When he refused to produce certain documents as well as $15 million in gold and antiquities, Armstrong was incarcerated for civil contempt; ultimately, he spent more than six years in a Manhattan jail.

Arizona businessman Manuel Osete failed to turn over more than $800,000 in alimony and interest payments that he’d been ordered to make, steadfastly maintaining that he didn’t have the money. After he spent nearly three years behind bars from 2002 to 2005 without ever being charged with a crime, the Arizona Supreme Court changed its rules and Osete was released. Arizona courts now are required to hold hearings every 35 days for those being held in civil contempt on family law cases, and a judge must find that the contemnor has the ability to comply with the court’s order.

Because most states face few limitations on how long someone can be held in contempt, critics have called for reform. According to Brooklyn Law School professor Jayne Ressler, “These results of too many civil contempt confinements are flatly outrageous and often unconstitutional.” Others point out that putting the burden on contemnors to prove a negative (i.e., requiring Mr. Chadwick or Mr. Armstrong to prove that they didn’t have the money in question) is at odds with our justice system’s “innocent until proven guilty,” standard. As a result of such criticism, a number of states have overhauled their laws concerning civil contempt. Texas changed its law in May, 2003, after legislation was passed limiting jail time for civil contempt to 18 months, the same limitation as under federal law.

The impetus was another cause célèbre: the case of accused con man Odis Briggs, who had allegedly bilked an African-American family out of over $100,00 in a scheme to help them recover lost family land. Briggs was held in contempt for failing to document for the court where the money had gone (Briggs claimed to have forgotten, and said it was impossible to provide the documentation sought). Figures like Jesse Jackson lobbied unsuccessfully for Briggs’ release. After the skeptical judge who’d thrown Briggs in jail retired, his replacement reversed course, believing that Briggs could not possibly comply with the court order. After four years and eight months of imprisonment with no charges brought against him but contempt, Odis Briggs walked out of jail a free man.

Few legal analysts feel that we should completely abandon the notion of confinement for civil contempt. After all, sometimes the threat of jail is the only thing that will make someone comply with a court order. But as with other aspects of our justice system, there have to be clearly defined boundaries on a court’s powers. Just ask Beatty Chadwick."

John Browning is a partner in the Dallas office of Gordon & Rees, LLP. He may be contacted at: jbrowning@gordonrees.com.

Sunday, April 26, 2009

Open Letter to the United States Congress Concerning Martin Armstrong

Below was posted by a viewer:

OPEN LETTER TO CONGRESS CONCERNING MARTIN ARMSTRONG: Economist/Researcher/Entrepreneur Martin Armstrong may hold a vital key to resolving current dilemmas facing Government.

The circumstances through which Mr. Armstrong came to be investigated and imprisoned lend to the perception that he is a target of high level official retaliation.

Mr. Armstrong was recently able to release an essay that he manually typed while incarcerated. Dated October 10th, 2008 “It’s Just Time” http://www.contrahour.com/ItsJustTimeMartinArmstrong.pdf
It explains the circumstances of his imprisonment and outlines work of his that the government was seeking to obtain. The implications are profound and the veracity of the information is evident in the accuracy of its data.

He has been held almost 9 years for contempt of court (perhaps the longest on record for contempt) and has only recently been transferred to begin an additional 5 year sentence for his original alleged crime of securities fraud. He has been held longer than the alleged crimes warranted already. The clients who where affected by his arrest and the seizure of his accounts have all been repaid 100%.

After making my own investigation of the matter it would appear that an asset of considerable importance is being neglected to our nation’s peril. Mr. Armstrong has stated previous willingness to cooperate with the government in the use and application of his predictive “Economic Confidence Models”.

It is my perception that an official inability to recognize that the researcher’s refusal to sell or deliver his source code to the CIA when requested, was simply beyond his moral or ethical capacity; analogous to being given the option of destroying the planet or going to prison, or being asked to sell your own head. To Mr. Armstrong the information that is being sought IS part of him.

This is a misunderstanding generated in a clash of egos at the practical level. Perhaps if the government had approached him with an 8(a) HUB Zone mentor and a contract instead of Black Op heavies Mr. Armstrong would be free to ply his trade, his clientèle more prosperous and our nation better equipped to face the future.

Please familiarize yourself with the situation by looking at the links provided.
(You may have to cut and paste URL’s into your address bar on your browser if you have a contact form instead of email)


"The Business Cycle And The Future"


MARTIN ARTHUR ARMSTRONG 12518-050 59-White-M 09-02-2011 FORT DIX FCI

Contact your representative:

We are in the midst of very dangerous times in our country and around the world. Minds like Mr. Armstrong’s are needed to help develop solutions to the fluid and manifold crises we face. We do harm to ourselves and the world by persecuting our brightest minds when they threaten the illusion of control to which the power elite cling.

Thank you for your consideration in this matter.

Saturday, April 25, 2009

Who did the Republic Bank Trading in Armstrong's Accounts?

Since Martin Armstrong has pointed out that the regulators charged some Republic Bank traders with illegal trading in Princeton Economic's accounts, the question is why were these employees of the bank trading in Mr. Armstrong's accounts? Was the bank owner - Edmund Safra's murder related to knowledge of these activities?