3 August 2008
Interview with financial expert Albert Spits
'Credit crisis caused by fighting wars and short-term vision'
Listen to or download part 2 of the interview with financial expert Albert Spits. In Dutch, MP3, 7 Mb, 14 minutes, recorded on 23 May 2008.
Spits is an advisor for pension funds and co-founder the Frédéric Bastiat Foundation. More on Spits and his quest for financial clarity in part 1 of the interview.
Interview by Daan de Wit.
Transcript by Michel Steyger and Trudie Beverloo.
Translation by Ben Kearney.
-What do you think the future holds? Can you sketch out a scenario for the future?
What I see is inflation and deflation occurring at the same time. I'll explain this. Inflation is monetary inflation, it just keeps growing. Because as long as we maintain trust in the currency - the euro, the dollar, the pound, the yen, etc. - the government is going to keep printing money, and the central banks will too. But at the same time there is deflation in the stock market, deflation in the housing market, deflation in commodities - not so much in raw materials, but in say industrial production.
-But monetary inflation means currency devaluation, and this deflation in commodities and houses, etc...
Yes, in capital. So you have inflation of expenditures and deflation of capital.
-So you see your wealth diminish - home prices drop.
Yes, the price of homes drops, stock prices drop, securities drop. At the same time we see inflation of the main vital necessities.
-Which we are already seeing.
Which we're now seeing, yes, that's going on now. In the 90's we experienced disinflation, which means that prices for industrial goods, etc., went down. Then in early 2000 price inflation started to slowly creep up again. What we now have is stagflation - stagnation versus inflation. And where we'll soon find ourselves is hyperinflation. At that point governments will be grasping for ways to manipulate the interest rate and the growth in the money supply. We are already seeing this unfold now, for the growth in the money supply has risen from roughly 7 to 8% in the last ten years to 10% now.
-Hyperinflation makes me think of those photos from the 1930's where you see people going to buy a loaf of bread with a cartful of money. But of course that's not going to happen now.
Well that depends.
-How do you see hyperinflation playing out today.
What we're seeing is that the 10% growth rate in the money supply is simply going to persist. So we'll get hyperinflation á la the 1970's, which we have also experienced. In the 70's prices rose sharply, by 10%, and wages rose as well. We'll see much more unrest, discontent among workers. People want higher wages in order to compensate for the higher prices, but employers can't meet that demand and they lay people off instead. So you actually end up with unemployment, massive unemployment. I think that in the next few years The Netherlands can count on more than a million unemployed workers [on a total population of 16,5 million].
-But then those people will need to receive unemployment benefits...
That's right. And that gets financed by way of monetary inflation.
-So more money gets printed as a result?
-Also here in The Netherlands?
Yes, here as well. Most people are probably unaware of this: In Frankfurt we have a central bank, the European Central Bank, but any bank in the eurozone can print its own money.
-So if the government needs more money for unemployment benefits, are they going to get that from the Dutch Central Bank?
Yes, the Dutch Central Bank is responsible for the printing of money.
-But printing additional money - they could do that anytime they wanted, couldn't they?
Yes, of course, and they do. What we see is that our leaders - I'm talking mainly about politicians - they are often ignorant people, uninformed about the real economy. A number of them may well be economists, but those are economists trained in the Keynesian school, they've never had training in the Austrian school. They think about the economy the way John Maynard Keynes did, who wrote his book in 1936. Since World War II we've plunged headlong into Keynesian economics. On the one hand that means that - as Keynes says - you can manipulate the economy, you can raise or lower the interest rate, you should print money as it becomes necessary, that the government has to provide you with financing, and that you have to be able to go into debt. That was his official position: if things aren't going well, then go into debt.
-As an investment?
As an investment, yes, exactly. 'It will turn out okay, because that investment will pay itself off soon enough. Once things are going well again, then you have to pay it off'. The problem was that most governments never bothered with that part. They went into debt, but they never paid it off. Look, Keynes' idea was that if you go into debt, you have to pay it off in good time. It was never his intention to say, 'We've gone into debt, and as long as everything's okay we'll go deeper into debt'.
-So politicians didn't have that sense of responsibility?
Exactly. That has been completely done away with over the course of decades.
-But then is the Austrian School really the great savior?
The Austrian School is an adherent of the gold standard . It functioned well for more than a century, it was introduced at the beginning of the 19th century. It wasn't a standard that was imposed by the government, it was a de facto standard that everyone complied with. The only thing the government had to do was produce gold and silver coins. In The Netherlands we had for instance the silver guilder and the silver rijksdaalder. The English had the sovereign, the French had the gold francs - the Louis d'Ors, and the Germans had the goldmark. These coins were minted and people viewed them as legal tender, as well as a way to save money. This system was able to manifest itself for an entire century, and it went very well, for there were precious few wars fought, and international trade grew so explosively that it was greater in 1909 than it was in 1964. There's a lot of talk about globalization these days, but globalization was actually already well underway in the 19th century.
-But the creation of money that completely abandons this, also is responsible for cr…
-Not creating it?
No, destroyed, that's an imaginary value.
-But with that so-called imaginary value someone can build an actual house.
Yes that's true, that's credit. That's credit that isn't backed by anything of real value.
-But there is still real value to such a house or building... America is full of magnificent...
Full of magnificent houses. There are also about 14.5 million of them that are currently uninhabited. This is actually a destruction of capital. Those people can't afford to live in those homes because the value of the homes has risen so explosively. That is imaginary value, but money is still borrowed against this imaginary value. If you take for instance a rise in value of 100%, that 100% is all air, and then people take out a loan for 200,000 euros, while the house is actually worth 100,000 euros. So the value of that 100,000 euros is imaginary. People can't pay that, and so they move out of their house, but the bank or the financial institution can't get rid of it either by selling it for 200,000 euros to someone else. That's also why we're seeing the collapse of the housing market, and that's been going on not only in the last few years, but over the course of the last century. The problem originated in 1909 when the gold standard was abandoned. Two countries were responsible for this: France and Germany. They sensed that war with each other was in the offing, and so both Germany and France abandoned the gold standard by ceasing to pay their government officials in gold coins, and instead paying them with paper money.
-Right, whereby one is still under the impression that it's being backed by the government: 'It will turn out alright'.
Yes, 'It will turn out okay'. This paper money then went into circulation, and the gold was used as backing for the weapons industry, at which point an arms race started first between France and Germany, followed later on by all other Western countries.
From 1914-1918 the gold standard was abandoned en masse because countries began to wage war. After 1918 the gold standard was not reinstituted, though a de facto gold standard came into being, and that's something else. In countries such as Germany, France and America , day-to-day needs were no longer paid for in gold and silver, but instead with paper, because people assumed that it was backed by the central bank. Then in the 1920's an enormous amount of money was created. Money was created in America and England , in The Netherlands and in Germany , whereby a huge bubble arose in the economy in the 1920's, when there was a high rate of production of cars, radios, airplanes and trains - you name it. So there was a huge boom in the economy. This came to an end in 1929. It was at that time that the first blow came, because the value of stocks and homes was also so high, such that the value reverted back to the actual value, because people couldn't pay for that either. The 1930's are the result of all this.
-Regarding the weapons industry... It has ultimately been able to pilfer a lot of value.
-Are there other areas as well in which value – value that in our eyes is disappearing - ends up surfacing somewhere else? Or does it really disappear?
Value never disappears, imaginary value certainly does, but never real value. What we are now seeing are bubbles, and those are exaggerated values. We've had a bubble in the stock market which exploded in 2000. We now have a bubble in the housing market, which is now in the process of exploding. We are now also seeing a bubble in raw materials, among them oil, gas, uranium, base metals, and others. And also with rice, with soybeans - of course this is becoming a huge bubble as well. But bubbles have a tendency to last a long time; the stock bubble has lasted about 20 years, 18 to 20 years. The housing bubble too. So the bubble in raw materials is going to last something like 20 years. That began sometime in 1997 or 1998, so we can safely say that it will stick around until 2015, 2017, and then it will collapse. That bubble is also going to move automatically into the monetary metals, which are gold and silver. But before that happens it's important to know what stage a bubble is in.
-But I wonder whether or not certain groups are - we were just talking about the weapons industry which has benefited from the elimination of the gold standard - whether there are certain industries that time and time again benefit from things that to our eyes are collapsing, but which perhaps make others very happy.
I think that people who have money in savings or who have gold and silver can simply wait until everything has returned to its actual value before buying. I'm also advising people not to buy a house - don't buy a house, and if you do buy a house, then you should simply hedge your investment, should you have the money to do so. You should really just keep renting. It's actually cheaper to rent than to buy an average home now. Look, most people look at the interest rate deduction, but that's only part of the story, because there are other issues like the ratable rental value, property taxes, sewer taxes, and everything that goes along with that. All those maintenance costs have to be figured in. Then you see how renting is actually not so expensive.
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