My name is Daan de Wit. With me here today is Albert Spits from the Frédéric Bastiat Foundation. We met each other at one of the info-dinners hosted by Willem Middelkoop, author of the bestseller (Dutch only) If The Dollar Falls. Mr. Spits, you are an advisor for pension funds.
I am.
-But you are also clearly interested in the mechanisms behind money.
Exactly.
-And this interest of yours is incorporated into the advice you give. Could you first talk about what your work involves and how much money we're talking about here?
The advisory organization that I work for deals in the millions of euro's, hundreds of millions, and that involves personal advice, actuary, pension administration, and everything associated with that. We're talking about pensions with an average turnover in the hundreds of millions.
-So the advice you give has a fair amount of impact?
Yes.
-Talk a little about your background, as well as your interest in the mechanisms of the financial world, and how you ended up at that dinner with Willem Middelkoop.
Albert Spits: It actually began 25 years ago in 1983. At that time I was still living in New Zealand , where I was studying Pedagogy and Psychology, and because New Zealand was going through some awfully difficult economic times - we were coming out of an economic crisis - I became more interested in the how and the why of the economy, and why it was looking so bad.
I became absorbed in four economic schools of thought. I started with the Keynesian School , which is the one most widely taught at universities in the Western world. I also studied Monetarism - the Monetarism of Milton Friedman - also called the Chicago School . The supply-siders - not so well known in The Netherlands, but more so in the English world, the Anglo-Saxon world - that's the school of Jude Wanniski , who was one of Ronald Reagan's biggest advisors, hence the term ‘Reaganomics'. And the last school that I studied was the Austrian School of economics. Strangely enough that was the school which interested me the most because it came closest to what I call the essence of economics. This school came about in the 19th century and came to the conclusion that the economy worked differently than the Keynesians and the Monetarists would have us believe.
The reason was that the economy was actually controlled from the standpoint of value, not so much from the standpoint of trust like we know now, but from the point of view of value - that there should always be a benchmark for value. But without getting too deep into all that... The reason I found out about this, that was only after 11 years of study, in 1994 (I started in 1983 and actually came to the discovery in 1994), and since then I've been more occupied with the Austrian School and at one time gave a number of lectures on it. At that time I worked at a corporate training agency. I utilized this information in financial training of production managers, department heads, etc.
In 2002, together with Sander Boon and René van Wissen, I founded the Frédéric Bastiat Foundation, and since then we've been engaged with the analysis and research of the economy. My studies of the Austrian School totally preoccupied me... I started in 1993. The book that actually set me on the path was 'The Road to Serfdom' by Friedrich von Hayek. That was a book from 1944 in which he explained that socialism would lead to serfdom. I found that really interesting. After that I read some of his other books, and gradually I came around to Ludwig von Mises, the biggest exponent of the Austrian School in the 20th century. It was tough going to get there because I first had to wade through all these other schools of thought and I was also busy reading articles on the economy - articles from the Financial Times, The Economist, Business Review, etc - which continually led me toward that same Keynesian way of thinking, and that put me on the wrong path for roughly eleven years.
-And you were doing your own research the whole time, never with the intention of for instance writing a book...
No, it was never my goal to write a book. I certainly accumulated a lot of information that I was able to use later on in my lectures, in my articles, etc. Right now I'm working on a publication.
-Eleven years of doing your own research, has that payed off in your work as a consultant for pension funds?
Yes, it really has.
-Have you come to a conclusion after all these years of research?
Yes, I have come to a conclusion, and that conclusion is that the fiat currency system... I'll just explain what the fiat currency system is. The fiat currency system - the system that we have now - is based on trust, trust in paper money, trust in the government. That trust is always temporary. That's why we experience upheavals, revolutions, etc. The more say that you allow a government to have, the more a government is going to abuse it. That's the conclusion that I have drawn from history. Having said that, you can see that a specific monetary standard is necessary, a fixed standard. You can't base everything on trust, because trust will simply be abused - history has taught us that. So you need a specific standard, like the gold standard or the silver standard or a bimetal standard, which means gold and silver together. That means that people will keep their promises. You prevent the government from printing money...
-But that's what's happening now... What to do?
That's right. The credit crisis is now the end point, the final phase of sixty years of credit expansion. And I am specifically not talking about the expansion of the money supply, because those are two different issues. You have credit expansion and you have monetary inflation. Monetary inflation is, in and of itself, printing money. Credit expansion is based on the promise to pay money back. Banks lend money to people hoping that it gets paid back because those banks are obliged to pay back the central bank. The central bank approves the credit that the banks lend to individuals and companies. If people are no longer able to pay it back because they've gotten so deep into debt, then the banking sector can't meet its obligations to the central bank either. That results in bankruptcy. And what we're now seeing - the first signs of this with the credit crisis - is that a few banks have already gone bankrupt. Bear Stearns, Northern Rock…
-But is that caused by the public or by governments?
That's caused by the government. I don't know if the term 'moral hazard' says anything to you. Moral hazard means the longer that things are going well, the more people there are who dare to take risks, the more risks there are being taken. And those risks translate into more credit. We have now generated a huge bubble that since the 1990's has totally exploded, and under normal circumstances this could no longer be paid back. In reality this means that everything needs to be reorganized.
-That also means that by definition the situation cannot be resolved.
Not with this system.
-Yet I'm reading reports that we've seen the worst of this credit crisis...
No, we haven't even seen the beginning of it yet, or at the very least we're just now at the beginning of it. We have a huge problem with hedge funds, which have issued a whole lot of money or credit. The housing market is only now starting to collapse, but soon it will be coupled with huge collapses...
-Are we talking just about America here, or Europe as well?
Europe too. Actually the rest of the world as well - they're coming right along with us. This is the first fiat currency system on a global scale that we've ever had in history. In the past it was localized, regionalized: for example there have been specific countries that did this, while other countries made use of the gold or silver standard. So you had other countries that could then straighten things out again.
-So you could say that it's never been quite as bad as it is now...
It's never been as bad as now. We have a credit bubble of roughly... The Gross World Product is currently 45 trillion dollars. The derivative time bomb heading our way is in upwards of 500 trillion dollars, so there is actually a bubble amounting to more than ten times that which the world produces each year.
-Will that by definition collapse?
Yes, because it's an exponential occurrence. At the time that the options market first began in the 1980's - initially the derivatives market - at that time there were but a few million dollars that were sunk into it worldwide. Now we see that that has grown in the 28 years since to almost 500 trillion dollars. So it's exponential. That also has to do with the desire to take risks - if things are going well for a long period of time, people are going to take more and more risks. But they're not getting corrected by a gold standard that would force you at a given moment to pay back your money to your creditors or to the banks. Debts are getting loaned out anew, in the form of a 'CDO' - a Collateralized Debt Obligation. They get bundled together - mortgages, loans... It gets put back into the market again in the form of financial instruments.
-Yes, at which point it's no longer subject to oversight.
Right, no one is keeping track of it anymore. It's not even known how much credit is currently outstanding. Someone once said - I don't know exactly who it was - 'Money is always scarce, and as soon as it is no longer scarce, it is no longer money'. And that describes this situation quite well. Particularly in the 1990's, we know that people here in The Netherlands took out credit for kitchens, roof dormers, vacations, big cars... All that credit was taken out against the mortgage. Because the value of homes kept rising, it was possible to keep borrowing against it. That has come to an end. In America they have the same problem. People were using their home as a sort of ATM. As long as housing prices kept on rising, that could be easily financed. Now housing prices are no longer rising, they're falling; that began in 2005. The credit crisis, which began in 2007, is a direct result of that.
-There is also the American government, which has been spending money like it's water and dumping it into a black hole in Iraq . It's as if it doesn't matter anymore.
Yes, that' true. Look, they're living off of credit. That's not money. The word "credit" comes from the Latin 'credere' meaning 'to trust'. You trust that you'll be paid back. But what happens if no one gets paid back anymore? What happens when people are in a state of bankruptcy? This is going to result in a contraction of credit once this credit crisis is over. In the past those with the worst credit could get money or mortgages or loans. Now those with the best credit will soon no longer be able to get a loan. We're now seeing the beginning of this contraction, because most banks are now wary of financing real estate projects, for instance. So we're seeing this all around us. This problem is going to express itself at the level of the individual consumer. What we're seeing with the credit crisis is just the beginning of what is to come, and it will probably be resolved in eight to ten years time.
-If possible, could you paint a picture of what the future holds.
The housing market is going to collapse.
-In The Netherlands as well?
In The Netherlands as well. Take a look at history - in Florida in 1925, 1926 the housing market collapsed to twenty percent of its value. If we look at Japan during the 1990's, the real estate market fell by 13%. To say that there will be a collapse of ten to twenty percent is very optimistic. Because we're talking about a deflationary situation, not about monetary deflation. We're talking about credit deflation, i.e. when credit is no longer available. People just plain need credit in order to purchase a home, a mortgage. Nobody can pay for that out of their own pocket. So homes won't be purchased anymore. Not only will it be a buyers market, but it will become a buyers market without any buyers.
-But are we not in a unique situation in The Netherlands because we live in such a densely populated country, where home prices always remain quite high?
Well, take a look at the 1920's. In the 1920's there was a housing shortage in the Netherlands , and in the 1930's that was resolved. A lot of people don't know about the Housing Act homes - the Dutch Housing Act dates back to the beginning of the last century. Because of World War I there weren't many homes and that prolonged the housing shortage into the 1920's. By the 1930's the housing shortage was over.
-But can you translate that into today's terms.
Well I think that the housing shortage that we have now... There is no housing shortage, there is a shortage of affordable housing. And that's only because the value of homes has risen so much. So someone who has €300,000 can easily buy a home. But someone who doesn't have that money or can't get any credit, that person faces a problem, and so has to go looking for a rental, which is harder to find.
-So home prices in The Netherlands are going to decline?
They are going to decline, yes.
-In England there was a cabinet minister photographed with a document, the text of which was so sharp that you could read it on the photo. It was Minister Caroline Flint. On the document it said that ‘‘at best' prices will tumble this year by five to ten percent'. That was in reference to England . It's widely known that home prices in England will most likely fall. What percentage do you expect for The Netherlands , and over how much time?
Well, I think you should figure on a drop of at least sixty percent. I'm working off of ratios. There was a great article in The Economist in 1987 that talked about the ratio of the housing market - average income versus the average price of a home. In 1987 the average income in The Netherlands was not the modal, see, the modal is higher. The Netherlands is one of the few countries that uses modal income, the rest of the world uses average income, which is lower. At that time the average income was 42,000 guilders, which converts to around 20,000 euros, and the average price of a home at that time was 145,000 guilders. So you end up with a ratio of roughly a little more than three. Historically the ratio is between three and four. If you look at the average price of a house and then assume the average income today - that's something like 30,000 euros - then you'd have to calculate the average price of a home at 120,000 euros. But where is it now? It's at 240,000 euros. So in order to get back to the average, it has to drop by 50%.
-You mentioned 60%, how long until then?
In Japan it lasted from 1993 until 2000. So you have to think in terms of a time frame of 6 to 7 years from now.
-But what should you do, you still have to live somewhere?
That's true. For those who are renting: Wait to buy, because an enormous buyers market is on the way. Try to build up a savings. For those who have their own house with a decent mortgage, I would advise putting 10% of that mortgage into gold or silver.
-But not to sell the house and get a rental?
You can sell and rent. But it's a difficult market for sellers right now, and that's when you're still living in it. If you want to sell, then I would get going on it quickly.
-With selling?
With selling.
-Tell me about this 10%. 10% of the mortgage.
-Ten percent of that mortgage...
In gold or in silver. Gold is still at an historic low now. If we look at the ratio between the amount of credit and the amount of gold that's out there, or better put: the amount of monetary instruments - that's money, euros, dollars, etc. - then we can see that gold represents approximately one tenth of that value. Because we're currently heading toward a crisis situation, we're starting to see a flight towards things of value, a flight to gold. So the price of gold is going to have to go ten times higher in order to keep pace with all of the paper money in circulation.
-So even if you get in now, the price is still going to increase tenfold?
Yes, ten times higher. I expect that the price of gold, which is now at 500 euros, will be somewhere between 4500 and 5000 euros in 2016.
-Is it a good idea to buy other precious metals as well?
If you're smart, you'll purchase half in silver and half in gold.
-But your advice is to actually buy it, to physically have it in your house?
Yes, in a place where it can be stored. I wouldn't buy a gold certificate at the bank because banks can fail.
-But if you don't buy it on paper but rather as actual gold, and you store it at the bank, the bank can still shut down.
Right, but not in a separate safe. You would need to have a separate safe at the bank. You could have it stored at a place like Shurguard. That's a kind of big storage shed with safes, you can store it there yourself.
-Or you dig a hole and stick it in the ground...
You can do that too. Or you can procure your own safes, a very good safe, and rivet it into the wall. That way you'll always have it within arm's reach.
-Still it all sounds rather extreme.
It may sound absurd, but if worst comes to worst - and we've experienced it before in the depression and also during the war - then gold and silver are the only currencies that you'll be able to buy food with or that you'll be able to survive off of. For people who have never experienced this it sounds very strange.
-But you've never experienced it either, have you?
No, I haven't. But my parents experienced it, and I heard it from them firsthand. Most people get this secondhand because their parents didn't experience it either, but their grandparents did. That's the problem. You remember what your parents told you, but you don't remember what your grandparents told you.
-Willem Middelkoop says: Monetary systems have collapsed 220 times throughout history. So it's not crazy to think that it might happen one more time. Relocating, moving away from the densely populated Netherlands - does that continue to be an option?
If you're looking for a kind of value-based system, then big cities are not preferable. See, in a big city you're always going to have the problem of riots that could break out, uprisings, revolutions.
-Or if the supermarket isn't stocked anymore...
Right. So then you have to get to the countryside, out of the city. There you could purchase a farm, for example, or you could occupy one. You should live close to farmland anyway, so that in a time of crisis you can provide for food.
-This time of crisis will come after the dollar has collapsed?
When the ATM's are no longer accessible. When the banks close their doors.
-And you consider this situation possible?
It's already happened once.
-Right, in Argentina. But do you have a time frame in mind for when this might happen?
We're now in a period of time in which things can change very quickly. I think that starting in 2012 we'll have to take into account the possiblity that banks or the banking sector could shut down. Then you're really dependent on the government, the government will step right in of course. At that point you'll be dependent on the government for your income, just like we saw right after the Second World War.
-Why 2012?
I've done my own research into the demographic situation: At that point we will have had the biggest bubble - the baby boomers that spent the most. The peak of the baby boom was somewhere between 1958 and 1962. That is the wave that is now heading in the direction of retirement age. By 2012 this largest wave will already be in decline. That also means that stock markets in the West will collapse. That has implications for businesses that are dependent on consumption, because consumption will naturally decrease. Then we'll probably find ourselves in a heavily deflationary situation. On the one hand prices will fall because businesses will still have to provide goods to the public. On the other hand monetary inflation, which the government attends to, will increase. Raw materials and vital necessities will then become more expensive.
-How does this insight affect your work as an advisor to pension funds, and how does it affect your personal situation?
I've already hedged my own capital by putting 10% of it into gold. I've already transferred my pension into raw materials and raw material shares. I sold my house in 2002, and I've been renting since then. As far as pension funds go, we're currently advising that a minumum of 10% of pension assets be put into gold.
-Is 10% enough?
Ten percent is the foundation - you still have the raw materials as well. That's another story, that's above and beyond precious metals. That's also something that I've done some research into: At a certain point gold and silver are going to decouple from raw materials and become monetary metals. Right now they are still seen as raw materials, but soon they will be considered monetary metals. That's the money that we'll be left with when the mountain of paper money collapses.
-OK, so that's your advice. But how does this information sit with the pension funds, these rather extreme ideas?
There are already a few pension funds that have come around to it. Unfortunately I can't name names without their approval. Obviously they don't want to broadcast it. But we're working on it. I think that it will most likely be a few years before a number of them are on board. As far as the bigger pension funds like ABP and PGGM go, we don't advise them.
-ABP is heavily invested in the U.S. dollar, is it not?
That's correct.
-Are they not running a huge risk?
Yes, they are running a risk, PGGM as well. They're very deep into stocks. That makes sense because they are really big pension funds. These are the great hulking supertankers of the pension fund world, so they're difficult to budge. If they were to put 10% of their assets into gold, the gold market would explode right now. So that's not advisable. But I do believe that they are going to have to make a shift in their entire way of thinking.
-How does it look for all the employees of ABP? Are they not in danger because of all this?
They are, and that's why I'm also advising them to invest in gold and silver so as to secure their personal assets. So that they are not solely dependent upon their pension and the government, but have instead secured their assets themselves a little bit.
-If I could ask another personal question - have you purchased a boat, or some land in Paraguay, like president Bush?
No, all my assets are liquid. That is to say: Gold, silver, as well as savings in the bank. You see, I'm waiting until everything collapses, and then I'll go ahead and buy something. To give an example: Recently I heard in the news that you can buy a single family home in Miami, Florida - right now - for 45,000 dollars. Four or five years ago, just before the collapse, those houses went for between 150,000 and 200,000 dollars. That's just an example...
-But is that an investment then?
Well, not an investment, it can also serve as a place to live. And with your retirement pension you can live anywhere you want.
-But is America really a smart place to live?
Personally America wouldn't be my choice, I'm just using it as an example.
-Why not?
Because in America you still have the same problems as here, especially if you live in the big city - riots and uprisings.
-But wouldn't you have even more issues in America because of the possible accumulation of harsh legislation?
That's true, it's definitely not my land of choice these days, with the Patriot Acts... Personal freedoms are being heavily restricted. And that's going to start getting worse soon because people tend toward extreme measures in a crisis situation. That's within the government, but the people will ask for it as well. We saw this in the 1930's with the election of Adolph Hitler: When people find themselves in extreme circumstances, they want extreme people in power. They want someone who will start solving things right away.
-I spoke with Willem Middelkoop about departing for another country. He made mention of some specific places that would be good to go to. He said: When it is warm, then...
South America is a nice example. I know some folks who live there and they also say that the climate is great. The problem with Brazil* is that there is an awful lot of crime - I wouldn't be so quick to recommend that country. Though Australia would be good. I myself have lived in New Zealand , that could be an option. Again, these are countries that are involved in the credit crisis, they have also built up a huge amount of debt.
* Also read the interview: DeepJournal interviews an expatriate who did what Willem Middelkoop is advising.
-What are you going to do?
At the moment I'm thinking things over. I think I'll go with an early retirement. And then I'll be thinking more about South America.
As long as things are going fine, then it's okay. But if you find yourself in a situation in which you need to find a way out, if you can buy a piece of land for not too much money, a place where you can grow your own vegetables and have alternative sources of energy like wind and solar on your own property... Then you'll be less dependent than you would be if you lived in a big city and were dependent on someone else for your energy, for your shopping, for your garbage pick-up, etc. In the countryside you're less dependent.
-Is there still time to get there if things go wrong?
If you have money! Most people who are in debt have few options. That's why I also advise people: Try to conserve your assets now. You don't need to worry about increasing your assets; conserving your assets is good enough. The money that you have from your house or from your investments can serve as an escape route.
-But at that point is there still really time? Won't everyone be standing in line, or stuck in a traffic jam?
By that time they very well could. But also by that time there will be a lot of people who can no longer get away. They'll have to put up with it. If you're in the middle of a credit crisis and the value of your home has dropped by 60%, then your alternatives have dried up.
-Credit crisis, food crisis - Middelkoop's new book is called The Permanent Oil Crisis. What does this situation say about us and our leaders?
Firstly I accuse the central banks, because they are the most responsible for creating this system. The Dutch Central Bank, the Federal Reserve, the European Central Bank - they are the ones that have actually created this situation thanks to their fiat currency system. Since the introduction of the euro, monetary inflation has been exceeded 10% per year.
A lot of people don't know it, but monetary inflation is the real, true inflation. The CPI , the Consumer Price Index, which we see as inflation, published by the Central Bureau for Statistics, is a manipulated index. There is a specific portfolio, and a weighting of commodities is done. And substitutions are made. For example if steak becomes too expensive, then it gets replaced with a substitute, like pork chops. But it's no longer the same thing that's getting weighted. That's also why you end up with some very distorted figures.
-What does the Central Bureau of Statistics say the inflation is?
At this moment the CBS is saying that it's heading in the direction of 3%.
-But in reality everything is getting 10% more expensive each year.
Yes. Currency devaluation actually. Now people are saying, ‘Yeah but I didn't really see that because I've been able to find cheap stuff'. That's because China is exporting deflation, goods are very cheap. It used to be that those goods were all made here in Europe or in America . Now they are being made in East Asia, in particular in China, where salaries are approximately one tenth of ours. Everyone knows that 80% of an industry's costs is payroll. That 80% in China is one tenth of ours. In China the value of what they produce is just 28% of the value of what we can produce in the West. That's also why China could export cheap products to us whereby the price index of China 's industrial production dropped. That has put an awful lot of pressure on the CPI.
A currency devaluation of 10% means that your euro is worth 10% less each year. I asked for the data from the Dutch Central Bank, the M1 and the M3 data. The M1 data was pretty impressive. (I always use M1 as monetary inflation, the M1 is the growth in the money supply plus money on deposit). It has risen 499% since 1982. That's a gigantic increase. Compared to the worth of a euro and/or guilder back in 1982, today it's worth about 17 or 18 cents. Not even a fifth of the original value is left.
-That's front page news, but I'm not reading it...
That's right.
-What is your scenario for the future?
What I see is that…
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?
Yes
-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…
Destroying wealth.
-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.
In 1933 Roosevelt was the first to abandon the de facto gold standard. All Americans were required to surrender their gold, which was stored at Fort Knox . They got 20 dollars for each ounce of gold, 31 grams. Once everyone had surrendered their gold, it was revalued to 35 dollars, so people had already been made 15 dollars per ounce poorer by the government. It was only in 1975 that Americans were once again permitted to purchase gold - most people don't know that. In 1971 an awful lot of money was spent on the Vietnam War. It cost billions, and it also cost a whole lot of Fort Knox 's gold, which was traded on London 's Bullion Market.
In 1966 [French President] de Gaulle began to demand gold in place of dollars, and then America had to sell gold right away. That lasted five years. At that time America was for the most part actually without gold, and then Nixon abandoned the international gold standard. That was in effect the end of the Bretton-Woods system, which had been in vogue since 1944.
-Regarding the weapons industry... It has ultimately been able to pilfer a lot of value.
Yes.
-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.
[Spits interpreted my question other than I had intended it. I was curious as to his view regarding the idea that the current crises are interpreted positively by some parties, and why that might be].
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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