THE CSIRO has won a long legal battle with the some of the world's leading technology companies in an outcome that will give a substantial financial windfall to Australia's peak scientific body.
The case revolved around the CSIRO's patented wireless local area network technology, a process invented in the 1990s that is being used in almost every wireless device - including mobile phones, computers, game consoles, networking equipment and internet-enabled TVs. "We are very pleased with the outcome in financial terms," said Mike Whelan, the deputy chief executive, operations.
"In aggregate, it will present the largest amount from IP [intellectual property] that this organisation has ever earned."
Based on the outcome of recent technology patent cases, the settlement is likely to run into millions of dollars.
On Monday a judge in Texas finalised the settlement after the last of the 14 companies accused of infringing CSIRO's patent agreed to negotiate. Under the terms of the settlement CSIRO was prevented broadcasting news of the resolution, which is why it has only now filtered out.
The companies which CSIRO took to court represented the who's who of the technology world and included Hewlett-Packard, Intel, Dell, Toshiba, Asus, Microsoft and Nintendo - some of which had settled before the case went to trial this month.
The settlement terms are confidential but, according to Mr Whelan, include one-off compensation payments, agreements to pay ongoing royalties and a combination of the two.
"We are going to reinvest the proceeds into further research," he said.
Mr Whelan said that for the foreseeable future CSIRO's technology would continue to be the standard wireless technology, ensuring a steady flow of royalties in the years ahead.
Microsoft's settlement with CSIRO came as the case got under way last week, making it the second time this month it has suffered a patent setback against Australians.
Last week, an Australian inventor, Ric Richardson, was the main beneficiary of a $US388 million ($537 million) damages award against Microsoft, after a US jury found that the giant US technology company had violating his patent relating to anti-piracy technology.
While not willing to be drawn on the size of the payout, Mr Whelan said it was a "very substantial case", which had required a team of 30 people working for the CSIRO to prosecute the case against the companies that were party to the litigation.
CSIRO argued that a patent which was granted to it in 1996 entitled it to royalties from any company that incorporated the 802.11 wireless standard in their devices.
The lawsuits against the technology companies had been running since 2005.
The court case, which had been under way for a week, was taking place before a jury of eight in the US District Court, in Tyler, Texas - a jurisdiction that has become a hunting ground for organisations seeking to defend their intellectual property rights.
Tyler and the neighbouring town of Marshall have developed a reputation over the years for conducting quick trials in what are typically complicated patent disputes and for plaintiff-friendly juries.
And for defendants, the odds of winning a patent dispute reportedly make settlement the better option.
DAVID AND THE GOLIATHS: WHO WILL PAY
- Hewlett-Packard
- Asus
- Intel
- Dell
- Toshiba
- Netgear
- D-Link
- Belkin
- SMC
- Accton
- 3Com
- Buffalo
- Microsoft
- Nintendo
http://www.smh.com.au/news/technology/biztech/2009/04/22/1240079730838.html
Showing posts with label property. Show all posts
Showing posts with label property. Show all posts
12 April 2009
7 March 2009
Donald Trump and the trail of broke backers revisited
SAN DIEGO (AP) - Stephen and Linda Drake cast aside concerns about owning property in Mexico because they believed in Donald Trump.
The Southern California couple paid $250,000 down payment on a 19th-floor oceanfront condo in Trump Ocean Resort Baja in 2006 before the first construction crew arrived.
But admiration for the celebrity developer and star of "The Apprentice" has now turned into anger and disbelief as Trump's luxury hotel-condo plan collapsed, leaving little more than a hole in the ground and investors out of their deposits, which totaled $32.2 million.
"I can't even stand to see Trump's face on TV," says Linda Drake, a psychologist, whose husband is a commercial airline pilot and financial adviser.
Investors were told last month their money was spent and they won't get a penny back. A single mother in suburban Los Angeles lost $200,000 and won't be able to send her sons to private universities. A Los Angeles-area businessman lost a deposit of more than $1 million on four Trump units, including two penthouses.
The project's collapse comes at a delicate time for Trump, whose casino company, Trump Entertainment Resorts Inc., filed for bankruptcy protection last month. He also is embroiled in a lawsuit to avoid paying debt on the struggling Trump International Hotel & Tower in Chicago.
Trump and his children heavily promoted the northern tip of Mexico's Baja California coast. He sold 188 units for $122 million the first day they went on a sale at a lavish event in a downtown San Diego hotel in December 2006.
"I went out and saw this site, and I was blown away by it," Ivanka Trump told The Associated Press in June 2007. "From the minute I saw it, it was a deal I had to do."
The location was a contrast to more expensive Mexican coastal markets such as Puerto Vallarta, Los Cabos and Cancun, she said.
The Trumps remained buoyant even as the U.S. housing market began to crumble. Ivanka assured buyers in an October 2007 newsletter that all Trump projects were immune to a slowdown.
"In characteristic Trump fashion, Trump Ocean Resort Baja will be the best of the best, and consequently always in demand," she wrote.
All that remains of Trump Baja is a highway billboard with a large photo of Donald Trump that advertises condos for sale. It hovers over a closed sales center and showroom, a paved parking lot, a big hole that cuts a wide swath, drainage pipes and construction equipment.
The failure of Trump Baja is a big blow to a real estate market just south of the border from San Diego that was booming two years ago with U.S. buyers looking for second homes and easy profits but is now similarly swooning. The market has been hammered by Mexico's drug-fueled violence and the global economic crisis.
Other developers completed big projects nearby in recent years and the area remains home to thousands of Americans, but the cliff-lined coast is pocked with partially built towers. The steel frame of one oceanfront high-rise is rusting, with air ducts hanging from one floor and an idled crane out front. A wind-tattered sales sign hangs outside twin towers nearby, one that appears almost complete and the other a much shorter steel skeleton.
Trump Baja demanded about 30 percent down for units that sold from less than $300,000 to $3 million, buyers said.
Deposits on abandoned projects are also at risk in the U.S., even in states like California that prohibit developers from spending the money on construction, lawyers say. The risk may be higher in Mexico because consumer protection laws are generally weak.
"The bottom line in Mexico is caveat emptor, buyer beware," said Art Spaulding, an Irvine, Calif., real estate attorney who does business south of the border.
Trump's condos went on sale when Southern California home prices were near their peak, offering a lower-cost alternative in the Mexican border city of Tijuana. The Trump Organization teamed up with Los Angeles developer Irongate Capital Partners LLC, the partnership behind Trump International Hotel & Tower Waikiki in Honolulu.
Guadalupe Mendoza, 47, paid a $200,000 deposit at the first-day sale in San Diego, refinancing her Downey home and getting a loan from a sister. She watched a giant screen show units getting snapped up.
After signing papers, buyers were ushered to a buffet of sirloin tip and fish tacos. Cheers erupted in the hotel ballroom for each new owner.
"I did it in less than a minute," said Mendoza, an administrator in the Los Angeles County Office of Education. "I remember my head was hurting and thinking, 'My God, what was that?' I was thinking maybe I should have asked questions. It was like a roller-coaster ride."
Buyers pressed for updates as construction fell behind schedule. They got a bombshell letter in December that said negotiations for a construction loan from German bank WestLB AG collapsed and Trump Baja had only $556,000 left. It quoted a contract clause that gave the developer a right to spend their deposits.
Another letter came in January that said Trump was removing his name.
A Feb. 16 letter from a Mexican entity, PB Impulsores, said the project was scrapped "given the extreme dislocation of the financial markets." It said there was no money left to refund deposits.
The December letter says Trump was not an investor, but buyers said they were sold on his imprimatur.
"We thought of Donald Trump," says Linda Drake. "If Donald Trump was behind it, it was going to work ... I am embarrassed to tell people we got caught up in this."
Ivanka Trump told the AP in 2007 that her father "is the boss" when asked about his role in the project.
"He is involved in every capacity," she said.
In response to a request to interview Donald and Ivanka Trump, the Trump Organization issued a statement that said its partner violated an agreement to license the Trump name, missing deadlines to obtain financing and begin construction.
Timothy Hughes, an attorney for Irongate, said the project "will not be going forward" but declined to answer questions.
One buyer sued Trump and Irongate in Los Angeles Superior Court last month and more litigation is expected.
"They put their trust in this project and feel betrayed," said Bart Ring, a Woodland Hills attorney who says he represents about 75 buyers who haven't sued.
Homeowners and brokers in Baja welcomed the publicity and higher prices that Trump brought. Now they wish he never came.
"It was a two-edged sword that's cutting the wrong way," said broker Brian Flock. "Everybody is shellshocked. I call it post-Trump syndrome."
link
The Southern California couple paid $250,000 down payment on a 19th-floor oceanfront condo in Trump Ocean Resort Baja in 2006 before the first construction crew arrived.
But admiration for the celebrity developer and star of "The Apprentice" has now turned into anger and disbelief as Trump's luxury hotel-condo plan collapsed, leaving little more than a hole in the ground and investors out of their deposits, which totaled $32.2 million.
"I can't even stand to see Trump's face on TV," says Linda Drake, a psychologist, whose husband is a commercial airline pilot and financial adviser.
Investors were told last month their money was spent and they won't get a penny back. A single mother in suburban Los Angeles lost $200,000 and won't be able to send her sons to private universities. A Los Angeles-area businessman lost a deposit of more than $1 million on four Trump units, including two penthouses.
The project's collapse comes at a delicate time for Trump, whose casino company, Trump Entertainment Resorts Inc., filed for bankruptcy protection last month. He also is embroiled in a lawsuit to avoid paying debt on the struggling Trump International Hotel & Tower in Chicago.
Trump and his children heavily promoted the northern tip of Mexico's Baja California coast. He sold 188 units for $122 million the first day they went on a sale at a lavish event in a downtown San Diego hotel in December 2006.
"I went out and saw this site, and I was blown away by it," Ivanka Trump told The Associated Press in June 2007. "From the minute I saw it, it was a deal I had to do."
The location was a contrast to more expensive Mexican coastal markets such as Puerto Vallarta, Los Cabos and Cancun, she said.
The Trumps remained buoyant even as the U.S. housing market began to crumble. Ivanka assured buyers in an October 2007 newsletter that all Trump projects were immune to a slowdown.
"In characteristic Trump fashion, Trump Ocean Resort Baja will be the best of the best, and consequently always in demand," she wrote.
All that remains of Trump Baja is a highway billboard with a large photo of Donald Trump that advertises condos for sale. It hovers over a closed sales center and showroom, a paved parking lot, a big hole that cuts a wide swath, drainage pipes and construction equipment.
The failure of Trump Baja is a big blow to a real estate market just south of the border from San Diego that was booming two years ago with U.S. buyers looking for second homes and easy profits but is now similarly swooning. The market has been hammered by Mexico's drug-fueled violence and the global economic crisis.
Other developers completed big projects nearby in recent years and the area remains home to thousands of Americans, but the cliff-lined coast is pocked with partially built towers. The steel frame of one oceanfront high-rise is rusting, with air ducts hanging from one floor and an idled crane out front. A wind-tattered sales sign hangs outside twin towers nearby, one that appears almost complete and the other a much shorter steel skeleton.
Trump Baja demanded about 30 percent down for units that sold from less than $300,000 to $3 million, buyers said.
Deposits on abandoned projects are also at risk in the U.S., even in states like California that prohibit developers from spending the money on construction, lawyers say. The risk may be higher in Mexico because consumer protection laws are generally weak.
"The bottom line in Mexico is caveat emptor, buyer beware," said Art Spaulding, an Irvine, Calif., real estate attorney who does business south of the border.
Trump's condos went on sale when Southern California home prices were near their peak, offering a lower-cost alternative in the Mexican border city of Tijuana. The Trump Organization teamed up with Los Angeles developer Irongate Capital Partners LLC, the partnership behind Trump International Hotel & Tower Waikiki in Honolulu.
Guadalupe Mendoza, 47, paid a $200,000 deposit at the first-day sale in San Diego, refinancing her Downey home and getting a loan from a sister. She watched a giant screen show units getting snapped up.
After signing papers, buyers were ushered to a buffet of sirloin tip and fish tacos. Cheers erupted in the hotel ballroom for each new owner.
"I did it in less than a minute," said Mendoza, an administrator in the Los Angeles County Office of Education. "I remember my head was hurting and thinking, 'My God, what was that?' I was thinking maybe I should have asked questions. It was like a roller-coaster ride."
Buyers pressed for updates as construction fell behind schedule. They got a bombshell letter in December that said negotiations for a construction loan from German bank WestLB AG collapsed and Trump Baja had only $556,000 left. It quoted a contract clause that gave the developer a right to spend their deposits.
Another letter came in January that said Trump was removing his name.
A Feb. 16 letter from a Mexican entity, PB Impulsores, said the project was scrapped "given the extreme dislocation of the financial markets." It said there was no money left to refund deposits.
The December letter says Trump was not an investor, but buyers said they were sold on his imprimatur.
"We thought of Donald Trump," says Linda Drake. "If Donald Trump was behind it, it was going to work ... I am embarrassed to tell people we got caught up in this."
Ivanka Trump told the AP in 2007 that her father "is the boss" when asked about his role in the project.
"He is involved in every capacity," she said.
In response to a request to interview Donald and Ivanka Trump, the Trump Organization issued a statement that said its partner violated an agreement to license the Trump name, missing deadlines to obtain financing and begin construction.
Timothy Hughes, an attorney for Irongate, said the project "will not be going forward" but declined to answer questions.
One buyer sued Trump and Irongate in Los Angeles Superior Court last month and more litigation is expected.
"They put their trust in this project and feel betrayed," said Bart Ring, a Woodland Hills attorney who says he represents about 75 buyers who haven't sued.
Homeowners and brokers in Baja welcomed the publicity and higher prices that Trump brought. Now they wish he never came.
"It was a two-edged sword that's cutting the wrong way," said broker Brian Flock. "Everybody is shellshocked. I call it post-Trump syndrome."
link
18 February 2009
Finance Capitalism Hits a Wall
Hudson saw earliest in my opinion that this was not an emerging technical problem, its a fundamental issue of the political economy and the dollar system. Its solutions will involve tension between owners and renters of all assets and between the real economy and financial flows.
The debt must be written off.
The Oligarchs' Escape Plan
By MICHAEL HUDSON
The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course. Finance capitalism is in a state of collapse, and marginal palliatives cannot revive it. The U.S. economy cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. A quarter to a third of U.S. real estate has fallen into negative equity, so no banks will lend to them. The economy has hit a debt wall and is falling into negative equity, where it may remain for as far as the eye can see until there is a debt write-down.
Mr. Obama’s “recovery” plan, based on infrastructure spending, will make real estate fortunes for well-situated properties along the new public transport routes, but there is no sign of cities levying a windfall property tax to save their finances. Their mayors would rather keep the cities broke than to tax real estate and finance. The aim is to re-inflate property markets to enable owners to pay the banks, not to help the public sector break even. So state and local pension plans will remain underfunded while more corporate pension plans go broke.
One would think that politicians would be willing to do the math and realize that debts that can’t be paid, won’t be. But the debts are being kept on the books, continuing to extract interest to pay the creditors that have made the bad loans. The resulting debt deflation threatens to keep the economy in depression until a radical shift in policy occurs – a shift to save the “real” economy, not just the financial sector and the wealthiest 10 per cent of American families.
There is no sign that Mr. Obama’s economic advisors, Treasury officials and heads of the relevant Congressional committees recognize the need for a write-down. After all, they have been placed in their positions precisely because they do not understand that debt leveraging is a form of economic overhead, not real “wealth creation.” But their tunnel vision is what makes them “reliable” to Wall Street, which doesn’t like surprises. And the entire character of today’s financial crisis continues to be labeled “surprising” and “unexpected” by the press as each new surprisingly pessimistic statistic hits the news. It’s safe to be surprised; suspicious to have expected bad news and being a “premature doomsayer.” One must have faith in the system above all. And the system was the Greenspan Bubble. That is why “Ayn Rand Alan” was put in charge in the first place, after all.
So the government tries to recover the happy Bubble Economy years by getting debt growing again, hoping to re-inflate real estate and stock market prices. That was, after all, the Golden Age of finance capital’s world of using debt leverage to bid up the book-price of fictitious capital assets. Everyone loved it as long as it lasted. Voters thought they had a chance to become millionaires, and approved happily. And at least it made Wall Street richer than ever before – while almost doubling the share of wealth held by the wealthiest 1 per cent of America’s families. For Washington policy makers, they are synonymous with “the economy” – at least the economy for which national economic policy is being formulated these days.
The Obama-Geithner plan to restart the Bubble Economy’s debt growth so as to inflate asset prices by enough to pay off the debt overhang out of new “capital gains” cannot possibly work. But that is the only trick these ponies know. We have entered an era of asset-price deflation, not inflation. Economic data charts throughout the world have hit a wall and every trend has been plunging vertically downward since last autumn. U.S. consumer prices experienced their fastest plunge since the Great Depression of the 1930s, along with consumer “confidence,” international shipping, real estate and stock market prices, oil and the exchange rate for British sterling. The global economy is falling into depression, and cannot recover until debts are written down.
Instead of doing this, the government is doing just the opposite. It is proposing to take bad debts onto the public-sector balance sheet, printing new Treasury bonds give the banks – bonds whose interest charges will have to be paid by taxing labor and industry.
The oligarchy’s plans for a bailout (at least of its own financial position)
In periods of looming collapse, wealthy elites protect their funds. In times past they bought gold when currencies started to weaken. (Patriotism never has been a characteristic of cosmopolitan finance capital.) Since the 1950s the International Monetary Fund has made loans to support Third World exchange rates long enough to subsidize capital flight. In the United States over the past half-year, bankers and Wall Street investors have tapped the Treasury and Federal Reserve to support prices of their bad loans and financial gambles, buying out or guaranteeing $12 trillion of these junk debts. Protection for the U.S. financial elite thus takes the form of domestic public debt, not foreign currency.
It is all in vain as far as the real economy is concerned. When the Treasury gives banks newly printed government bonds in “cash for trash” swaps, it leaves today’s unpayably high private-sector debt in place. All that happens is that this debt is now owed to (or guaranteed by) the government, which will have to impose taxes to pay the interest charges.
The new twist is a variant on the IMF “stabilization” plans that lend money to central banks to support their currencies – for long enough to enable local oligarchs and foreign investors to move their savings and investments offshore at a good exchange rate. The currency then is permitted to collapse, enabling currency speculators to rake in enough gains to empty out the central bank’s reserves. Speculators view these central bank holdings as a target to be raided – the larger the better. The IMF will lend a central bank, say, $10 billion to “support the currency.” Domestic holders will flee the currency at a high exchange rate. Then, when the loan proceeds are depleted, the currency plunges. Wages are squeezed in the usual IMF austerity program, and the economy is forced to earn enough foreign exchange to pay back the IMF.
As a condition for getting this kind of IMF “support,” governments are told to run a budget surplus, cut back social spending, lower wages and raise taxes on labor so as to squeeze out enough exports to repay the IMF loans. But inasmuch as this kind “stabilization plan” cripples their domestic economy, they are obliged to sell off public infrastructure at distress prices – to foreign buyers who themselves borrow the money. The effect is to make such countries even more dependent on less “neoliberalized” economies.
Latvia is a poster child for this kind of disaster. Its recent agreement with Europe is a case in point. To help the Swedish banks withdraw their funds from the sinking ship, EU support is conditional on Latvia’s government agreeing to cut salaries in the private sector – and not to raise property taxes (currently almost zero).
The problem is that Latvia, like other post-Soviet economies, has scant domestic output to export. Industry throughout the former Soviet Union was torn up and scrapped in the 1990s. (Welcome to victorious finance capitalism, Western-style.) What they had was real estate and public infrastructure free of debt – and hence, available to be pledged as collateral for loans to finance their imports. Ever since its independence from Russia in 1991, Latvia has paid for its imported consumer goods and other purchases by borrowing mortgage credit in foreign currency from Scandinavian and other banks. The effect has been one of the world’s biggest property bubbles – in an economy with no means of breaking even except by loading down its real estate with more and more debt. In practice the loans took the form of mortgage borrowing from foreign banks to finance a real estate bubble – and their import dependency on foreign suppliers.
So instead of helping it and other post-Soviet nations develop self-reliant economies, the West has viewed them as economic oysters to be broken up to indebt them in order to extract interest charges and capital gains, leaving them empty shells. This policy crested on January 26, 2009, when Joaquin Almunia of the European Commission wrote a letter to Latvia’s Prime Minister spelling out the terms on which Europe will bail out the Swedish and other foreign banks operating in Latvia – at Latvia’s own expense:
Extended assistance is to be used to avoid a balance of payments crisis, which requires … restoring confidence in the banking sector [now entirely foreign owned], and bolstering the foreign reserves of the Bank of Latvia. This implies financing … outstanding government debt repayments (domestic and external). And if the banking sector were to experience adverse events, part of the assistance would be used for targeted capital infusions or appropriate short-term liquidity support. However, financial assistance is not meant to be used to originate new loans to businesses and households. …
… it is important not to raise ungrounded expectations among the general public and the social partners, and, equally, to counter misunderstandings that may arise in this respect. Worryingly, we have witnessed some recent evidence in Latvian public debate of calls for part of the financial assistance to be used inter alia for promoting export industries or to stimulate the economy through increased spending at large. It is important actively to stem these misperceptions.
Riots broke out last week, and protesters stormed the Latvian Treasury. Hardly surprising! There is no attempt to help Latvia develop the export capacity to cover its imports. After the domestic kleptocrats, foreign banks and investors have removed their funds from the economy, the Latvian lat will be permitted to depreciate. Foreign buyers then can come in and pick up local assets on the cheap once again.
The practice of European banks riding the crest of the post-Soviet real estate bubble is backfiring to wreck the European economies that have engaged in this predatory lending to neighboring economies as well. As one reporter has summarized:
In Poland 60 percent of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America’s sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not. Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks.
This was the West’s alternative to Stalinism. It did not help these countries emulate how Britain and America got rich by protectionist policies and publicly nurtured industrialization and infrastructure spending. Rather, the financial rape and industrial dismantling of the former Soviet economies was the most recent exercise in Western colonialism. At least U.S. investors were smart enough to stand clear and merely ride the stock market run-up before jumping ship.
But now, the government’s plan to “save” the economy is to “save the banks,” along similar lines to the West trying to save its banks from their adventure in the post-Soviet economies. This is the basic neoliberal economic plan, after all. The U.S. economy is about to be “post-Sovietized.”
The U.S. giveaway to banks, masquerading as “help for troubled homeowners”
The Obama bank bailout is arranged much like an IMF loan to support the exchange rate of foreign currency, but with the Treasury supporting financial asset prices for U.S. banks and other financial institutions. Instead of banks and oligarchs abandoning the dollar, the aim is to enable them to dump their bad mortgages and CDOs and get domestic Treasury bonds. Private-sector debt will be moved onto the U.S. Government balance sheet, where “taxpayers” will bear losses – mainly labor not Wall Street, inasmuch as the financial sector has been freed of income-tax liability by the “small print” in last fall’s Paulson-Bush bailout package. But at least the U.S. Government is handling the situation entirely in domestic dollars.
As in Third World austerity programs, the effect of keeping the debts in place at the “real” economy’s expense will be to shrink the domestic U.S. market – while providing opportunities for hedge funds to pick up depreciated assets cheaply as the federal government, states and cities sell them off. This is called letting the banks “earn their way out of debt.” It’s strangling the “real” economy, because not a dollar of the government’s response has been devoted to reducing the overall debt volume.
Take the much-vaunted $50 billion program designed to renegotiate mortgages downward for “troubled homeowners.” Upon closer examination it turns out that the real beneficiaries are the giant leading banks such as Citibank and Bank of America that have made the bad loans. The Treasury will take on the bad debt that banks are stuck with, and will permit mortgagees to renegotiate their monthly payment down to 38 per cent of their income. But rather than the banks taking the loss as they should do for over-lending, the Treasury itself will make up the difference – and pay it to the banks so that they will be able to get what they hoped to get. The hapless mortgage-burdened family stuck in their negative-equity home turns out to be merely a passive vehicle for the Treasury to pass debt relief on to the commercial banks.
Few news stories have made this clear, but the Financial Times spelled the details buried in small print. It added that the Treasury has not yet decided whether to write down the debt principal for the estimated 15 million families with negative equity (and perhaps 30 million by this time next year as property prices continue to plunge). No doubt a similar deal will be made: For every $100,000 of write-down in debt owed by over-mortgaged homeowners, the bank will receive $100,000 from the Treasury. Government debt will rise by $100,000, and the process will continue until the Treasury has transferred $50,000,000 to the banks that made the reckless loans.
There is enough for just 500,000 of these renegotiations of $100,000 each. It may seem like a big amount, but it’s only about 1/30th of the properties underwater. Hardly enough to make much of a dent, but the principle has been put in place for many further bailouts. It will take almost an infinity of them, as long as the Treasury tries to support the fiction that “the miracle of compound interest” can be sustained for long. The economy may be dead by the time saner economic understanding penetrates the public consciousness.
In the mean time, bad private-sector debt will be shifted onto the government’s balance sheet. Interest and amortization currently owed to the banks will be replaced by obligations to the U.S. Treasury. Taxes will be levied to make up the bad debts with which the government is stuck. The “real” economy will pay Wall Street – and will be paying for decades!
Calling the $12 trillion giveaway to bankers a “subprime crisis” makes it appear that bleeding-heart liberals got Fannie Mae and Freddie Mac into trouble by insisting that these public-private institutions make irresponsible loans to the poor. The party line is, “Blame the victim.” But we know this is false. The bulk of bad loans are concentrated in the largest banks. It was Countrywide and other banksters that led the irresponsible lending and brought heavy-handed pressure on Fannie Mae. Most of the nation’s smaller, local banks didn’t make such reckless loans. The big mortgage shops didn’t care about loan quality, because they were run by salesmen. The Treasury is paying off the gamblers and billionaires by supporting the value of bank loans, investments and derivative gambles, leaving the Treasury in debt.
U.S./Post-Soviet Convergence?
It may be time to look once again at what Larry Summers and his Rubinomics gang did in Russia in the mid-1990s and to Third World countries during his tenure as World Bank economist to see what kind of future is being planned for the U.S. economy over the next few years. Throughout the Soviet Union the neoliberal model established “equilibrium” in a way that involved demographic collapse: shortening life spans, lower birth rates, alcoholism and drug abuse, psychological depression, suicides, bad health, unemployment and homelessness for the elderly (the neoliberal mode of Social Security reform).
Back in the 1970s, people speculated whether the US and Soviet economies were converging. Throughout the 20th century, of course, everyone expected government regulation, infrastructure investment and planning to increase. It looked like the spread of democratically elected governments would go hand in hand with people voting in their own economic interest to raise living standards, thereby closing the inequality gap.
This is not the kind of convergence that has occurred since 1991. Government power is being dismantled, living standards have stagnated and wealth is concentrating at the top of the economic pyramid. Economic planning and resource allocation has passed into the hands of Wall Street, whose alternative to Hayek’s “road to serfdom” is debt peonage for the economy at large. There does need to be a strong state, to be sure, to keep the financial and real estate rentier power in place. But the West’s alternative to the old Soviet bureaucracy is a financial planning. In place of a political overhead, we have a financial and real estate overhead.
Stalinist Russia and Maoist China achieved high technology without land-rent, monopoly rent and interest overhead. This purging of rentier income was the historical task of classical political economy, and it became that of socialism. The aim was to create a Clean Slate financially, bringing prices in line with technologically necessary costs of production. The aim was to provide everyone with the fruits of their labor rather than letting banks and landlords siphon off the economic surplus.
Ideas of economic efficiency and “wealth creation” today are an utterly different kind of liberalism and “free markets.” Commercial banks lend money not to increase production but to inflate asset prices. Some 70 per cent of bank loans are mortgage loans for real estate, and most of the rest is for corporate takeovers and raids, to finance stock buy-backs or simply to pay dividends. Asset-price inflation obliges people to go deeper into debt than ever before to obtain access to housing, education and medical care. The economy is being “financialized,” not industrialized. This has been the plan as much for the post-Soviet states as for North America, Western Europe and the Third World.
But we are far from having reached the end of the line. Celebrations that our present financialized economy represents the “end of history” are laughingly premature. Today’s policies look more like a dead end. But that does not mean that, like the Roman Empire, they won’t lead us down toward a new Dark Age. That’s what tends to happen when oligarchies do the planning.
Is America a Failed Economy?
It may be time to ask whether neoliberal pro-rentier economics has turned America and the West into a Failed Economy. Is there really no alternative? Have the neoliberals made the shift of planning from governments to the financial oligarchy irreversible?
Let’s first dispose of the “foundation myth” of the idea still guiding the United States and Europe. Free-market economists pretend that prices can be brought into line most efficiently with technologically necessary costs of production under capitalism, and indeed, under finance capitalism. The banks and stock market are supposed to allocate resources most efficiency. That at least is the dream of self-regulating markets. But today it looks like only a myth, public relations patter talk to get a generation of increasingly indebted voters not to act in their own self-interest.
Industrial capitalism always has been a hybrid, a symbiosis with its feudal legacy of absentee property ownership, oligarchic finance and public debts rather than the government acting as net creditor. The essence of feudalism was extractive, not productive. That is why it created industrial capitalism as state policy in the first place – if only to increase its war-making powers. But the question must now be raised as to whether only socialism can complete the historical task that classical political economy set out for itself – the ideal that futurists in the 19th and 20th centuries believed that an unpurified capitalism might still be able bring about without shedding its legacy of commercial banking indebting property and carving infrastructure out of the public domain.
Today it is easier to see that the Western economies cannot go on the way they have been. They have reached the point where the debts exceed the ability to pay. Instead of recognizing this fact and scaling debts back into line with the ability to pay, the Obama-Geithner plan is to bail out the big banks and hedge funds, keeping the volume of debt in place and indeed, growing once again through the “magic of compound interest.” The result can only be an increasingly extractive economy, until households, real estate and industrial companies, states and cities, and the national government itself is driven into debt peonage.
The alternative is a century and a half old, and emerged out of the ideals of the classical economic doctrines of Adam Smith, David Ricardo, John Stuart Mill, and the last great classical economist, Marx. Their common denominator was to view rent and interest are extractive, not productive. Classical political economy and its successor Progressive Era socialism sought to nationalize the land (or at least to fully tax its rent as the fiscal base). Governments were to create their own credit, not leave this function to wealthy elites via a bank monopoly on credit creation. So today’s neoliberalism paints a false picture of what the classical economists envisioned as free markets. They were markets free of economic rent and interest (and taxes to support an aristocracy or oligarchy). Socialism was to free economies from these overhead charges. Today’s Obama-Geithner rescue plan is just the reverse.
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
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The debt must be written off.
The Oligarchs' Escape Plan
By MICHAEL HUDSON
The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course. Finance capitalism is in a state of collapse, and marginal palliatives cannot revive it. The U.S. economy cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. A quarter to a third of U.S. real estate has fallen into negative equity, so no banks will lend to them. The economy has hit a debt wall and is falling into negative equity, where it may remain for as far as the eye can see until there is a debt write-down.
Mr. Obama’s “recovery” plan, based on infrastructure spending, will make real estate fortunes for well-situated properties along the new public transport routes, but there is no sign of cities levying a windfall property tax to save their finances. Their mayors would rather keep the cities broke than to tax real estate and finance. The aim is to re-inflate property markets to enable owners to pay the banks, not to help the public sector break even. So state and local pension plans will remain underfunded while more corporate pension plans go broke.
One would think that politicians would be willing to do the math and realize that debts that can’t be paid, won’t be. But the debts are being kept on the books, continuing to extract interest to pay the creditors that have made the bad loans. The resulting debt deflation threatens to keep the economy in depression until a radical shift in policy occurs – a shift to save the “real” economy, not just the financial sector and the wealthiest 10 per cent of American families.
There is no sign that Mr. Obama’s economic advisors, Treasury officials and heads of the relevant Congressional committees recognize the need for a write-down. After all, they have been placed in their positions precisely because they do not understand that debt leveraging is a form of economic overhead, not real “wealth creation.” But their tunnel vision is what makes them “reliable” to Wall Street, which doesn’t like surprises. And the entire character of today’s financial crisis continues to be labeled “surprising” and “unexpected” by the press as each new surprisingly pessimistic statistic hits the news. It’s safe to be surprised; suspicious to have expected bad news and being a “premature doomsayer.” One must have faith in the system above all. And the system was the Greenspan Bubble. That is why “Ayn Rand Alan” was put in charge in the first place, after all.
So the government tries to recover the happy Bubble Economy years by getting debt growing again, hoping to re-inflate real estate and stock market prices. That was, after all, the Golden Age of finance capital’s world of using debt leverage to bid up the book-price of fictitious capital assets. Everyone loved it as long as it lasted. Voters thought they had a chance to become millionaires, and approved happily. And at least it made Wall Street richer than ever before – while almost doubling the share of wealth held by the wealthiest 1 per cent of America’s families. For Washington policy makers, they are synonymous with “the economy” – at least the economy for which national economic policy is being formulated these days.
The Obama-Geithner plan to restart the Bubble Economy’s debt growth so as to inflate asset prices by enough to pay off the debt overhang out of new “capital gains” cannot possibly work. But that is the only trick these ponies know. We have entered an era of asset-price deflation, not inflation. Economic data charts throughout the world have hit a wall and every trend has been plunging vertically downward since last autumn. U.S. consumer prices experienced their fastest plunge since the Great Depression of the 1930s, along with consumer “confidence,” international shipping, real estate and stock market prices, oil and the exchange rate for British sterling. The global economy is falling into depression, and cannot recover until debts are written down.
Instead of doing this, the government is doing just the opposite. It is proposing to take bad debts onto the public-sector balance sheet, printing new Treasury bonds give the banks – bonds whose interest charges will have to be paid by taxing labor and industry.
The oligarchy’s plans for a bailout (at least of its own financial position)
In periods of looming collapse, wealthy elites protect their funds. In times past they bought gold when currencies started to weaken. (Patriotism never has been a characteristic of cosmopolitan finance capital.) Since the 1950s the International Monetary Fund has made loans to support Third World exchange rates long enough to subsidize capital flight. In the United States over the past half-year, bankers and Wall Street investors have tapped the Treasury and Federal Reserve to support prices of their bad loans and financial gambles, buying out or guaranteeing $12 trillion of these junk debts. Protection for the U.S. financial elite thus takes the form of domestic public debt, not foreign currency.
It is all in vain as far as the real economy is concerned. When the Treasury gives banks newly printed government bonds in “cash for trash” swaps, it leaves today’s unpayably high private-sector debt in place. All that happens is that this debt is now owed to (or guaranteed by) the government, which will have to impose taxes to pay the interest charges.
The new twist is a variant on the IMF “stabilization” plans that lend money to central banks to support their currencies – for long enough to enable local oligarchs and foreign investors to move their savings and investments offshore at a good exchange rate. The currency then is permitted to collapse, enabling currency speculators to rake in enough gains to empty out the central bank’s reserves. Speculators view these central bank holdings as a target to be raided – the larger the better. The IMF will lend a central bank, say, $10 billion to “support the currency.” Domestic holders will flee the currency at a high exchange rate. Then, when the loan proceeds are depleted, the currency plunges. Wages are squeezed in the usual IMF austerity program, and the economy is forced to earn enough foreign exchange to pay back the IMF.
As a condition for getting this kind of IMF “support,” governments are told to run a budget surplus, cut back social spending, lower wages and raise taxes on labor so as to squeeze out enough exports to repay the IMF loans. But inasmuch as this kind “stabilization plan” cripples their domestic economy, they are obliged to sell off public infrastructure at distress prices – to foreign buyers who themselves borrow the money. The effect is to make such countries even more dependent on less “neoliberalized” economies.
Latvia is a poster child for this kind of disaster. Its recent agreement with Europe is a case in point. To help the Swedish banks withdraw their funds from the sinking ship, EU support is conditional on Latvia’s government agreeing to cut salaries in the private sector – and not to raise property taxes (currently almost zero).
The problem is that Latvia, like other post-Soviet economies, has scant domestic output to export. Industry throughout the former Soviet Union was torn up and scrapped in the 1990s. (Welcome to victorious finance capitalism, Western-style.) What they had was real estate and public infrastructure free of debt – and hence, available to be pledged as collateral for loans to finance their imports. Ever since its independence from Russia in 1991, Latvia has paid for its imported consumer goods and other purchases by borrowing mortgage credit in foreign currency from Scandinavian and other banks. The effect has been one of the world’s biggest property bubbles – in an economy with no means of breaking even except by loading down its real estate with more and more debt. In practice the loans took the form of mortgage borrowing from foreign banks to finance a real estate bubble – and their import dependency on foreign suppliers.
So instead of helping it and other post-Soviet nations develop self-reliant economies, the West has viewed them as economic oysters to be broken up to indebt them in order to extract interest charges and capital gains, leaving them empty shells. This policy crested on January 26, 2009, when Joaquin Almunia of the European Commission wrote a letter to Latvia’s Prime Minister spelling out the terms on which Europe will bail out the Swedish and other foreign banks operating in Latvia – at Latvia’s own expense:
Extended assistance is to be used to avoid a balance of payments crisis, which requires … restoring confidence in the banking sector [now entirely foreign owned], and bolstering the foreign reserves of the Bank of Latvia. This implies financing … outstanding government debt repayments (domestic and external). And if the banking sector were to experience adverse events, part of the assistance would be used for targeted capital infusions or appropriate short-term liquidity support. However, financial assistance is not meant to be used to originate new loans to businesses and households. …
… it is important not to raise ungrounded expectations among the general public and the social partners, and, equally, to counter misunderstandings that may arise in this respect. Worryingly, we have witnessed some recent evidence in Latvian public debate of calls for part of the financial assistance to be used inter alia for promoting export industries or to stimulate the economy through increased spending at large. It is important actively to stem these misperceptions.
Riots broke out last week, and protesters stormed the Latvian Treasury. Hardly surprising! There is no attempt to help Latvia develop the export capacity to cover its imports. After the domestic kleptocrats, foreign banks and investors have removed their funds from the economy, the Latvian lat will be permitted to depreciate. Foreign buyers then can come in and pick up local assets on the cheap once again.
The practice of European banks riding the crest of the post-Soviet real estate bubble is backfiring to wreck the European economies that have engaged in this predatory lending to neighboring economies as well. As one reporter has summarized:
In Poland 60 percent of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America’s sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not. Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks.
This was the West’s alternative to Stalinism. It did not help these countries emulate how Britain and America got rich by protectionist policies and publicly nurtured industrialization and infrastructure spending. Rather, the financial rape and industrial dismantling of the former Soviet economies was the most recent exercise in Western colonialism. At least U.S. investors were smart enough to stand clear and merely ride the stock market run-up before jumping ship.
But now, the government’s plan to “save” the economy is to “save the banks,” along similar lines to the West trying to save its banks from their adventure in the post-Soviet economies. This is the basic neoliberal economic plan, after all. The U.S. economy is about to be “post-Sovietized.”
The U.S. giveaway to banks, masquerading as “help for troubled homeowners”
The Obama bank bailout is arranged much like an IMF loan to support the exchange rate of foreign currency, but with the Treasury supporting financial asset prices for U.S. banks and other financial institutions. Instead of banks and oligarchs abandoning the dollar, the aim is to enable them to dump their bad mortgages and CDOs and get domestic Treasury bonds. Private-sector debt will be moved onto the U.S. Government balance sheet, where “taxpayers” will bear losses – mainly labor not Wall Street, inasmuch as the financial sector has been freed of income-tax liability by the “small print” in last fall’s Paulson-Bush bailout package. But at least the U.S. Government is handling the situation entirely in domestic dollars.
As in Third World austerity programs, the effect of keeping the debts in place at the “real” economy’s expense will be to shrink the domestic U.S. market – while providing opportunities for hedge funds to pick up depreciated assets cheaply as the federal government, states and cities sell them off. This is called letting the banks “earn their way out of debt.” It’s strangling the “real” economy, because not a dollar of the government’s response has been devoted to reducing the overall debt volume.
Take the much-vaunted $50 billion program designed to renegotiate mortgages downward for “troubled homeowners.” Upon closer examination it turns out that the real beneficiaries are the giant leading banks such as Citibank and Bank of America that have made the bad loans. The Treasury will take on the bad debt that banks are stuck with, and will permit mortgagees to renegotiate their monthly payment down to 38 per cent of their income. But rather than the banks taking the loss as they should do for over-lending, the Treasury itself will make up the difference – and pay it to the banks so that they will be able to get what they hoped to get. The hapless mortgage-burdened family stuck in their negative-equity home turns out to be merely a passive vehicle for the Treasury to pass debt relief on to the commercial banks.
Few news stories have made this clear, but the Financial Times spelled the details buried in small print. It added that the Treasury has not yet decided whether to write down the debt principal for the estimated 15 million families with negative equity (and perhaps 30 million by this time next year as property prices continue to plunge). No doubt a similar deal will be made: For every $100,000 of write-down in debt owed by over-mortgaged homeowners, the bank will receive $100,000 from the Treasury. Government debt will rise by $100,000, and the process will continue until the Treasury has transferred $50,000,000 to the banks that made the reckless loans.
There is enough for just 500,000 of these renegotiations of $100,000 each. It may seem like a big amount, but it’s only about 1/30th of the properties underwater. Hardly enough to make much of a dent, but the principle has been put in place for many further bailouts. It will take almost an infinity of them, as long as the Treasury tries to support the fiction that “the miracle of compound interest” can be sustained for long. The economy may be dead by the time saner economic understanding penetrates the public consciousness.
In the mean time, bad private-sector debt will be shifted onto the government’s balance sheet. Interest and amortization currently owed to the banks will be replaced by obligations to the U.S. Treasury. Taxes will be levied to make up the bad debts with which the government is stuck. The “real” economy will pay Wall Street – and will be paying for decades!
Calling the $12 trillion giveaway to bankers a “subprime crisis” makes it appear that bleeding-heart liberals got Fannie Mae and Freddie Mac into trouble by insisting that these public-private institutions make irresponsible loans to the poor. The party line is, “Blame the victim.” But we know this is false. The bulk of bad loans are concentrated in the largest banks. It was Countrywide and other banksters that led the irresponsible lending and brought heavy-handed pressure on Fannie Mae. Most of the nation’s smaller, local banks didn’t make such reckless loans. The big mortgage shops didn’t care about loan quality, because they were run by salesmen. The Treasury is paying off the gamblers and billionaires by supporting the value of bank loans, investments and derivative gambles, leaving the Treasury in debt.
U.S./Post-Soviet Convergence?
It may be time to look once again at what Larry Summers and his Rubinomics gang did in Russia in the mid-1990s and to Third World countries during his tenure as World Bank economist to see what kind of future is being planned for the U.S. economy over the next few years. Throughout the Soviet Union the neoliberal model established “equilibrium” in a way that involved demographic collapse: shortening life spans, lower birth rates, alcoholism and drug abuse, psychological depression, suicides, bad health, unemployment and homelessness for the elderly (the neoliberal mode of Social Security reform).
Back in the 1970s, people speculated whether the US and Soviet economies were converging. Throughout the 20th century, of course, everyone expected government regulation, infrastructure investment and planning to increase. It looked like the spread of democratically elected governments would go hand in hand with people voting in their own economic interest to raise living standards, thereby closing the inequality gap.
This is not the kind of convergence that has occurred since 1991. Government power is being dismantled, living standards have stagnated and wealth is concentrating at the top of the economic pyramid. Economic planning and resource allocation has passed into the hands of Wall Street, whose alternative to Hayek’s “road to serfdom” is debt peonage for the economy at large. There does need to be a strong state, to be sure, to keep the financial and real estate rentier power in place. But the West’s alternative to the old Soviet bureaucracy is a financial planning. In place of a political overhead, we have a financial and real estate overhead.
Stalinist Russia and Maoist China achieved high technology without land-rent, monopoly rent and interest overhead. This purging of rentier income was the historical task of classical political economy, and it became that of socialism. The aim was to create a Clean Slate financially, bringing prices in line with technologically necessary costs of production. The aim was to provide everyone with the fruits of their labor rather than letting banks and landlords siphon off the economic surplus.
Ideas of economic efficiency and “wealth creation” today are an utterly different kind of liberalism and “free markets.” Commercial banks lend money not to increase production but to inflate asset prices. Some 70 per cent of bank loans are mortgage loans for real estate, and most of the rest is for corporate takeovers and raids, to finance stock buy-backs or simply to pay dividends. Asset-price inflation obliges people to go deeper into debt than ever before to obtain access to housing, education and medical care. The economy is being “financialized,” not industrialized. This has been the plan as much for the post-Soviet states as for North America, Western Europe and the Third World.
But we are far from having reached the end of the line. Celebrations that our present financialized economy represents the “end of history” are laughingly premature. Today’s policies look more like a dead end. But that does not mean that, like the Roman Empire, they won’t lead us down toward a new Dark Age. That’s what tends to happen when oligarchies do the planning.
Is America a Failed Economy?
It may be time to ask whether neoliberal pro-rentier economics has turned America and the West into a Failed Economy. Is there really no alternative? Have the neoliberals made the shift of planning from governments to the financial oligarchy irreversible?
Let’s first dispose of the “foundation myth” of the idea still guiding the United States and Europe. Free-market economists pretend that prices can be brought into line most efficiently with technologically necessary costs of production under capitalism, and indeed, under finance capitalism. The banks and stock market are supposed to allocate resources most efficiency. That at least is the dream of self-regulating markets. But today it looks like only a myth, public relations patter talk to get a generation of increasingly indebted voters not to act in their own self-interest.
Industrial capitalism always has been a hybrid, a symbiosis with its feudal legacy of absentee property ownership, oligarchic finance and public debts rather than the government acting as net creditor. The essence of feudalism was extractive, not productive. That is why it created industrial capitalism as state policy in the first place – if only to increase its war-making powers. But the question must now be raised as to whether only socialism can complete the historical task that classical political economy set out for itself – the ideal that futurists in the 19th and 20th centuries believed that an unpurified capitalism might still be able bring about without shedding its legacy of commercial banking indebting property and carving infrastructure out of the public domain.
Today it is easier to see that the Western economies cannot go on the way they have been. They have reached the point where the debts exceed the ability to pay. Instead of recognizing this fact and scaling debts back into line with the ability to pay, the Obama-Geithner plan is to bail out the big banks and hedge funds, keeping the volume of debt in place and indeed, growing once again through the “magic of compound interest.” The result can only be an increasingly extractive economy, until households, real estate and industrial companies, states and cities, and the national government itself is driven into debt peonage.
The alternative is a century and a half old, and emerged out of the ideals of the classical economic doctrines of Adam Smith, David Ricardo, John Stuart Mill, and the last great classical economist, Marx. Their common denominator was to view rent and interest are extractive, not productive. Classical political economy and its successor Progressive Era socialism sought to nationalize the land (or at least to fully tax its rent as the fiscal base). Governments were to create their own credit, not leave this function to wealthy elites via a bank monopoly on credit creation. So today’s neoliberalism paints a false picture of what the classical economists envisioned as free markets. They were markets free of economic rent and interest (and taxes to support an aristocracy or oligarchy). Socialism was to free economies from these overhead charges. Today’s Obama-Geithner rescue plan is just the reverse.
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
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10 January 2009
GEAB reflect on the Gulf's Investments
The residential and commercial real estate boom in the oil-states of the Persian Gulf will come to a sudden stop at the turn of the year 2008/2009 when the effects of US recessflation, European stagflation and Asian economic slowdown combine.
In this matter we should keep in mind that the dithyrambic leaflets and articles on the Dubai’s real estate and the like were written by those very companies, media and experts who praised the American real estate opportunities two years ago, and the UK or Spanish ones a year ago. The market upon which petro-monarchies expect to make their colossal construction investments profitable only exists in the minds of their developers, bankers and all those who believe in them.
It is nothing but a desert mirage.
Indeed, at the time of Internet and A380s, Asians and Europeans need no intermediaries to make business. These “booms” only exist because there is a need today to make the best possible use of those mountains of US dollars losing value every day and nowadays impossible to invest in the US.
These investments will not be profitable and these regions will be full of incredible ghost-cities within a decade. If, in addition to this, the United States and Israel decide to attack Iran in the coming months, ongoing construction work will not even be completed.
geap
In this matter we should keep in mind that the dithyrambic leaflets and articles on the Dubai’s real estate and the like were written by those very companies, media and experts who praised the American real estate opportunities two years ago, and the UK or Spanish ones a year ago. The market upon which petro-monarchies expect to make their colossal construction investments profitable only exists in the minds of their developers, bankers and all those who believe in them.
It is nothing but a desert mirage.
Indeed, at the time of Internet and A380s, Asians and Europeans need no intermediaries to make business. These “booms” only exist because there is a need today to make the best possible use of those mountains of US dollars losing value every day and nowadays impossible to invest in the US.
These investments will not be profitable and these regions will be full of incredible ghost-cities within a decade. If, in addition to this, the United States and Israel decide to attack Iran in the coming months, ongoing construction work will not even be completed.
geap
27 October 2008
House prices to decline 60% everywhere?
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.
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.
1 October 2008
Henry Liu's Critique of capitalism
Capitalist bias notwithstanding, labor is not a factor of production. It is the core component in the economy around which factors of production, such as capital, land, technology, organization, and so forth are applied to increase labor productivity. Marx considered it a reification to treat labor as just another factor of production. Workers are people who should not be used as things, with profit they create extracted to benefit solely others who own things that workers use to be more productive. Return on capital should not be achieved through robbing labor of its fair share of the fruits of workers' labor.
Profit should only be realizable pari passu with wage increases. As corporate revenue rises, wages must rise with it to prevent obscene profits. Rather, corporate profit should be shared with labor in the from of wage bonuses along with dividends to shareholders.
Privatization of the public sector is an abdication of government responsibility to the governed. It is economically unsound, financially inefficient and socially unjust when national public infrastructure, either physical or social, are privatized.
The public sector is not merely another component of the national economy. It is the critical component that defines the limits of the globalized market in a functioning sovereign state. Minsky pointed out that a sizable and strong government sector is indispensable for a capitalist market economy to maintain macroeconomic stability and avoid recurring deep recessions. In a globalized economy, national public sectors are necessary to maintain global macroeconomic stability.
Privatization of the public sector exposes the capitalist market economy to cyclical disasters that require nationalization measures to bail out, as the recent collapse of the finance sector of the US economy aptly illustrates.
economic resources and development to where there is highest profit rather than where the nation's most critical needs are located. The nature of private finance is such that privatized public enterprises are forced by market pressure to focus on the short term, often leading them toward long-term problems and even insolvency.
Privatization of the public sector provides needed public services only to those who can afford them rather than to all who need them as a matter of rights of citizenship. The dilemma over universal health care and insurance in the US is an obvious example. The market by its very nature rewards the financially strong and punishes the financially weak, in opposition to the function of government to protect the weak from the strong. The
market is the venue of choice for owners of capital, notwithstanding that the market value of capital is basically defined by state actions, such as monetary policy, interstate trade and antitrust regulations, tax policies, and above all by the productivity of labor.
Fundamentally, capital is merely idle assets when deprived of the opportunity to invest in enhancing the productivity of labor. Capital is merely an auxiliary factor of production. Without capital, labor can still produce, albeit at a lower productivity rate, but without labor, capital cannot exit. This is why capital, when allowed to move freely, tends to go to where workers are and where worker productivity is underdeveloped. This fundamental truth is often distorted by the supporters of capitalism who promote the flawed concept that capital is the driving force in a capitalist economy and therefore must be given preferred advantage or it will move to another economy that does.
Dollar hegemony operating on a globalized trade regime pushes capital to where wages are lowest without any intention of developing global parity in worker productivity. The sole aim is to maximize the return on capital with lowest wages. For centuries, capitalism prospered because it enhanced labor productivity that yielded rising wages. For the past two decades, free market capitalism has worked to drive wages down throughout the global economy, a trend that will spell self-destruction.
Further, just as the rich can enjoy a life of riches only if they control money, but not when money controls them, an economy can prosper only when its workers control the capital needed to enhance their productivity. It is a very American idea that workers should be able to become rich by their labor, an idea deeply rooted in the founding of the new nation. The founding fathers of the United States considered the concept of financial capital unnatural and an unholy obstacle to the inalienable right of the pursuit of happiness.
On February 12, 2005, I wrote:
The US Declaration of Independence issued on July 4, 1776, states that to secure "inalienable rights", among which are life, liberty and the pursuit of happiness, "governments are instituted among men". It goes on to accuse King George III of England of having "abdicated Government here, by declaring us out of his Protection". The declaration characterizes England as a failed state and justifies the separation of the American colonies from it to institute a new government. Yet privatization, a movement to abdicate government by declaring the people out of the government's protection and placing them at the mercy of the market, has since gathered much ideological support in the name of liberty. (See The privatization wave.
Operationally, the public sector performs a stabilizing effect on volatile business cycles inherent in the private sector market. Private-sector market participants can then be allowed to fail from their own business misjudgments without the risk of bringing the entire economy down because the public sector can keep the economy going while orderly market correction takes place in the private sector.
'Too big to fail' syndrome
The "too big to fail" syndrome would be less likely to surface amongst private enterprises. If Fannie Mae and Freddie Mac had remained government entities, and not been privatized, with the original mandate to provide government subsidies to low- and moderate-income families not overridden by profit incentives and the income ceiling for qualifying for government guaranteed mortgages not amended beyond low- and moderate-income levels, the housing bubble crisis of 2007 would have been less systemic.
Transnational investment banks and private equity firms such as Goldman Sachs, Blackstone, the Carlyle Group, Merrill Lynch, Morgan Stanley and so forth are eager to pounce on juicy privatized public assets such as infrastructure projects worldwide. But privatization of the public sector (the sale or lease of public assets) means governments will be relinquishing control over and responsibility for key infrastructure for the common good for the term of the sales. It usually also means higher fees for users, since private borrowing tends to be more costly than sovereign credit, and investors always insist on taking their profits off the top from gross revenue, thus increasing user fees and reducing the cost-competitiveness of those users depending on such infrastructure for efficient operation.
And rising user fees seldom translate into improved service. To the contrary, surveys have shown that in-house operation of publicly provided services is generally more efficient than contracting them out to private operators, while privatizing public infrastructure for private profit has typically led to increased inefficiency and corruption.
State-owned-projects can keep user fees to a minimum and recoup public investment from increased tax receipts generated by economic growth. Many counterproductive cases are cited in a large body of work on privatization, including my article cited immediately above. Much of the blame for the current housing credit crisis can be laid at the footstep of the privatization of government sponsored agencies, namely Fannie Mae and Freddie Mac.
Privatization of the public sector in China is not simply the benign transfer of ownership from the state, as a political institution representing all the people, to corporatized entities controlled by private financial institutions and private individual shareowners. Rather, it is the very process by which the system of private property is reintroduced into the public sector, a socialist society in the process of transitioning to a socialist market economy. This involves fundamental questions about social justice in ownership distribution, valuation of assets being privatized, and the fairness of the privatization sale process of state-owned assets.
Privatization for transitional economies requires not only the restructuring of the economy but also the creation or redefinition of private property rights and market institutions and mechanism while ensuring maximum economic growth with minimum socio-economic and political disruption. Above all, the issue of social justice needs to be a controlling consideration.
Ronald Coase, 1991 Nobel Laureate in economics, developed the Coase theorem in his 1937 paper describing the economic efficiency of financial allocation in the presence of externalities. Externality in economics involves impacts on parties not directly engaged in economic decisions or actions, or in plain language: the spillover effect. Externality in finance occurs when others besides the actors must pay for the cost or share the benefits of a decision, action or transaction.
The theorem, clarified in his 1960 article "The Problem of Social Cost", states that when trade in an externality is possible with no transaction costs bargaining will naturally lead to an efficient outcome regardless of the initial allocation of property rights. By extention, given well-defined property rights, low bargaining costs, perfect competition, perfect information and the absence of wealth and income effects, resources will be used efficiently and identically regardless of who owns them.
The Coase theorem has been cited as a basis for most modern economic analyses of government regulation. According to Coase, disputes over resources stem mostly from a situation where no one owns them, as in the case of nature, or everyone owns them, as in the case of public property. However, these disputes could be resolved automatically if the unclaimed resources were divided up as private property, even if the division contain inherent unfairness.
The folly of privatization
This is the basic argument used by those promoting privatization of the public sector. They view the problem of air pollution as no one owning the air, or everyone owns it. The same argument applies to water. If these natural resources were privatized, economic efficient over their use and preservation would improve, these privatizers argue. But the nature of the economic man is such that whoever is assigned to own the air would rather charge others for permission to pollute it than to pay everyone else to stop polluting it. Privatization of air would then end up promoting air pollution for profit.
Another obstacle to applying the Coase theorem is the wealth and income effects. This is defined as the change of wealth or income that occurs when public property or property rights are awarded unevenly to private parties. Coase made his "invariance claim" that outcomes will be similar of not identical regardless who the favored owners are. But effects of wealth and income disparity on equality and social stability are ubiquitously obvious enough to invalidate the Coase theorem.
Coasians argue that the social results may be different, but they will be equally efficient economically. The problem with this argument is that changes in supply and demand caused by different ownership patterns have rippling effects throughout the entire economy that affect efficiency. And even if efficiency is unaffected, social stability will certainly be affected that will in turn affect economic efficiency.
History has shown that no national resurgent strategy can succeed without a clear understanding of the importance of a viable monetary strategy for successful independent national development. Chinese monetary strategy in recent decades has been reactive, lacking political will to take the initiative and playing a game in ways that show her policymakers as not having full understanding or the necessary skills to control the outcome, despite the fact that China has become the world's biggest creditor nation and the top manufacturer.
China cannot continue to allow her currency to be a derivative of the dollar; nor can she rely on a foreign trade surplus denominated in dollars to finance much-needed domestic development. China must stop further privatization of her public sector, stop exposing her strategic sectors to international market forces and take steps to reverse the disparity of wealth and income and free up sovereign credit to develop much need physical and socio-economic infrastructure at a much faster pace.
After three decades of reform and opening-up to the outside world, Chinese policymakers should realize its time to review and redirect toward new approaches of national revival not merely to catch up with a decadent West, but to restore Chinese civilization as the guiding light towards a world free of exploitation and oppression.
Profit should only be realizable pari passu with wage increases. As corporate revenue rises, wages must rise with it to prevent obscene profits. Rather, corporate profit should be shared with labor in the from of wage bonuses along with dividends to shareholders.
Privatization of the public sector is an abdication of government responsibility to the governed. It is economically unsound, financially inefficient and socially unjust when national public infrastructure, either physical or social, are privatized.
The public sector is not merely another component of the national economy. It is the critical component that defines the limits of the globalized market in a functioning sovereign state. Minsky pointed out that a sizable and strong government sector is indispensable for a capitalist market economy to maintain macroeconomic stability and avoid recurring deep recessions. In a globalized economy, national public sectors are necessary to maintain global macroeconomic stability.
Privatization of the public sector exposes the capitalist market economy to cyclical disasters that require nationalization measures to bail out, as the recent collapse of the finance sector of the US economy aptly illustrates.
economic resources and development to where there is highest profit rather than where the nation's most critical needs are located. The nature of private finance is such that privatized public enterprises are forced by market pressure to focus on the short term, often leading them toward long-term problems and even insolvency.
Privatization of the public sector provides needed public services only to those who can afford them rather than to all who need them as a matter of rights of citizenship. The dilemma over universal health care and insurance in the US is an obvious example. The market by its very nature rewards the financially strong and punishes the financially weak, in opposition to the function of government to protect the weak from the strong. The
market is the venue of choice for owners of capital, notwithstanding that the market value of capital is basically defined by state actions, such as monetary policy, interstate trade and antitrust regulations, tax policies, and above all by the productivity of labor.
Fundamentally, capital is merely idle assets when deprived of the opportunity to invest in enhancing the productivity of labor. Capital is merely an auxiliary factor of production. Without capital, labor can still produce, albeit at a lower productivity rate, but without labor, capital cannot exit. This is why capital, when allowed to move freely, tends to go to where workers are and where worker productivity is underdeveloped. This fundamental truth is often distorted by the supporters of capitalism who promote the flawed concept that capital is the driving force in a capitalist economy and therefore must be given preferred advantage or it will move to another economy that does.
Dollar hegemony operating on a globalized trade regime pushes capital to where wages are lowest without any intention of developing global parity in worker productivity. The sole aim is to maximize the return on capital with lowest wages. For centuries, capitalism prospered because it enhanced labor productivity that yielded rising wages. For the past two decades, free market capitalism has worked to drive wages down throughout the global economy, a trend that will spell self-destruction.
Further, just as the rich can enjoy a life of riches only if they control money, but not when money controls them, an economy can prosper only when its workers control the capital needed to enhance their productivity. It is a very American idea that workers should be able to become rich by their labor, an idea deeply rooted in the founding of the new nation. The founding fathers of the United States considered the concept of financial capital unnatural and an unholy obstacle to the inalienable right of the pursuit of happiness.
On February 12, 2005, I wrote:
The US Declaration of Independence issued on July 4, 1776, states that to secure "inalienable rights", among which are life, liberty and the pursuit of happiness, "governments are instituted among men". It goes on to accuse King George III of England of having "abdicated Government here, by declaring us out of his Protection". The declaration characterizes England as a failed state and justifies the separation of the American colonies from it to institute a new government. Yet privatization, a movement to abdicate government by declaring the people out of the government's protection and placing them at the mercy of the market, has since gathered much ideological support in the name of liberty. (See The privatization wave.
Operationally, the public sector performs a stabilizing effect on volatile business cycles inherent in the private sector market. Private-sector market participants can then be allowed to fail from their own business misjudgments without the risk of bringing the entire economy down because the public sector can keep the economy going while orderly market correction takes place in the private sector.
'Too big to fail' syndrome
The "too big to fail" syndrome would be less likely to surface amongst private enterprises. If Fannie Mae and Freddie Mac had remained government entities, and not been privatized, with the original mandate to provide government subsidies to low- and moderate-income families not overridden by profit incentives and the income ceiling for qualifying for government guaranteed mortgages not amended beyond low- and moderate-income levels, the housing bubble crisis of 2007 would have been less systemic.
Transnational investment banks and private equity firms such as Goldman Sachs, Blackstone, the Carlyle Group, Merrill Lynch, Morgan Stanley and so forth are eager to pounce on juicy privatized public assets such as infrastructure projects worldwide. But privatization of the public sector (the sale or lease of public assets) means governments will be relinquishing control over and responsibility for key infrastructure for the common good for the term of the sales. It usually also means higher fees for users, since private borrowing tends to be more costly than sovereign credit, and investors always insist on taking their profits off the top from gross revenue, thus increasing user fees and reducing the cost-competitiveness of those users depending on such infrastructure for efficient operation.
And rising user fees seldom translate into improved service. To the contrary, surveys have shown that in-house operation of publicly provided services is generally more efficient than contracting them out to private operators, while privatizing public infrastructure for private profit has typically led to increased inefficiency and corruption.
State-owned-projects can keep user fees to a minimum and recoup public investment from increased tax receipts generated by economic growth. Many counterproductive cases are cited in a large body of work on privatization, including my article cited immediately above. Much of the blame for the current housing credit crisis can be laid at the footstep of the privatization of government sponsored agencies, namely Fannie Mae and Freddie Mac.
Privatization of the public sector in China is not simply the benign transfer of ownership from the state, as a political institution representing all the people, to corporatized entities controlled by private financial institutions and private individual shareowners. Rather, it is the very process by which the system of private property is reintroduced into the public sector, a socialist society in the process of transitioning to a socialist market economy. This involves fundamental questions about social justice in ownership distribution, valuation of assets being privatized, and the fairness of the privatization sale process of state-owned assets.
Privatization for transitional economies requires not only the restructuring of the economy but also the creation or redefinition of private property rights and market institutions and mechanism while ensuring maximum economic growth with minimum socio-economic and political disruption. Above all, the issue of social justice needs to be a controlling consideration.
Ronald Coase, 1991 Nobel Laureate in economics, developed the Coase theorem in his 1937 paper describing the economic efficiency of financial allocation in the presence of externalities. Externality in economics involves impacts on parties not directly engaged in economic decisions or actions, or in plain language: the spillover effect. Externality in finance occurs when others besides the actors must pay for the cost or share the benefits of a decision, action or transaction.
The theorem, clarified in his 1960 article "The Problem of Social Cost", states that when trade in an externality is possible with no transaction costs bargaining will naturally lead to an efficient outcome regardless of the initial allocation of property rights. By extention, given well-defined property rights, low bargaining costs, perfect competition, perfect information and the absence of wealth and income effects, resources will be used efficiently and identically regardless of who owns them.
The Coase theorem has been cited as a basis for most modern economic analyses of government regulation. According to Coase, disputes over resources stem mostly from a situation where no one owns them, as in the case of nature, or everyone owns them, as in the case of public property. However, these disputes could be resolved automatically if the unclaimed resources were divided up as private property, even if the division contain inherent unfairness.
The folly of privatization
This is the basic argument used by those promoting privatization of the public sector. They view the problem of air pollution as no one owning the air, or everyone owns it. The same argument applies to water. If these natural resources were privatized, economic efficient over their use and preservation would improve, these privatizers argue. But the nature of the economic man is such that whoever is assigned to own the air would rather charge others for permission to pollute it than to pay everyone else to stop polluting it. Privatization of air would then end up promoting air pollution for profit.
Another obstacle to applying the Coase theorem is the wealth and income effects. This is defined as the change of wealth or income that occurs when public property or property rights are awarded unevenly to private parties. Coase made his "invariance claim" that outcomes will be similar of not identical regardless who the favored owners are. But effects of wealth and income disparity on equality and social stability are ubiquitously obvious enough to invalidate the Coase theorem.
Coasians argue that the social results may be different, but they will be equally efficient economically. The problem with this argument is that changes in supply and demand caused by different ownership patterns have rippling effects throughout the entire economy that affect efficiency. And even if efficiency is unaffected, social stability will certainly be affected that will in turn affect economic efficiency.
History has shown that no national resurgent strategy can succeed without a clear understanding of the importance of a viable monetary strategy for successful independent national development. Chinese monetary strategy in recent decades has been reactive, lacking political will to take the initiative and playing a game in ways that show her policymakers as not having full understanding or the necessary skills to control the outcome, despite the fact that China has become the world's biggest creditor nation and the top manufacturer.
China cannot continue to allow her currency to be a derivative of the dollar; nor can she rely on a foreign trade surplus denominated in dollars to finance much-needed domestic development. China must stop further privatization of her public sector, stop exposing her strategic sectors to international market forces and take steps to reverse the disparity of wealth and income and free up sovereign credit to develop much need physical and socio-economic infrastructure at a much faster pace.
After three decades of reform and opening-up to the outside world, Chinese policymakers should realize its time to review and redirect toward new approaches of national revival not merely to catch up with a decadent West, but to restore Chinese civilization as the guiding light towards a world free of exploitation and oppression.
21 June 2008
Nyquist is an idiot
Anti-Western ideology animated the Axis in World War II and the Communist Bloc during the Cold War. It animates al Qaeda and the Iranian clerical regime. If you look to American domestic politics, anti-Western ideology animated the sixties radicals as it continues to animate the anti-war movement. George W. Bush is unfairly maligned as a liar and a warmonger. In fact, he is nothing more than a well-meaning man who has been ill-served by his advisors and betrayed by his own intelligence service. His mistakes are not those of a master conspirator. The logic of totalitarian rhetoric automatically assumes that 9/11 was an inside job because it is intolerable to allow capitalism and the Republic any moral high ground whatsoever. All measures of national defense are hereby denounced as illegitimate. All U.S. officials are villains, crooks or dupes. The Republic itself is nothing more than a system of exploitation that must be overthrown. Listen for these words. Do not be taken in by the drumbeat of anti-Western propaganda.
I agree with him about conspiracy theoies and think Zeitgeist complete rubbish.
But its more complex than old nyquist can understand, imo.
RE: Yes, he is.-nm rkb65 NEW 6/20/2008 1:47:38 PM
~
RE: Prrof here of idiocy rkb65 NEW 6/20/2008 1:54:07 PM
On Pres. Bush:
"In fact, he is nothing more than a well-meaning man who has been ill-served by his advisors and betrayed by his own intelligence service."
RE: Proof here of idiocy gjohnsit NEW 6/20/2008 1:57:27 PM
I stopped reading his rubbish years ago.
I'm not impressed with Puplava's political agenda either.
RE: What''s pathetic is that Puplava rkb65 NEW 6/20/2008 1:55:25 PM
Prolly pays Nyquist for the psuedo-intellectual gibberish he spews out week after week.
RE: Puplava''s political agenda aussiebear NEW 6/20/2008 2:17:26 PM
I wince everytime he says global warming is a none issue and that drilling everywhere in the USA is the answer. He spruiks free enterprise and responsible fiscal policy but hates taxes.
The cure for high prices is high prices, everybody in america needs to be driving light hybrids or electrics and making massive investments in alternate energy.
I give Pup credit for seeing the supercycle, gold and silver and peak oil.
Us guys are determined to make a high speed run at a brick wall, the West is gutless, everyobody talks their book and the simple facts on issues mean nothing. Sold everything to rentiers for a plasma TV and a holiday flat and made the world safe for the nimble footed.
The only people with cred re capital accumulation and family values and hard work are Chinese.
RE: And Germans aussiebear NEW 6/20/2008 2:23:11 PM
The european core is rock solid.
RE: And Germans thirsty NEW 6/20/2008 3:15:55 PM
Germany isn't a joke and is set to play a major role in the new century. They are one of only a handful of countries in the western hemisphere that hasn't bought Wall Street financialization hook, line and sinker. There is a degree of discipline pre-dominate throughout their population which you do not find in most westernized countries. They are the world's top exporter, from construction infrastructure technology to renewable energy they are market leaders. All this done without having to turn their housing stock into some sort of casino gambling chip. No Helocs, and full cap gains paid on any house sold before ten years. Now that the Prussian military tradition is dead and buried on the eastern front they'll probably do economically what their Feld Marshalls did militarily-get 'er done with less men, no fuel and the rest of Europe kind of tagging along.
RE: And Germans gjohnsit NEW 6/20/2008 4:11:35 PM
That may be true. But that's doesn't mean the Euro is doomed.
It isn't doomed because of Germany, but it is doomed because countries like Spain, Greece, and Portugal can't keep up with Germany.
RE: Nyquist is an idiot. kudu NEW 6/20/2008 2:50:25 PM
Nyquist is a top notch thinker - more insight in his pinky than you'll find in the combined brains of his peers.
An excellent read, consistently.
And, as an aside, we should be drilling off our coasts like Australia does, but the anti-tech statists/greens/Nazis resurrect a new bogeyman to fool the sheeple whenever convenient.
RE: thx for your opinion aussiebear NEW 6/20/2008 2:55:43 PM
But it seems to me that oil is too precious to burn. You can make plastics and pharms out of it as well. What's the hurry, havent you heard of peak oil?
But I glad for you there is a guy around who tells you what your dying to hear.
RE: Nyquist sucks and blows thirsty NEW 6/20/2008 3:06:13 PM
I don't know how anybody who takes themselves seriously as an intellectual can go on for more than several paragraphs raging about communists and various authoritarian regimes and then turns around and plants a big kiss on the ass of financialization. Doesn't this stupid shit realize that the collectivization and centralization of credit under a central bank is the fifth plank of the communist manifesto? Nyquist and the rest of his neo-CON ilk wouldn't last five minutes in a true capitalist free-market system. As soon as the producers nominated their own form of monetary unit the freeloaders and parasites both in government and in corporate world would be out sweeping streets and picking up garbage. Nyquist included.
RE: I ocassionally wonder if I''ve got it wrong aussiebear NEW 6/20/2008 3:45:37 PM
But then guys like thirsty, supercycle, cambodiabear and others (Thomas, Johnsit, et al) that provide compelling evidence that I actually have it exactly right.
You have got to be at the edge to see it.
The closer you are to the heart of the old economic centre and the more you have internalised certain myths and make them a part of the infrastructure of your identity the more crap you hear.
I'm a massive beleiver in the enlightenment and the work of classical economists, but those that claim this heritage only talk the talk imo, the days when the US was walking the walk are gone.
I was prompted to say this by thirsty's comment re germans resistance to financialisation, he's got it right, that's as plain as the nose on your face that europe didn't buy any of this "secruritise this" shite.
You guys also are way deluded on China. The chinese are using the best of the western tradition in economics to support the state and the people. Politics in china is far more consultitive and expertise based than imagined here. Dreams that the chinese people are unhappy and the big rival will dissolve into disorder are complete delusions.
The european (first world) and chinese (for the third world) models are now the light of the world.
Western anglo-democratic models foundered when networks, money and the short circuit of the lobby turned it into a facade behind which state assets and citizens savings were looted by the kleptocracy.
We passed the baton.
RE: Have you ever actually been to China? fredreed NEW 6/20/2008 3:52:29 PM
I have. And believe me, they some impressive strengths, but some equally impressive weaknesses.They have a long row to hoe.
It's true that they haven't lost the spirit of innovation and entrepreneurism. Neither have the lost the spirit of nutty envy and rampant corruption that brought on the cultural revolution.
RE: Yes and its so like the US in that regard aussiebear NEW 6/20/2008 4:03:12 PM
Not one place but many places, both inspiring and grubby and sordid. When australians went inland we didn't find the great plains, but a dead heart. We are more communal and skeptical than those of the endless frontier.
RE: Sad ideologue rather than synaptically SuperCycleBear NEW 6/20/2008 4:58:39 PM
challenged.
The nature of the system as it currently stands relies on the continued expansion of US indebtedness.
The trouble is there are no more lenders.
The CBs can continue to expand their balance sheets in the hope the oncoming adverse winds will swing in their favor but if it doesn't, fiat will continue to lose value and holders of fiat will continue to be fleeced.
We live in truly exceptional times. Made or the more exceptional by the apparent ignorance of the degree of the mess.
The real shoe is yet to drop. But each day it gains weight.
RE: typo SuperCycleBear NEW 6/20/2008 5:00:42 PM
Made all the more exceptional by the apparent ignorance of the degree of the mess.
I agree with him about conspiracy theoies and think Zeitgeist complete rubbish.
But its more complex than old nyquist can understand, imo.
RE: Yes, he is.-nm rkb65 NEW 6/20/2008 1:47:38 PM
~
RE: Prrof here of idiocy rkb65 NEW 6/20/2008 1:54:07 PM
On Pres. Bush:
"In fact, he is nothing more than a well-meaning man who has been ill-served by his advisors and betrayed by his own intelligence service."
RE: Proof here of idiocy gjohnsit NEW 6/20/2008 1:57:27 PM
I stopped reading his rubbish years ago.
I'm not impressed with Puplava's political agenda either.
RE: What''s pathetic is that Puplava rkb65 NEW 6/20/2008 1:55:25 PM
Prolly pays Nyquist for the psuedo-intellectual gibberish he spews out week after week.
RE: Puplava''s political agenda aussiebear NEW 6/20/2008 2:17:26 PM
I wince everytime he says global warming is a none issue and that drilling everywhere in the USA is the answer. He spruiks free enterprise and responsible fiscal policy but hates taxes.
The cure for high prices is high prices, everybody in america needs to be driving light hybrids or electrics and making massive investments in alternate energy.
I give Pup credit for seeing the supercycle, gold and silver and peak oil.
Us guys are determined to make a high speed run at a brick wall, the West is gutless, everyobody talks their book and the simple facts on issues mean nothing. Sold everything to rentiers for a plasma TV and a holiday flat and made the world safe for the nimble footed.
The only people with cred re capital accumulation and family values and hard work are Chinese.
RE: And Germans aussiebear NEW 6/20/2008 2:23:11 PM
The european core is rock solid.
RE: And Germans thirsty NEW 6/20/2008 3:15:55 PM
Germany isn't a joke and is set to play a major role in the new century. They are one of only a handful of countries in the western hemisphere that hasn't bought Wall Street financialization hook, line and sinker. There is a degree of discipline pre-dominate throughout their population which you do not find in most westernized countries. They are the world's top exporter, from construction infrastructure technology to renewable energy they are market leaders. All this done without having to turn their housing stock into some sort of casino gambling chip. No Helocs, and full cap gains paid on any house sold before ten years. Now that the Prussian military tradition is dead and buried on the eastern front they'll probably do economically what their Feld Marshalls did militarily-get 'er done with less men, no fuel and the rest of Europe kind of tagging along.
RE: And Germans gjohnsit NEW 6/20/2008 4:11:35 PM
That may be true. But that's doesn't mean the Euro is doomed.
It isn't doomed because of Germany, but it is doomed because countries like Spain, Greece, and Portugal can't keep up with Germany.
RE: Nyquist is an idiot. kudu NEW 6/20/2008 2:50:25 PM
Nyquist is a top notch thinker - more insight in his pinky than you'll find in the combined brains of his peers.
An excellent read, consistently.
And, as an aside, we should be drilling off our coasts like Australia does, but the anti-tech statists/greens/Nazis resurrect a new bogeyman to fool the sheeple whenever convenient.
RE: thx for your opinion aussiebear NEW 6/20/2008 2:55:43 PM
But it seems to me that oil is too precious to burn. You can make plastics and pharms out of it as well. What's the hurry, havent you heard of peak oil?
But I glad for you there is a guy around who tells you what your dying to hear.
RE: Nyquist sucks and blows thirsty NEW 6/20/2008 3:06:13 PM
I don't know how anybody who takes themselves seriously as an intellectual can go on for more than several paragraphs raging about communists and various authoritarian regimes and then turns around and plants a big kiss on the ass of financialization. Doesn't this stupid shit realize that the collectivization and centralization of credit under a central bank is the fifth plank of the communist manifesto? Nyquist and the rest of his neo-CON ilk wouldn't last five minutes in a true capitalist free-market system. As soon as the producers nominated their own form of monetary unit the freeloaders and parasites both in government and in corporate world would be out sweeping streets and picking up garbage. Nyquist included.
RE: I ocassionally wonder if I''ve got it wrong aussiebear NEW 6/20/2008 3:45:37 PM
But then guys like thirsty, supercycle, cambodiabear and others (Thomas, Johnsit, et al) that provide compelling evidence that I actually have it exactly right.
You have got to be at the edge to see it.
The closer you are to the heart of the old economic centre and the more you have internalised certain myths and make them a part of the infrastructure of your identity the more crap you hear.
I'm a massive beleiver in the enlightenment and the work of classical economists, but those that claim this heritage only talk the talk imo, the days when the US was walking the walk are gone.
I was prompted to say this by thirsty's comment re germans resistance to financialisation, he's got it right, that's as plain as the nose on your face that europe didn't buy any of this "secruritise this" shite.
You guys also are way deluded on China. The chinese are using the best of the western tradition in economics to support the state and the people. Politics in china is far more consultitive and expertise based than imagined here. Dreams that the chinese people are unhappy and the big rival will dissolve into disorder are complete delusions.
The european (first world) and chinese (for the third world) models are now the light of the world.
Western anglo-democratic models foundered when networks, money and the short circuit of the lobby turned it into a facade behind which state assets and citizens savings were looted by the kleptocracy.
We passed the baton.
RE: Have you ever actually been to China? fredreed NEW 6/20/2008 3:52:29 PM
I have. And believe me, they some impressive strengths, but some equally impressive weaknesses.They have a long row to hoe.
It's true that they haven't lost the spirit of innovation and entrepreneurism. Neither have the lost the spirit of nutty envy and rampant corruption that brought on the cultural revolution.
RE: Yes and its so like the US in that regard aussiebear NEW 6/20/2008 4:03:12 PM
Not one place but many places, both inspiring and grubby and sordid. When australians went inland we didn't find the great plains, but a dead heart. We are more communal and skeptical than those of the endless frontier.
RE: Sad ideologue rather than synaptically SuperCycleBear NEW 6/20/2008 4:58:39 PM
challenged.
The nature of the system as it currently stands relies on the continued expansion of US indebtedness.
The trouble is there are no more lenders.
The CBs can continue to expand their balance sheets in the hope the oncoming adverse winds will swing in their favor but if it doesn't, fiat will continue to lose value and holders of fiat will continue to be fleeced.
We live in truly exceptional times. Made or the more exceptional by the apparent ignorance of the degree of the mess.
The real shoe is yet to drop. But each day it gains weight.
RE: typo SuperCycleBear NEW 6/20/2008 5:00:42 PM
Made all the more exceptional by the apparent ignorance of the degree of the mess.
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