WEBVTT

NOTE Current Market Conditions: 13 Oct. 2008

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Good afternoon, Frank. Good afternoon to you. Well, I guess it's not afternoon for you, is it? It's morning for me.

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Do you check what's going on in the American stock market when you wake up in the morning?

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Yeah, always, always, always. Today it was quite a big, well it's not a surprise I mean,

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but we had massive increases as you probably were. Dow Jones was up 11.1% and S&P 500 11.6%

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and the Nasdaq was up 11.8%. These are gigantic percentages, right? And on the face of it

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everything looks great.

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Right, all because the Fed helped us.

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Well, I mean, it's all basically massive pumping or potential pumping now in Europe.

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We know now, they announced that there will be two and a half trillion U.S. dollars will

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be pumped into the banking system, two and a half trillion in Europe.

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And in America, I presume, will be, the numbers will be also very large.

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I mean, we're talking also, we're probably will end up in trillions, not in one trillion,

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but in many trillions over time.

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My personal view is that you can push as much money as you like. If the bottom line is not

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there, it's not going to help. If pushing money is the solution, then my old example

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is that every third world country should by now be very wealthy because everybody knows

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how to print money. The point is that not everybody knows how to create real wealth

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and that's really the main issue.

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Yes, but perhaps having gone through these very difficult times that will cause a certain

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amount of capital accumulation to develop and some saving, that would be good for economic

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recovery.

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Well, I mean, in the so-called bad times, that's when the accumulation of savings begins.

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I mean, according to Mises, he was basically straightforward. He said that recession is

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the beginning of recovery. That's when the accumulation of savings, real savings takes

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place. But what the central bankers are trying to do right now is precisely to destroy the

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beginning of accumulation of real savings. And actually they're trying to dilute it even

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more without maybe realizing that, but that's really what they're going to do.

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Another metaphor, I would say, they're basically saying we're going to rescue the banking system.

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But nobody really asks how in the world they can rescue the banking system.

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If there would have been wealth creators and if they would have had wealth hidden somewhere,

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then I would understand they can actually bring the extra reserves which were hidden

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and then throw it into the private sector.

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But that's not the case.

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They have to take it from already impoverished private sector.

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So by taking wealth from the impoverished private sector and giving it to somebody who is insolvent

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and losing money, you're going to weaken the private sector even more.

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And that's really what they're actually trying to do.

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Another metaphor, instead of planting seeds, farmers eat the seeds.

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Obviously, they won't be a crop.

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And if people are starting to expect crop, then they live in the cuckoo land.

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This Fed tendency to want to bail out illiquid or bankrupt institutions seems to be spreading

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all over the world.

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The Fed has prevailed upon all the banks of Europe and elsewhere.

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That's the idea because 10 minutes ago I had a chat with a very reasonable businessman

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And he says to me, look Frank, I understand the Austrians, I understand what they're saying,

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but I don't think they're right, because right now we're in a situation where government

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must interfere.

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So when I told him why they should interfere, how they can help, he didn't have any answer,

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but all he told me was that he knows of many businesses who actually cannot get credit,

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and as a result they will go belly up.

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So my answer to him was very simple.

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Certainly those good businesses were good yesterday, but as a result of bad policies

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of the central banks and government, wealth was destroyed, and those bad businesses, the

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good businesses are now suffering, right?

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So obviously, those good businesses which were viable yesterday, they're not viable

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today any longer because there's less wealth available, and if they really want to survive,

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they have to borrow, pay a much higher interest rate.

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That's precisely what they cannot afford, and that's what the central banks are trying

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to do right now.

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By pushing money, they're trying to keep interest rates as low as possible.

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But by keeping interest rates as low as possible, they don't allow the credit markets to clear.

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And that's really the problem.

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Why haven't we seen much change in the shape of the yield curve over the last two weeks?

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Or am I wrong that we have?

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Well, I mean, the long-term rates are still higher than the short-term rates.

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So in this sense, we have an upward positive slope yield curve, if you want. We have it

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right now. But as such, all it basically tells you right now is that central banks are aggressively

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lowering short-term rates. That's what it is right now. So the shape of the yield curve

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is positive in this sense.

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It's rather chilling in some way. It makes you wonder if the central banks will ever

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again permit regular market fluctuations to occur.

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Well they haven't been allowing such a thing for a long time. They're always tampering

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with interest rates. They're controlling the federal funds rate or cash rate in other countries,

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And by doing this, they are affecting the entire interest rate structure all the time.

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So interest rate is the most tempered type of market that you can even think of, right?

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And by doing this, they falsify all the signals and they're destroying the smooth operation

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of markets.

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You're in a position to advise clients and maybe you don't want to say anything about

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this but we get a lot of questions, what should we do with our money and we decline to answer

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them.

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Do you decline to answer these kinds of things too at this point?

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It seems like politics is so volatile right now.

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Yeah, it's very difficult to give an advice where to place your money right now.

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But one thing, which comes to my mind at least, that first of all, don't try to lose what

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you got.

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Don't lose what you have, right?

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In other words, don't try to make money, but just keep what you got.

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And staying in cash, whatever it means, is probably the best proposition.

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But again, even those people who wanted to be in cash and put money in the money market,

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mutual funds, they also lost money there, right?

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So one needs to be really in something which he believes that it's really safe.

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Very difficult to identify such a thing because if banks are vulnerable and you have run on

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banks and it still may happen because this rescue package may not work, right?

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And then it's difficult to say how you protect yourself.

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Even in terms of buying gold coins, for instance, which is a good idea, but then where are you

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going to keep them?

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Are you going to keep it in the safe deposit box?

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And the safe deposit box will be with the bank. Then what will happen if you won't be able

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to access the bank? So it's always a difficult situation we are in right now. Just to give

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you an example of how disastrous things can be, and we see it as we speak right now, it's

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a good example, we have Iceland. Iceland is a western, it's supposed to be a western economy,

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and got 300,000 people. And this economy was destroyed by central bank policies, almost

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literally, it was obliterated completely. And the reason was very simple, like in July

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2006, they were pushing money at the pace of 120%, the central bank. Then by January

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2007, they lowered it to 23%, so they created massive boom, massive bust, right? And the

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The whole thing kicked, the whole thing killed off the economy completely.

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The massive boom sparked the property boom, the luck in America on a different scale in

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Iceland.

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A massive banking sector, they became gigantic, so to speak.

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And now the bust, the tight stands killed off all these bubbles.

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And because it was one gigantic bubble, the whole thing is falling apart.

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Today, in Iceland, they're saying that they got only food left, maybe for two weeks. That

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really sounds crazy, but that's really the situation, that they're actually talking about

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the scarcity of food right now in Iceland.

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That's remarkable. You don't expect anything on that level in Europe or the United States,

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do you?

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Well, I hope not, you see, but we always have to take into account what happens. The nature

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Here gives us examples all the time, right? We had one example several years back in Argentina.

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Argentina was a very powerful economy, right? And all of a sudden it became almost destroyed

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completely, says the economy. Likewise, you know, example of Iceland. I mean, that's an

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example of what can happen if you're abusing the power of printing money. And what we see

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The currency today in the United States of America and in Europe is very scary, it's

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very scary, and I'm saying because they're literally throwing massive amounts of dollars,

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which is empty tickets, and this just dilutes whatever capital we still have got.

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America is a wealthy country, but by throwing so much money, you also destroy the capital

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which is still there, and that's really the terrible thing.

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Do you expect that the dollar, that this event could end in unseating the dollar as a world

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reserve currency?

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Is that even a remote possibility?

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Well, I don't see it this way because every central bank, as you can see, they are cooperating,

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they're doing everything together, right?

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And they're all there, they're basically engaged in joint printing.

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So therefore, on a relative basis, they will remain the same, more or less, right?

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In other words, we all will be sick, but the strength of the currency will be determined

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who is relatively less sick.

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That's really what will happen, right?

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So if you print a little bit less than other guys, then you will be appearing as healthy.

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But on balance, the situation that everybody prints money, and ultimately my prediction

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is, I don't know when it's going to happen, that this whole current system of paper money

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Keynes always dreamed about a world central bank and a single currency, but it sounds

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as if we're getting to that point in a de facto sense, and the world currency is the

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dollar and the world central bank is the Fed.

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That's right. That's right. I mean, you can see Fed is sort of a set the pace and all the other central bankers are just like a branch following the agenda.

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And that's true. That's true.

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It was always Hans-Hernoltz's preferred monetary reform to just repeal legal tender laws and let people use and produce whatever currencies they would want in this way.

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You could move to a gold standard without any kind of government decree.

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Yeah, I mean, I believe, look, it's possible that the law of nature may dictate such a thing

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that if we run a very massive inflation, if you want runnable inflation, people will not

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accept any paper money and then they will sort of gravitate towards something which

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is more acceptable and people will talk about gold.

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It may happen, you know.

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And the way they're pumping money, one of these days it could end up in a runaway inflation.

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Maybe before that we'll have a deflation, then we'll have inflation, a runaway inflation.

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Well, thank you very much, Frank.

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Thank you, it's my pleasure.