Current Market Conditions: 13 Oct. 2008

0:00Good afternoon, Frank. Good afternoon to you. Well, I guess it's not afternoon for you, is it? It's morning for me. Do you check what's going on in the American stock market when you wake up in the morning? Yeah, always, always, always. Today it was quite a big, well it's not a surprise I mean, but we had massive increases as you probably were. Dow Jones was up 11.1% and S&P 500 11.6% and the Nasdaq was up 11.8%. These are gigantic percentages, right? And on the face of it everything looks great.

0:50Right, all because the Fed helped us. Well, I mean, it's all basically massive pumping or potential pumping now in Europe. We know now, they announced that there will be two and a half trillion U.S. dollars will be pumped into the banking system, two and a half trillion in Europe. And in America, I presume, will be, the numbers will be also very large. I mean, we're talking also, we're probably will end up in trillions, not in one trillion, but in many trillions over time. My personal view is that you can push as much money as you like. If the bottom line is not there, it's not going to help. If pushing money is the solution, then my old example is that every third world country should by now be very wealthy because everybody knows how to print money. The point is that not everybody knows how to create real wealth and that's really the main issue.

1:48Yes, but perhaps having gone through these very difficult times that will cause a certain amount of capital accumulation to develop and some saving, that would be good for economic recovery. Well, I mean, in the so-called bad times, that's when the accumulation of savings begins. I mean, according to Mises, he was basically straightforward. He said that recession is the beginning of recovery. That's when the accumulation of savings, real savings takes place. But what the central bankers are trying to do right now is precisely to destroy the beginning of accumulation of real savings. And actually they're trying to dilute it even more without maybe realizing that, but that's really what they're going to do.

2:41Another metaphor, I would say, they're basically saying we're going to rescue the banking system. But nobody really asks how in the world they can rescue the banking system. If there would have been wealth creators and if they would have had wealth hidden somewhere, then I would understand they can actually bring the extra reserves which were hidden and then throw it into the private sector. But that's not the case. They have to take it from already impoverished private sector. So by taking wealth from the impoverished private sector and giving it to somebody who is insolvent and losing money, you're going to weaken the private sector even more. And that's really what they're actually trying to do. Another metaphor, instead of planting seeds, farmers eat the seeds.

3:29Obviously, they won't be a crop. And if people are starting to expect crop, then they live in the cuckoo land. This Fed tendency to want to bail out illiquid or bankrupt institutions seems to be spreading all over the world. The Fed has prevailed upon all the banks of Europe and elsewhere. That's the idea because 10 minutes ago I had a chat with a very reasonable businessman And he says to me, look Frank, I understand the Austrians, I understand what they're saying, but I don't think they're right, because right now we're in a situation where government must interfere.

4:17So when I told him why they should interfere, how they can help, he didn't have any answer, but all he told me was that he knows of many businesses who actually cannot get credit, and as a result they will go belly up. So my answer to him was very simple. Certainly those good businesses were good yesterday, but as a result of bad policies of the central banks and government, wealth was destroyed, and those bad businesses, the good businesses are now suffering, right? So obviously, those good businesses which were viable yesterday, they're not viable today any longer because there's less wealth available, and if they really want to survive, they have to borrow, pay a much higher interest rate. That's precisely what they cannot afford, and that's what the central banks are trying to do right now.

5:02By pushing money, they're trying to keep interest rates as low as possible. But by keeping interest rates as low as possible, they don't allow the credit markets to clear. And that's really the problem. Why haven't we seen much change in the shape of the yield curve over the last two weeks? Or am I wrong that we have? Well, I mean, the long-term rates are still higher than the short-term rates. So in this sense, we have an upward positive slope yield curve, if you want. We have it right now. But as such, all it basically tells you right now is that central banks are aggressively lowering short-term rates. That's what it is right now. So the shape of the yield curve is positive in this sense.

5:55It's rather chilling in some way. It makes you wonder if the central banks will ever again permit regular market fluctuations to occur. Well they haven't been allowing such a thing for a long time. They're always tampering with interest rates. They're controlling the federal funds rate or cash rate in other countries, And by doing this, they are affecting the entire interest rate structure all the time. So interest rate is the most tempered type of market that you can even think of, right? And by doing this, they falsify all the signals and they're destroying the smooth operation of markets.

6:46You're in a position to advise clients and maybe you don't want to say anything about this but we get a lot of questions, what should we do with our money and we decline to answer them. Do you decline to answer these kinds of things too at this point? It seems like politics is so volatile right now. Yeah, it's very difficult to give an advice where to place your money right now. But one thing, which comes to my mind at least, that first of all, don't try to lose what you got. Don't lose what you have, right? In other words, don't try to make money, but just keep what you got. And staying in cash, whatever it means, is probably the best proposition.

7:32But again, even those people who wanted to be in cash and put money in the money market, mutual funds, they also lost money there, right? So one needs to be really in something which he believes that it's really safe. Very difficult to identify such a thing because if banks are vulnerable and you have run on banks and it still may happen because this rescue package may not work, right? And then it's difficult to say how you protect yourself. Even in terms of buying gold coins, for instance, which is a good idea, but then where are you going to keep them? Are you going to keep it in the safe deposit box? And the safe deposit box will be with the bank. Then what will happen if you won't be able to access the bank? So it's always a difficult situation we are in right now. Just to give you an example of how disastrous things can be, and we see it as we speak right now, it's

8:27a good example, we have Iceland. Iceland is a western, it's supposed to be a western economy, and got 300,000 people. And this economy was destroyed by central bank policies, almost literally, it was obliterated completely. And the reason was very simple, like in July 2006, they were pushing money at the pace of 120%, the central bank. Then by January 2007, they lowered it to 23%, so they created massive boom, massive bust, right? And the The whole thing kicked, the whole thing killed off the economy completely. The massive boom sparked the property boom, the luck in America on a different scale in Iceland.

9:14A massive banking sector, they became gigantic, so to speak. And now the bust, the tight stands killed off all these bubbles. And because it was one gigantic bubble, the whole thing is falling apart. Today, in Iceland, they're saying that they got only food left, maybe for two weeks. That really sounds crazy, but that's really the situation, that they're actually talking about the scarcity of food right now in Iceland. That's remarkable. You don't expect anything on that level in Europe or the United States, do you? Well, I hope not, you see, but we always have to take into account what happens. The nature Here gives us examples all the time, right? We had one example several years back in Argentina.

10:00Argentina was a very powerful economy, right? And all of a sudden it became almost destroyed completely, says the economy. Likewise, you know, example of Iceland. I mean, that's an example of what can happen if you're abusing the power of printing money. And what we see The currency today in the United States of America and in Europe is very scary, it's very scary, and I'm saying because they're literally throwing massive amounts of dollars, which is empty tickets, and this just dilutes whatever capital we still have got. America is a wealthy country, but by throwing so much money, you also destroy the capital which is still there, and that's really the terrible thing.

10:48Do you expect that the dollar, that this event could end in unseating the dollar as a world reserve currency? Is that even a remote possibility? Well, I don't see it this way because every central bank, as you can see, they are cooperating, they're doing everything together, right? And they're all there, they're basically engaged in joint printing. So therefore, on a relative basis, they will remain the same, more or less, right? In other words, we all will be sick, but the strength of the currency will be determined who is relatively less sick. That's really what will happen, right? So if you print a little bit less than other guys, then you will be appearing as healthy. But on balance, the situation that everybody prints money, and ultimately my prediction is, I don't know when it's going to happen, that this whole current system of paper money Keynes always dreamed about a world central bank and a single currency, but it sounds as if we're getting to that point in a de facto sense, and the world currency is the

12:04dollar and the world central bank is the Fed. 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. And that's true. That's true. 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. You could move to a gold standard without any kind of government decree. Yeah, I mean, I believe, look, it's possible that the law of nature may dictate such a thing that if we run a very massive inflation, if you want runnable inflation, people will not accept any paper money and then they will sort of gravitate towards something which is more acceptable and people will talk about gold.

13:01It may happen, you know. And the way they're pumping money, one of these days it could end up in a runaway inflation. Maybe before that we'll have a deflation, then we'll have inflation, a runaway inflation. Well, thank you very much, Frank. Thank you, it's my pleasure.