A series of conversations between economics reporter Willem Middelkoop and Daan de Wit on current economic affairs. This series is unrelated to the conversations with Middelkoop that have appeared previously on DeepJournal, and is devoted to covering the latest news. The conversations will be held on a monthly basis.
Today's
conversation concerns the manipulation of the stock market by the
Plunge Protection Team, escalating monetary depreciation, the role of
hedge funds in the buying up of European assets with dollars that soon
won't be worth very much, the price of oil as it relates to a coming
war with Iran, the housing market, the unstable dollar situation, the
risk that pension funds take by investing in dollars, and the lack of
investments in gold.
The transcript of this interview has been translated from Dutch into English by Ben Kearney. Download the interview.
Daan de Wit: It's
April 18, 2007. My name is Daan de Wit and on the line with me now is
Willem Middelkoop. Willem, last time we talked about the housing
market; what are right now the most important issues?
Willem Middelkoop: The
housing market remains extremely important of course. It's going to put
pressure on the American economy. Another important development that
has become increasingly evident these past months: in order to offset
the effects of the recession of 2002/2003, bankers drastically lowered
global interest rates in order to stimulate people into borrowing more
money. People thus responded en masse, and as a result the amount of
new money grew by 10 to 15%. In Russia it's growing as much as 40%
annually - every year they see a 40% increase in new money - but we're
also seeing this growth in money crop up in India, China and Japan, and
in Europe the amount of new money is increasing at a rate of 10% a
year.
How is that new money is getting into circulation? Banks are
money-creating institutions and can magically bring real money into
existence. So when you qualify for a new mortgage or a new loan, that
money is actually created on the spot by the bank in the computer. No
money needs to be printed - you can see the money in your account
balance. Most of my colleagues don't even believe that this is the way
it works, but's it really is the case. Banks are money-creating
agencies which are permitted to create money out of nothing. Money
hasn't been backed by gold for quite some time, so we've seen a huge
mountain of extra money created each year throughout the entire world,
with which a worldwide recovery has been fashioned in the past couple
years. In this way things seem to be going just fine - and they are
doing just fine - but the result is that there's a lot more money now
and the sum total of raw materials is remaining constant, or is even
shrinking somewhat every year due to consumption. So now raw materials
are seeing a tremendous increase in their value relative to money.
That's regardless of whether we're talking about zinc, oil or gold -
all those prices are rising. This can also be seen in the rising prices
for homes and land - we can't just all of a sudden create millions of
extra houses. This would seem to be a very healthy development, but if
you correct for the loss of buying power, then you realize that prices
have risen nominally, though not in relative terms. A house that sells
for 200,000 euros now has a totally different value then a house that
sold for 200,000 euros back in 2000 (then 440,000 Dutch guilders). In
2000 you could buy a beer for 2 guilders, and now you pay 2 euros for
the same thing (2.2 times as much). The loss in buying power is
enormous, monetary depreciation is enormous, and I think that this
depreciation in the value of money - due to the creation of more and
more money - is one of the most important developments to come to grips
with.
So
actually we're finding ourselves in an inflationary situation in which
more money is continually being created and monetary depreciation is
going to increase. During inflationary times you're better off
borrowing money than owning it, because if you have money sitting in
the bank in savings it keeps decreasing in value, whereas on the other
hand your mortgage is also decreasing in value, which is just fine.
Those
who lived through the hyperinflationary days of the Weimar Republic of
1920's Germany - the likes of which by the way we're now seeing in
Zimbabwe, with an annual inflation rate of 1000% - and who had money in
savings, didn't have a single cent left over. And anybody who had
borrowed money was in good shape because the value of the loan
evaporated. So what at one time was a very expensive loan ends up being
rather easy to pay back. What I always advise people to do if they have
a good job: Just get an equity-plus mortgage, lock in a low, long-term
interest rate, and you'll see that in such a scenario your mortgage
will evaporate over the course of 30 years.
Daan de Wit: It's
my understanding that in America it's not possible to lock in the
interest rate long-term in the sub-prime lenders market, what with
terms such as liar loans and predatory lending coming up. You wrote on
your site about the collapsing housing market: "And so the Plunge
Protection Team, the PPT, opened up the floodgates at exactly a quarter
past eight. The rates shot up." If that's true, then we're totally
getting swindled, and the big question then is - why isn't that
front-page news?
Willem Middelkoop: It's
very difficult to prove intervention in the financial markets, to prove
that financial markets are being propped up. It's a given that the
Plunge Protection Team exists, that's a popular name for the
Presidential Working Group on Financial Markets, which was founded in
1987. After the crash in 1987 the financial world realized that a team
was needed that could ensure stability in the markets in the event of a
crash or during times of crisis. The Plunge Protection Team seems to be
getting more active of late. Not only during crises but also on any
given day of the week, though there is only circumstantial evidence of
this. So there's no hard evidence for it, and journalists can't write
stories based on some suggestions and clues. They're all waiting on
solid evidence and sources, and there is nothing of the kind. There
have been some reports written by a notable Canadian asset management
firm that has taken all of the indications into consideration.
Meanwhile for me it's no longer a question as to whether the rates are
being propped up, it's quite obvious that in America real losses are no
longer being tolerated on Wall Street. Only once in the last thousand
trading days has the Dow Jones dipped more than 2% on the day, and that
was attributed to computer malfunction, so that tells you which way the
wind is blowing. Daan de Wit: Exactly. But on April 12th the NRC
Handelsblad wrote: "Economy again in balance following lopsided
growth." The first sentence reads: "According to the IMF things are
once again going well with the economy." What should we make of that?
Willem Middelkoop: Through
the creation of enormous amounts of money, through loaning so much to
people and by taking on huge investment projects, things seem to be
going well again. The economy is definitely growing again, but that has
been happening in a very artificial way. The economy hasn't received
just one shot in the arm - it's received a hundred shots in the arm.
The big question is: When will the drugs wear off, and what will the
side effects of all this heavy medication be? Even now with the
imploding housing market we see that the drugs used to fight the
recession of 2002/2003 are having some serious side effects. You just
have to let recessions work themselves out, that's a natural cleansing
process in the economy. But recessions have now become too dangerous
for our financial system, and so the big guns are being brought to bear
against them. Then what you get is a partially-successful recession
that gets cuts short halfway into it, and is absorbed with the help of
a created bubble. But the bigger that bubble gets, the bigger the bang
is going to be later on, because that recession is going to come back
one way or another.
Daan de Wit: A
significant part of the problem has to do with the dollar reserves of
China, Japan and Russia, but I read a report by Bloomberg that said we
are only paying attention to the official reserves of China, Japan and
Russia, which amount to only 60% of the total. The other 40% concerns
money that isn't lying in reserve but which has been invested out of
sight, and which can influence the financial markets.
Willem Middelkoop: There
are huge deficits in America now, but it's in the future that there
will be unsecured obligations to the tune of 60 trillion dollars.
There's practically nobody who believes that America can remain
prosperous into the future (10 to 30 years from now) and can hang on to
the advantages it now has. The dollar can be used to purchase raw
materials. The whole world has to buy dollars in order to be able to
purchase raw materials, while America is alone in being able to print
the dollars for free and then buy raw materials with those dollars.
That also explains why 1 out of every 4 barrels of oil - 25% of all the
oil - goes to 5% of the world's population - the Americans.
Americans
have enjoyed a huge advantage with the dollar being the world reserve
currency during these last fifty years. The dollar was at the root of
the financial system. What has now become clear to economists is that
in the coming ten to twenty years, the role of the dollar is going to
get smaller and smaller. What's key here is that the entire world is
stocked to the gills with dollars. The money is mainly in China, Japan,
and especially in India. Forty percent is held by everyone and their
brother, and anyone can decide to exchange those dollars for some other
currency, or to purchase raw materials with it. That development is
underway; there are more people selling dollars than buying them.
That's how the dollar is falling in value. Right now there is something
very important to keep an eye on. We always look at the value of the
euro as expressed in dollars. That stands now at 1.36 - the dollar is
weak and the euro is strong. For 1 euro I get 1 dollar and 36 cents.
That was also the case 3 years ago, up until now that was the record
during the time that the euro has existed. But if you look at the value
of the dollar as expressed in other currencies, then what you end up
with is the dollar index. In twenty years the dollar index has never
fell below a mark of 80. It stands now at 82. If the dollar weakens any
further, then we would fall below the 80 mark. And then we could get a
dollar panic in the financial markets. Before that happens you should
take another look at the VPRO documentary The day that the dollar falls.
But for the time being we're still above the 80 mark. That's a key
index that I keep an eye on no matter what. What you can also figure on
happening is, if the euro goes above 1.40, then things are going to
start getting tense. I think that will also bring instability to the
financial markets.
Daan de Wit: Yesterday the AP wrote 'Dollar weakness reaches new benchmark '. The British pound is now worth more than 2 dollars.
Willem Middelkoop: Right.
The pound has now become quite strong - we haven't seen that for some
time. The euro stands at its highest point in two years. But it's
really all about the value of the dollar as it relates to all those
currencies. The pound, the euro, the Japanese yen. So that's the dollar
index - it hasn't found itself under the 80 mark in twenty years. And
it's now just under 82 (81.7). And should that fall below 80, then I
would advise friends and acquaintances alike to withdraw yet more money
from the bank, and in any case to sell off all of your dollar holdings
if you haven't done so already. Daan de Wit: And regarding the price of
oil - it remains more likely than not that Iran will be invaded...
Willem Middelkoop: I recommend that everyone go out and buy the latest book
by Scott Ritter, who was a U.N. weapons expert charged with the duty of
finding Saddam Hussein's forbidden weapons a number of years ago. At
one point back then he revealed that the hunt for weapons of mass
destruction in Iraq was hopeless - because the weapons weren't there.
At that time no one believed him. He has now received a lot of
credibility because everything that he wrote about Iraq appears to have
come true. Now he's written a book in which he once again lays out the
facts concerning a potential attack on Iran. The Israelis want to draw
America into that conflict. Iran itself would also like a conflict, for
if you read the book you can see how Iran can only emerge as the
victor. America can do a lot with air strikes, but America is in no
condition to occupy Iran. Iran is a very strong and proud nation that
could stir up a lot of trouble. And that's really going to interfere
with the oil market. If just one missile is fired at Iran, then there
will be an orgy of violence in the Persian Gulf - or so Scott Ritter
predicts. I share that opinion.
Daan de Wit: But the price of oil?
Willem Middelkoop: In
my opinion it can only go higher, and that's not including what ends up
happening with Iran. I follow the data on worldwide supply and demand,
and for the first time we've arrived at a situation in which the demand
for oil has exceeded supply for three years running. We've talked often
about peak oil and possible problems in the future if the demand is
greater than the supply. But the future is now, because in 2006 the
demand for oil was 100,000 barrels greater than the supply. We're
talking about 100,000 barrels per day. This year the shortage is up to
700,000 barrels per day, and for next year yet another shortfall is
predicted. So that's three years in a row with an oil shortage. And
then the last thing we'll need is another conflict in the Persian Gulf.
Daan de Wit: Getting
to the hedge funds, you can't open a newspaper anymore without reading
about the socalled thieves, the locusts who just buy everything up and
then resell it. The PCM deal went south, Hema is being sold off, ABN is
up for sale. Is all of The Netherlands for sale?
Willem Middelkoop: Dutch
and other European companies are relatively cheap in comparison to
American companies. Also playing a role are these hedge funds - private
equity corporations that buy up these kinds of companies - which are
working with an awful lot of borrowed money. And if you as an American
make an acquisition in Europe and borrow a whole lot of dollars to do
that, and you know that the dollar is going to fall further - which is
what everyone is expecting in the future - then you're going to make a
huge profit on the increase in value of your European investment. Add
to that the fact that you've borrowed a lot of dollars to finance that
due to the fact that European companies are relatively cheap: you can
purchase them relatively cheaply and then pull all kinds of different
stunts like we saw with PCM. PCM was to a large extent sucked dry in 3
years time.
Because of low interest rates, these kinds of private
equity corporations and hedge funds can borrow money quite easily. Lets
take the example of a hedge fund - a hedge fund with a net worth of 10
billion and interest charges totaling 5 billion in the past year. These
kinds of funds are speculating with enormous leverage. They borrow a
massive amount of money with which to negotiate their positions. It's
Monopoly, but for the really big boys.
We're now in a situation in
which things are actually going pretty well worldwide. There seem to be
hardly any risks for an investor. Even Alan Greenspan gave a speech two
years ago in which he said that history shows that there is no mercy
bestowed upon the perception that risks are low in the financial
markets. You can expect a period in which bubbles are bursting left and
right. And if all the bubbles burst and then massive debt along with
huge losses transpire, then don't be surprised if huge losses are
suffered by the pension funds, such as we saw between 2000 and 2003.
And I don't believe that pension funds learned anything from what
happened back then. Pension funds continue to speculate as if
everything is going to continue to go well, that you actually don't
need to practice safe investing, and that you can take on all kinds of
risks. There isn't a single pension fund in The Netherlands that
invests in anything that would have previously been considered normal,
such as asset management companies that have invested 50% of their
portfolio in physical wood. It's all been invested in paper and stocks,
obligations and other certificates. It's all on paper, all promises on
future returns, future yields. You have to hope that all those promises
are kept.
One last thing I'd like to mention Daan. I'm no longer writing for Inveztor; I'm no longer contributing to inveztor.nl,
where my weblog and columns appeared. I'm writing a monthly column for
Penthouse and I'm going to be writing a bi-weekly column for the
members' newsletter of the VEB - the Dutch Investors' Association. But
for the moment my columns can no longer be found freely on the
internet. I'm working on a new English-language newsletter for
investors, and I'm going to be launching my own website, but more about
that as the time comes.
Daan de Wit: Okay Willem, thanks a lot and I'll talk to you next month.
Willem Middelkoop: Okay.
The original Dutch transcript was prepared by Pieter Navis and Laurens Foudraine.
The complete series of interviews with Middelkoop can be found at DeepJournal.
Writings 
This series is unrelated to the conversations with Middelkoop that have 
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