The Inteligencia Financiera Global blog (Global Financial Intelligence Blog) is honored to present an exclusive interview with Sandeep Jaitly, a prominent member of the New Austrian School of Economics. Jailtly is a student of Professor Antal. E. Fekete, Fund manager and a very good friend of ours.
Thanks for accepting this interview in Mexico City.
Guillermo Barba (GB): Sandeep, let me start with this direct question: Why is the world in the current economic situation? When did the crisis really started?
Sandeep Jaitly (SJ): I think you can say that the crisis that we are experiencing hasn’t finished from 2008 – It’s still going on. It started when the Fed wanted to manipulate the rate of interest. The Federal Reserve System was originally set up to coordinate bills of exchange from their member banks (as) a way of discounting, centrally, all bills of exchange across America.
When World War One was on the horizon, the US government issued “government” bonds to the willing public to pay for armaments and things like that. But when the repayment of those bonds looked improbable in the stated time, they usurped the Federal Reserve System to ‘hide’ these bonds. And so the Federal Reserve System, instead of just being limited to bills of exchange representing nothing more than commerce amongst people of trade and consumers,, we had government bonds introduced into the system and the government bond only has value because of the taxing authority of the government.
A bill of exchange does not have value because of any taxing authority, it has value because it represents the sale of a marketable good against money – or the ‘quantum’ of unit gold coins. The government bonds started to infiltrate the Federal Reserve system and as a consequence of that, the Federal Reserve balance sheet became illiquid, it didn’t mature into gold because these bonds kept on getting rolled over. They were never paid off.
Subsequent to this, the idea of open market operations was introduced; the Federal Reserve would buy and sell short term securities to control the market rate of interest. This started in the twenties to maintain the rate of interest as they saw fit. As of the start of the Great Financial Crisis in 2008, this has just extended into long term securities, or ‘quantitative easing,’ as we call it now. This is all just a spill-over from the way that the Fed started to behave in the 1920s.
When we look at the standard, neo-classically based cause of the Great Depression, it’s not the ‘over-issue of credit’, that wasn’t the reason. The over-extension of credit was a consequence of government bonds in the system distorting the market rate of interest..
GB: By the way, it is said that the only way out from the Great Depression was the World War II, is war really good for the economy as some economists say?
SJ: Obviously, it was not good ultimately for the world. If they wanted to reform the system, they could have done it. It’s not difficult. To start a war to keep the system going . . . I don’t like to think that way of my fellow man. Conspiracy theorists would say World War Two happened because “the authorities” needed to maintain that fiat system. I don’t know. I would like to get across that we’re more likely just victims of our own ignorance, rather than anything else!
GB: Many people think that the gold standard ended in 1971, but you are saying that the beginning of its end was…
SJ: No. Well before. 1971 was just the icing on the cake. It was the final nail in the coffin. Anyway, there has never been a true unadulterated gold standard in history.
GB: What’s true is that in 1971 when the US closed the gold window, a new “bull market” cycle started for commodities. Why did that happen?
SJ: It’s a bull market if you “price” it in fiat dollar (i.e. number) terms. If it was priced it in quantum of unit gold coin terms, i.e. proper money terms, there’s no super-cycle in commodities or anything like that. Commodity prices measured against true money are going lower and lower and lower. So from 1999/2000 up until 2007, if you price this commodity ‘super-cycle’ in gold terms, it’s nothing spectacular. If you look at a twenty, thirty, forty year-chart, it was nothing.
GB: In the early 1980s, the Federal Reserve raised the interest rates and then a “bear market” started for commodities in terms of fiat money. So, was that rate hike a “correct” decision at the time?
SJ: They had no choice. We have the fiat system and the distinct natural gold or silver coin system, as we would have done it, were we allowed to. The authorities were trying to bribe us the public to stay in the fiat system: “If you keep your balances and units of account in dollars and don’t try and exchange it for gold, we’ll give you 16% per year” was their way of thinking, the authorities were trying to bribe people to sell their gold and silver for fiat dollars, and keep these fiat ‘assets’ that earned a large amount of fiat interest. And the bribe worked, because people back then took it and sold their gold but that group of people are no longer the ones that matter. The ones that matter now are our age group and we’re not thinking the way they did back then.
GB: Do you think that the Federal Reserve interventions were the main cause first of the dotcom bubble and then the housing bubble in the US?
SJ: All of their action causes distortion like that. There’s no question about that. It causes the biggest distortions that you could imagine.
GB: That said, what are the consequences of those distortions?
SJ: Well, the consequence of that policy is falling fiat interest rates, in the sense that the interest rate keeps on falling. Because in order to keep the rates of interest down, you need to buy bonds from the open market and then once those bonds mature, you have to buy more bonds from the open market. It’s sort of like a ratchet process that just keeps on bringing the rate lower. Look at it this way – how many people would (have) expected interest rates to be at 6 or 7% right now versus the 1.95% that the ten-year rate got to today? So, the way that people think about interest rates in fiat, it will never work. If you want to measure whatever an interest rate is, truly, in fiat, it just won’t work.
GB: So, basically they keep printing money to buy those bonds…
SJ: At the beginning of the crisis, they printed the fiat out of thin air to buy the bonds. But now, those bonds are maturing, consistently, so they need to fill the hole that those bonds maturing (creates). That means that they need to keep on buying bonds from the open market. The Federal Reserve has to buy $200b of bonds this year alone; 10% of their treasury holdings – this year, within one year, because of maturities. Now, if you compare the amount that the government is going to issue over the year, it’s basically the majority of the issuance.
GB: Then, what can we expect from this activity in the bonds market? What will the result be?
SJ: It’s an easy trade to do. If the interest rate goes from 2% to 1%, that means that people would rather make ‘investments’ in treasuries, because if the yield goes from 2% to 1%, you’ve almost doubled your money. That means that everybody – if you own a factory, a shop – if you’ve got large amounts of capital, in terms of fiat capital, you’re not going to feel like deploying it in setting up a factory, with all of that risk, with all of that hassle – when one could just buy treasury bonds that will have huge capital gains. But buying treasury bonds is not a useful activity. So, if we all started to do that and buy treasury bonds for this fiat capital gain – well, the mere fact that we’re doing it means that we’re not running a factory, we’re not doing something else. And this is collapse!
GB: Is there any solution?
SJ: I think the market will force a solution. The solution will be some kind of return to sound money, and that means gold coin, silver coin, circulating freely; it means allowing people to use them as their unit of account. They’re not (currently) allowed to use them as their unit of account because of legal tender laws in The United States. The UK is different, there is no such thing as legal tender in The UK, it’s only de facto legal tender. So, if we have the energy and the inclination to create a separate banking system based on a gold coin, we can do it. There’s nothing against the law that says that we can’t, but we’re very lazy in The UK, we just continue as is until we can’t.
GB: Do you think that the current monetary system will be repudiated?
SJ: It will be repudiated. Ultimately, a debt of a thousand dollars is as meaningless as an asset of a thousand dollars. More and more people will realise this; that a thousand dollars in debt doesn’t mean anything in a similar way a thousand dollars in cash does.
GB: Will the market force a return to the gold standard?
SJ: Yes back to proper exchange. If people want to exchange things with each other then they’ll have to come up with the ability to pay in silver or gold.
GB: Does this have something to do with the fact that the Chinese are buying astonishing amounts of gold? Are they preparing for the collapse you are talking about?
SJ: No. I think it’s just in their nature to exchange their surplus fiat balances into gold and silver. That’s just the way that they’ve been thinking for thousands and thousands of years. Gold and silver coin are money. No question about it.
GB: So the Chinese and the Indians are doing the correct thing…
SJ: They are doing the correct thing. No question about that.
GB: Bloomberg Intelligence considers that the Chinese own about 3,500 tons of official gold reserves. Do you think that the actual number of those gold reserves matter?
SJ: I don’t think it honestly matters in the scheme of things. What matters with gold and silver is how much of it is in the hands of the people, not in the hands of any central fiat bank. Unless the central banks are making plans to distribute that gold fairly amongst the people, there’s no point in a central bank accumulating gold and silver – absolutely no point at all.
GB: Many analysts are blaming the Chinese for the recent turbulence in the financial markets, do you agree?
SJ: No. I think that it’s unfair to say that kind of thing. If they are accumulating dollar debts, yuan debts, that doesn’t mean anything. The Chinese can deal with that in whatever way they wish to.
No, I think that turbulence will just increase in the markets going forward because everything is in quotation against a fiat price and fiat will be inherently unstable going forward as it disappears. By its nature, fiat is nothing, but markets are something and if you’re trying to price markets, which are something in fiat, which is nothing, you’ll get all kinds of madness going on.
GB: China owns more than 1 trillion dollars in American bonds in reserves. How will the US pay all this debt not only to China but to the entire world?
SJ: What can they pay in? They’ll just be paying in their Dollars and their Euros. The resolution of this will be beyond the Dollar and the Euro, let’s just put it that way. It will involve something . . . something like gold. It might not be gold, but something like gold. The State of California? I do not know…
GB: You say that what matters is the gold and silver in the hands of the people. How should the people do that?
SJ: Everybody needs to keep on accumulating silver and gold coins. Not silver and gold bars or anything like that – silver and gold coins. A bar is not marketable. If you give a coin to someone in exchange, it’s very easy for them to check how pure it is, whether it’s made fully with silver and gold, this kind of thing. A bar is not like that. The smaller the coin, the better (the unit coin should be a 10g coin. An ounce is too big for a unit coin).
GB: What form will the new crisis take?
SJ: We don’t know what form the crisis will take. The crisis will never be something like that which started in 2008. So, keep on buying equities in good companies that you would like to run yourself, retailers, wholesalers.
The stock market won’t suffer in the sense that people still need to do business and that’s what the stock market is about. If it’s going into complete Armageddon, then it doesn’t matter – forget even owning gold, just enjoy yourself!
Owning equities is the way that you get an income. After you’ve got enough gold, from a personal basis, it’s a case of how you generate an income. Under free exchange, gold would just be idle. If you held gold coins, it means that you don’t own shares in something, which are giving you more gold coins on an annual basis in dividends. That’s why I say building up good quality shareholdings as well, as a prelude to whatever reset we have, is very important.
GB: Finally, what’s your opinion about cryptocurrencies like Bitcoin?
SJ: What’s happening is of the greatest interest but money’s substance is gold/silver and gold/silver is the substance of money – that’s the end of the story. Now, one can talk about Bitcoin and the others as currency but currency has a strict demarcation, if one is aware about money, it means bills of exchange denominated in money (unit gold or silver coins). The volume of currency would far exceed the volume of money. If cryptocurrencies are trying to be competition to the Dollar and the Euro, why would one want to be in competition against something that’s going to fail anyway?
GB: Many thanks, Sandeep. Hope to see you soon again.