The Inteligencia Financiera Global blog (Global Financial Intelligence Blog) is pleased to present this interview with Prof. Antal E. Fekete, founder of the New Austrian School of Economics, monetary scientist, proponent of the gold standard and a critic of the monetary system based on irredeemable currency (fiat money).
Thanks for accepting this new interview, Professor.
Guillermo Barba (GB): In your opinion, what are the most important events since our last interview two years ago?
Professor (P): Certainly, the most important development was the establishment of the negative interest rate structure by various countries; including Switzerland, which is an amazing development. I thought Switzerland would be the last country that would play with fire and here it is – they were leading the pack and hailing the advance of negative interest rates, which is just insane. I think that was the most important development over the past two years.
GB: Could you please explain to people why that is insane?
P: First of all, it portrays the complete ignorance about the nature and the theory of interest and I go back to Carl Menger. Carl Menger didn’t have a formal theory of interest rates, but Carl Menger had the general framework of economic theory and I believe that if Carl Menger had lived longer, then he would have actually finished the job and included a complete theory of interest rates in his economic theories. This didn’t happen, but it shouldn’t prevent us from trying to fill in the details and trying to reconstruct what such an interesting theory it could have been, if Carl Menger had lived longer and completed the job. So, why is it insane? Because it is not that interest rates are falling to zero and then keep falling until they become negative – this is not what is happening. It’s not doing it on its own – it’s being pushed. This is equivalent to destruction of capital. If you push interest rates into negative territory – that is the equivalent to the destruction of capital and not only financial capital, but also physical capital.
Falling interest rates destroy capital because the interest rates and capital values move in opposite directions. If the interest rates falls, then the bond price goes up, if the interest rate goes up then the bond price goes down. So if interest rates go to zero, then the bond price goes up. But how far can it go up? Can it go to infinity? Well, that’s clearly a contradiction.
Negative interest rates, first of all it has never happened in history that worldwide interest rates became negative, but it’s very destructive as far as the integrity of capital is concerned.
GB: Who is artificially depressing the interest rates?
P: We can only guess. I mentioned Switzerland, and this is my most shocking example because what Switzerland is trying to do is to fix the value of the Swiss Franc in terms of the Euro and also other currencies, and in order to do that they have to keep buying a lot of junk. They are buying assets of other central banks which are just no good! A lot of bad assets are being added to the balance sheets of the Federal Reserve, The Bank of England, The Bank of Japan and even The Bank of China – The People’s Bank of China.
So, what I see is a great destruction of capital all over the world, including solid countries also such as Switzerland and The National Bank of Switzerland, which is turning the Swiss economy into a shadow economy that is losing capital all the time. So, I think will end in a bad way. I don’t see anything constructive in this effort of pushing interest rates into negative territory.
GB: Why do the central banks keep pushing the interest rates down? Why do they keep trying this?
P: Well, one explanation, especially in the case of the Swiss, is that their effort is to fix the value of the Swiss Franc, in terms of other currencies, but looking at the picture more globally, what you see is a rush to destroy the value of all currencies. You’ve probably heard the expression race to the bottom. The idea is that the various currencies – the Dollar, the Yen etc. are floating, but that floating has turned into sinking, and ultimately that sinking is a race to the bottom. The winner is the one which loses the most value fastest. This is, in itself, insane.
GB: Is it a currency war?
P: Yes, that’s right. A currency war and more importantly, a trade war. Countries think that by cheapening their own currency, they’re boosting exports.
GB: Is that true?
P: No, no, no. This has been refuted thousands of times over the centuries. This was the idea of mercantilism, and it never worked. It always backfired. A country cannot get richer by cheapening its currency because that means destroying the value of the savings of the people; including companies, individuals, pensioners and so on and so forth. So, you cannot create wealth by destroying the value of your currency. That is the reason why they try to do that, including the Swiss. They want to keep exports at an artificially high level, even if this means making people at large poorer.
GB: Last December, the Fed’s FOMC raised the interest rate. Do you think that they are doing the correct thing this time?
P: In the US, The Federal Reserve doesn’t have a clue what they are doing. They are completely confused. They have been saying they’re going to raise interest rates to normalise the interest rate structure.
GB: Should they do it or just leave interest rates to the free market?
P: It’s obvious that interest rates should be left to the free market because the free market is the ultimate judge of what is good for the economy – what is good for the people, and, if you go against the free market you only cause damage. In this case, you cause damage by hurting the pensioners, the insurance companies, the saving institutions and ultimately the banking industry, because the capital of the banking system is being destroyed. So that is going to be the outcome, the destruction of capital at large. That is what I think is going to happen and it is already happening.
GB: Do you think we will see negative interest rates in the US?
P: We can only guess. My guess is that yes, this is on the cards because the Fed is utterly frustrated that nothing works. They’ve tried everything; they tried zero interest, they’ve tried lowering interest rates, but nothing works. The economy is sinking, it’s not improving in spite of the big propaganda effort that says unemployment is down, the economy is picking up and the companies are generating profit. This is not true, it’s just artificial lies through the propaganda means which the government and the Federal Reserve have at their disposal.
GB: If negative interest rates destroy capital, can they reverse this process by raising them?
P: I have been saying for a long time that falling interest rates destroys capital and once capital is destroyed, it’s not so easy to recreate capital. They say “ok, if interest rates are being pushed down and capital is destroyed, we can always readjust by going back to a higher rate”. This is not so. It’s much easier to destroy something than to build it.
GB: Do you think that the US dollar could become a bubble? Will the crisis of the dollar be the ultimate crisis?
P: What is happening now is the ultimate outcome. The rush in the US Dollar is completely misleading, it suggests strength – of the US Dollar, its banking system and its economy, but that completely obscures the fact that behind all of the superficial appearance there is destruction. So, I cannot help but believe that we are at that point where the destruction has reached a point where the whole structure has become unstable, it could collapse.
GB: What’s the role of gold in this financial and economic mess?
P: Gold is the only antidote we have, it’s the only stable rock or anchor on which we could fix things. Everybody knows that gold is an antithesis in the United States. It’s an antithesis of Keynesianism and there is a war against gold by the central banks and by all the government, which in a way is understandable because the artificial creation of credit has reached a proportion which is weakening the whole system and without gold, this rot cannot be stopped – the rot has already gone very far and is still going on. So, I think gold is the key to the situation. The denial of gold is very damaging for the western world.
GB: Why is gold so important? Do you think that we could return to the gold standard?
P: I firmly believe that it is possible but not before some cataclysmic event – such as the collapse of the world economy, takes place, because the present thinking in academia, in government circles, in the financial world – is still for the destruction of solid, sound values. So, we have to go back to Menger for the answer. Why is gold so important? Well, the answer according to Menger is that gold is the only commodity which has constant marginal utility. Every other commodity or financial asset has the property that if you buy more and more of it, the unit value is going to be lower, the marginal utility will be lower, and gold is the only one that defies that law of declining marginal utility. Gold has the property that if you keep holding it, it’s not going to lose its value. That is the secret of gold and that is what they try to make people forget, but people will not keep holding assets which have declining marginal utility. People will instinctively hoard that gold, and to a lesser degree, silver. (They) are the commodities that defy the law of declining marginal utility.
GB: Do you think that gold would be the solution to revive the world trade?
P: Definitely! Here I have a very recent paper by Senyor Hugo Salinas Price. The title is The Coming Revaluation of Gold, and in this article, Senyor Salinas very cogently analyses the situation and points out the reasons why it is absolutely necessary to revalue gold. He even mentions figures – he mentions the gold price going to 10,000 dollars an ounce or even 20 or 50 thousand dollars an ounce. I would not comment on future possibilities because we just don’t know the future. There is no scientific method to predict, with any assurance, what the future gold price will be. But, this is not even necessary, because instead of a quantitative statement we can make a qualitative statement, which has more scientific respectability than the quantitative statement, talking about the future gold price. This qualitative statement, I have been advocating this for several years now, that you have to look at the backwardation of gold, which is now a reality. When I started talking about the backwardation and even permanent backwardation of gold, it was not yet a reality, it was just a possiblity – but now it’s a reality. This means that the future price of gold, the near-future price of gold, which normally should be higher than the spot price, it becomes lower and the spot price becomes higher. This means it’s a qualitative statement. We don’t say what the price is in terms of numbers, we just say it’s a difference of magnitudes.
So, if the spot price rises above the near future price, this is a danger sign – it’s a blinking red light showing that there is a tremendous shortage of deliverable gold in the market and that the market is not going to be able to satisfy that demand. So, rather than putting numbers on it, we just say that the backwardation of gold, first, will be sporadic; the backwardation appears but then it disappears again. This can fluctuate for a time, but there is a point, a threshold, beyond which the backwardation of gold becomes permanent and that means that gold cannot be obtained for any price because nobody will give up gold unless they can see that they can replenish his gold through trade or through transactions and when this becomes impossible – that’s the end of the monetary system. So, there’ll be a flight away from paper money. This is again part of the general destruction of capital values.
GB: So, even if we cannot know how high the “price” of gold will be, will there be a revaluation of it? What do you think?
P: The coming revaluation of gold casts a long shadow ahead. In other words; it’s not something which happens from one day to the next – it’s something, which like a storm or a hurricane approaching – the signs are all around us and we have to read these signs and interpret what is happening. In the case of this revaluation of gold, especially when you try to imagine it in terms of such very large numbers as 10,000; 20,000 dollars; 50,000 dollars for one ounce of gold – somehow, people will feel it in their system – that something very drastic is happening and they will react basically in two ways.
A lot of people, including speculators who have disdained gold, will turn around and they will see this revaluation coming and they will start hoarding more and more gold in the hope of capital gains and that has the effect of the option premium or call option premium, in the gold market, go higher and as it does – a trading or selling of gold call options will be very profitable.
There is also another aspect of this, as I say, the coming revaluation of gold is casting a long, long shadow ahead, is just the opposite – namely, people who already have the gold – a lot of people, including governments, central banks, industries, individuals, pension funds etc. – they already have the gold but they are afraid that this value that they already have is exposed to possible setbacks and therefore they want to protect or ensure this value – they will want to sell put options. This means that there is a pent-up demand for put options and therefore selling put options is going to be very valuable. So, to cut a long story short, I would like to describe the coming revaluation of gold in terms of trading call options and put options – in part, selling call options by those who want to earn a capital gain and selling put options by those who want to protect the value they already have accumulated by virtue of the coming revaluation.
Now, what does that mean in practical terms? In practical terms, this means that the successful self-protection against these cataclysmic times – which the coming revaluation of gold is going to bring – is not buying low and selling high or selling high and buying low, which is the traditional approach – but it is trading gold call options and put options, basically selling call options and put options.
Now, we have tried to put this into practice and we have followed this formula of selling call options on the gold we already have or selling call options when we expect the price to rise. It may not (necessarily) mean physical gold, it may be substituted by gold mining shares because there are also options markets on these shares. We have consistently pursued a trading policy based on selling options and I may mention a trading system which we have pursued in Hungary for something like two-and-a-half years – the idea of selling puts or selling calls and, another experiment is being carried out in London. So, this experiment has been very successful, I’m happy to say, and it is no longer a question that this is a matter of luck or a good trading system, but this is the fact that one can overcome this insane policy of the central banks pushing interest rates into negative territory because in two cases, we can now have an example that you could make a profit of over 100% per annum, which means doubling your capital every year. It sounds impossible, it seems that it defies the laws of physics or nature, but it doesn’t because we now have working examples of this happening.
So, I am pushing this point because we have new proof that the FIAT monetary system is going to collapse. There are several proofs of this; one is history – that there has never been a permanent established FIAT monetary system in all of history – in every system that they tried it, it collapsed. Now we have new proof that it is possible to double your capital every year and the way to do that is trading options – call and put options, and I would like to go public with this record. I think it is a little bit premature to say more about it, but those that don’t believe me should watch because I’m going to make a disclosure in the near future about this experiment.
GB: Thank you, professor Fekete, for the interview.
P: Thank you Guillermo, for the searching questions.