4 October 2008
Interview financial expert: more expensive, less to spend, riots in the streets
Listen to or download part 4 of the interview with financial expert Albert Spits. In Dutch, MP3, 8 Mb, 12 minutes, recorded on 23 May 2008.
Spits is an advisor for pension funds and co-founder the Frédéric Bastiat Foundation. More on Spits and his quest for financial clarity in part 1 of the interview.
Interview by Daan de Wit.
Transcript by Michiel Bezemer.
Translation by Ben Kearney.
I would advise people to sell their house and start renting. You could rent a house of a housing corporation, if necessary. That way you can keep your costs down. An awful lot of people have taken out a 5-year mortgage. If the loan needs to be extended after 5 years, you don't know whether or not you can still get a loan. A lot of people are going to get into trouble. The first problem is whether or not the borrower can get any credit at all, and second, assuming that credit is available, you're going to be paying much higher interest.
Some believe that the government could make use of the interest rate weapon - the prime rate - which is the interest rate that central banks demand from the banking sector. You can lower this interest rate, but you can't lower the market interest rate because that gets determined in the open market itself.
If you want to take out a mortgage after 5 years, then the interest rate is very likely going to be between 10 and 12%.
- Shouldn't you get a fixed 30-year mortgage?
If you get a mortgage, then you should take it out for as long a period as possible. It's a long-term investment that should be secured over the long term. Most people have secured their mortgage - a long-term investment - over the short term. People kept thinking: The interest rate will stay low or go even lower, and then I'll keep my costs down. But I'm saying: That's a very erroneous line of reasoning, because it can also go the other way.
- But then over the course of a few years there are going to be an awful lot of homeowners in trouble.
Yes, that's true. When their mortgages expire, there's a real danger that they will either have to come up with the money or abandon the house.
- Then things are going to get pretty nasty...
It's going to get really nasty. This involves a considerable percentage of homeowners. I think that 20 to 25% of homeowners are in trouble.
- That again is going to cause more problems because people are going to revolt. The government has to act as savior; we're already seeing this in America . The Federal Reserve is going to buy up houses there. The mortgage lender Fannie Mae is sitting on a huge amount of these houses and they are losing an enormous amount of money. They've asked the Federal Reserve to figure out a solution for this. The Federal Reserve is considering buying these houses. It may sound strange, but the Federal Reserve is going into the rental business.
- So the houses become the property of the FED.
Yes, strange things do happen.
- How long before things start to go wrong?
I think the period in which it's really going to get bad is between 2010 and 2012. That has to do with the demographic changes that I illustrated earlier.
I see an enormous collapse of the housing market. It's going to lose 50 to 60% percent of its value between 2010 and 2016. The stock market might hold steady but will probably suffer a substantial drop in value. I think a whole lot of companies are going to go under, especially companies that are deep in debt. Real estate firms, construction firms, they're going under.
Unemployment will rise tremendously. In The Netherlands we'll end up with well above a million unemployed workers [on a population of 16 million people]. Like I already explained, people have salary expectations that are not going to be met. Companies will further automate or will be downsized , as we so nicely like to put it. Or production will be shifted to China. Those are the types of sticks that they have sitting behind the door.
I think there are a few banks that are going to collapse. Here in The Netherlands too, what with our being so heavily involved in the credit sector. I don't want to name any names, but I know of some banks here that have invested a lot in derivatives and are also heavily invested in the sub-prime market.
- Is it really so bad when banks collapse?
Yes, because the problem is that if a few banks go under, bank-to-bank business transactions no longer function as they should. Banks often loan each other money. That system would be in danger.
- And beyond that?
Goods from China will become more expensive, assuming there is still demand for them. DVD's, color TV's will all go up in price. The price for raw materials will continue to rise; a huge bubble is going to manifest itself in that area.
- Will stuff at the supermarket get more expensive?
Yes. Beyond that, retirees will end up seeing their pensions flatline at best. This I think is really awful. That means that their pensions will no longer be indexed for inflation. Their pensions won't go up with inflation or with the CPI index.
We're going to see this with businesses as well; in the best case scenario their incomes will flatline. There will be downsizing, there will be more unemployment, manufacturing will be shifted overseas. So you can forget about a raise. Your expenses will go up at the same time that your assets are shrinking. Two things will be out of the question for the average person: One, salary increase, and the other, the building up of assets. You won't be able to get credit anymore. If your mortgage expires after 5 years then you'll have to come up with the money.
- What are the consequences for society?
You have to figure on riots and rebellions taking place, especially in the big cities. Some countries may see revolutions, the Mediterranean countries in particular. At that point government buildings could be set on fire and government employees attacked. You have to consider these kinds of scenarios. In any crisis situation you're going to have people who revolt.
In order to see what can happen in a crisis situation we have only to look at what happened in Argentina. People went from being middle class one day to finding themselves below the poverty line the next.
- What would be some things that would be good to do? Should one maybe get a job along the lines of a baker?
Yes of course. Jim Rogers, the well-known investor, has said that in looking toward the future it's not such a good idea to become a sociologist or a psychologist or a lawyer, but that you'd be better off becoming a farmer.
- And teach your children Chinese. A more practical approach towards everyday life.
The universities will also have to downsize. A lot of faculties will have to close down, for there will no longer be a demand for specific occupations like lawyers, economists, sociologists, psychologists, educators. There will be a greater need for engineers, inventors - people with the wherewithal for setting things up, like agricultural enterprises.
The plan to flood the Wieringermeer Polder is of course absurd. We're really going to need that land to provide for our food supply. Those sorts of projects were initiated back in the 90's when things were still going great. Now we find ourselves in another situation in which we really can't afford to do these kinds of things.
- What kind of an effect is this going to have on issues such as privacy laws?
We're already seeing this now. We already have a government that wants to forbid all kinds of things. And this of course comes at the cost of individual freedoms. We've already had preventative searches and compulsory ID legislation - these types of things cut deeply into personal freedom and personal integrity. As the economy gets worse, a lot more of these types of laws are going to be passed, they're going to gain momentum. More and more, privacy is going to become a thing of the past.
- So things aren't going to get any better.
No. We sometimes forget that much of the privacy that disappeared during Nazi rule in the 1930's had already been done away with during the Weimar Republic . The only thing Hitler needed to do was to replace the German flag with the swastika. Many of the other issues had already been attended to.
Now we're seeing this again. We have a government that is extremely uncompromising and insensitive to privacy issues. This is going to manifest itself more and more as time goes on. The worse the economy gets, the more the government is going to invade our privacy.
- A government that becomes more and more afraid of it's citizens.
Yes. Most people probably don't know it but in 1916 the seat of the Dutch government in The Hague was shut down because of a revolt. A mob tried to get inside in order to harass a number of politicians. That came about because of the blockade that was in place between 1914 and 1918. Because of the blockade, only a small amount of food got into the country. At that time, during the First World War, everything was rationed.
- Now this Dutch cabinet felt they had to make contact with the average citizen throughout the country. They're headed out to do this for 100 days.
And that hasn't helped much.
- It's rather absurd that they have to make contact with the people - at that point you're no longer a representative of the people...
That's why I never talk about representatives of the people, I talk about politicians. Because politicians are a whole different animal. Their attitude is: We are your leaders, we make the laws, and you obey those laws.
Looked at from the classic liberal standpoint, the government acts as an administrator of a people that want to be able to pursue individual activities. The administration makes sure that everything flows in the right direction. The legislator provides a framework within which we as citizens are free to lead our own lives. Conduct trade, pursue an education, run errands, be able to do work.
We no longer have an administration, we have politicians instead. These politicians make the laws and expect that we will comply with this draconian legislation. In most instances they can get away with this because they have a monopoly on force. The police and the military are totally in the hands of politicians.
The laws that these politicians make are scarcely examined for their constitutionality. Were they to be tested for their constitutionality, then a whole lot of these laws would disappear because they are not in line with the constitution.
- Mr. Spits, thank you so much for giving this interview to DeepJoural.
Thank you for having me.
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