In this interview financial reporter Willem Middelkoop provides an update on the credit crisis. Middelkoop discusses the latest news and articulates what his expectations are for the future.
He is author of the bestseller - Available only in Dutch- If the dollar falls - What bankers and politicians aren't telling you about money and the credit crisis, and publishes the free newsletter Nieuws-Flash!.
Download the interview (MP3, 9 Mb, 19 minuten - in Dutch). Read the transcript below.
The transcript is provided by Trudie Beverloo, Maarten van Dijk and Michel Steyger.
The transcript is translated by Ben Kearney.
It is March 17, 2008. My name is Daan de Wit, reporting for DeepJournal, and on the line with me is Willem Middelkoop, author of the bestseller If the dollar falls. Willem, what's the latest news?
: The latest news is that the dollar is falling hard. It is now Monday morning. Sunday evening, which would be Sunday overnight into Monday for us in the Netherlands, the financial markets again began trading in Asia
, and early this morning in the first hour of Monday we saw the dollar fall from 1.57 to 1.59 against the euro - that's two whole cents. That was a reaction to the news that Bear Stearns, the big investment bank on Wall Street - the smallest of the five big investment banks that found themselves in trouble on Friday - was acquired over the weekend in a kind of rescue operation. This rescue operation had to succeed before the markets in Asia opened up on Monday, and it worked. The upshot of the rescue operation is that JPMorgan Chase is paying two dollars per share. Shares of Bear Stearns closed Friday at 30 dollars. On Friday morning shares stood at 60 dollars, and a year ago they stood at 160 dollars. So the shareholders of one of the largest investment banks on Wall Street have seen their shares drop from 160 dollars to 2 dollars. But what's much more important is that it's now become clear that the credit crisis has taken down a big Wall Street bank. So this is only an artificial rescue operation, and for Bear Stearns it is simply the end for this important bank.
Daan de Wit
: So what does this mean then? It looks as if there are two parallel worlds. We read in the newspaper that the banks are having a very hard time, but meanwhile - I was recently at a wedding where the sky was the limit - life just goes on. We're aware of it to an extent, but are we eventually going to find ourselves at a kind of tipping point, what do you think? Willem Middelkoop
: That's right. There seem to be two completely separate processes going on. Processes that are only going to play out in the financial world on account of the credit crisis, and the real economy which actually hasn't noticed any of that. But of course the real economy is totally dependent on what happens in the financial economy. In the past the financial economy was an offshoot of the real economy, and now it seems that the real economy has become an offshoot of the financial economy. The only reason the economy runs well for everybody is because we are able to borrow an awful lot of money at such an extremely low interest rate, that's everybody worldwide. That's why we can build all these houses, all these office buildings, it's why we can sell all these houses, and it's why we can all easily borrow money in order to build something. And if something goes wrong in the financial system, if a credit crisis breaks out - and this has now occurred and I've always been afraid of this, we've actually been warning about this in our discussions all along - then it's not going to be as easy to borrow money, it's going to get more expensive. Then the great supercharger behind the huge growth of the world economy disappears. In China there is also an awful lot of money that has been loaned out at very low interest, invested in projects that aren't showing a profit, and now banks all over the world are starting to come to their senses. We're going to see this in the real economy - delayed, it's already begun. But worldwide, if we're lucky, we're only going to get a worldwide slowdown in growth. If we're not, then we'll get a worldwide recession. And if we're really unlucky, then the system won't even be able to hold up any more. There is a real fear of that now.
Daan de Wit
: When I first spoke to you two years ago, you talked about the price of gold and advised to buy. In the meantime it has practically doubled compared to then. Just read a story about people who stole a church bell on a pedestal from the town square, a church bell from 1309, and then melt it down. Copper, or at any rate precious metals, which you also said before - things that come from under the ground. Are we going to see more of this kind of thing? The price of gold continuing to rise? Willem Middelkoop
: You can actually predict quite easily what's going to happen, it's getting easier to do so. I'm looking right now by the way at some movements on my screen at CMC, these bank shares are all about 5 to 10 percent lower and also shares for emerging markets for instance, these new up and coming economies, you see all of them dipping about 5 percent today as well. But what's going to happen now, the only way to keep the system under control, is really to keep it functioning in such a way that the public at large doesn't actually notice anything - that's actually due to the fact that the government is going to buy up everything that gets into trouble. And that process is already underway. We've already seen Northern Rock, which got into trouble, bought up by the British government, with nothing more than public funds, in reality tax revenues. In America: Bear Stearns in trouble, actually gets bought up by JPMorgan, but that occurs with money from the Federal Reserve, America's central bank. So what we're now going to see is all these entities that are now getting into trouble - and there's going to be a lot more of them - are all going to get bought up. Because if you let them go bankrupt, then there's a great danger that the dominos start to fall, that the one domino hits the next one. That has to be prevented at all costs, that will be prevented at all costs.
But if the government has to go and buy everything up, a huge amount of money will be created in order to do that - they're going to crank up the printing presses. And that's going to happen in America in particular, and the interest rate is going to be lowered sharply. I think we're going to see the interest rate lowered in America somewhere between three-quarters to one percent this week or next. Consequently the dollar is going to be under even more pressure, the dollar has really given up, the fall of the dollar is going to keep on going. Hopefully a dollar panic won't break out. If a dollar panic breaks out then we've really got a big problem, but if there is no dollar panic and the dollar just keeps sinking, then that means that prices of raw materials are going to rise further, in particular gold and silver will continue to rise. Those have really become safe havens, and actually that means that inflation is going to get worse, but that also means that important companies like Unilever or Shell - companies that are safe and sound, the old economy - actually end up being worth much more. We're seeing markets fall now, but if we get a lot of inflation and money ultimately becomes almost worthless, then people are going to flee right to stocks. You're much better off holding a share in a company - it never becomes worthless - than money in the bank. So in this scenario that we're in now, what with that much more money being created in order to absorb all these losses, that means that inflation is going to rise sharply, a huge currency devaluation is coming. And buying stocks is like a big safe haven against inflation, because in an inflationary scenario stocks - and thus companies - become, expressed in terms of money, worth more and more.Daan de Wit:
What does the fact that inflation is rising so sharply mean for the man in the street?Willem Middelkoop:
Having a savings won't do anything for you. If you have a pension then you're surrendering a lot of it each year because you're not being compensated for inflation. It's in this way that more and more middle class and low income people are finding themselves in trouble. In this regard inflation is a silent killer.
Daan de Wit
: Are we going to see big price increases now? And people who are now young and working toward a pension, can they forget about that pension? Willem Middelkoop:
Yes, we're going to see big price increases either way. Inflation is rising quite sharply now, it might even get out of hand. That's because of this massive currency devaluation, prices are going to rise further, the economy will come under pressure and you can hope that the recession that's surely coming to America - you can hope that it doesn't turn into a depression in America and that it doesn't cause a recession in Europe. I think that the central banks are going to do everything they can to prevent that, and that they can only do by creating unlimited amounts of money so as to buy up all these problems as much as possible, which eventually leads toward futher currency devaluation. Daan de Wit:
Well that doesn't sound very attractive. Willem Middelkoop:
No, everything that's happening right now is worrisome. Whether we go this way or that way, or whether all that money creation brings about a lot of inflation, or if a panic breaks out, that's even more worrisome. The financial-economic system that you and I been talking about for years, about the possibility that we would at some point experience a systemic crisis... Last week the IMF said that policy makers are now going to have to start planning for the unthinkable, thinking about the unthinkable - that the system simply falls apart. Daan de Wit:
What advice do you have for the man in the street? Willem Middelkoop:
There's not much you can do. If you have a lot of money, then I think it's a good idea to turn a portion of that money into gold or silver, I've been saying that for years. That's why gold and silver prices are rising so high - not because I've been saying it for all these years - but because people with money are choosing gold and silver for their money. Just now I'm looking at a report..., the IMF is now reporting 'Recession a potential problem for Europe'. Daan de Wit:
We can't think of ourselves as being totally independent of America. Willem Middelkoop:
No. I think that we're going to see a recession regardless. Another newsflash coming in from the IMF: 'Financial crisis will have a significant impact'. So the IMF is now actually saying: Europe is going to get hit by recession, an even more severe recession is going to hit America, and then possibly a growth slow-down in Asia, but no recession. And that's the best case scenario. Daan de Wit:
Previously in our conversations you've said that it would be a smart idea to leave the big cities. Are you still saying that?Willem Middelkoop:
We've philosophized over it from time to time: What will happen? Daan de Wit:
Because here you are, still in The Netherlands... Willem Middelkoop:
I live outside the city, Daan. Daan de Wit:
Yeah, but you also live in one of the most densely populated countries in the world. Willem Middelkoop:
We have philosophized about what will happen if the financial system can't hold on. The IMF has said that there is a small possibility that something with huge consequences will happen. That small possibility with huge consequences is that the system can't hold on and that we experience a big crisis. That is still a small possibility, but it's no longer so small as to be negligible. If that happens then it's a good idea to have some kind of plan at the ready, for let's say an individual who doesn't want to wait and see what the government is going to do, and then generally speaking you're better off living in a rural environment during a crisis than in the inner city or in a big city. If you study crises, financial crises, you find that people who live almost self-sufficiently are the ones who suffer the least in a crisis - those who live in a rural, agrarian setting, where life is actually the same regardless of whether the economy is booming or is in recession. Daan de Wit:
I had to think of that because I recently spoke with a very prudent individual who often times manages to see his policy advice becoming government policy, good policy, I think - he had invested little in his home in the city, but he had a boat that could hold five people, with clothing suitable for all temperatures. I thought that was pretty smart. Willem Middelkoop:
A boat - think of Henk de Velde: you get a little boat and pack it full of the right food and you can sail all over the place for a year. Daan de Wit:
Are we overlooking anything else? A kind of kamikaze policy from the Bush Administration, because he's spending an awful lot of money. Joseph Stiglitz, the economist, recently wrote a book in which he talked about amounts of between five and seven trillion dollars for the wars in Iraq and Afghanistan alone. Bush has been confronted by people who believe that we have such a lousy economy because the war is so expensive. Bush says 'No, we've built too many houses. That's why the economy is in such bad shape'. Does that also say something about how he views wars? Willem Middelkoop:
What's amazing is that there has been a criminal, short-term economic policy carried out in the area of money creation - it has everything to do with the economy. With only short-term interests taken into consideration... And only to win the next set of elections, with a kind of assurance. That's also why I've been able to write my book - I'm no clairvoyant - of this crisis a few years later. And I've always felt an urgency to write that book, and to write it fast, If The Dollar Falls
. Because I knew that if I took my time - you know, you have been part in the production of the book - if I took two or three years and made it a really good, thick book, then I'd probably be too late. I've always felt, and so have others, that I need to get this book written really fast. Wealthy people had to to get their affairs in order now, because you could figure out: This is becoming a crisis. It could be seven years off, but chances are high that...
Paul Volcker, Alan Greenspan's predecessor, said a few years ago: There's a 50-50 chance of experiencing a big crisis within five years. He said that three or four years ago. So the insiders knew it. But why did the Bush Administration choose to carry out such a policy, a policy you know is going to bring about a huge crisis within a few years? That's the big question. And maybe the Bush Administration knew that a crisis was coming anyhow, that the American system had become untenable, and they thought to themselves: Let's go ahead and make best use of the situation in the short term for our own purposes, so that we're the ones with the power in any case. So that we can do the things that we want to do.
Daan de Wit: Or is it planned, do they want this to happen on purpose? You hear those kinds of stories about 1929.
Willem Middelkoop: Why would you want to plunge a country into chaos?
Daan de Wit: That's what you hear about 1929, that they did it deliberately, to buy everything up cheap afterwards.
Willem Middelkoop: No, it doesn't work like that. No, you don't consciously plunge a country into chaos in order to be able to buy the whole thing up again cheap. In the 1920's there was an explosion of credit, just like there was an explosion of credit in the nineties. And in 1929 insiders saw that the good times weren't going to be sustainable. Back in the summer of 1929 the insiders got out of the market. Because they knew that the crisis was on the way. And when the crisis finally came, they of course waited for low prices. They bought stocks again. But rich people also experienced a lot of pain, from the economic crisis in the 1930's as well as the war in the 1940's that followed. You don't plan that in order to profit from it. If you're an insider you only know roughly what to expect, and then you're certainly going to take advantage of it.
Daan de Wit: You're also an insider as far as oil goes, and I see from your newsletter that you're working on a new book about it. What can you tell us about it?
Willem Middelkoop: The book is almost done, The Permanent Oil Crisis [Dutch only]. In the book I write about the one scenario in which we are not confronted with oil prices that go right through the roof. The only such possibility is a global recession in which the demand for oil decreases by 10, 20 or 30 percent. If that doesn't happen, then we've got a permanent problem in the oil market. On Friday Bush accidently confirmed this when he said 'Oil price is high, because demand is greater than supply'. He said it in passing, but it was the first time he confirmed it - the demand for oil is greater than worldwide production. That's been the case for a year and a half, and you won't read that in any newspaper. But out of a worldwide production of 85 million barrels a day, there is a deficit of 1.1 million barrels a day. That deficit keeps growing, the price of oil is heading in the direction of 200 dollars per barrel fast, and that alone is enough to cause a global recession in my opinion. But for now we have only the one problem, the credit crisis.
And then we have the next problem of oil running out, or at least becoming prohibitively expensive. And so it's increasingly looking like a lot of people predicted - that we are going to see a great transition arise in our capitalist system around the year 2010, 2011, 2012. The way we manage the world and this booming economy is not tenable, and the process of reckoning is now taking place. It has now begun.
Daan de Wit: I get the feeling that there are all kinds of systems now starting to collape... Willem, we'll talk again on the second evening of Docs at the Docks on May 27th, which will be about oil. We'll talk about your book at that time. We'll be showing the film A Crude Awakening. It will be nice to see you again, this time on the podium at Docs at the Docks on May 27th in Amsterdam. Willem, thank you very much.
Willem Middelkoop: I'll be very curious to find out where we'll be with the credit crisis in a few months.