8 March 2006
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This article is part of the series: Interviews Willem Middelkoop
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DeepJournal interviews RTL Z economics reporter Willem Middelkoop - part 1
'The question is not if, but when this financial system is going to fail'
Willem Middelkoopis an investor and freelance economics reporter for the Dutch financial report RTL Z. Based on his expertise and his sources - newsletters from insiders and conversations with bankers and financial analysts - Middelkoop believes that the question is not if the current financial system is going to fail, but when. What might then ensue, and how one can prepare for it, will be addressed in future conversations. The following interview [MP3, part one of two, recorded 8 February 2006] lays the groundwork for this.
(There are also two separate interviews with Middelkoop on current affairs).
By Daan de WitDaan de Wit: Willem, are you familiar with DeepJournal.com?Willem Middelkoop: 'I've been reading it for a while. At first I didn't quite get it - I thought: "Who is behind this?" But I've been reading your articles for almost a year now.' Daan de Wit: You have a newsletter [in Dutch]. Willem Middelkoop: 'Yes, I've been a freelancer since 1984. Two days out of the week I work for RTL Z, and then I write a newsletter containing the two most important articles that I come across in the course of that week. For a couple of years now I've been in search of the truth regarding this financial system. How the financial system is set up, how the world works with the money, how the power is divided up. I've discovered that you aren't going to read this in the newspaper, that you're not going to read it in magazines, that you're not going to read it in specialized books, but that you're going to find it primarily in highly specialized websites and newsletters. There has arisen almost a sort of underground culture of people in search of this kind of information, who meet each other on the internet, and you have to know exactly what places to go to get the good information. I've been trying to find the good people and the good places over the course of several years, and now that has worked out nicely.'In part eight of the DeepJournal series on the coming war against Iran, entitled Protection of dollar economy as a motive for war with Iran, email correspondence between DeepJournal and financial analyst Rob Kirby, (who on his website links to this article) was quoted extensively. In the emails Kirby talks about the pending collapse of the dollar. Middelkoop appears to have also had contact with Kirby. Willem Middelkoop: 'Rob Kirby researched the current standing of other countries in dollars. That is, how many dollars does Japan own, how many dollars does China own? America publishes the data once a month and he actually found out that China and Japan are buying less dollars than they did in years past and that this role has been largely assumed by, as the Federal Reserve refers to them, Caribbean Banking Centers. And so financial parties in the Caribbean are actually financing the American deficit. And those have become just as big as China and Japan and we already know that China and Japan are very big and important financers of America, but also that there are financial concerns in the Caribbean that are now doing that as well…This is of course quite strange, because who are these factions and what interest do they have in purchasing dollars? Now if you give this some thought and then inquire some further, you actually get an official explanation that these are hedge funds; hedge funds are speculative investment funds that actually seek a very high yield. Well you don't make a thing on American Treasury bonds and that is the yield, because there is only 4 percent yield, only 4 percent interest is paid on that. So the suspicion is now that America is financing itself by making a U-turn, via the back door. Hedge funds are unregulated, under no circumstances are they regulated. Hedge funds can come and go as they please. The Federal Reserve can in theory set up their own hedge funds, which reside in the Cayman Islands or the Antilles, and the Federal Reserve can actually mandate that those hedge funds purchase American Treasury bonds…, as if they are foreign investors that are doing that. But in the meantime this is all about money that is printed in America and is used to purchase American Treasury bonds. In this way America is actually financing itself - they are pretending that foreigners are still actually doing the financing. This is Rob Kirby's theory, and I strongly agree with it, for there is really no other logical explanation for it. And we are also seeing that the gap that is being created by China and Japan loaning less to America is being filled by these Caribbean Banking Centers. In the last few years they have become quite active.Daan de Wit: I emailed that same Kirby regarding the money supply (the M3 data) which is increasing exponentially, as well as the fact that the Fed is going to cease publishing that data, beginning March of 2006. Is it not the case that after March 2006 America might just start printing a whole lot more dollars, thus basically turning on the printing presses and letting them roll?Willem Middelkoop: 'That's already happening. That's clearly visible in the M3 money supply data. M3 is the data that defines how much money is being printed by a country. The suspicion is that America wants to keep the show running by printing more and more dollars in order to buy up more and more things and in this way lift up markets. Greenspan [Chairman of the U.S. Federal Reserve] has already pointed out in committee that America is intervening in currency markets and manipulating interest rates. But they can also intervene in stock markets, they can intervene in real estate markets. There are a number of bubbles in the American economy, such as the housing market for example. America can't allow those bubbles to burst suddenly, like we have seen with the stock exchanges in Europe. And in this context it is quite remarkable that the Dow Jones, the most important stock exchange in America, has never dropped as much as the European stock exchanges. Because of this there are very strong suspicions that the stock market is being propped up in America, via dollars that America itself is printing, and it is strongly suspected that America is financing itself through the backdoor of the Caribbean Banking Centers. I communicated with Rob Kirby about this. So there are a lot of indications that suggest that the economy is going to become increasingly strained in order to keep it up and running, whereby America is resorting to more and more creative and unorthodox ways of keeping the whole thing running and in large part to hide what is going on from the public.' Daan de Wit: Does the Plunge Protection Team, which I wrote about previously, have a role to play in all of this? Willem Middelkoop: 'The Plunge Protection Team is the popular term for an official organization that has existed since 1987 in America. 1987 was the last time that the stock exchanges on Wall Street crashed hard. At that time the White House, in consultation with the Federal Reserve, decided that an organization was needed to stabilize financial markets during times of crisis and panic, and they would do that by for instance buying up futures to hold up markets. There are laws that govern this, which have been formally agreed to. This is commonly known as the Plunge Protection Team, which is the team that has to make sure that stock prices don't collapse. There is a report written by a highly respected Canadian investment strategist, John Embry of Sprott Asset Management, and in that report, The Visible Hand of Uncle Sam [PDF], he outlines how many indications there are to suggest that the Plunge Protection Team gets involved not only when the stock exchange threatens to crash, but that there is talk of almost structural support. And also, if you analyze the daily changes in the Dow Jones, you see that since the beginning of the war in Iraq, since April of 2003, the Dow Jones no longer falls more than 2 percent in one day. That's very atypical, that really never happens, it's unprecedented. In both good and bad years you always have days with losses of more than 2 percent. We still have days like that in Europe, it happens still in Asia, but on Wall Street it simply doesn't happen any more.'
Daan de Wit: Is the money that the Plunge Protection Team uses for this virtual money, do they simply let the printing presses roll?
Willem Middelkoop: 'In a certain sense all of the money has already become virtual. Money can be created out of nothing because our money is no longer backed by gold. Central banks can actually create money from nothing, just like commercial banks: If you for example take out a mortgage with a bank, money is created on the spot where there previously was none. That's not the same kind of money as your neighbor has in his savings account. This is money that is rarely given to you in the form of banknotes. If you buy a house, that money is simply remitted to the previous owner of that house. So that's a transaction that is purely digital, a form of virtual money. In this way central banks can create money. The Wall Street Banks are a component of and the owner of the American Central Bank, the Federal Reserve. That bank does not belong to the state, it belongs to the big Wall Street banks. And in principle they have unlimited potential, unlimited and deep pockets with which they can purchase what they want to purchase and prop up what they want to prop up. And now that they are going to cease publishing the money supply data starting at the end of March, a very important indicator for the people who follow these things is going away, the proof is being removed.
If you take a look at the past ten or twenty years, you see that there has been an enormous amount of money created out of nothing. You know, we do this in Europe also, the total number of outstanding mortgages in Europe is rising at a rate of 10 percent per year, the total amount of money in circulation is rising at a rate of 8.5 percent per year, but the economy is growing at only 1 percent per year. That should lead to a loss of purchasing power, that should lead to inflation, and that of course also leads to a loss of purchasing power. It's only in the official numbers that it is not totally visible. But you need only take a look at what you are paying for a beer or for some french fries: you are now paying two euros, and a number of years ago it was two guilders. That demonstrates a loss of purchasing power and that also explains why so many people, especially in the middle class, are having a lot of problems, because you are really not compensated for the loss of purchasing power.'
Daan de Wit: The way you tell it, it seems like you notice less inflation that there actually is.
Willem Middelkoop: 'Yes, and that's why economists talk about perceived inflation. Perceived inflation is much higher, let's say around 6.7% a year, and official inflation is only 2% a year. But I'm starting from the assumption that perceived inflation is the real inflation and that the official inflation is the manipulated inflation. Just like in America and a lot of other countries, the statisticians at the [Netherlands] Central Bureau of Statistics use all sorts of tricks, all sorts of models, and the result is that inflation ends up getting rated lower than it actually should.
A really nice example, coming from the Wall Street Journal, which at one point sorted this out, is this: you take a certain model TV set which in 2005 cost let's say $1000. In 2006 you again take a look at what the price of that same model is and it appears to be still $1000, the same price, but the model has been changed somewhat. Instead of a 6 Watt speaker the TV now has a 10 Watt speaker, and instead of the rounded corners it used to have, it now has right-angled corners. As far as the rest of it goes, it has the same picture tube, and only some cosmetic changes. And then the statisticians of the American agency that keeps track of all these things and calculates the inflation data says: 'This television set has gotten so much better through these small modifications that we can actually declare it to have become 30% better, and so we are going to lower the price by 30%. So we are pretending that this television set has gotten 30% cheaper, while it is still selling for the same price.' But only the specifications have been improved. Another example: If Pampers diapers get an adhesive strip in place of some other strip, then that is an improvement in quality and the price of the diapers is lowered - it gets marks for that improvement. And this happens continually: Cars get an airbag - at a certain point you're not going to be able to buy a car without an airbag - but they deduct the price of that airbag from the purchase price in such a way as to virtually or artificially bring the purchase price down. And so in this way all sorts of tricks are used to keep inflation numbers lower than they actually are.
Crédit Agricole, a large French bank, has just published a report [PDF] and states in it that with the inflation numbers in America, which officially stand at around 4%, you have to add 2.7% in order to get real inflation. Then you're at 6.7%, and that is coincidentally just as much as the growth in money supply in America. You can't trust the inflation data, and there is a whole lot of other data out there that you can trust less and less.'
Daan de Wit: But if we can no longer trust the data, then the whole foundation falls away. I can understand not trusting that which the data is based on, but if you can no longer trust the data itself...
Willem Middelkoop: 'Well, that's true. I distrust all data and statistics. It's a well-known saying: 'There are lies, damn lies, and statistics.' You can show just about anything you want with statistics - it's all about what model you use and you can apply that model in all kinds of ways. Data is horribly manipulated. That happens in the corporate world and that also occurs at the government level.'
Daan de Wit: Back to inflation: How can it actually be that you simply print more money? The other party still has to get something in return. The Chinese have 200 billion dollars in credit, they're going to want something in return...
Willem Middelkoop: 'The Chinese, the Japanese, they are doing the same thing we do in Europe, and what we do in America: create all that money out of nothing. All of these monetary systems are creating money from nothing and the money that we create we loan out and build buildings from it, and those buildings remain standing.'
Daan de Wit: How can you build a building from money that doesn't exist, year in and year out, I don't get it.
Willem Middelkoop: 'At the point when you can continually loan out money, especially by keeping the interest rate very low, if you set the interest rate very low, in Japan the interest rate is around 1%, if you then borrow a million from the bank, then you only have to pay ten thousand a year in interest in order to have that money at your disposal. Well, in this way you are stimulating a lot of people into making investments, to go and develop durable goods or to make all sorts of other investments.'
Daan de Wit: But the one who then receives that million dollars, who gives you a piece of land for it for example, he thinks that he has a million dollars in his hands.
Willem Middelkoop: 'He actually does get a million dollars that has been created out of nothing, but that has actually become at that moment a million real dollars which is accepted by someone for which you certainly can buy things. But it is "monopoly money" that has been created out of nothing and of course you can keep it up for a while, but ultimately that money becomes worthless of course - at a certain point it's going to fail.
There is a good reason that we have known 220 different monetary systems in our history. Not in The Netherlands, but worldwide there have been 220 monetary systems that have all at some point fallen apart at a given moment. Take a look at what happened with the ruble, look at what happened in Argentina. It's actually happening one after another and it's coming because central bankers and politicians can't restrain themselves. Oftentimes a new monetary system is initiated because the money is tied to gold so that you can't create all kinds of extra money without increasing the gold supply. Frequently that system ends up getting abandoned at some point and money simply gets printed. Everyone benefits from this, it stimulates the general welfare, but ultimately such a monetary system flops. And also this monetary system that we have, the euro and the dollar, will ultimately flop. All scholars agree with this. Two years ago I had lunch with a banker from De Nederlandse Bank (the central bank of The Netherlands) and I asked: How long can we go on with this, with the piling up of debt, with borrowing. He said: 'Willem, everything is going to collapse'. And he said that with a straight face, so these people already know this. Except that, to the outside world - it was of course an off the record conversation with this banker - they will always continue to maintain that this is a very stable system and that you need not fear for your property.'
Daan de Wit: Would you say that the question is not if the dollar is going to collapse but when it will collapse?
Willem Middelkoop: 'The question is not if the dollar is going to collapse, the question is when this financial system will fail. The question is not if this financial system will fail, the question is only when this financial system will fail. And all scholars simply agree with this. And what you saw with Van der Hoop Bank is a nice example - it's a bank that has existed for 150 years and so you think that that's a good bank. But then there appears to be a few things that go awry at the bank, and suddenly the bank is closed, simply folded. But then there appears also to be deposit insurance-this has existed in life for a very good reason since a long time ago. The state reimburses you 20,000 euros. That regulation was devised solely to prevent a run on the banks. Because say for a minute that that deposit insurance wasn't there, then everyone would withdraw their money from the bank immediately, because they're thinking, 'That could happen to my bank too.' So because of that there is deposit insurance. Because those bankers, they know very well what could happen. It is by definition an unstable system. Banks only have to hold on to, let's say 5, 6, 7% of their total assets for all outstanding commitments. So if something happens to a small percentage of their outstanding commitments, if they have to write off the amounts due, they're going to fulfill their minimum requirements very quickly. This is what happened with Van der Hoop. And if there is no new financier there to deposit money in that bank, willing to increase the actual assets, then that bank collapses. And that can happen to any bank.'
Daan de Wit: Okay, those are banks, but the worldwide economic system. That's a little different...
Willem Middelkoop: 'The worldwide system is of course composed of all banks taken together. So if all banks are individually financed in this way, are vulnerable in this way, then the worldwide system is likewise vulnerable. Example: JP Morgan is a large American bank that is quite vulnerable. JP Morgan is responsible for 52% of all derivative contracts. Derivatives are financially derived products, such as options. But the whole derivatives market has become so huge, you have no idea. All of that plays out amongst professionals. JP Morgan is a counterpart and is responsible for 52% of all outstanding contracts worldwide. If something happens to JP Morgan, then everything goes under. And we've seen this during the Asian financial crisis. More and more countries went bust, Thailand and Malaysia. At a certain point South Korea threatened to give way, the financial system there. The IMF took continual measures to prop up the economies of all those countries, and with difficulty they were kept afloat. South Korea, that was a big player that threatened to drag the entire worldwide system down with it. Then you get a domino effect of sorts with the financial system. There was then a kind of nighttime rescue mission that ensued. Time Magazine did a reconstruction of the events in which Alan Greenspan and Robert Rubin - who at that time was the American Secretary of the Treasury - stayed up all night long just calling bankers. Everybody started calling each other: 'We've got to support this, we have to get money to South Korea, otherwise the entire system is going down.' So it got close to the brink. It's simply a very unstable system. And you should realize this and be sure to take it into account when you make decisions.'
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