14 December 2011
Economist Albert Spits: the euro is gone by the summer of 2012
By Daan de Wit
'It is is November 24, 2011. My name is Daan de Wit, and today I am once again joined by Albert Spits.
Listen to the interview (in Dutch) with Albert Spits.
De Wit: The last time we spoke, we talked about the Austrian School versus the Keynesian School, and what a huge difference that would mean in the way of solutions for our current economic situation and how we go about dealing with these things. At a moment the tape was not running you said to me: ultimately, there will come a time when this entire monetary system will come to an end, with the demise of the euro being only one component of this. Do you really think that the writing is on the wall for the euro?
Albert Spits: The euro has a number of inherent flaws. The first flaw can be found in the range of cultures, languages and ethnic groups that participate in the euro, all of which have their own unique history. If we take a look at the larger economic system within Europe, we find five economic systems. The first is the Anglo-Saxon system, that’s what Great Britain and Ireland have. There’s the Rhineland model, according to which the Dutch, Austrians, Luxembourgers and Germans operate. Then there’s the Scandinavian model, in Scandinavia and Finland, as well as what I refer to as the Club Med model, which we see in the countries of the Mediterranean. And lastly there is the Visegrad model, which is a collection of countries such as Hungary, Czech Republic, Poland and Slovakia.
De Wit: So these countries are all doing things their own way?
Spits: Yes, they all have their own peculiarities that are unique to them.
De Wit: But in the meantime they are all operating within the euro system, and it looks as if it’s not going to work out for them in the end.
Spits: That’s the first thing.
De Wit: But right now we are trying to rescue the euro.
Spits: Right, but that’s never going to work, because those flaws that I referred to are still there. Those flaws are too severe, due to the five different economic systems. But there is still another issue that is extremely serious. To compare this with that of America back in 1787 - right after America gained its independence - Alexander Hamilton, then Secretary of the Treasury, consolidated the debt of all of the original thirteen states into one all-encompassing debt. But - and this was important - he saw to it that only the Treasury would be able to print dollars and be able to pay off these debts. They didn’t have 13 independent central banks, with each of them creating their own credit and printing their own paper money. Instead, they had one centralized authority by way of a Treasury note - a type of interest-bearing dollar, the likes of which Germany also had with the Rentenmark back in 1924. You had a piece of paper, a dollar, which earned 3% interest per year. So the longer that you held onto it, the more this paper dollar would be worth, and they called this a Treasury note. You can still buy one in America. So that’s the main difference: they consolidated everything all at once - the debts, as well as the authority to print money and to pay off the debts. And that’s what the eurozone has failed to do.
De Wit, 03.35: And that’s what is killing us right now?
Spits: That’s right.
De Wit: What’s your prediction as far as when that will happen - is it more than a year from now?
Spits: I think that it will actually happen within 6 months.
De Wit: And all these countries, are they all going to revert to their own currency?
Spits: We have to. We are going back to a situation that we know from 1992. At that time we had the EMS - the European Monetary System. That went defunct, and all of these countries went back to their own currencies. That was possible because all of these countries still had their own currencies, because of the ECU - the European Currency Unit: at that time a sort of basket of currencies, a unit of account used in financial transactions between the member countries. After 1992, there were only two countries left in the EMS: Germany and the Netherlands. The rest all had to leave: France, Italy, Great Britain, Belgium, etc. We are now finding ourselves in this same situation. But this is going to become quite laborious, because now we have physical money, physical euros, physical banknotes. We didn’t have that back then, but of course this wouldn’t be impossible to do.
De Wit: No, but it’s going to cost an awful lot of money to reprint all of those currencies and make the switch.
Spits: Sure, but it’s going to cost a lot more money to try and save the euro, which cannot be saved.
De Wit: But in the meantime we are giving money to Greece, for example, so all that money is gone.
Spits: That’s right, we’ve lost that money.
De Wit: So should we put a stop to this operation as soon as possible?
Spits, 5’05: I think that, for the Netherlands to go back to the guilder, it would cost the country somewhere between 9 and 15 billion euros. We could still keep the euro, but as a unit of account, a sort of trade currency. But not as a physical currency, there are way too many flaws in it for that. The euro has undergone such a massive bloodletting during this whole credit cycle that, if we want to save this euro, it’s going to cost us between 3.5 and 4.5 trillion euros to do so. Because then all of these debts are going to have to be consolidated – that’s what Alexander Hamilton did in 1780 - in order to put things on the right track somewhat. But that would mean that the Netherlands, for instance, would be on the hook for somewhere between 250 and 300 billion.
De Wit: Instead of the 15 billion that it’s going to cost to revert to the guilder?
De Wit: And as far as you’re concerned, going back to the guilder is not an ideological thing.
Spits: Not at all.
De Wit: You’re saying that it’s simply going to happen because there is no other option.
Spits: There is no other option.
De Wit: But within a reasonably short time period?
Spits: Yes, within half a year.
De Wit: So you are saying that by summer of 2012 we will be using the guilder?
Spits: By then we will be using the guilder.
De Wit: We’ll revisit that before that time comes. Before our interview you were telling me about a pendulum. You had an interesting story about that. Could you tell us more?
Spits: This pendulum has to do with mass psychology and comes from the Kondratiev cycles. The economy is continually alternating between extremes. Sometimes there is euphoria, such as the dot-com craze in 1999 and 2000 - that was euphoria. Now the pendulum has swung back to panic and fear. We see the eurozone, which is collapsing; we see the global monetary system, which no longer can count on enjoying a long life. And now we see this fear manifesting itself within the rest of the population, all over the world. We see everybody choosing for security, a safe haven, so that’s the other side of it. We are moving from paper money value, which gave rise to the dot-com bubble, and we are returning to permanent value, something that people can put their hands on. Just take a look at how much gold and silver have risen in value, and look at raw materials, which have seen enormous gains. People want something that they can hold onto.
De Wit: And you also find this important because debts can be paid off this way.
Spits, 7’45: Exactly. What’s happening right now is really important. We are going from a debt-based economic system to an ownership-based economic system. So if you have something of tangible value - you can touch it, you’ve paid it off - and you don’t owe anything more on it. At that point the economy has become ownership-based.
De Wit: And that also applies to everyday citizens, they also need to make sure that they are in possession of tangible things, and also that they have a house that is paid off.
Spits: Yes, as much of it paid off as possible, and if you can’t pay it off, you should invest a portion of it in gold or silver. That means that a large portion of your debt can be paid off with it in the coming years.
De Wit: So the gold actually becomes tangible and manageable. Because people are always saying that you can’t eat gold.
Spits: But you can’t do that with euros either. Gold is becoming a means of payment.
De Wit: You say - almost parenthetically - that the monetary system has reached its end. That sounds pretty serious. What do you mean by that exactly? Does this involve more than just the disappearance of the euro?
Spits: That’s right, this has to do with our monetary system, which is based on paper money. Paper money is a promise.
De Wit: But you will still always need to conduct trade, you will still always need something.
Spits: Of course, but if you are doing business, then that also means that I place an order with you, I give you money...
De Wit: But that’s the monetary system!
Spits: That’s paper money, but then you have to deliver the goods. I pay you money in the meantime to bring in the harvest, for example, but I definitely want that harvest. That’s why I gave you the money. That means that you actually create a promise, as it were. And if someone is unable to fulfill that promise, then you’ve lost that money. And that’s what’s going on with our monetary system. There were an awful lot of promises made by people who were supposed to pay their debts, by countries that were supposed to pay their debts, by governments that were supposed to pay their debts, but in the end, they didn’t do it.
De Wit: America will never pay off its debt. They're not able to.
Spits: No, that’s true.
De Wit: So what do you end up with? You still have to have some kind of system for conducting trade.
Spits: You have to inject something of tangible value into the monetary system. That could be raw materials, but the best thing would be a means of payment that we have had for a total of fifty centuries now, and that is gold. We must have some form of gold standard, a gold medium of exchange in order to restore faith - because faith is what everything rests on - in the system.
De Wit: But when I think of the monetary system, I think of doing business with pieces of paper. Are you now saying that this is coming to an end and that this is going to be replaced with gold coins?
Spits, 10'40: No, at this point in time the central banks do not have enough gold in the safe to be able to cover everything. So what happens is: the money loses value. You can do this by way of monetary inflation or you can revalue the gold upward. And the latter is what’s going to happen when the new monetary system is established on the heels of this bankrupt system. Then gold will be introduced not only to back currencies, but it will also be massively revalued upward. So it’s going to be worth a lot more.
De Wit: That’s where we are heading?
Spits: That’s where we are heading.
De Wit: So we are still going to be doing business with one another, but with guilders for instance, and the currency will be backed by gold, and the gold will be worth a lot more than it is now.
Spits: Exactly, you see, we must reintroduce some form of value store into the monetary system.
De Wit: So these days, is it still a good idea to acquire some gold?
Spits: It sure is - gold is going to more or less triple in value between now and 2016. And silver even more so, 8 or 9 times what it’s worth now.
De Wit: Even though so much of it has already been purchased?
Spits: Yes, but you see, silver is a horribly undervalued metal. Because during the crisis, when silver remained stable, 97% of it disappeared, it got gobbled up - it’s already been used in industrial processing. It’s already in jewelry, it’s in India and China, you name it. So 97% of the silver that we once had, we no longer have. Not only is silver very much undervalued, there is also very little of it on hand. A lot more of it will have to be mined if we want a monetary system that is fully backed by silver.
De Wit: You’re saying that we are reverting to a gold standard. There is a documentary entitled The Secret of Oz that comes out against the introduction of a gold standard.
Spits: I know what they’re getting at, and in theory, they’re right. Because a gold standard that is introduced by a government will eventually just collapse again. If we look back at history, there has always been a gold standard. People have always paid with gold. But at the same time, all governments have always tried to inflate gold by snipping off the edges of coins, for example, or by mixing silver with it. Because then they can issue more gold. That’s what governments like to do. So I am not in favor of a state-mandated gold standard. But gold must be recognized, it must be a recognized form of currency, because that gives individuals the power to isolate themselves from the inflationary conduct of their government.
De Wit: So that’s what you would say to the makers of The Secret of Oz? You would end up on the same side of the issue as they are?
Spits: Yeah, I think so, because I only see gold working as long as it’s not legal tender - that’s when it becomes a big problem, when you are going to legalize it. It’s only going to work if it’s merely recognized as being a currency. There is a difference between being legal and being recognized.
De Wit: You have to keep the state out of it.
Spits: Yes, that’s what we classical liberals say. We had a separation of church and state, and now we need a separation of economy and state. Because the government has way too much power to intervene in the economy.'
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