merleg

Down with the monopoly of central banks!

Thorste Polleit, a German investment and economy expert elaborates on the topic pointed out in the title. The professor of Frankfurt School of Finance and Management, president of the Ludwig von Mieses Institution, and economist of Degussa, a company trading mainly gold, thinks that the world’s leading central banks entered a vicious circle, where they could not stop flooding the world with liquidity, even if they wanted to. This is an inflation spiral, which leads to ‘currency-war’. Confidence in unsecured money produced and distributed by monopolies connected to nations or regions will become vulnerable. Market operators have to start looking for other, safer standards like gold or bitcoin. The interviewee also thinks that the refugee crisis will be disadvantageous to the German economy, and agrees with the Hungarian point of view.

Péter Zentai: This is the right time to get involved with VW, isn’t it? Or do you think that the shares of Volkswagen will be even cheaper?
Thorsten Polleit:
I would definitely not buy VW or any other car company shares. This market segment does not fit into my investment philosophy. I look for investment tools, and trade with the securities of companies that are able to have a good shot at providing something unique and exceptional. We should not have such illusions with car company shares. Volkswagen, Audi, Daimler, etc. – from an investment point of view, all of them are interchangeable. However, the only certain thing is that none of them can generate significant return.

Let’s see the developments objectively: are you not afraid that this situation will indirectly lead to the decline of German economy?
 We can only hope that the VW issue remains the problem of a sole German company, and will be resolved. The problem would be far greater if it turned out that the scandal has ties to other German companies. The image of the German economy has suffered enough already for completely other reasons – the refugee crisis…

What do you mean?
I agree with you in the refugee issue. You recognized and stated that the borders of the EU must be protected, and it is impossible to let everyone in. This should be absolutely clear, however, the German political elite was too emotional rather than rational about the issue. The German leaders want to put unpredictable social and economic burdens, and security policy challenges on Germany’s shoulders.
Under the surface, however, there is an internal conflict. Nobody knows when it will erupt, but it might seriously affect the global perception of the German economy.

The majority of the leaders of the German economy and industry – on the contrary to your opinion – do share the viewpoint of the CEO of Daimler, saying this migration ‘holds the promise of laying the foundation for another economic upswing similar to the country’s postwar boom in the 1950s and 1960s’ which was mainly due to guest workers.
This does not convince me because it is not scientific or professional. The fact that so far nobody really knows who the newest migrants are, and how capable they are to be integrated into one of the world’s most developed economy based on their schooling, qualifications, age distribution and cultural background – in contrast to the Italians, Portuguese, Spanish at the end of the 1950s, and more recently, people from Eastern Europe employed in our economy. The only clear thing is that they are going to overwhelm the social care system and the budget.

If developments follow your negative scenario in Germany and other strong economies of the EU, then the European Central Bank can intervene more actively in order to stabilize and enhance the European economy…
And as a result, there will be such a high Europe-wide inflation that we have not seen for decades. Inflation has been around since central banks have been flooding national economies with fiat money.

But the real threat is deflation, not inflation…
The American economy is the only one that more or less still performs relatively well as a result of central bank interventions. In comparison, the European and the Japanese are still stagnating despite the enormous supply of fiat money of the last two to four years. In the relevant countries, the future of loans that commercial banks lent to households, market operators and companies, is uncertain with no economic growth. Central banks have no other way to deal with this problem – because they have already entered to this vicious circle – but to keep expanding the money they flood the economy. Specifically: the acquisition of corporate and – primarily – state debt; in other words, the purchasing bonds.

Will ECB stop it eventually, just like Fed did?
There is no stop, there is no turning back. According to our predictions, there will be another 5 billion (10^12) euros will be fed to the economy of the euro-zone – mainly through bond purchases. They also want to inflate state debt. All in all, it is a financial and economic rational, that such a dramatic and unstoppable expansion of cash flow with no production cover results in inflation. The only thing that we cannot know is the final degree of this inflation, which will be extremely heavy on everyone. Though, official inflation data do not include the rising of property and share prices, but we should not be misled! There is simply no way, that a dramatic jump of investment vehicle prices does not ‘explode’ and ‘infest’ economies with inflation. This comes quite handy for stock exchange investors – in the short term – because the persistent easing ensures that stock market crashes, like the one seven years ago, will never happen again.
Instead of crashing, volatility will become more and more extreme, and exchange rate corrections will be more severe.

In the Wirtschaftswoche you said – I quote – ‘central banks should be shut down’. You are not serious, are you?
Of course, I am.  Central banks in fact are undoubtedly responsible for the global inducement of inflation. The resulting economic and actual market uncertainties could be stopped by shutting down the national monopoly for money creation and distribution, which is the very foundation of central banks. If we let the free competition of currencies develop, so that the market in its broadest sense and a greater part of world economy operators can decide which currency – be it a usual, unusual, or one which does not even exist yet – could be used as a ‘final’ standard, a shelter and an authentic value preservation by market participants: consumers, producers, traders, households, commercial banks and most of the states themselves too.
Maybe gold, for example gold coins will fill this role again, but it is not entirely impossible that the more and more popular bitcoin will do. The point is, the market is already looking for a standard because it has realized that the alarming rate at which property and share prices are increasing is threatening. A quality change can be achieved only by shutting down the national monopoly for money creation of central banks – of course, the result would be seen only after many years. Until then, we face turbulent currency wars – and the start of one of the greatest battles of this war is the devaluation of yuan.

Original date of Hungarian publication: September 24, 2015