The Seeds For An Even Bigger Crisis Have Been Sown
Part 1 of what became a two-part interview begins: "On occasion of the publication of his new gold report, Ronald Stoeferle talked with financial journalist Lars Schall about fundamental gold topics such as: “financial repression“; market interventions; the oil-gold ratio; the renaissance of gold in finance;“Exeter’s Pyramid”; and what the true “value” of gold could actually look like.
Ronald Stoeferle, who is a Chartered Market Technician (CMT) and a Certified Financial Technician (CFTe), was born October 27, 1980 in Vienna, Austria. During his studies in business administration and finance at the Vienna University of Economics and the University of Illinois at Urbana-Champaign in the USA, he worked for Raiffeisen Zentralbank (RZB) in the field of Fixed Income / Credit Investments. After graduating, Stoeferle joined Vienna based Erste Group Bank (http://www.erstegroup.com), covering International Equities, especially Asia.
(Photo: Ronald-Peter Stoeferle, credit Gold Switzerland)
In 2006 he began writing reports on gold. His five benchmark reports on gold such as “A Shiny Outlook” and “In Gold We Trust” drew international coverage on CNBC, Bloomberg, the Wall Street Journal and the Financial Times. Since 2009 he also writes reports on crude oil. The latest gold report by Stoeferle was published (July 11). (Ed. Note: the full report is available for subscribers in the Other Reports section of the GGR subscriber pages.)
The Seeds For An Even Bigger Crisis Have Been Sown
Lars Schall: What is “financial repression“ according to Ronald Stoeferle?
Ronald Stoeferle: Financial repression is a perfidious form of redistribution. It always means a combination of incentives and restrictions for banks and insurance companies, which cause the investment universe to be substantially reduced for investors. This means that capital is channeled away from the asset classes that it would flow into in a more liberal environment.
I sincerely believe that financial repression will continue to crop up in many shapes and sizes over the coming years. However, the long-term costs of the lack in efforts made towards consolidating national finances are substantial. While low bond yields in the short run suggest that the saving measures are on course, one has to bear in mind that this has mainly been achieved by market interventions.
Therefore, we regard the gradual transfer of assets as a disastrous strategy in the long run.
What happens is that none of the previous problems of misallocation are resolved, but instead redistribution takes place (at the beginning mostly invisibly) and problems are dragged out, having to be addressed later. As the dependence on these measures rises, so does the collateral damage to be expected later, and the seeds for an even bigger crisis have been sown. …
Part 1 of this interview continues at the link below.
Part 1 of Lars Schall interview of Ronni Stoeferle
Part 2 is a follow up interview entitled: Gold goes where The Money is
The setup reads: “In a follow-up interview related to his new gold report, commodity analyst Ronald Stoeferle discusses with financial journalist Lars Schall for MATTERHORN ASSET MGMT some more crucial points for a better understanding of the action in the gold pits. This time around they talk about, inter alia: “Resource Nationalization”; Peak Gold; the “Asian love affair with gold; and the “aurophobia” of certain old men in finance.”
Part 2 begins: Lars Schall: A lot of goldbugs are accused that they cheer about high gold prices while the whole world is in a mess. How do you feel about this, Mr. Stoeferle?
Ronald Stoeferle: To be honest, I would love to be bearish on gold. For this would mean that we’d have sound money, low debt levels, a solid financial system. I do not wish for prices at 10,000 per ounce. This would imply major (social) disruptions and the end of the world as we know it.
I really love this quote by Ayn Rand: “You can avoid reality. But you cannot avoid the consequences of avoiding reality.” Therefore, we have to be realistic and admit that the (tail) risks we’re facing are getting bigger and bigger from day to day.
L.S.: What has to be said about the US debt in relation to gold?
R.S.: I think that excessive structural debt suggests further increase of the gold price. A wrong diagnosis of causes leads to wrong solutions. The systemic problem is not low tax revenue, but excessive spending. Additional tax hikes will never consolidate the public budgets in the long run. This can only be achieved by structural reforms in the spending department.
According to Schlesinger saving is tantamount to holding back on consumption in the present in order to be able to consume more in the future. The opposite is true for credit, where today’s benefit is bought with tomorrow’s shortcoming.
Let me give you a few facts on the situation in the US:
• In fiscal 2011 public spending in the US amounted to USD 3,700bn, whereas revenues were falling short, at USD 2,400bn. Tax revenues covered only 65% of expenditure. Reinhart and Rogoff call this the “bang point”, at which the confidence of creditors often tends to collapse.
• When including the debt and guarantees given by states, authorities, pension funds, etc., we find that the picture of excessive debt looks even more dramatic. According to Prof. Laurence Kotlikoff the fiscal gap, i.e. the financing gap between the present value of all future expenditure and all future tax revenues, amounts to at least USD 200,000bn
• Within the past twenty years debt has increased by 350%, while the interest burden has only risen by 60%. If interest rates were on a similar level as in 1991, interest paid would have increased to USD 1,200bn. According to the CBO, government debt will rise to USD 20,000bn by 2015. At an interest rate of 5%, interest payments would then amount to USD 1,000bn, or 45% of current tax revenues.
• Today, the USA has three times as many Treasury bonds outstanding as ten years ago. In the meantime, the average interest rate has fallen from 6.1% to 2%. Is that a logical development? Hardly, seeing as last year 61% of all bond issues were bought by the Federal Reserve. In 2008, it had been an insignificant percentage. This results, on the one hand, in an erroneous impression of high demand, and on the other hand, it downplays the urgency of slashing debt and getting structural reforms underway.
• The budget of the current fiscal year will produce a deficit of USD 1,300bn – an amount that would have exceeded the entire budget in 1990. During Barack Obama’s term in office, public debt has increased by more than USD 5,000bn – the same amount of debt that had been amassed over a period of 211 years from George Washington’s inauguration in 1789 to Bill Clinton’s second term. The average deficit between 2000 and 2007 amounted to USD 174bn, while the annual shortfall has come to an average of USD 1,160bn since 2008.
Although we are currently faced with the highest level of public debt in times of peace, a far-reaching consolidation of public budgets does not seem to be up for discussion. The required grave cutbacks are being postponed, and the policy of “muddling through” is cheerfully continued. The longer structural and far-reaching reforms are postponed, the more substantial will be the need for adjustment and thus greater the burden on future generations.
According to the Austrian School of Economics every act of consumption has to be preceded by production first. “Debt is nothing but consumption brought forward which will then not take place in the future.” There does not seem to be a painless therapy for these problems. I believe that gold is an effective medicine. Thus I expect interest rates to be kept low for an extensive period of time, and this in turn is one of the strongest arguments in favour of a rising gold price. –
Part 2 of this fascinating and timely interview continues at the link below.
Source: Gold Switzerland and Matterhorn Asset Management
Thanks to our friend Chris Powell at GATA for calling our attention to the story.