Yesterday, I spoke by invitation at the prestigious Dutch Nyenrode Business University, situated on a 13th century estate with its own genuine castle, moat, and drawbridges. This is the only university of its kind with such a unique atmosphere and remains the only private university in the Netherlands, which explains the invitation.
The questions were interesting, to say the least. We focused on how the economy had changed post-Bretton Woods, reaching the point that the central banks no longer have control over the economy, as people assume. Nations borrow because the old theory was rather simple. If a nation borrowed it was deflationary, for they were removing capital from the system. There was a law in place prohibiting banks from lending money on government bonds. Hence, it did shrink the money supply, reducing the VELOCITY (deflationary).
Debt became money post-Bretton Woods. If you wanted to trade futures, you put your money into AAA government T-bills and posted that as collateral. The central bank lost Keynesian control of the money supply, as raising interest rates had NO EFFECT upon those in government. Government continued to spend money, which is what eventually collapsed Bretton Woods.
We discussed how people want to view the central bank as the Financial God of the economy, but the reality is that they cannot control anything since the bulk of the money is created through government borrowing, which has become printing money that pays interest.
There was great skepticism about the euro surviving. As I have explained, it very well may be too late to consolidate the debts to save Europe. Nevertheless, Brussels will fight to the last drop of blood of the private sector, because if the euro fails, there is no longer a need for Brussels. This is now a battle for their bureaucratic jobs – not to save or manage Europe. This is why they now want a European army. They need to defend their system, no matter how economically unfeasible it has been constructed.
We also focused upon the thinking process and my favorite quote from Einstein. There is little hope that the ECB will wake up here, for they continue down the same course of thinking that has created the current crisis. They continue to lower interest rates under the delusion that at some point this will stimulate demand to borrow. They are wiping out the elderly and destroying pensions, which are often compelled by law to invest in government bonds. Simultaneously they are producing a lost generation among the youth who cannot find jobs, as no one is creating new small businesses.
Those in government CANNOT think outside of the box. Japan lowered interest rates for more than 20 years and it utterly failed. You cannot follow this course of thinking, for it wipes out all savings and renders the entire socialistic system dysfunctional. Years ago, I wrote that real estate would decline UNTIL the first uptick in mortgage rates. I received a flood of emails saying I was dead wrong again, showing just how many people are brainwashed. I did not make such statements based upon personal opinion – I based them on facts – derived from correlating the markets and trends.
People are not stupid. Just ahead of the sales tax increase, the people of Japan ran out and bought anything they may have been waiting to purchase, to the point where it almost looked as if Japan had recovered. The same was true with interest rates. People are NOT as stupid as these theories portray. Why should someone buy a house if mortgages rates continue to decline? You save money by waiting. At the first sign of an uptick in rates, people will rush out to borrow, for it will be cheaper to borrow today rather than waiting until tomorrow.
Correlate the stock market to interest rates and you will see that there too, the pundits and theories are DEAD WRONG. Stocks historically RISE with RISING interest rates, and rates plummet with every decline like 1929–1932 or 2007–2009. You will see the U.S. share market RISE with RISING interest rates, compelling the central bank to continue raising rates as they are trapped within the corridors of this simply wrong thinking process.
We are lost in these theories; I honestly cannot understand how people continually repeat the same nonsense, yet nobody bothers to do the slightest bit of investigation to validate what they are saying. So to me, what I say is based upon fact, which is supported by correlating the world. It is not some personal opinion on how I “think” the world works. That is just a delusion. If we are going to ask a question or adopt a policy, why can’t we actually do the research to answer authoritatively? Too many economists postulate only what they think, not what they independently research, and this has plagued the field of economics. I love the ones who proclaim that the business cycle cannot be defined, and therefore whatever I say is dubious. They will not prove me wrong – they just think they will.