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This is a translation of a Handelsblatt interview with Konrad Hummler.
"Currencies have gambled away their credibility"
Konrad Hummler, head of the oldest Swiss private bank, fears the collapse of the money system. In the interview, he explains why we won't make it through a debt reduction, and how investors should position themselves.
Mr. Hummler, the stock markets have fallen. Recession fears have risen. This all feels like the financial crisis of 2008. What is causing this?
We are living through the unraveling of the money system, the path of virtue has long been abandoned. Money should be a reflection of real life, it should facilitate the exchange of goods or be a store of value. I'm afraid we've blundered into a situation where money has become an independent entity, free from reality.
Where does the problem lie?
The major currencies are no longer politically independent, they have themselves become part of the political system. They have thereby given up their most important virtue: credibility. And this is the only thing our money is based on. When it can no longer be believed, that with a bank note, or an account balance, or some money equivalent, you can pay tomorrow, the day after tomorrow, or in a year for a kilo of bread, a doctor's bill, or a house, then money is worthless.
Can policy restore confidence?
From, of all people, those that undermine the money system, the politicians and bankers, we wait for the strengthening or restoration of credibility, then this is a joke. The politicians pick up the problems, disguise them, and shift them onto the public that struggles to deal with them.
When did we leave the virtuous path?
1987 - with the admittance of Alan Greenspan into the Federal Reserve. With him, began the ultimate expansion of the money supply. Since Greenspan, the US central bank has tried to correct every real shock to the real economy, by reducing or increasing the money supply with interest rates. That was a sweet poison - with considerable side effects.
The formation of financial bubbles and inflation.
Not a few think that speculators caused the crisis or at least made it worst.
The crisis was in my view politically induced: banks were allowed to shift their debt problems onto the state, which in turn, caused a state debt problem. At the same time, the central banks, under political pressure, went overboard with the buying of state debt. Through the buying of state bonds they also became part of the state debt problem. The market simply straightened out this distortion. The investors now believe that in many cases, repayment and interest payments have become unlikely or even impossible. This does not have a moral component, but is simply a crude fact.
What does a solution of the finance and credit crisis look like?
Always protecting creditors and transferring risk to the collective should not be allowed. That is what happened with the banks, that is what happened with Greece. The bailout was not a bailout for Greece, it was a bailout for the creditors. A financial restructuring must take place between debtors and creditors. In concrete terms it means that without a cut in debt, in one form or another, it won't work.
Would a common economic and fiscal policy help?
The fundamental problem is the structural differences within the Eurozone. People were aware of this even before the Euro was introduced. It begs the question of whether a common fiscal and social policy can overcome differences in competitiveness. A transfer union is conceivable. It would still however not be competitive on a global basis.
Will the Eurozone fall apart?
The United States of America took a hundred years to grow together, between which there was a civil war. Europe, in this form, is only 20 years old. Ultimately, it will come down to whether the political will in the EU is strong enough, to go this way. But this has political implications, in light of the fact that the democratic deficits of the organization are not trivial - which has to be carefully articulated.
What conclusions have you drawn for your own bank?
We are trying to invest as globally as possible. We are relying on real assets which includes stocks. For me a real asset is a healthy company with trusted management and a stable dividend policy. In terms of nominal values we see a need for a big correction in things like government bonds.
Stock prices have crashed recently. How is it going with your customers at the moment?
A mixture of fear and resignation prevails among them. They are currently holding a lot of cash which is understandable. I can only tell them not to look at their portfolio so often and to be happy about their dividends which are after all a positive cash flow.
Will the price of Gold climb higher?
Gold holds value in times of crisis. It is a fever thermometer of crisis. We are still far from a solution. Therefore I don't see signs that investors will sell gold and buy bonds from Portugal or Italy.
Many thanks for your words.
© 2010-2012 Stefan Hollos and Richard Hollos
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