Introduction

Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens.

A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend checking the podcast out in its entirety –  there is a lot more than is covered by the summary).

 

Mark Thornton and Claudio Grass

Photo via mises.org

 

TARGET-2 balances in the euro zone belie the “everything is fine” narrative. They show that capital flight remains a major problem, with Spain and Italy at the forefront, as their citizens evidently remain wary of their banking systems. It should be no surprise that the ECB remains extremely reluctant to stop its QE operations, although it has at least begun to “taper” its purchases (it is doing so mainly for lack of bonds to buy in certain countries – if it wanted to keep the purchases going at their current level, it would have to shift the weighting of the purchases from the ECB capital key toward buying more peripheral and fewer core country bonds, which would presumably be strongly resisted by ECB Council representatives from Germany, the Netherlands and others). [PT] – click to enlarge.

 

Interview Highlights

We currently find ourselves in a historically and economically significant transition period. The already overstretched bubble in the markets is still expanding, but we now see bold moves by the Fed to reduce its balance sheet, at the same time  the ECB plans to taper, overall presenting us with a fairly deflationary outlook. This reversal of the expansionary policies of the last decade can be seen as the first step toward a potentially ferocious correction in the not-too-distant future.

The ECB is trapped, as it already holds 40% of euro zone sovereign debt. At the same time, Spain, Italy and Greece continue to potentially present major challenges, as a banking crisis could easily reemerge in these countries [ed note: banks in Europe have managed to boost their capital ratios, but the amount of legacy non-performing loans in the system remains close to EUR 1 trn. Moreover, TARGET-2 imbalances have recently reached new record highs, a strong sign that the underlying systemic imbalances remain as pronounced as ever]. Mario Draghi intends to reduce the ECB’s asset purchases from EUR60 billion to EUR30 billion per month. He may soon realize that if the ECB does not buy euro zone bonds, no-one will.

Ultimately, this could lead to a massive flight to the USD. The US still has the biggest capital markets, controlling 52% worldwide compared to Europe’s 9.8%. Stock prices may rise even more in this scenario, but more importantly, the USD would strengthen, which practically nobody wants. Such a development would be seen as a threat to the global economy, as borrowers in developing countries would have a hard time repaying their USD-denominated debt, bringing the threat of a wave of defaults back into view.

Another possible game changer is the “petro-yuan”, the Chinese government’s  plan to start a crude oil futures contract priced in yuan, which would then be convertible into gold [ed. note: in other words, it would introduce yuan convertibility through the back door – see also the comments by Luke Gromen of FFTT, the research firm that first highlighted this development].

This is an attack on US hegemony, as it would inter alia make it easier for certain countries to circumvent US sanctions. It may also strengthen the renminbi’s potential to become a global trade currency, which would counteract USD strength. Moreover, it goes to show that gold remains strategically important and is still the only real money.

This action is also in sharp contrast with statements by some central bankers to the effect that gold is no longer an important monetary or a financial asset. This scenario actually suggests that central banks know exactly why they own physical gold and it is not just a matter of “tradition”, as Ben Bernanke asserted when Ron Paul asked him why he thought central banks still hold physical gold [ed. note: it is obviously not an asset held merely for reasons of nostalgia; Alan Greenspan’s response to a similar question at a Congressional hearing a few years earlier was a lot more credible].

European political elites are invoking the victory of Emmanuel Macron as evidence  of the stabilization of the euro zone. However, quite the opposite is the case: If anything, it represents proof the EU is about to go further down the drain, as it remains firmly unwilling to undertake any of the fundamental reforms the euro zone really needs. This actually makes it all the more likely that the EU will push for further centralization and become ever more totalitarian in the process, by increasingly restricting civil and individual liberties.

Today more than ever, gold remains the most reliable store of value, especially in contrast to the paper money system. If one had invested USD 100K of one’s liquid savings in 1800 oz of gold back in the 1970s, the investment would be worth approximately USD 2 million today.

Apart from qualities such as reliability and timelessness, gold ownership represents an important hedge against political turmoil, particularly when stored outside one’s own jurisdiction. It is probably a good idea to avoid storing precious metals in jurisdictions that have already confiscated gold in the past, such as Russia, Germany, Italy and the US. Switzerland remains exceptional among sovereign nations, as the Swiss people are able to severely limit the power of politicians. This makes confiscation a nigh unthinkable prospect.

Nowadays more and more people are becoming aware of the cracks in the system. A trend toward increased decentralization and autonomy is definitely underway [ed. note: the trend is becoming quite popular among individuals and in certain geographical regions, but it is vigorously resisted by the political elites currently in power – for obvious reasons].

Decentralizing political power would be the best solution for what is coming, in order to make room for a sorely needed competition of ideas. The efforts by the  establishment to stop such initiatives [ed. note: such as e.g. the recent secession attempts in Scotland and Catalonia] are on the rise as well, however they will ultimately most likely fail to turn the tide. You can blow out a candle, but you cannot blow out a raging fire.

 

Podcast video:

 

Claudio Grass interviews Mark Thornton, discussing a wide range of financial and economic issues

 

About Mark Thornton:

 

Mark Thornton is Senior Fellow at the Mises Institute. He serves as the Book Review Editor of the Quarterly Journal of Austrian Economics. His publications include The Economics of Prohibition (1991), Tariffs, Blockades, and Inflation: The Economics of the Civil War (2004), The Quotable Mises (2005), The Bastiat Collection (2007), An Essay on Economic Theory (2010), and The Bastiat Reader (2014).

Dr. Thornton served as the editor of the Austrian Economics Newsletter and was a member of the Editorial Board of the Journal of Libertarian Studies and several other academic journals. He has served as a member of the graduate faculties of Auburn University and Columbus State University. He has also taught economics at Auburn University at Montgomery and Trinity University in Texas. Mark served as Assistant Superintendent of Banking and economic adviser to Governor Fob James of Alabama (1997-1999), and he was awarded the University Research Award at Columbus State University in 2002. He is a graduate of St. Bonaventure University and received his PhD in economics from Auburn University. In 2014, he debated in opposition to the “War on Drugs” at Oxford Union.

Dr. Thornton has been featured in American Spectator, Barron’s, Bloomberg, Christian Science Monitor, The Economist, Forbes, Investors’ Business Daily, Le Monde, New York Times, USA Today, Wall Street Journal, Economic Times (India), Financial Times (Norway), and Tejarat-e-Farda (Iran). He has also had multiple appearances on Russia Today and Press TV

His editorials have appeared in the following leading regional newspapers: Atlanta Constitution, Birmingham News, Business Alabama, Chicago Sun-Times, Houston Chronicle, Mobile Press Register, Minneapolis-St. Paul Star Tribune, Montgomery Advertiser, Orange County Register, Richmond Times Dispatch, Tampa Tribune, and the Washington Times. His commentary appears regularly in the Mises Daily and the Mises Wire. He also appears regularly on “Boom-Bust,” “RT,” “Butler on Business,” “Tom Woods Show,” “Thom Hartmann Show,” “Scott Horton Show,” “Press TV and “Freedom Works.”

 

About Claudio Grass:

 

Claudio Grass is a Mises Ambassador and an independent precious metals advisor based in Switzerland. He is a proponent of Austrian economic theory and strong advocate of individual liberty and free markets. He helps his clients find tailor-made solutions to trade and store physical precious metals under Swiss law. Web presence: ClaudioGrass.ch ; email: contact Claudio Grass

 

Chart by cesifo

 

Chart annotation / caption and editing by PT