Can you give an example?
Japan proved this. They did it by building roads, bridges and mostly infrastructure projects. You would see, well, doesn’t that contribute to prosperity? My answer is no. They have built roads to nowhere, roads which have no traffic. They have channelled rivers. They have bridges which go nowhere. Those things are not real contributors to prosperity. They look like prosperity because they give people jobs. And they show people activity and so on. And they show up in GDP and that’s what I mean by GDP being fraudulent. That’s why I mean GDP shows something but it doesn’t really measure what people think it measures. It measures activity but it doesn’t measure prosperity. That’s why the Soviet Union had high GDP. There numbers during the seventies led to major American economists commenting that the growth figures were very good. They even said that the Soviet economy would overtake the US economy. But the missiles and all those things that the Soviets were building, they don’t contribute to prosperity.The only way you can have prosperity is in a free market. Only in a free market are people doing with their money what they want done. Nobody wants a bridge that doesn’t go anywhere. Only the government would do such a thing.
So does it make sense then to hold onto physical assets?
Not in the short run. I don’t believe in speculating, so I’d say I want to hold gold now and practically all I want to hold is gold. I don’t trust paper money. Stocks are overvalued. Commodities are going to go down the tube when China blows up, which it will. So what does that leave? Just gold, for this period and only this period, in which we are waiting for this calamity to happen. We are waiting for the destruction of the monetary system that was set up in 1971. Until that is destroyed, wiped away, and something else is put in its place, gold waits.Gold is the only good thing to buy. My guess is that there will be some big crisis, and catastrophe, blow-ups and all kinds of things. And gold will be the last man standing, through that and end of that thing. When that happens you want to get rid of gold because then gold is just a protection against this kind of stuff. There are only a few times in history, when you need gold and you want gold, this is one of those times.
Would you say the big Western Economies and Japan are insolvent?
The US is insolvent. Japan I don’t know. Japan has huge net assets in its reserves and so on. The US is bankrupt. If the US had to subject its balance sheet to GAAP (Generally Accepted Accounting Principles) accounting standards you would see it has a deficit of something like $54 trillion because GAAP forces you to recognise currently future obligations. And the entire wealth of the American households is $52trillion. So even if you took all the wealth of all the Americans the government would be broke.
You wrote recently that the China story is largely a stimulus story too. That being the case, do you see the rapid growth rates in China continuing?
Not possible. We are going to see either one of two things. One is that China is going to blow up and fantastically blow up. And all of a sudden Chinese companies go broke, the banks are broke. China is a central planning story. They are building cities that don’t have any people in them. That is not a good idea. Some bank in China has bonds as debt for those cities. It’s impossible that debt is good. So far the Chinese are supporting, the banks are lending. But keep in mind that there is no such thing like the credit boom like the one that China has had — where they doubled bank lending last year (and it was) not being followed by a credit bust. We are seeing empty cities, empty factories, empty office buildings there. So they are probably going to blow up. And the blow-up could take a form like the 2008 blow-up on the Wall Street. Or it could take the form of a slowdown. Who knows?
People don’t even know who runs China. It is run by central planners; we don’t even know who they are. Nobody knows. A slowdown in China to say 6% growth will be a catastrophe. It is catastrophe for Brazil, because Brazil sells stuff to China. It’s a chop for Russia for all the material producers that are out there digging, drilling, flapping, hopping and they are doing that to provide stuff for China’s 10% growth. If China’s growth goes down to 6%, there would be a whole worldwide sell-offled by the commodities and followed into the emerging markets. India’s stock market will go down a lot because it depends on foreign investment. The funny situation is that the economy does not depend in exports, the stock market does.
What about all the US debt that China holds?
It’s a big bubble. Eventually — I don’t know when — the US debt will become hard to finance like Greece. Eventually it will become hard to make somebody lend enough money that will cover the US deficit. Then US will be in Greece’s situation, where they will have to say, look, we either cut expenses or we fund that debt ourselves by printing money. If we fund it ourselves, then all the dollar holders all over the world, including China are going to say “Wow, this does not look good.” I have got $2.4 trillion and these Americans are printing more money. In that case China will then sell its debt. But remember all this takes place in the context of a global meltdown. China is melting down. When China melts down then US melts down too but it melts down in a funny way. Because when China melts down, people go for safety. Where do they go? They go to US bonds. In fact, I would guess is that what we are going to see is a meltdown, maybe slow, maybe fast, maybe catastrophic, maybe gentle, we don’t know. And that meltdown will lead people back to the US dollar, back to US bonds for safety, which will shore up US for a while. The US will continue to borrow tremendous amount of money and then eventually it will be hard for them to borrow money too. Interest rates will go up, dollar will go down, and China will dump some of its US bonds and so on. I don’t know how fast all this will happen though it is all there waiting to happen.
So right now China is probably in a Catch-22 situation?
Yes. They have got all the stuff and they can’t get rid of it. (Laughs)
Comments