‘Many nations in the West are already bankrupt’

“Central banks will continue to print money until the world runs out of trees,” wrote Puru Saxena, sometime back. And that is what governments across the world seem to be doing these days to rescue their “beleaguered” financial institutions and also to pump prime their economies.

The US Federal Reserve recently decided to expand its balance sheet by $1.15 trillion, which means it will be printing more dollars. “The Fed monetising debt is inflationary and will result in a loss of purchasing power of the US dollar. Although I expect very high inflation down the road, I don’t expect hyperinflation in the US within the next decade,” says Saxena on the US Fed’s decision.

Saxena is the founder and CEO of Puru Saxena Wealth Management. Based out of Hong Kong, Saxena is also the editor and publisher of Money Matters, a monthly economic newsletter.

But where will all this ultimately lead to? “Many nations in the West are already bankrupt (US, Britain, Spain, Iceland and Ireland) and the only thing they can now do is to print even more money. For example, America’s total debt is now worth $54 trillion (and rising!) and there is no way the US can ever hope to repay its debt in today’s money. In other words, either the US will default (highly unlikely in my view) or it will print and inflate so that this huge mountain of debt feels much smaller in the future due to the loss of its purchasing power,” says Saxena. In this interview he spoke to DNA. Excerpts:

“I urge you not to be fooled by the recent strength in the US dollar,” you wrote in the recent past. In spite of all the pessimism, US dollar held strong against other currencies, for sometime. How do you explain that?
The whole world was ‘short’ on the US dollar between 2002 and 2008 and most investors were ‘long’ on all kinds of currencies and assets. So, when the credit crisis intensified and investors got margin calls, they had to liquidate their ‘long’ positions and buy back US dollars in order to pay back their US dollar-denominated loans.

This stampede buying of US dollars and Japanese yen is the cause of the sharp rallies in both currencies. Also, American consumption has slowed down somewhat and the current account deficit has shrunk significantly and this is another reason why the US dollar has rallied in the past few months. Once this asset liquidation phase ends, the US dollar should resume its decline, especially against the commodity-producing currencies (Canadian and Australian dollars).

Do you feel the US dollar will see an ‘epic crash’ in the near future?
I am not so sure whether the US dollar will see an epic crash against other major currencies. After all, no nation wants a strong currency and everyone is engaged in competitive currency devaluations.

But if the Fed continues to print money and take on more debt, eventually the purchasing power of the US dollar will shrink considerably against certain assets. In my view, the US dollar will lose maximum purchasing power against commodities, whose supply can’t be increased at the same pace as the US dollar. 

Also, the CRB index (a commodity price index) today is only marginally higher than the bear-market bottom in 1999 and 2001, so commodities have once again become super-cheap and should benefit immensely from the sky-high monetary inflation.

You wrote sometime back that “In fact, central banks will continue to print money until the world runs out of trees.” Why do you say that?
The global economy is now so leveraged and debt levels in the West are now so high that Western governments have two options — (a) default (b) monetary inflation and debasement. Throughout history, governments have always opted for the inflation route and they are doing the same now—essentially pushing the problem into the future.

Do you think governments like US and UK, which have been using the printing press extensively, will continue to keep printing money?
Yes, they have no option but to keep printing money and expanding credit. Many nations in the West are already bankrupt (US, Britain, Spain, Iceland and Ireland) and the only thing they can now do is to print even more money.

For example, America’s total debt is now worth $54 trillion (and rising!) and there is no way the US can ever hope of repaying its debt in today’s money. In other words, either the US will default (highly unlikely in my view) or it will print and inflate so that this huge mountain of debt feels much smaller in the future due to the loss of its purchasing power.

Depending on whom one believes, the US debt is anywhere around $50-70 trillion. Do you see them repaying that amount over the years?
Oh! I don’t think they will default because they have the world’s reserve currency and a well-oiled printing press. As long as foreign creditors are willing to accept America’s IOUs, they will continue to live beyond their means by borrowing more and more from the rest of the world.

A debt-laden nation such as the US has very low savings and it owes a lot of money, so it is in its own interest to debase the value of the US dollar. This way, they’ll have to pay back much less in real terms due to the ‘magical powers’ of inflation! 

A clear fallout of this financial crisis has been the fact that more and more financial institutions are being nationalised. How do you see that panning out?
It is tragic that taxpayers’ money is being used to save bankrupt and incompetent financial institutions. It is clear that most bankers at the top were incompetent at best and corrupt at worst. These guys walked away with billions of dollars of bonuses during the boom years and the public didn’t benefit at all from this prosperity. Thereafter, greed took over and they started to leverage their balance-sheets 30 to one or 40 to one!  Some banks were even leveraged 50 or 60 to one! 

Even an idiot with half a brain could have seen that this was a time bomb waiting to explode; this is precisely why we didn’t invest a single cent in financial shares during this decade. Now that these dubious banks have gone bust, I think they should be
allowed to fail. Why should the poor teachers, farmers and plumbers pay for this mess?

Now, I am not saying that depositors and customers of the banks should lose anything.  Instead of wasting money by buying toxic assets, the governments need to guarantee all bank deposits, protect customers and then, they should take these ailing institutions into receivership.

Similar to Bear Stearns, the US establishment needs to act as a conduit so that all assets can be sold to the highest bidders; without causing any financial loss to depositors and customers of these banks.

Under my approach, only the bondholders of these banks will stand to lose and so they should! Shareholders have already been wiped out so it wouldn’t make any difference to them. What is going on now is absurd and insane. The world’s governments are essentially using taxpayers’ money to bail out bondholders of these banks. This is nuts and has never worked throughout history.

The world over governments have cut interest rates hoping that would lead to more lending by banks. But that isn’t happening. Don’t you think it is kind of ironic to expect lending to pick up given that it is excessive lending that caused the problem in the first place?
It is a total joke! Over-consumption and excessive leverage created this huge mess and we can thank Mr Greenspan for that. He left interest rates at 1%, long after the US economy had recovered earlier this decade and then he encouraged American homeowners to take on variable rate mortgages.

Now, the Fed is hoping to offer the same poison as medicine! This is totally bizarre and ridiculous. Banks aren’t lending at the moment, but I think they will start to lend in a few months and then we will have another gigantic asset-bubble in a few years but by then, the US government’s balance-sheet will be much extended. So, at that point, who is going to bail out the US government?

What are your views on the ways the Obama administration is trying to rescue the American financial system? 
A bunch of turkeys have hijacked our monetary system and all they know is how to print money.

Rather than let the market clear itself out, central banks continue to use taxpayers’ money to bail out insolvent institutions.

This brilliant strategy has never worked in the past and it will not work this time around. Instead of robbing innocent people of their savings, the establishment must allow the weak banks to go bust. For example, if Citibank is on the verge of collapse, then the US Treasury must let it go bust.

All Mr Geithner needs to do is to protect the customers of Citibank, allow Citibank’s investors (shareholders and bondholders) to suffer and sell the bank’s book to another institution. This is all that needs to happen.

This way, depositors will not lose anything and only investors in Citibank will suffer — and they should! Why should the public share the losses with these investors? When Citibank did well in the past, did its shareholders and bondholders distribute the profits to the public? Of course not. So, why should the reverse occur now? Personally, I find these bailouts absurd, unethical and a total waste of valuable resources.

How long do you expect the current contraction to run and how big do you expect the decline to be in terms of GDP for the western world and Japan?
I suspect the contraction will run for at least another year if not longer. The West is now in a period of secular deleveraging whereby the private sector is tightening its belt and paying back debt.

So, American consumption will remain muted for a while but I think the US government will now borrow and spend like crazy to try and stimulate the economy. Before this is all over, I think the GDP in the West will contract by perhaps 8-10%.

Of late, a lot of experts have been betting on the fact that China will come to the rescue of the world economy…
China can’t rescue anyone. If it manages to come out of this contraction without much damage, it would have done a superb job. China isn’t big enough to pull the whole world out of this mess. Its economy is tiny compared with the size of the US and Europe and people who believe China will rescue the world are smoking some very potent stuff.

Of India and China, which country are you more bullish on and why?
I like both these economies and we have investments in both. China is a world-class manufacturing centre, it has a tight-fisted government, massive savings rate and large foreign exchange reserves. So, China should perform extremely well over the next decade or two.

Sure, it has some problems — water and rural population come to mind — but these are manageable and the Chinese should be able to weather this storm. As far as India goes, I like it for different reasons. For better or for worse, India is a democracy and investors in the West seem to like that.

So, in the future, I expect huge capital inflows into India and this should boost India’s stock market. Furthermore, India is a world leader in providing IT and other services and this dominance should continue for many years. Moreover, India’s infrastructure is still ancient and herein lies a big opportunity. 

Which are the sectors you are bullish on in India?
I like infrastructure, power and the beaten down property development companies. The time to buy is when everyone is despondently selling and I’m seeing such signs of panic today. Honestly, I couldn’t tell you where the market will be in 3 or 6 months but I think we’ll be a lot higher in 4-5 years.

You recently wrote “Given the negative economic news and awful investor sentiment, my assessment may sound absurd but it looks as though the bear market ended late last year and we are now in the early stages of a new cyclical bull-market.” Why do you say that?
Sentiment is always most negative around major market bottoms and most euphoric after a big rally in the markets. I agree that the economy will stay sluggish for a long time, but the last fall’s crash in the financial markets has already discounted this slowdown or contraction. It is interesting to note that despite major US indices breaking to new lows, Asian markets and the resources’ shares haven’t followed suit and this is a bullish divergence. Again, it is possible that the market overshoots to the downside in the near future due to additional negative news from the banking sector but I suspect most markets will be a lot higher in 4-5 years from now.

I recently interviewed, John Rubino (the co-author of The Collapse of the Dollar and How to Profit From It) and he told me that “$5,000 an ounce is a reasonable target a few years hence.” What is your forecast on the price of gold?
It all depends on how much money the various governments print in the years ahead. If all nations start to inflate like Zimbabwe, then Mr Rubino’s target of $5,000 will be left in the dust but I don’t like to make accurate price forecasts because the truth is that nobody can really anticipate the madness of the crowd. 

Having said that, I do expect paper money to continue to lose purchasing power against gold, silver and other hard assets over the years ahead and we have allocated a portion of our clients’ capital in precious metals as an insurance policy.