And many, including myself, point out that the emperor does not wear clothes. But only a few, like Professor Antal Fekete, have the credentials of a bespoke tailor.
Professor Fechetti’s critiques of the global economy are particularly persuasive because they are grounded in academic discipline and tradition. A mathematician by training (Professor Emeritus at the University of Newfoundland), Professor Fechetti possesses that unique trait of those whose interests extend into neighboring areas and bring with them a fresh perspective to their new field.
We are fortunate that Professor Fecetti chose economics as his second love – and I, more than most, because it was the Professor who made the Austrian School of Economics alive for me. The Austrian School of Economics is known for the brilliant work of economic theorists Karl Menger, Eugen von Boehm-Bawerk, Friedrich Hayek, Ludwig von Mises etc.
In the spring of 2007, Professor Fechetti revised my book, How to Survive a Crisis and Thrive in the Process, and particularly approved the sections on money and credit. When I presented my predictions of an upcoming economic meltdown at a conference in March 2007, the prevailing view was that if I am right, then I was certainly among the very few who thought a crisis was imminent – except for the gold community.
What difference does a few months make
In early May 2007, I wrote an article called Subprime America Hits Asia and Europe, predicting that delinquent US mortgage loans would soon appear in the portfolios of European and Asian banks, insurance companies, pension and hedge funds, and thus damage US financial markets in the eyes of global investors.
The summer of 2007 subsequently confirmed my prediction that the global financial markets were riddled with speculative mold that had spread like an AIDS virus during the excessive financial downturn resulting from rumors of billions of dollars in bonuses being paid out by Bally’s and MGMs for international finance (Goldman Sachs, Bear Stearns, Lehman Bros, Citigroup, Morgan Stanley, Deutsche Bank, UBS, etc.).
Summer 2007 also brought something more unexpected, an invitation from Professor Fekete to speak at the second session of Gold Standard University Live (GSUL) in Szombathely, Hungary. When I got Professor Fekete’s invitation, I thought the second session would be in Birmingham, AL, home of Full Moon BBQ; They are known for their coconut slow smoked ribs and I was thinking of attending.
But at the invitation of Professor Fecetti, instead of eating Birmingham roast ribs, I dined on goulash in Hungary and was destined to take a radically different view of the now-unfolding crisis that is now spilling over into world markets. When I was in Hungary, the liquidity crisis in the global banking system took a huge turn for the worse.
Midsummer nightmare 2007
Some might dismiss the midsummer nightmare of 2007 as a temporary crisis of confidence, a temporary shake-up of investment bankers’ confidence that is essential in ascertaining risk and reward in today’s markets.
Indeed, it would have been if trust were not the backbone of today’s global financial system. Since gold was replaced by fiat money and debt securities are routinely accepted as investments, trusts have become the real currency in today’s global banking system.
When the confidence game is on
Nothing is more important than confidence
What prompted the central banks of the United States, the European Community, and Japan to offer liquidity to banks in August, was their realization that banks no longer trusted each other. When LIBOR, the interbank rate (the rate at which banks lend money to each other), began to rise rapidly, central banks knew a crisis of confidence was spreading. Banks were now reticent in lending money to each other, accepting additional risks from other banks, at the usual rate.
Where private banks fear to tread
Central banks get involved with public funds
For now, the central bank’s response appears to have worked. In fact, it only delayed the inevitable. The yield on the three-month US Treasury yield fell from 4.69% to 2.51% in a few days as money managers feared that commercially backed paper assets were at risk and fled to the apparent safety of government debt securities. The crisis was, and now continues to be, beyond the ability of central bankers to fix or contain.
We are not in the midst of a “correction” as many hope. We have come to the end of the largest credit cycle in history, built on decades of credit and debt (from central banks) slowly replacing savings and productivity until the amount of credit and debt overwhelmed the ability of producers and savers to service it. We are at the end of the cycle, not the middle, and the endings, as we all know, are very different from what one would hope for.
There is no way to avoid the eventual collapse of the credit (debt) boom.
Ludwig von Mises
Those who traveled to Szombathely, Hungary to hear about Professor Fekete were not the usual crowd one finds gathering around water cooler switch tips. They came from as far away as Australia and America and as close as Austria, but they all shared the feeling that the collapse of the debt capital markets was approaching.
As we listened to Prof. Vekete’s lecture on ‘The Structure of Capital Markets’, ‘Capital Productivity vs. Time Preference’ etc., the global capital markets outside our lecture hall began to falter and falter – the liquidity nightmare of midsummer 2007 was in full swing.
When one is running with the crowd, denial and common beliefs are enough to justify seriously tolerant attitudes and opinions. At this time, America, and indeed the world, is clearly blind to what awaits them.
Today the idea of catastrophic economic change is seen as an unlikely event, just as the dam collapse in New Orleans was before 2005. A week later in Szombathely, Hungary, it is clear, however, that the next economic collapse is as certain as the New Orleans dam collapse.
Will the chickens on a Kentucky colonel’s farm escape from a farm?
At such times one wonders if the citizens of Pompeii had noticed any unusual volcanic activity before the deadly eruption of Vesuvius; And if so, did they ignore him as just another necessary release of volcanic pressure or did some heed his warnings and leave in the nick of time to escape destruction.
Human nature rarely seems to change, and if today is a pointer to the past, it is safe to assume that Vesuvius did indeed erupt in the days leading up to its cataclysmic eruption; But this ignored most of his warnings and perished. And now, just like the citizens of Pompey, America is about to have a crash course in economics and will suffer the consequences of its continued denial. The past is actually a prelude if it is not heeded.
Professor Fechetti has announced that the third session of Gold Standard University Live will take place in February 2008 in Bessemer, AL (near Birmingham and Full Moon BBQ Restaurant). Those interested, call GSUL@t-online.hu