Wednesday, October 29, 2008

Beginning of Hyperinflation

Beginning of Hyperinflation

By Florian Godovits

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Hard-Cash investor Walter K. Eichelburg, predicted the mortgage bubble bust and insolvency of Fannie Mae and Freddie Mac in the United States in an early 2007 Epoch Times interview. He made himself available for another interview with The Epoch Times.

Epoch Times (ET): Mr. Eichelburg, what can we learn from today’s crisis?

Walter K. Eichelburg (WKE): This [crisis] is a progression of the entire economic system. Everything repeats itself. My thinking is that for every investment there is a specific time frame within a cycle, which one must recognize. If one acts at about the right time, one can make a good living. But, I must tell you that I’m not here to save the world. What I’m doing here is educating the investor.

I discovered that the true problem is not the business, but the information. There is a pent-up demand for correct information and that is what I want to satisfy.

ET: Would you share which area of information we need to address?

WKE: You must ask for different information than from today’s “Bubble-Media.” I have studied the history from the Dutch ‘Tulip Crash’ (1624-1636), and it always repeats itself over and over again. The values are artificially pushed up by easy borrowing, which brings investors running – the money comes in for a time and then the insiders quickly exit shortly thereafter, the bubble bursts. It is always the same scenario.

There is something else, called a Kondratiev cycle [1]. A Kondratiev cycle lasts from 50 to 70 years and is present in any national economy where credit (borrowing) is available.

If one invested 5 cents one-hundred years ago, during the time of Franz Josef [2], one would have a shilling today [3]. But, after about 1,460 years, one would have a globe of gold – which in truth is not possible.

Common sense says that at some point in time, there must be at a bottoming out. This is cyclical and was discovered by the Russian scientist Kondratieff. So, [according to his theory] we are in the spiraling downward phase. This is generally called the Kondratieff Winter.

These cycles expand and contract slowly. Therefore very few people notice it. But, a seasoned investor must be able to recognize these contractions. A man in Canada arranged these cyclical movements by the four seasons. A different investment ideal governs during each of these business seasons. Such a phase generally lasts between 10 and 20 years. If one does not change ones investment strategy one will suffer enormous losses.

ET: Can you explain about today’s Kondratiev cycle?

WKE: The present German Kondratiev cycle began in 1948 with the monetary reform. In the beginning, credit is granted prudently. Therefore, there is little inflation. The “growth cycle” began in 1966. Borrowing activities were on the rise, but it was still on the positive side. That continued until 1980. Then, we saw the Kondratieff-maturity cycle. This is the ideal time for trading with paper money, such as stock and bond issues, as well as property types of transactions. Their price depends on credit availability.

ET: Can you explain please? Perhaps using Iceland’s growth as an example?

WKE: For us, there was only one creditworthy entity—that was the state. And now the state was also fully tapped. That means, when the state loses its creditworthiness and their guarantees are worthless, it will crash.

There is something that Robert Rubin, the former U.S. treasury secretary said, when he was asked what he wanted to be in his next life. He responded, “The bond market.” Why? “The bond market controls everything.”

ET: Why is this the case?

WKE: Because interest and credit terms control everything. The reason for an economy to crash is because the bond market collapses. This is the reason.

ET: What do you think about the situation in other countries?

WKE: It was rumored in Austria that the SPO [Social Democratic Party of Austria] politician Hannes Swoboda said the following, “If the 100 billion Euro used for guarantees granted by the State were called, the Austrian State would be bankrupt. This is what could happen and that would be a catastrophe. And the Americans are running out of money. That means they monetize government bonds like crazy.

ET: What do you mean by monetize [4]?

WKE: What is the United States doing? The government sells bonds to the U.S. Federal Reserve Bank, and the bank then has money. A bond is not the same as money. One has to be careful about this point. This is called monetizing. It is not important if it is through borrowing activities or through time debentures. The importance lies in the fact that the central bank generates the money.

ET: Do central banks print the money?

WKE: In the past they printed money, now it is done electronically.

ET: Is it known which bank will fail and which will not?
WKE: Today, no one can predict which institution is safe and which is not. One does not know which bank will collapse first; perhaps Raiffeisen [Raiffeisen International Bank Holding AG] is going to be the first one, or perhaps Constantia Privatbank [5]. No one can predict it.

ET: What about the bank managers? Don’t they know?

WKE: No, they themselves have no clue. I couldn’t believe my eyes and thought that it was completely irrational when Raiffeisen International assumed the Russian Oligarchs Oleg Deripaska debt, held by the Deutschen Bank AG. Banks are just like small investors.

ET: In the past, the currency was backed by gold. Does it mean that this increases the risk of bankruptcy?

WKE: As I mentioned earlier, the last solvent creditor – the State -- was drawn into the crisis. If the banks go under and need to call on the guarantees, then the state will collapse. That can be seen in Iceland, Hungary, the Ukraine and other countries. Then, they sell-off the government bonds for currency, which is now worthless. If that happens then all has reached the end.

ET: What does this mean for the public?

WKE: The collapse happens because all the money is worthless. There will be hyperinflation at the supermarket. Then hunger will begin.

ET: What do you suggest an investor should do?

WKE: Don’t keep paper money. The Euro has become toilet paper, and the Franc is not better off. I suggest that people have sufficient food, buy an acre of arable land and invest in gold. Gold is still cheap at US$3,000 an ounce.

Notes

[1] The Kondratiev wave/cycle theory was discovered by Nikolai Dmitriyeivich Kondratiev (1892-1938), a Russian economist. Proponents of the Kondratiev wave theory note it successfully predicted the 1929 stock market crash based on the 1870 crash. The Kondratiev wave is also referred to as the Kondratiev cycle.”

[2] Franz Josef was the oldest son of Archduke Franc Karl and crowned Emperor of Austria in 1848 at the age of 18.

[3] A shilling is a coin formerly used in the United Kingdom.

[4] When one monetizes, one converts government debt from bonds to currency. The currency is then used to buy products or services.

[5] Constantia Privatebank was taken over by five Austrian banks. The Austrian Central Bank has told Reuters that “the bank was relevant to Austria's financial health because it had a fund subsidiary managing 10 billion Euros (US$13.5 billion) in client assets.”

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