No panic on the Titanic
Capital Protection in Times of Monetary System Crisis According to the Teachings of the Austrian School of Economics
By guest author Steffen Krug*, Head of the Institute for Austrian Asset Management (IfAAM). This provides information on the economic effects of the prevailing state money system based on the Austrian School of Economics.
Central banks and their policy decisions are increasingly being steered by panic. At its meeting on 9/14/2013, the Governing Council of the ECB decided to raise the key interest rate for the tenth time in a row, to now 4.5% since July 2022. There was a similar flurry of interest rate hikes by the U.S. Fed, which in June 2023 raised the key rate for the eleventh time in succession to a current level of 5.5%. This was preceded by a phase of unrestrained low interest rate policies starting with the 2008 financial crisis, which sent inflation and debt rates worldwide to historic highs.
The truth is, however, that the panic-stricken, desperate course changes in interest rate policy we’ve seen in recent months will not bring any improvement in the economic situation, contrary to all promises. The opposite is the case. But why is that?
Today’s monetary system, with the U.S. dollar as the reserve currency, has not had any anchor – like gold or silver in the past – since the end of the Bretton Woods monetary system in 1971. This so-called fiat money is created out of thin air by means of balance sheet expansions by commercial and central banks and it then vanishes again into thin air after repayment of the loans.
Interest rates, i.e. the price of money, are set deliberately and in a planned fashion in the fiat money system, with increases in interest rates making credit more expensive and tending to reduce the money supply. A decline in the money supply, in turn, leads to falling goods prices, to a higher insolvency rate and ultimately to recession. Due to the previous expansion of the money supply caused by years of artificial zero interest rate policies by central banks, there has been a global increase in asset and consumer prices and a distortion of the global capital structure in recent decades.
The rapid rise in interest rates over the past year is now rendering many investments unprofitable, and bad investments made during the artificially low interest rate phase are being exposed. Indebted companies that were still profitable when interest rates were low are increasingly experiencing liquidity problems and are gradually going bankrupt. Property owners and indebted private individuals in particular are finding it increasingly difficult to service their debts these days. As a result, commercial banks have to write off more loans, and falling credit ratings make it riskier for banks to grant new ones. More and more debtors are being forced to repay their loans. This shrinks the money supply even further.
Many companies and private individuals now have to sell assets in order to meet their credit obligations. There are foreclosures on real estate and companies being sold off. As a result, asset prices are falling and bank loan defaults are rising even further. The economy is shrinking and unemployment is beginning to rise. Thus, even in the peak of summer in July, unemployment in Germany rose by 0.2% to 5.7%. At the same time, money is becoming scarcer and consumer prices are also starting to fall. The inflation rate in Germany fell from 9% at the end of 2022 to 6.1% now, and producer prices actually fell by 12.6% in August 2023. This is the highest slump recorded since 1949. In the absence of a renewed massive cut in key interest rates by central banks, such deflationary dynamics against the backdrop of gigantic total global debt risk causing the entire fiat currency system to collapse.
So, having created a severe hyperinflationary crisis with its zero-interest monetary policy, the central bank is now about to fuel the next major crisis in the form of a severe deflationary recession. In H1 2023, 50,600 larger companies went out of business in Germany alone, representing a 24% increase in corporate insolvencies. At the same time, German companies are currently withdrawing more money from Germany than at any time in recent history.
Public pressure, especially from politicians, will ensure that, contrary to all assurances, the ECB will soon respond by once again increasing the money supply through interest rate cuts and bond purchasing programs. A return to the cheap money policies is seen by the world’s powerful as the lesser evil compared to a severe deflationary depression. Such a resurgence of inflationary policies will continue to destroy the value of fiat currencies, and the euro in particular will increasingly become a soft currency. The likelihood of bank runs will also increase further in this crisis-ridden capital market environment, as large numbers of savers lose confidence in the solvency of their banks and try to move their deposits to safety. But how can effective capital protection actually be achieved?
It was the representatives of the Austrian School (Austrian Economics) and in particular the economist Ludwig von Mises who analyzed the economic effects of this planned economy-controlled fiat money system already more than 100 years ago and wrote: “The recurring emergence of boom periods followed by depression periods is the inevitable result of the constantly repeated attempts to lower the market interest rate by credit expansion. There is no way to prevent the final collapse of a boom generated by credit expansion. The only alternative is: Either the crisis arises earlier through the voluntary termination of a credit expansion – or it arises later as a final and total catastrophe for the monetary system in question.”
But what does that mean for investors?
Already during the financial crisis of 2008 I developed an investment style (Austrian Asset Management) for the festering monetary system crisis based on the insights of Mises, Hayek & Co. The Austrian School of Economics combines classical value investing with Austrian Monetary and Business Cycle Theory and Austrian Theory of Entrepreneurship. Successful investing against the backdrop of a terminally ill fiat-USD-EUR currency system requires that the underlying value of a real investment is easy to understand, that this investment is in demand even without cheap credit money and government subsidies, and that there is maximum protection against financial and political repression. The goal is long-term value preservation of the savings beyond the monetary crisis and foreseeable currency reforms. The Austrian School’s investment focus is on precious metals such as gold and silver, industrial metals, mining stocks, corporate investments with a solid equity ratio, and real assets that are needed at any time.
A great example is the portfolio of Realunit Schweiz AGwhich reflects the investment philosophy of the Austrian School of Economics. The Swiss also focus on physical assets that are stored outside the banking system and thus offer the best possible protection against financial repression. A broadly diversified portfolio with investments in crisis-resistant corporate holdings, physical precious metals as well as industrial metals and Swiss banknotes in non-bank deposits in Switzerland offer the highest level of security.
The long-term protection of savings against the loss of purchasing power and financial crises is central to all investment decisions. Direct access outside the banking system protects customers from bank runs and bank closures, like those seen in Greece during the last financial crisis. RealUnit Schweiz AG is an investment company, so by investing in it you automatically become a RealUnit co-owner. Investors from Germany and Austria in particular can thus significantly reduce the dependency of their portfolios on the euro. During the coming storm in capital markets, stability and asset protection will always take precedence over speculation and stock market rip-offs. So, don’t panic on the Titanic. Your lifeboat is ready!
*After his studies at the University of Heidelberg, ESC Reims in France and the European University Viadrina in Frankfurt (Oder), economist Steffen Krug worked as a securities specialist at a Hamburg bank. Over the course of his work he developed the “Austrian Asset Management” investment style and founded the Institute for Austrian Asset Management(www.ifaam.de) in 2009. He is the host of the successful capital protection talk show alphaTrio as well as the World of Value conferences and interview formats (www.worldofvalue.de).
** The contents of this article represent the personal views of the author only and not necessarily those of RealUnit Schweiz AG. The quality (financial statements, market positions, etc.) and competitiveness (future) of the investment positions, taking into account possible threats and opportunities (external factors), have not been examined.
