Keiser Report: Gold-for-Bonds & Debts-for-What?!


And finally, how does it actually not, exactly as you say, debase the trust that we need to have in the monetary system in the value of the Euro note or the Dollar note you have?


So all that breaks apart, but even more important than that, because you’ve got these very low levels of interest rates, which is zero.


I suppose, is as low as you can go, and I bet you anything, Max, the one thing the ECB is gonna do in the next couple of weeks is slash interest rates…


Because they got no choice. They got to slash interest rates. And every one is very critical of Jean-Claude Trichet, when he put up interest rates.


I think in the back of his mind he knew that the politicians would not make any hard decisions. So he used inflation as an excuse to put up interest rates so he could drop them later if needs be as a sort of, you know, putting some foam down on the runway.


But coming back to that, low interest rates don’t create the right incentive structure to reduce debt. And that’s the critical problem.


But this is the Japan problem. You put the interest rates down, allowing the government to run up more debt. Everybody is to run up more debt. Then, of course, you can increase interest rates, because if you increase interest rates, you become insolvent even quicker.



Max Keiser: Let me, let me stop, let me chop in there for a second because you say higher…without higher interest rates, you don’t have the right incentives to reduce the debt i.e. to stimulate enough growth to pay off the debt.


That seems to be counter intuitive to most people out there. They would think that lower interest rates somehow are a greater incentive. But that’s not true, is it Das?



Satyajit Das: No, I don’t think so. I don’t think so.


And, you create all these sort of terrible, terrible incentive problems in the economy. I’ll tell you what they are. The first thing is, what’s the incentive for the mass of the population who have been good and saved?


What’s the incentive for them to save if you’re just basically gonna rob them?


Because essentially in Europe, and in the United States, these people are earning negative real returns. What’s the point of saving?


So, basically, they should just go and spend their money and throw themselves to the mercy of the government, which just basically accelerates the bankruptcy process.


The other thing is if you have really low interest rates, you have low cost of capital, which means the substitution between capital and labor and the right mix of the two changes in a very adverse way.


And the two other real issues about that which really, I think, are misunderstood, is the massive subsidy to the banking system. Because if you look at the banking system, the deposits are not costing them anything.


So all they’re now incentivized to do is to go and buy government bonds which give a little bit more which are risk free assets, and take the carry between the rate on the government bond and the zero cost of their deposits.


And this is what the American banks have been living on for the last 2 or 3 years. And so, all the wrong incentive structures are put in place.


And that’s what we’re going to see which is why I am appalled at this whole idea that people like Sarkozy is pushing, “Oh but if the ECB printed money, life woud actually get better.”


I don’t think it will. And the devaluation pressures that we actually put on the Euro would be off-set by the appreciation of the United States dollar. And they would basically start to print money to devalue.


So it becomes a race of…to nowhere. And I think that’s the big problem in all of this.



Max Keiser: Alright, exactly. Das, we’re out of time. Thanks for the commentary ’bout the Keiser Report.

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