I recently spoke with Canadian billionaire Eric Sprott about his views on the Greek debt crisis and investing in gold and silver.
Greece has missed payments to its creditors and has been trying to negotiate down its debts for several months.
The situation is reminiscent of the Detroit bankruptcy, says Eric. It was easy to see it coming – the borrowers plainly stated they would run out of money. In both cases, the borrowers and creditors let the clock run until there was no money left.
Eric says Greece would be better off if it left the Euro and reneged on its debts. More negotiations are likely to draw out the crisis, as Greece simply cannot pay its obligations.
Meanwhile the US reportedly has $85 trillion in unfunded obligations, a number which grows each year… Does anyone believe those can be paid?
Henry Bonner: Hello Eric, what are your thoughts on the Greek debt crisis? How do you see things playing out from here?
Eric Sprott: I have always thought that the ECB (European Central Bank) would persist in coming up with some kind of solution, because they had just under $89 billion euros in the Greek banking system and we were theoretically only talking about lending another $7.2 billion to Greece to solve the problem.
But that has gone way up in the meantime, like most estimates that countries make on the size of their difficulties.
When I look at the proposals, it just is a total wipeout for Greece. For the love of me, I can’t understand why their parliament would pass that.
I mean, the ECB is seizing $50 billion in assets. It almost looks like they want to run the banking system in the country, if not effectively run the country itself! All the reporting mechanisms go to the ECB.
I can’t believe that Tsipras would have won the “no” vote (against the bailout) and then had that happen to him.
I have always believed that Greece would have been better off just reneging on the debt because there’s no way in the world that the ECB can honestly expect to be paid back.
So we will see what happens in the Greek parliament. But I think Greece would be better with an exit and debt repudiation. With what they theoretically agreed to, it is going to be very, very difficult for the Greeks and the country to survive in that environment.
So we will see how that plays out as events unfold. Even other governments within the ECB might reject it. So there are still a lot of acts to be played.
So you don’t think that the situation will settle just because they reached a deal? You think the Greek crisis is going to continue?
Well, of course the fundamental problem, which was very much expressed by Mr. Varoufakis, is that Greece is broke.
He said it probably three months ago now. The fact is that they are broke and have around 25 percent unemployment.
They’ve been undergoing a recession for five years. So how do you expect somebody who’s broke to pay up? Normally, when someone is broke, they go through a chapter 11 bankruptcy or something in order to get out from under debt.
So I think it’s going to be an ongoing crisis. It will be interesting to see how it plays out in the banking system. But of course it’s the banking system that the powers-that-be want to preserve. That’s because the banking system can create a domino effect where all of a sudden everyone is questioning everyone else’s credit. Also, writing down a debt would be bad because that debt is on people’s balance sheets, particularly the ECB’s.
They can pretend that there are no write-offs or put it up in some organizations where you never see the losses. But we all know that if Greece repudiates its debts, there are going to be lots of losses on those bonds. We will see how it plays out.
Is this a repudiation of the idea that you can bring about prosperity with centrally-planned economic policies and a common currency? Is this part of the case against fiat currencies in general, including the dollar?
That is totally the case.
It’s similar to what we’ve seen in Japan, where there really is no recovery. We see it happening in the States where there’s no recovery. The only hint of a recovery is coming from the fact that you took rates to zero. You let the marginal buyer buy a home. You let the marginal buyer buy a car. Those slight gains, which are often at very low levels, have kept the economy bumbling along here.
But as you know, there are lots of signs that the economy is not strong. Retail sales were down 0.3 percent for the month of June.
The middle class is getting pillaged because inflation is way higher than the wage gains they have seen. Therefore, there’s no extra money for discretionary spending, even in the US.
Europe looks like it has failed the Greek situation here.
And we even have a situation in China now where the monetary authorities were perhaps too lax and now they are paying the price.
The population bought into the stock mania and now they are getting their hats handed to them too.
The theory that central planners can alter events on a sustained basis is fundamentally wrong. We saw the central planners fail in the USSR. We see them failing in Japan. We see them failing in the ECB. We see them failing in the US.
I think it all shows that fiat currency — and more importantly debt creation — can sustain an economy for a while. But once you have to start paying back the debt and you can’t take on increasing amounts of credit, then your GDP goes down because people don’t have the spending power.
That’s essentially where we are now. Countries, central banks, and people really can’t take on more debts. Therefore, you’re likely to see a contraction in economies as that extra spending from debt vanishes from the scene.
So do you think we could see other countries follow in the path of Greece — other countries that are weak in Europe or elsewhere?
Well, I’ve always believed that the US is essentially bankrupt. Based on their own data, their unfunded liabilities are something like $85 trillion and rising by $5 trillion a year. Of course the reason you’re not totally insolvent is because those unfunded obligations don’t have to be paid yet.
But theoretically they do have to be paid someday and whenever I look at this $17 or $18 trillion GDP, I think: “Well, that engine has to support $85 trillion of obligations and an extra $5 trillion every year.”
There’s no way that those obligations can be met.
I analogize with Detroit. Ten years ago, they were broke and time went by until finally they said “we’re bankrupt.” It was writ large because the pension obligations weren’t going to diminish.
It’s the same thing with the US where medical care, civil service pension plans, and social security can’t be funded.
I like to focus on the US as a prime example. But I can also go to Italy, Spain, or Japan. I could go to any number of countries, including probably Canada for that matter, and see an untenable situation in the long run.
What do you do if you want to protect yourself? Do you hold gold?
I’ve always believed you should own gold and it has played out very well since I got involved back in 2000. It has been spectacular, quite frankly.
Of course it has been a very, very tough game for the last four years here. In my own account, I continue to invest in gold and silver companies. I recently bought a mine in the United States personally. I just took on 40% of another mine here in Canada.
So I’m a believer. I look at the physical supply and demand of gold and silver for that matter, where we are experiencing some shortages here.
The demand numbers I’ve seen are way beyond the supply. I think that Western central banks surreptitiously make up the missing supply and that someday they’re going to look in the cupboard and realize that it’s bare.
So far, everyone in the press is downplaying gold and silver but I haven’t lost any conviction whatsoever.
To your bigger question, how do you survive in a recession or a depression?
You have got to take matters into your own hands. Make sure you have essentials and the things you need to get you through. It could fall apart pretty seriously all of a sudden – just like we experienced in ‘08 where there was almost a zero credit available at one time.
That is just as likely to happen this time and it’s hard to transact in an environment like that. So you had better be prepared. Have some ‘good’ currency — gold and silver.
Are you going to be telling people your thesis for gold and silver this month at the Vancouver conference?
Definitely. Look at the economy, which I don’t think is coming along. Look at the ‘Ponzi finance’ that we’re in. I can hardly believe it when we see zero-interest-rates and money printing and everyone says it’s OK. Well, we all know that it’s not OK.
It’s not OK in the medium to long run. We see what Ponzi finance has done to Greece for example, where they were able to take on debt because somebody fudged the numbers. They looked healthy when they weren’t healthy.
Of course they’ve been struggling for the last five years because they mis-portrayed themselves. Most of these central planners and governments are mis-portraying where they really are financially and they’re not going to be able to meet their obligations.
So those are some of the things we will talk about, as well as opportunities to invest in the precious metals sector. So I’m very much looking forward to the conference.
Thank you, Eric. I’m looking forward to seeing you in Vancouver.
Courtesy: Henry Bonner
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