Felix Zulauf Interview

Felix Zulauf gave a rare interview with Eric King where he described the deflationary collapse that he expects in the next decade.

“I think this is completely different than the 1970s. In the 1970s we had an inflationary problem that was due to bottlenecks here and there and everywhere in the booming world economy.

Today our problem is deflation. The deflationary problem is due to too much debt outstanding. When an entity has too much debt it has to borrow more and more to pay the interest. We are in that Ponzi type of scheme. At some point in time you begin to decrease your income that is discretionary to spend and invest because more and more goes to paying and servicing interest on your debt. We are at a level where we have too much debt which is highly deflationary, so it’s forcing our system down and we won’t have much of economic growth in coming years, certainly not enough to service the outstanding debt. Therefore the problem is deflationary in nature not inflationary in nature.

Now I think the US as well as many other industrialized countries are going eventually to hit the wall because we are in the final, the end game of this system as we knew it over the past 70 years. It means that we will enter a deflationary period which is extenuating and the policy makers are trying to counteract and fight it by using highly inflationary policies. So it’s a sort of a dance on a high rope, a high risk dance. We do not know for certain which way the dancer will eventually fall down to. Some argue it’s going to be a deflationary collapse and others argue it will be hyperinflation.

I think that the deflationary pressure in our system will increase and intensify over the next few years and we will come to the point where we have a Lehman, AIG, Citibank in one day happening. And then you have you have a banking system, I mean I do not mean those particular companies but entities of the same significance in our system. At that point of time there is no way that the banking system can handle it. Our banking system in the US and Europe has an equity capital of between 2% and 4%, the big money center banks. In such a situation they will be bust.

Therefore, next time the government cannot come in again because many of those governments are already perceived as bust too. At that point in time I think that  the central banks will come in big time and you will see the balance sheets of the central banks will not expand by a factor of two or three but probably by a factor of 50 or 100, or something like that. Once that happens than you have virtually in a matter of a few weeks a situation where you basically make our currencies as we knew them invaluable, you destroy them. I think that at that point in time you will see some activity on the side of the central banks within a short period of time we will have a currency reform due to the crisis. That’s the sort of events that I see in the next five or six years. I cannot tell you if it will happen in two years, or in five years or in seven years but I think that we will see it in this decade.”

via Felix Zulauf Interview.