Rallo sees growing interest in the teachings of Austrian economics, because it’s the only school that provides a theory of the business cycle in relation to monetary phenomena. Keynsian economics on the other hand fails to see the heterogeneity of the economy when talking about aggregate demand. Furthermore printing money and issuing new debt won’t solve structural problems of misallocation of capital. Talking about real estate, Rallo points out that in the US the housing market has more or less bottomed, while in Spain prices still have further to fall. We have reached a point of debt saturation with people wanting to deleverage. Adhering to Keynesian thought, the government steps in to force more debt upon the people in order to stabilise the system.
While Rallo thinks that the ECB will finally resort to money printing, the right thing to do would be to privatise public assets in order to bring down debt levels. However Macleod points out that it will be difficult to find buyers if everybody starts selling at once. Also western countries don’t want to have Asian countries buy their public assets. Rallo says that our monetary system, which is no longer tied to gold, is very unstable and shows a lot of volatility. He believes that Europe could go bankrupt, but that the dollar could survive at the centre of the global monetary system.
Rallo states that fiat money does not lead to equilibrium, because it does not fulfill the basic functions of money. Therefore the market is always on the lookout for assets which can be used to fulfill these money functions. This is what caused recent bubbles in stocks and real estate. Gold however is different due to its monetary properties and it’s scarcity compared to the existing stock of gold. Therefore it doesn’t make sense to talk about a gold bubble. Gold is being monetised by investor demand and should be part of an investor portfolio to protect purchasing power.
Talking about silver’s monetary role, Rallo says that Silver used to be a monetary asset in the past and still has a role for lower payments, however, he doesn’t see as strong monetary demand for silver as there is for gold – making it riskier in the short term as shown by its higher volatility. However, if more people decide to put their savings into silver, the silver market would become more liquid and thus more stable.
This interview was recorded on November 15 2011 in Madrid.