World Economic News

German Banker: Financial System Has 'Cancer'

Volker Hellmeyer, chief economist of the state-run Bremer Landesbank, in an interview with the German daily Die Welt Oct. 24, was asked about his expectations concerning the commodity price bubble. The first point he makes, is that central banks around the globe have recently become very reluctant to further reduce their gold reserves. According to the Washington agreement on gold a few years ago, central banks will not sell more than 500 tons a year. However, in the meantime, they have been selling much less. Bundesbank President Axel Weber even announced a policy of selling no more gold in the near future. Germany now has 3,300 tons of gold reserves, the second-highest figure worldwide. The Russian and Chinese central banks have mooted increasing their gold reserves in order to lower their dependency on the U.S. dollar.

Hellmeyer then emphasized a particular aspect of the commodity price boom. Here we are dealing, he said, with "real assets. And in view of the fragile situation of our financial system it makes a lot of sense to invest in real assets, like corporate stocks or commodities." Asked whether people are buying gold and silver as a preparation for a "financial crash," Hellmeyer responded that he can fully understand such forms of "precautionary action, because our financial system is not healthy, it has cancer. In the past, gold was always used as a protection against a financial crash."

The "cancer" is the "growing imbalance between the center of the financial system, the U.S., and the rest of the world." The U.S. is running a current account deficit of $800 billion per year. This capital is not being used for investments, which at some point would translate into the "generation of new products and values, but [instead] just finances private consumption. This is the problem. A weakening of the dollar is therefore just a matter of time," and this will drive up commodity prices. In the future, he says, there will no longer be a dominance of the U.S. dollar in the financial system. Other currencies, including the Russian ruble and the Chinese renminbi, will become more important.