Peter Schiff: Dollar, credit ratings, China, short-term debt

In the latest Peter Schiff videoblog (July 12th), Mr Schiff thinks we are entering the economic lull before the storm and that the Dollar has finished its recent bear market rally, with the world now re-focusing its attention on the US economy and its failed stimulus, after the travails in Europe.

With stimulated US car and home sales both now slumping, following this failed stimulus, the US people may now be finally losing their faith in Keynesian stimulus policies.

Schiff then moves on to discuss a Chinese bond rating agency which has recently put the US government’s debt at number 13 in the world (unlucky for some). Of course, US ratings agencies usually place the US government at the top of the tree with a triple-AAA rating, though all of the licensed US ratings agencies have a government-tranted monopoly privilege, so Schiff thinks they may be under some pressure to keep US government high in their bond rating charts.

As the same ratings agencies which triple-AAA rated most of the world’s collateralised debt obligations (CDOs), Schiff wonders how can they rate China four notches below the US when the US is the world’s biggest debtor and China is a global net creditor with $2.5 trillion Dollars in reserves?

After pondering this intriguing question, Schiff notes that the Bank of International Settlements (BIS, the central bankers’ bank) have noted that global maturity of debt is the shortest it has been for many years, because lenders do not want long-term interest rate risk and want borrowers to hold this risk. When all these borrowing governments and banks want to roll over this debt in a couple of years, then there will be an almighty competition for funds (i.e. interest rates must go up or the printing presses must roll into overdrive, to produce the required funds).

Schiff leaves us with the thought that the economy will either grow, according to the Krugman stimulus model, so interest rates must go up to keep pace with this growth, or economies will collapse, thus causing governments to try to borrow more money to fund more stimulus packages.

Either way, interest rates must go up.

2 Comments

  • Bad policy is a result of the misunderstanding of short-run and long-run impacts of events and policies, you know “The long run is just a sequence of short runs, so if we make sure things always make sense in the short run, the long run will take care of itself.” China is biding its time, it has the edge right now on the U.S. and I don’t see any shift any time soon. What is it that makes you think that interest rates will go up?

  • For one US dollar you get 7.30 swedish krona. That’s alot of swedish money. A couple of years ago you got 11 swedish kronors for 1 dollar. So swedes find it cheap to shop in the states.

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