Peter Schiff: Dollar rout, CNBC, Fin Reg

With the Dollar cratering this week, the last shoe in Peter Schiff’s Austrian-based prediction set from 2007 may finally be dropping.

In his latest video blog (July 15th), Peter Schiff comments upon the 9% drop in the Dollar Index this month, with the Dollar showing particular weakness against the Euro, the Yen, and the New Zealand Dollar.

Schiff thinks this Dollar Index drop may be the direct result of the recent G20 meeting, where a clear split opened up between the American stimulus-and-spend position and the European austerity-and-save position — dare we say the Krugman versus Schiff divide? — which has subsequently weakened the Dollar outlook versus the Euro outlook, despite the earlier problems with Greece et al.

Mr Schiff has faced much criticism in the past two years because of his 2007 conviction that a forthcoming crash, on the bursting of Greenspan’s bubble, would be accompanied by US government bailouts, bank failures, Fannie and Freddie bankruptcy, zero percent interest rates, massive government borrowing, quantitative easing, and record deficits. Under these predicted conditions, he saw it as highly unlikely that the Dollar would increase its strength relative to other currencies; yet this is exactly what happened.

The financial world turned in panic to the Dollar as a ‘safe haven’, thereby pushing up the Dollar Index value, when virtually everything else crashed almost exactly in line with Schiff’s many other predictions, all based upon his long-term analysis of the Greenspan bubble and its necessary eventual bust, according to the tenets of the Austrian Business Cycle Theory (ABCT).

(For more on ABCT, the following concise PDFs are freely available: The Austrian Theory of the Trade Cycle [Mises, Haberler, Rothbard, Hayek] and The Austrian Theory of Money [Rothbard].)

Despite the avalanche of snickering criticism, Mr Schiff remained convinced that economic gravity would eventually grab the Dollar in the same way that cartoon gravity eventually grabs hold of Wile E. Coyote whenever he chases the Road Runner over a cliff — despite Wile E. Coyote’s fervent desire to remain up in the air.

The Dollar’s recent problems may thus mark economic gravity finally nailing the elusive Dollar, thinks Schiff; it was certainly difficult for gravity to remove all the subtle traces of a smile from Mr Schiff’s cherubic face as he opined upon the issue.

He then moves on to price inflation, with some commentators at CNBC saying that price inflation is almost invisible and is certainly nothing to worry about. On the contrary, claims Schiff; to him the price inflation train is highly visible because prices should be dropping in a time of US economic distress, but they are holding up due to all of the money inflation pumped into the US economy by the Federal Reserve.

(As in Britain, many US government-measured figures have been massaged down over the years, to create a better press for government.  Ronald Reagan took housing-related costs out of the CPI, because they were going up too quickly, and there have been many other finaglings and finessings over the years, especially since 1980.  To take a clearer look at US price inflation, it is often worth taking a looking at the Shadowstats web site, which is currently showing US price inflation at approximately 9%, using the US government’s 1980 price inflation methodology, rather than the approximate 1% figure reported currently using the US government’s 2010 price inflation methodology.)

Schiff predicts that when prices do start going up significantly, as the inflation train rushes towards us, it may be too late for anyone to do much about it, because the inflationary stimulus policies of the US government and its Federal Reserve have made the US economy so febrile that any punitive Volcker-style interest rate rises required to shut down rapid price inflation will cripple the US economy completely. The analogy Schiff uses is of a man who has got rid of his party hangover (the 2008 bust following the preceding boom) by taking another large cup from the punch bowl (the Keynesian stimulus policy). This may have made the pain go away temporarily (producing the infamous green shoots of recovery), but have left the man in an even worse state to cope with reality when the second hangover inevitably kicks in (which is starting about now).

The man would have been better off taking the painful hit of the first hangover and dealing with it, says Schiff, rather than hitting the punch bowl for a refill. One assumes that hitting the punch bowl for a third time, as Obama may do with another round of stimulus, will cause even less temporary relief and will cause even more eventual pain.

To wrap up, Schiff predicts that when the Dollar index starts going really low (sub-80) then the US bond market will start to move downwards in line with the US stock market. He also criticises the theatrics in Washington over the recent passage of the financial regulations bill. The too-big-to-fails will get bigger, Schiff claims, due to all of the extra regulation and easy access to government finance, while the smaller firms will either be more likely to fail or to merge into the larger entities, thereby decreasing competition and allowing yet more financial complacency, which can only be bad news for the long-term recovery.

12 Comments

  • Too big to fail? Ha! What they mean in reality is too big to nail.

  • Dave Redick says:

    Right ON !! Thanks. I would only add that while you say; ‘ American stimulus-and-spend position and the European austerity-and-save position ‘, I bet the EU folks would love to ‘stimulate-and-spend’ but dare not due to loss of Euro value from monetary inflation. As the world’s primary reserve currency, the US can create new money with near impunity. Our ‘exorbitant privelege’ as De Gaulle would say. See more in my book ‘Monetary Revolution-USA’ at Amazon.com and at part 1 and 2 in the left margin of my site. Comments??
    Thanks., Dave

  • Al Sledge says:

    The ABCT does not get public acceptance as it clearly shows that government (central banking and regulation) is the problem rather than the solution. Government schools teach that the government can solve all problems thus as our nation like the Titanic slips below the waves, the band will play on. Yet the public dutifully believes that we do not have enough regulation and government involvement! Lunatic Nation. Perhaps only 5% of citizens understand the real problem, but the good news is that amounts to about 15 million people nationwide that may be able pick up the pieces after the politicos are finished unless the US makes a move to join a world government. In that case we will no doubt enter another Dark Age. Very sad indeed. Thank you very much for this article.

  • Al Sledge says:

    In addition to Dave Redick post above, he failed to provide a link to his website, thus I searched for it. A quick glance at it appears he may be a kindred spirit. I have no affiliation with him, but the link is:
    http://www.forward-usa.org/

    That said, the US is rapidly losing it’s status as “reserve currency”. This currency will come back to us with devastating results.

  • Keith Pierson says:

    Mr. Schiff’s opinion is ‘probably’ ultimately correct, but certainly not in the near term. Also near term, the imminent flight to quality by world investors will cause the dollar to rise substantially (for lack of any other perceived safe haven) not fall, commodities to fall (including gold and silver) and the indexes to ‘tank’ beyond what most will think is possible.

    Deflation is next up on stage, leading to THE great depression of the ages followed by the massive inflation mis-timedly proclaimed by Mr Schiff. If gold is a hedge to inflation, what is it to deflation?

    Mr. Schiffs predictions on gold are going to break the back of those who follow his reco’s. The economy’s coming relentless demise will far outlast the solvency of investors. It is unfortunate Mr. Schiff is going to go the way of most market/investment commentators. He will never recover from his self inflicted black eye. Nor will his followers ever recover the wealth they lose from following his advice.

    It’s all about timing Mr. Schiff…..timing.

  • David Wooten says:

    The dollar is well above levels of last December and will likely rally soon. As bad a shape as this country is in, others are even worse. The dollar collapse will not start for at least another year and it will be the last fiat currency standing.

  • Roger A. Huddleston says:

    There are millions of Americans who understand the mess that centralized government, centralized banking, and their fiat currency have created. The solution to this freedom strangling debt is to SECEDE from the federal government of the USA (peacefully, through the ballot box) and establish hard money currencies based on precious metals.

  • dan says:

    the US dollar will never be worthless when it is the only currency that can be used to trade oil. alot of these clowns (Schiff) fail to acknowledg this. hence the reason why europe, uk ect are going down austerity path and US stimulating and stimulating some more… because they can! they can print as many dollars as they want because eventually they will MAKE oil prices rise which will “soak” up these new dollars.

    timing is everything, and getting their sheep to invest rubbish that is going to be hammered before taking off is criminal.
    these guys have their blinkers on and miss real opportunities to make $$$ acting on second rate advice.
    Any of these hacks that you see on TV work for wall street and aim to take your money.

  • Andy Duncan Andy Duncan says:

    Hi Dan,

    Perhaps you’ll be interested in this story:

    Iran to Sell Oil in euros and other currencies

    • Andy Duncan Andy Duncan says:

      Though this has been superseded by other news:

      Iran to sell oil in currencies other than euros,dollars

      Then there’s this:

      The demise of the dollar

      Haven’t these people heard that God Himself made it illegal for people to trade for oil in anything other than Federal Reserve notes?

      Obviously, the Iranians ought to be worried about insisting on anything other than dollars for their oil, because when Saddam Hussein announced it would be selling oil for euros, within a few years there were American helicopter gunships swarming over the streets of Baghdad reversing that policy.

      But this time, if the US does invade Iran to get them to use dollars again, it will be doing so alone, or at least, only with Israel as a junior partner. No politician in Britain will dare to use British soldiers as cover for US global military aggression for a third time in ten years.

  • Current says:

    Oil-price speculators work with a highly-liquid spot market. That this market is denominated in US dollars isn’t particularly important. No paper currency is needed, and bank-money is only needed for a short period.

    That said, it’s difficult to believe that the fact that oil markets are primarily dollar denominated has no effects. It is very difficult to speculate *what* those effects are though.

    I share Dan’s doubts about the accuracy of Peter Schiff’s pronouncements though.

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