Peter Schiff: Dollar hyperinflation is coming unless policy direction is rapidly changed

As you might expect, with Mr Ben Bernanke threatening another massive bout of currency printing to bail out rich Americans with the wealth of poor Americans, under the cover of the hilarious Phillips curve — these days badly camouflaged under the feeble protective cloak of the Dynamic Stochastic General Equilibrium (DSGE) model to stop people laughing at it — Mr Peter Schiff has recently felt obliged to add one or two words to the debate.

In the first of three recent video blogs Mr Schiff begins by discussing high gold prices before predicting $50 dollar silver, within two years. He then moves on to the currency wars currently affecting the world, which he likens to strange inverse wars in which governments deliberately kill their own citizens, by making them poorer, to achieve their own selfish political ends. [Or as Doug Casey recently said, by treating captive citizens as monetary beef cows rather than the more usual tax milk cows.]

Mr Schiff then talks about how more monetary inflation will fail to create jobs or increase production, but will merely increase price inflation, including nominal stock prices, especially as the federal US government is ramping up even more taxation, borrowing, and regulation to make it just about impossible for small firms to grow employment. [Does anyone else think this sounds like somewhere closer to home?]

“The worse the economy gets, the more the Fed is going to do quantitative easing to fix it, which means the more damage it’s going to do and the worse the economy’s going to get, which means more [quantitative] easing; it’s a self-perpetuating cycle which [eventually] destroys the dollar.”

Peter Schiff, Video Blog, Gold, currency war, ADP, inflation, jobs, 4:55

Finally, Mr Schiff predicts that the US will have hyperinflation unless it rapidly reverses its monetary and fiscal policies, and just for fun wonders when Paul Krugman is going to give his Nobel prize back for being so wrong about everything.

In the second video, Schiff expands upon the first video by comparing and contrasting commodities against stocks and pushes his ideas further on the insanity of currency wars. He then moves into the loss of 95,000 US jobs in September, especially the loss of 22,000 goods-producing productive jobs, caused by government regulation and taxation, before taking Alan Greenspan to task for daring to criticise current Fed policy. It was Greenspan who lit the fire and set the blaze, says Schiff, and it’s rich of him to now criticise Bernanke for doing exactly what Greenspan himself would be doing now if he was still in the chair.

Before concluding, Schiff also discusses the recent ‘hope for the best’ thoughts of Larry Meyer, a former Federal Reserve governor:

“Another round of QE is baked in the cake…Markets expect cumulatively around a trillion, and my guess is it will be more than a trillion…it will turn out to be one and a half trillion…You’re not going to sit on your hands, you shouldn’t sit on your hands, you should do something and hope for the best.”

Larry Meyer, former Federal Reserve governor, on CNBC

Schiff concludes in his third video an analysis of the strange Orwellian language being used where a strong currency is ‘bad’ and a weak currency is ‘good’.

[I suppose that’s why Switzerland is so poor and why Great Britain is so rich, and why the Germans had a terrible economic time in the 1950s and 1960s, eventually fed by an IMF bailout in 1976, whereas we in Britain enjoyed a long-term economic miracle, leading to a dolce vita paradise in the 1970s and a continuing worldwide dominance in major manufacturing industries such as car building and other engineering productive activities.]

Mr Schiff finishes by defending his predictive record against various detractors.

The video is followed by Peter’s latest economic commentary, from his Euro Pacific Capital web site, which supports various of the several ideas found within each of the three videos.

The Hail Mary

Peter Schiff, Friday, October 8, 2010

Since the US economy has failed to recover as widely predicted, pressure on the Federal Reserve to conjure a solution has increased. In fact, the Fed now faces the hardest choices in its history. It can either redouble its past efforts to re-inflate America’s bubble economy (risking the destruction of the US dollar) or it can stop pumping and let the economy deflate to a self-sustaining level. Unfortunately, both choices guarantee severe economic pain – but only one offers the possibility of ultimate success.

Today’s news that the economy lost 95,000 jobs in September confirms that record doses of stimulus have failed to create a real recovery. The loss of 159,000 government jobs in the month could have been a positive if those lost positions had been replaced by wealth-generating private sector jobs. But the 65,000 jobs generated by businesses didn’t come close. Worse still, most of these jobs came from the goods-consuming service sector rather than the goods-producing manufacturing sector (which lost another 6,000 jobs). The unemployment rate has now been above 9.5% for 14 consecutive months, the longest such streak since monthly records began in 1948. More importantly, the real unemployment rate, which factors in discouraged and under-employed workers, rose from 16.7% to 17.1%.

Armed with this weak jobs report, the Fed seems poised to make good on its plan for other round of quantitative easing (in English: printing money). Recent statements from top Fed governors have made that sentiment clear. Apparently they feel that they must do something, even though Fed inaction would be far better for the economy. At a time when we should be trusting the markets to grind out three yards in a cloud of dust, we have put our faith in the Fed’s ability to fling a Hail Mary pass, even though all previous attempts have failed.

Most people assume that the “crash” I referred to in my 2007 book “Crash Proof: How to Profit from the Coming Economic Collapse” occurred in 2008. Those who actually read the book know otherwise. The financial crisis that resulted from the bursting of the housing bubble, accurately foretold in my book, was not the crash itself, but merely the overture to a much more tragic economic opera for which the curtain is just now rising.

I argued that the housing bust would threaten the financial system with collapse and that the government would react with stimulus and bailouts – thereby making the situation much worse. That is exactly what happened. I did not believe then, and I don’t believe now, that the process of liquidating bad debt would kill us. But I do believe we will succumb to Washington’s “cure” of endless stimulus.

Many now claim that government deficits and Fed easing prevented a repeat of the Great Depression. From my perspective, calamity was not averted but merely delayed. The price for the reprieve will be a far more severe downturn, which I now think will surpass the Great Depression.

In Crash Proof, I talked about how our economy suffered from the co-morbid diseases of asset bubbles, excessive debt and consumption, and insufficient savings, capital investment, and production. These conditions did not arise as a result of market forces, but from foolish monetary, fiscal, and regulatory policies that distorted market forces. The proper cure would have been to remove the distortions and allow the markets to correct.

Unfortunately, as I forecast, the opposite occurred. Washington lacked the economic understanding and the political will to allow for a painful adjustment to take place. So, instead, they cranked up the printing presses and administered the equivalent of economic heroine. The drugs succeeded in postponing the pain, but at the expense of exacerbating the underlying condition. As the high wears off, a more debilitating hangover will set in.

By electing to bail out the financial sector, prop up housing prices, allow excess spending and borrowing to continue, and maintain superfluous government and service-sector jobs, the government has pushed our economy to the edge of a very dangerous precipice.

The right choice is to admit past mistakes and reverse course. The Fed must raise interest rates aggressively, shrink its bloated balance sheet, and allow the real recession to finally run its course. It will be much more painful now than it would have been in 2008, but at least this time the pain will end and real recovery will take hold. By forcing the federal and state governments to slash spending, sound monetary policy will allow market forces to rebuild a solid foundation upon which future prosperity may be built.

The wrong choice is for the Fed to continue quantitative easing as planned, allowing the government to grow at the expense of the economy. This will widen the economic imbalances that lie at the root of our problems. As a side effect, the US dollar will continue spiraling downward as it becomes clear to foreign creditors that the Fed has no interest in protecting their investments. A weaker dollar will lead to higher inflation and higher interest rates, which will make the Fed’s task that much more difficult.

In the end, our bubble economy will not just deflate, it will burst. The dollar will collapse, consumer prices will skyrocket, real credit will completely evaporate, millions more will lose their jobs, and our economy will change in ways few of us can imagine. Our standard of living will plummet and legions of middle- and upper-class Americans will be impoverished. It is not a pretty picture, but unfortunately, it’s the one our government is painting. Unfortunately, we are running out of time to change artists.