Episode 76: GoldMoney’s Andy Duncan talks to Peter Schiff about the upcoming “fiscal cliff” in the United States, and how precious metals investors should manage their way through it. They also talk about Peter’s view on gold stock investments, China, as well as both the short-term and long-term outlooks for gold. Peter Schiff is CEO and Chief Global Strategist at Euro Pacific Capital; CEO of Euro Pacific Precious Metals; and author of several financial books, including How an Economy Grows and Why It Crashes (2010); Crash Proof 2.0: How to Profit From the Economic Collapse (2011); and The Real Crash: America’s Coming Bankruptcy—How to Save Yourself and Your Country (2012). He’s also the radio host of The Peter Schiff Show.
This podcast was recorded on 28 November 2012 and previously published at GoldMoney.com.
Although most people reading these pages are familiar with the idea of gold becoming money once again, as it was for so many millennia in the past, it’s always interesting to see these ideas being discussed, however tangentially, within the mainstream media. So it was good to see the Daily Telegraph giving coverage to a Peter Schiff interview on King World News, where Mr Schiff puts forward the bold claim that the U.S. Dollar will become backed by gold within two years.
Not that he claims the politicians in the United States wish to do this – even despite talk of a gold commission around the boundaries of the Republican Party – but because the United States will be forced into this through irresistible economic pressures.
Although he has many critics, it has often proved dangerous for these critics to laugh at Mr Schiff too loudly on video when he makes one of these predictions, because all too often the predictions come true – no matter how outlandish they seem at the time – and those videos are then replayed endlessly on YouTube, much to the ongoing amusement of Mr Schiff and all of his many followers.
For those who wish to check out Mr Schiff’s remarks, as reported at the Telegraph, you can follow this link:
From what looks to be a remarkably pleasant location, Peter Schiff delivers his two cents on the S&P’s effective downgrading of the US government’s debt rating. As you might imagine, the words scathing, nonsensical, and laughable, underly much of what Mr Schiff says:
Here is a related article excerpted from Mr Schiff’s own web site:
The only thing more ridiculous than S&P’s too little too late semi-downgrade of U.S. sovereign debt was the market’s severe reaction to the announcement. Has S&P really added anything to the debate that wasn’t already widely known? In any event, S&P’s statement amounts to a wakeup call to anyone who has somehow managed to sleepwalk through the unprecedented debt explosion of the last few years.
Given S&P’s concerns that Congress will fail to address its long-term fiscal problems, on what basis can it conclude that the U.S. deserves its AAA credit rating? The highest possible rating should be reserved for fiscally responsible nations where the fiscal outlook is crystal clear. If S&P has genuine concerns that the U.S. will not deal with its out of control deficits, the AAA rating should be reduced right now.
By its own admission, S&P is unsure whether Congress will take the necessary steps to get America’s fiscal house in order. Given that uncertainty, it should immediately reduce its rating on U.S. sovereign debt several notches below AAA. Then if the U.S. does get its fiscal house in order, the AAA rating could be restored. If on the other hand, the situation deteriorates, additional downgrades would be in order.
The Austrian money manager, Mr Peter Schiff is back with another one of his Schiff reports. In this YouTube he tries to seek out what is catalysing a weak dollar, weak bonds, and rising commodity prices.
He thinks Catalyst #1 is the increasing inflationary heating in China, caused by their export of goods to the U.S. in return for container ships full of U.S Treasury I.O.U.s, to import uncontrolled American inflation into China, with Chinese food prices rising 12% in the last calendar year.
Schiff describes the only way China can reduce its inflation rate, which is to let the Chinese Yuan rise. When they do this — which Schiff thinks is inevitable — then price inflation will funnel back to the United States, which will produce higher U.S. interest rates, which will then pull the rug out from under any of the Fed’s “stimulus” money printing programmes.
Catalyst #2, says Schiff, was Obama’s platitudinous set of folksy homilies delivered last weekend, which promised more tax cuts, more unemployment benefits, and more government spending — all paid for with fresh air and fairy dust — as combined with the thoughts of Chairman Ben Bernanke, as broadcast on 60 Minutes, on how this sagacious doge stands ever-ready with a firm hand on the plunger wired up to nuke the printing press, which absolutely no-one, including himself, believes he will ever press.
If Ben Bernanke does fail to raise interest rates in 15 minutes, when the Tsunami of price inflation washes in from China, says Schiff, then all of the U.S. government spending obligation chickens will come flying home to roost, plucked and ready to cook; this will then send the U.S. into massive price inflation. Hoist by his own petard, if Mr Ben Bernanke does raise interest rates in 15 minutes, as he promised to do on 60 Minutes, then the gargantuan U.S. economic collapse he has been holding off with massive money printing for the last two years will melt down the roost, instead.
Either way, thinks Schiff, this is a Sophie’s Choice that the Federal Reserve has long been dreading, while it has been cowering for the last two years betwixt a rocky printing press and a hard monetary fire pit, hoping beyond hope that all those dreadful people shouting at it will go away when the leprechauns at the World Bank find some fiat currency solution to this horrible mess that it has created for itself in the last forty years of its insane money printing madness.
Mr Schiff has produced two YouTubes since we were last with him.
The first video, from the 26 of November, discusses the dollar and its ugly-lady contest with the euro, plus the peculiar United States shopping festival of Black Friday and what this credit-card-fuelledevent says about the general level of American economic knowledge regarding the difference between production versus consumption:
The second video, from the 3rd of December, discusses the recent surge in gold, on its way towards the highly significant price of $1500 dollars an ounce.
In a move which will please the Mogambo Guru, Mr Schiff also discusses oil prices and the Zimbabwean madness of the Keynesian multiplier, where the US congress thinks that for every new dollar of unemployment benefit printed and handed out in its largesse, two dollars of economic growth will be created from the firmament of Keynesian wonderment. Schiff asks the obvious question; if this was the case, why doesn’t the congress just give everyone unemployment benefit, and lots of it, to really get the party going:
In Mr Schiff’s latest back-on-form video blog (17th November), Connecticut’s finest son discusses the recent parabolic ups and downs in the gold market and how this volatile market uses the stairs to go up and the elevator to go down, to shake out the weak hands and the pre-Christmas-bonus speculators. Obviously, many nervous gold bugs will still be hiding under their beds at the moment, after the gold price cliff-dropped this week; however, those of us with stiffer backbones are still happy to keep accumulating at these temporarily lower beachside prices, indeed we welcome these major seaside dips to provide ourselves with better buying opportunities.
Schiff then goes on to explain how successful the Chinese will be with their proposed price controls, to counter all of the inflation they are creating, as they go paper-note for paper-note with Bernanke, with their Chinese yuan printing press.
[You really do wonder if the economists in the Chinese communist party are either joking or really are as stupid as this?]
They will, of course, be as successful as Richard Nixon was in 1971, or as successful as the Chinese emperors were with their own paper money experiments, which they called ‘flying money’ — for good reason.
Schiff then finishes with the big thank you Warren Buffett has just given the US government for bailing Berkshire Hathaway out, and a warning to run a thousand miles away from the GM share sale, the largest IPO in US history; Schiff predicts that GM will go bankrupt again, soon, except in the case of a really massive inflation, which will cover up their otherwise more easily discernible losses.
[UPDATE: Max Keiser has an interesting theory on where the $20 billion dollars came from to fund the GM IPO.]
While it’s true that history repeats itself, the patterns should always be separated by a generation or two to keep things respectable. Unfortunately, in today’s economic world, it seems the cycle can be counted in months.
On July 24, 2009, just as the Federal Reserve unleashed its first quantitative easing campaign (now called “QE1” – an echo of the reclassification of the Great War after still more destructive subsequent developments), Fed Chairman Ben Bernanke wrote an opinion piece in the Wall Street Journal to soothe growing concerns about excess liquidity. He assured the public that the Fed had an “exit strategy.”
In a response entitled “No Exit for Ben”, I called the Chairman’s bluff. I argued that the Fed had no exit strategy, and that Bernanke was trying to fool the market into believing that quantitative easing was not debt monetization.
Just 16 months later, Bernanke is at it again, penning another op-ed to defend his second round of QE. Except this time, instead of feigning an exit strategy, he just outlines a path to expand the program in perpetuity.
In recent months, Fed economists have taken great pains to tell us how much better off the economy is now than it was in the first half of 2009. Given this supposed good news, what prompted the current turnaround in policy? Could it be, perhaps, that perpetual easing was the policy all along?
Should we expect another op-ed in a few months in which Bernanke tries to reassure us that QE3 will not over-liquefy the market? How much longer can the Fed play this game before the public and the markets wise up?
The reason I knew QE1 would fail, and that the Fed had no exit strategy (other than more rounds of easing), is because the remedy is totally flawed. If Bernanke’s predecessor, Alan Greenspan, had engaged in prudent monetary policy, we never would have arrived at the point of desperation that made quantitative easing a palatable option. However, we did, and Bernanke’s understanding of economics is so remedial that making the right choice is essentially impossible for him. Now, we are caught in a vicious circle of spending, borrowing, and easing.
In his most recent op-ed, Bernanke rather envisions a “virtuous circle” in which QE2 causes stock prices to rise, which then “boost[s] consumer wealth, and increase[s] confidence.” The wealth effect, in turn, “spur[s] spending and produce[s] higher incomes and profits,” which finally “support[s] economic expansion and promote[s] increased employment.”
Despite the devastation of the Fed’s previous burst bubbles (stocks in ’99 and real estate in ‘08), Bernanke still believes in the virtue of pumping. His current policy is to inflate another stock market bubble to cure the recession that resulted from the bursting of the housing bubble, which was itself inflated to counter the effects of the bursting tech stock bubble. Does the story of the old lady who swallowed the fly come to mind? She eventually tried swallowing a horse, and we know how that ended. It’s hard to decide who is more culpable for the strategy: Bernanke for selling it or the country for buying it.
In the 16 months since Bernanke assured us that QE1 would not jeopardize price stability, oats prices are up 40%, concentrated orange juice up 45%, gold and rice up 50%, corn up 55%, coffee up 60%, copper up 70%, sugar up 90%, and cotton and silver up 100%! (The sluggish Dow Jones Industrials are “only” up 30%.)
Last week, Kraft Foods reported a 26% rise in third quarter revenue; however, because of steeply rising material costs, profits actually dropped 8.5% over the same period. If Bernanke is correct in assuming that consumer prices will stay low, the only way Kraft shares could go up would be for the market to assign much higher multiples to lower earnings. You can hope that will happen, but it’s not a wise bet.
Given that QE2 will also push down the dollar against foreign currencies, companies exporting to the US will face the same bind as Kraft. If foreign suppliers don’t raise prices, a weaker dollar will cut into their profits.
My guess is that neither foreign nor domestic companies will take the hit, but pass the costs along to consumers. Rising prices will soon became a daily occurrence on Main Street, not just in the stock market.
For all the wrangling over extending the Bush tax cuts, no one seems bothered by the continuation of the Bernanke tax increases. For the typical American wage earner, the inflation tax will more than offset the benefits of slightly lower income taxes. Savers and retirees will suffer the most as the interest paid on their assets continues to fall and the purchasing power of their principal is eroded.
In reality, quantitative easing will produce the exact opposite of its intended result. In the short-run, it may create the illusion of economic growth and temporarily add some service sector jobs, but once the QE ends, the growth and jobs will vanish. Then, the Fed will most likely try once again to douse the fire it started with another round of QE gasoline, creating an even larger and less manageable inferno. Let’s hope we can change policy before the whole economy burns to a cinder.
Here is Mr Schiff’s latest video blog which covers much of the same ground:
On Sunday, World Bank President Robert Zoellick wrote a remarkable article in the Financial Times of London. (FT subscribers, click here to read. Others, click here for a summary.) He called for a renegotiation of the global monetary order and – incredibly – the introduction of a new gold standard. In response, gold broke $1,400/oz on Monday.
This is a tremendous breakthrough for gold investors. For the head of the World Bank to make such a statement is unheard of in modern times. Among top bureaucrats and their economist friends in academia, the gold standard has always been a taboo – mostly because it prevents governments from using the “inflation tax” to finance military expeditions and entitlement programs. So, for such a high-ranking official to publicly express support for gold-backed currency, the dollar system must be nearing its end.
In fact, since the Fed’s announcement last week of a new round of stimulus using $600 billion freshly printed dollars, world leaders from Brasilia to Tokyo have been protesting like never before.
This may be remembered as the moment the world rose up and said, “enough!”
While Zoellick danced around the edges of calling for a true gold standard, I believe that the transition is already taking place. Investors and foreign central banks are re-monetizing gold as they move their savings out of the dollar. In Zoellick’s words: “Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.” That’s why gold is breaking one record after another, and will continue to do so for the foreseeable future.
If gold were officially remonetized, the price would have to be about 47 times higher to pair central bank holdings with the assets of the global banking system (according to 2008 estimates from the McKinsey Global Institute). To look at it another way, central banks would be in the market for about 42.6 million ounces of gold to back up all the fiat money in circulation. Martin Wolf, columnist for the FT, asserted that a new gold standard “would generate huge windfall gains to holders of gold.”
It has only been since 1971 that the world money system has functioned without a gold-backing. I believe this experiment is rapidly coming to a close. Commentators are right when they say there is no currency ready to take the dollar’s place as the global reserve – but there is a metal with a great track record that has been waiting patiently in the bullpen.
It is hard say when the Fed’s monetary Ponzi scheme will fall apart, but many of its biggest “investors” are wisening up. I strongly recommend preparing for a dollar collapse before it’s too late. When the president of the Washington-based and Washington-funded World Bank speaks out against the dollar system, what more warning do you need?
Here is a recent Peter Schiff interview covering much the same ground:
This has been a busy 10 days for Mr Schiff and he has had a lot to say about all of the crazy Keynesian things that have happened.
In the first video (25th Oct), Schiff speaks about the dispensing of economic advice to the G20 by Timothy Geithner, the US Secretary of the Treasury, who told the rest of the G20 heads of state to stop manipulating their currencies to prevent “excessive volatility”:
In the second video (29th Oct), Schiff speaks from New Orleans about the dollar index and the rise in the price of silver, especially the rise in institutional demand for this industrial precious metal. In this video, without explicitly mentioning Austrian Business Cycle Theory, he describes how the Fed’s stimulus plans are just a way in which they borrow from the future to pay for things today, thereby exacerbating the problems in the future. He also predicts that QE2 will be followed by QE3, QE4, and whatever else it takes to destroy the dollar. [The column on quantitative easing that he mentions can be found at the end of this post.] Schiff also points out that he thinks the real reason for quantitative easing is nothing to do with ‘policy’, but simply a backs-against-the-wall move to help the US Treasury move its bond securities, because without quantitative easing there would be an immediate funding crisis for these securities:
In the third video (1st Nov), Mr Schiff discusses the reported rise in US consumer spending and why this is going in the wrong direction and why this should be increased saving instead. He then gets round to a favourite subject, the thoughts of Chairman Paul Krugman, and why the Chairman is so spectacularly wrong about everything. For instance, if Krugman was right, indicates Schiff, then the 30% savings rates of Singapore and China would imply they were in a long economic slump rather than having record years of growth behind them.
Schiff finishes (3rd Nov) with his comments on the US mid-term elections and Uncle Ben Bernanke’s desperate QE2 injection of $600 billion dollars of ‘stimulus’ money printed from out of thin air, ostensibly to deliberately increase US price inflation, whereas Schiff thinks that the real reason is to allow the US Treasury to keep spending, with the money it spends funded from bond sales propped up via quantitative easing:
Here is the economic commentary on QE that Schiff mentions in his videos above:
There has been so much discussion recently about “QE 2″ that you would think the entire financial sector were about to embark on a transatlantic cruise. Unfortunately, they, and we, are not so lucky. In the year 2010, “QE 2″ doesn’t refer to a sumptuous ocean liner, but a second, more extravagant round of “quantitative easing” – stimulus. In the past, this technique was simply called “printing money.” As if the nation has not already suffered enough from the first round, Captain Ben Bernanke and the Fed are determined to compound the damage by hitting us with another monetary juggernaut. Their stated goal is to boost the economy and create jobs. However, since economic growth cannot be achieved by printing money, their QE 2 will sink just as surely as the Titanic.
The intent of QE 2 is to lower interest rates to promote job growth and avoid the apparently growing threat of deflation. But the very idea that the economy is weak because interest rates are too high is laughable. Deflation is the market’s cure for the asset bubbles that have recently burst, so any attempt to avert it will only weaken the economy further.
In fact, one of the reasons the US economy is in such bad shape is that interest rates are already too low. Low rates have encouraged excess borrowing, by both individuals and governments, and discouraged saving, fueling new asset bubbles at the expense of legitimate investment. As a result, the dead weight of debt has simply overloaded our economy, and our creditors are getting nervous. What we need now is to make hard choices, not engage in more easing – to deleverage, not borrow more.
Worse still, by keeping rates too low, the Fed has enabled the US government to grow significantly larger than it otherwise could had its borrowing been restrained by higher rates. Absent these low rates, Washington likely wouldn’t have passed expensive new healthcare and financial regulation reforms; they would be too busy trying to keep the lights on in the Capitol.
For this and other reasons, the bogeyman of deflation is really not a concern at all. It’s not a threat because falling consumer prices could serve as a relief for many suffering from layoffs and pay cuts in the recession. Even if it were a threat, it’s not even likely because so much liquidity has already been created and an infinite amount could still be created at will by the Fed. Consumer prices are already rising across the board, despite a contracting economy, so what’s all this talk about deflation?
The Fed is quick to point to falling real estate prices. But a drop in real estate will no more cause consumer prices to fall than the real estate boom caused them to rise. Real estate prices are too high, and the economy will never truly recover unless they are allowed to fall. It is interesting that when real estate prices were rising, the Fed did not raise rates to bring them down, but now that they are falling, the central bank feels compelled to lower rates to prop them up. If falling real estate prices threaten deflation, why did the Fed not perceive an inflation threat when real estate prices were rising?
My thinking is that, at the end of the day, all this deflation talk is a red herring. The true purpose of QE 2 is to disguise the decreasing ability of the Treasury to finance its debts. As global demand for dollar-denominated debt falls, the Fed is looking for an excuse to pick up the slack. By announcing QE 2, it can monetize government debt without the markets perceiving a funding problem. If the truth were known, a real panic would ensue. So, the Fed pretends buying treasuries is simply part of its master plan to boost the economy, even though, in reality, it is simply acting as the buyer of last resort.
If the Fed really wanted to help the economy, it would raise rates quite dramatically. Instead of preparing for QE 2, it should be unloading the debt it purchased during QE 1. Of course, that is not so easy to do – which is precisely why I was against QE 1 from the beginning. However, even though the exit will be painful, going down with the ship will be even more unpleasant.
Higher interest rates and a commitment from the Fed to refrain from purchasing Treasury debt would force the government to dramatically reduce spending. If we combine less government spending with fewer regulations, reform our tax code in a way that stops punishing savings and investment, stop all government subsidies for real estate so that prices can fall to affordable levels, and allow all insolvent entities to fail, then a real recovery will take hold.
If the Fed refuses to set sail on QE 2, then her loyal passengers might complain, but at least the US will be on solid monetary ground as it tried to rebuild a viable economy. If instead we board QE 2 (and QE 3 and QE 4 thereafter), then we are headed to a sea full of icebergs called interest rate spikes, and all on board will surely drown in a sea of worthless Federal Reserve Notes.
Stop all the clocks, cut off the telephone, prevent the dog from barking with a juicy bone, silence the pianos, and with muffled drum announce to the listeners that the daily Peter Schiff radio show has come:
Alas, it appears that to listen to the full show via download podcasts you need to pay a monthly subscription, though there is an archive from which you can download full show MP3s directly, should you be able to deal with the hassle. Being a skinflint and a creature of the iPhone, I’ll wait until Mr Schiff releases them all as free podcasts, which hopefully will be soon, before I partake of the experience, but hardcore Schiff fans may wish to start listening sooner.
Peter announces his new daily radio show, which replaces Wall Street Unspun, at the tail end of the the first of the videos below. In this first video, Mr Schiff also begins with an analysis of various currencies, including the news that Singapore is going to allow its dollar to rise against the US dollar. He then examines Bernanke’s remarkable claim that price inflation in the US is too low, which Schiff puts down to Bernanke’s Keynesian reliance upon the heavily discredited Phillips curve; most thought that this vampire had been successfully staked through the heart in the 1970s, especially with the re-emergence of Hayek and the Austrians.
[Apparently a complete stagflationary decade of failure in the 1970s and a situation of both rising price inflation and rising unemployment, which Phillips had earlier claimed was impossible, was not enough to slay this particular vampire. In the land of the Undead Keynesians and the Zombie Banks, Bernanke is the drop of blood that has revived the smoking ashes of the Phillips curve, and its bat-winged sons, the 'non-accelerating inflation rate of unemployment' NAIRU model and the 'dynamic stochastic general equilibrium' DSGE model. Both of these models are as equally fantastical as their vampirical ancestor, and based upon mathematical curves on graphs rather than the economic decisions of individual human beings and the realisation that counterfeiting done by governments is still counterfeiting, albeit legalised counterfeiting. Just as a private basement counterfeiter may boost local trade for a time, before everyone realises that they are being paid in funny money, once the drug wears off from the injection of more currency into an economy, the drug of extra currency usually causes more problems than it solves, though admittedly the NAIRU model is slightly better on this front than the DSGE model. It has always seemed strange to me that all of these money-crank theories and models forever dance around the dead stinking elephant in the middle of the ballroom, which is that counterfeiting is generally seen by everyone as a very bad thing, perhaps without even knowing why, but that somehow counterfeiting becomes a very good thing when it is done by a government-licensed agency with a fancy badge. Everyone of us, including central bank chairmen, knows that counterfeiting is wrong and that it is bound to produce deleterious complex effects, as described in the Austrian Business Cycle Theory. The bigger question to my mind is why does everyone have such a blind spot in their minds when it comes to government action? The very presence of a government administrator in charge of any policy, no matter how stupid or dangerous, somehow makes it all right, or even good. Until we can shake this almost universal mirage that government men are not angelic super men who can produce thousands of loaves and fishes from a few rocks and stones, but are merely ordinary men with smooth tongues enveloped in fancy cloaks with fancy badges, we shall never move into a world of progress, truth, and honesty.]
In the second video, Peter Schiff talks about the many corrections this week in the markets, following the announcement of a tighter monetary policy in the Middle Kingdom and higher interest rates for the Chinese people’s currency, the renminbi.