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:
In a letter this morning to his Euro Pacific Precious Metals customers, Peter Schiff gave his opinion on the recent thoughts of Robert Zoellick, president of the World Bank:
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.
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.”
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.
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.
In parallel with Ben Davies, of Hinde Capital, Peter Schiff believes that the world’s central banks are in a desperate race to the bottom with the values of their fiat currencies. Unlike Mr Davies, who believes that we will all be losers in this race, Mr Schiff thinks that he knows who the winner will be.
The piece below is also complemented by Peter Schiff’s latest video blogs, both of which you can find at the tail end of this post.
Long ago, before economic models developed their current levels of sophistication, it used to be that the goal of a government’s economic policy was to bring prosperity to its citizens; in other words, to raise the general level of material comfort, while at the same time reducing the amount of toil required to attain that end.
However, due to the blather spouted by modern economists, success is no longer measured in those terms. Instead, governments simply look to pump up nominal levels of gross domestic product (GDP), while simultaneously catering to the needs of entrenched political classes. As exports feed directly into GDP, currency devaluation has been widely used as a means to boost exports and therefore achieve ‘prosperity.’ In this model, selling is an end unto itself. There is no focus whatsoever paid to the obviously negative consequences of currency debasement: diminished purchasing power and lowered living standards.
Way back in the 20th century, a nation’s currency was viewed much as a company’s stock price. The reliability, competitiveness, and growth of a national economy usually translated into a strong currency. This system made sense.
Countries that offered the most fertile soil for investment capital or that made products other countries wanted would attract funds from abroad. Demand for the currency of these “blue chip” countries (which was needed to invest or buy locally) would inevitably push up the value of the currency. And so, much as shareholders of successful companies are rewarded by higher stock prices, citizens of successful countries were rewarded with stronger currencies – with which they could buy more goods and services both domestically and internationally, raising their living standards.
But all that has changed in recent years. With a strategy that seems to be taken from the playbook of Sam Walton, governments now look to take market share from competitors by lowering the cost of their exports. To do this, they have adopted a beggar-thyself policy of habitual currency debasement. Although such a move may benefit those who buy the products, it is a burden to the country’s own workers who, like Wal-Mart employees, have to get by on subsistence wages. While the markets like a low-cost provider, this is not a niche that everyone can, or should, fill. While some will compete only on price, more successful ventures will compete on quality and innovation. For every Kia, there is a Mercedes Benz.
Given the US dollar’s status as the world’s reserve currency, America’s oversized status as the world’s biggest consumer, and the influence of overseas export-oriented businesses on their home governments, the falling dollar is a difficult issue for many countries to ignore. And with the imminent arrival of a second round of ‘quantitative easing’ from the Fed, the big guns of dollar destruction are being locked and loaded. The move looks poised to set off a frantic race to the bottom among global currencies, which will have important ramifications for every investor. Unfortunately, this is one race the United States is poised to win.
The goal of those trying to win the race to the bottom is to promote exports and create jobs. However, people don’t work simply for their love of labor. They work so that they can earn enough to consume the things they need and want. Under normal conditions, a nation only exports its production, rather than consuming it domestically, to leverage its comparative advantages. If a country can produce one type of good especially efficiently, it can trade that good for other goods it doesn’t make as efficiently at home. As a result of this process, its citizens will be able to consume more goods than if consumption had been limited to domestically produced goods.
However, when a government debases its currency in order to gain sales overseas, the nation earns less foreign exchange for the goods that it exports. As a result, its comparative advantage is blunted, and its citizens consume less as a result. In other words, as a nation’s currency declines, its citizens are forced to work harder for less.
If a department store decided to have a sale in which all of its merchandise were marked down 50%, it will surely sell a lot more stuff. However, it would earn a lot less than if it had been able to sell its goods without marking them down. This is how currency debasement works. Similarly, one way for the unemployed to get work is to accept lower wages. Workers will sell a lot more of their labor if they accept 50% pay cuts. However, are they better off as a result? Relative to being unemployed, the answer is yes – but they would be much better off being employed at full pay.
Last week, Brazilian Finance Minister Guido Mantega made headlines when he mentioned that a worldwide currency war was brewing, with the winner being the nation with the weakest currency. Ignoring the irony of why countries would want to destroy their own currencies, Mantega reasonably warned that the conflict could get out of hand and destabilize the global economy. His comments came in the wake of overt efforts by both the Japanese and Swiss governments to intervene in the foreign exchange market to push down their respective currencies.
The politics of currency intervention are actually quite simple. Japan’s economy is dominated by large manufacturers that export lots of goods to Americans. The problem is that Americans can’t really afford to buy in the quantities that they did just a few years ago. So, instead of looking for new customers with more money to spend, Japanese manufacturers use their political clout to force a bailout of their traditional US customers.
Essentially, in order to protect the status quo of their elite, governments are surreptitiously forcing workers to take pay cuts through inflation. Everyone works harder, but the extra effort does not raise living standards. In fact, despite the added jobs, overall consumption will fall.
The irony for the United States is that its currency debasement plan has little to do with saving export jobs. We don’t have many of those left to save. The government is debasing our currency merely to ‘pay’ its own bills, preserve bank profits and Wall Street bonuses, allow us to continue buying homes we can’t afford, and prevent many service-sector workers from having to find more productive jobs. In return, they will perpetuate an unworkable economic model. So while the US will probably ‘win’ the currency war, we will definitely lose the far more important battle to improve our quality of life.
