As regular viewers of Peter Schiff’s video blog channel will already know, there are ups and downs in his output. However, last Friday’s show (September 24th) was one of his best in recent months and a fairly decent contender for Schiff-of-the-Season. Without seemingly pausing for breath or erring once, Mr Schiff laid into the popular urban myth of a gold bubble and then the resignation of President Obama’s financial adviser, Larry Summers — who Schiff thinks could be replaced by an inexpensive parrot squawking “Print More Money” — before directing his forensic attention towards Bernanke, Obama, and finally a hedge fund billionaire called David Tepper, who Schiff accuses of being yet another believer in the omnipresence, omnipotence, omniscience and omnibenevolence of government-appointed central planning bureaucrats.
The 2006 article Peter Schiff refers to in the video above, can be found here:
This week, after the Japanese yen had surged to a fifteen-year high against the US dollar, the Japanese government decided to intervene in the foreign exchange market. To great fanfare, the Bank of Japan initiated a vigorous campaign to buy US dollars, thereby stemming the rise of the yen and pulling up the greenback. The effects were immediate, with the yen falling an astonishing 3% on the day of the announcement. At a time when American politicians are growing increasingly vocal about China’s currency manipulations, Washington was strangely silent on the Japanese move. This was completely overlooked by the hawkeyed media.
While missing this blatant irony, the media spin doctors cast the Japanese decision as an attempt by the island state to prop up its own fragile economy. More accurately, the intervention was done to help American consumers buy more cars and electronics from Japan. In truth, although more American purchases would nominally benefit some Japanese exporters, a weaker currency is a detriment to the overall Japanese economy.
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, either in their own country or in other productive economies, Japanese manufacturers use their political clout to lobby their government to bailout their traditional U.S. customers. The bailout takes the form of a direct transfer of purchasing power from Japanese savers to American consumers, so that Americans can continue buying products they couldn’t otherwise afford. In short, pushing up the dollar allows Japanese exporters to postpone a necessary, but costly, restructuring.
The tendency for governments to sacrifice the needs of the general population in favor of entrenched corporate interests is not unique to Japan. In the United States, we have taken similar measures on behalf of our dominant industries. However, instead of manufacturers and exporters, whose political clout has waned along with their economic prospects, Washington has moved to protect the profits of the financial, retail, and real estate industries– the true heavyweights of the American corporate world. These industries profit when Americans borrow money to buy things they can’t afford. To keep this behavior going, the government must make it possible for consumers to take on more debt; but, in so doing, these policies have left us with an ailing economy in need of deep and drastic restructuring.
In a way, what the Japanese government is doing for American consumers is very similar to what our government is doing for American homebuyers. Rather than let home prices fall, the US government subsidizes homebuyers so they can continue overpaying for houses they cannot actually afford. The beneficiaries of these moves are those selling, building, and financing overpriced homes. Unfortunately, the last thing we need as a nation is to build, buy, or finance more homes. Our economy would improve if the resources devoted to the real estate market could be devoted to other, more needed industries.
Japan should allow the dollar to fall, which would force their manufacturers to adapt to a changing global market where Americans consume less, and those in emerging markets consume more. Instead, it is vainly trying to preserve the status quo and appease entrenched political factions.
Just like here in the US, Japanese politicians take cover by falsely claiming that the intervention “saves jobs.” However, the jobs that are saved come at the expense of more productive jobs that are either lost or not created. If Americans cannot afford to buy Japanese products, it makes no sense for the Japanese to continue selling them to us. Rather they should devote their time, effort, savings and resources to selling products to customers who can actually afford to pay.
Japan’s bailout of American consumers is nothing more than international vendor financing. This is the same technique used by telecom companies during the Internet boom of the late ‘90s. In order to pump up short-term profits, manufacturers of communications gear loaned money to cash-strapped Internet startups so they could buy switches and routers. Of course, when the dot-coms went bankrupt, all those phony sales were written off; then, the stocks of those companies doing the financing, like Cisco, Lucent, and Nortel, collapsed as well (though they did not collapse to zero like the dot-com companies). Although their performance would have lagged during the boom, the equipment manufactures would have been in far better shape fundamentally if the phony sales had never been made.
The same fate awaits the US and Japan. In this analogy, Japan is Cisco and the United States is Pets.com. Sooner rather than later, both Japan and China will realize that they have been hoodwinked by a fast-talking sock puppet without a credible plan to pay them back. When that happens, they will take the write down and let us fend for ourselves.
In the first of three new videos, the first one dated September the 14th, Peter Schiff reflects upon last week’s rise in the precious metals markets, with gold going up by over $30 dollars in one day, as it headed towards $1,300 dollars an ounce. He also discusses different foreign currencies and their relation to the dollar, such as the Swiss Franc going over one dollar per franc, despite the Swiss National Bank’s stated policy of devaluing their currency, and what the Federal Reserve is going to do about this falling dollar (i.e. nothing).
Mr Schiff finishes up by discussing US trade deficits and how these are going to affect both America and the rest of the world.
In his second video, recorded on September the 17th, Schiff kicks off with the intervention of the Bank of Japan and its propping up of the dollar.
[This reminded me of a military experience I once had. About a hundred of us had to run three miles in 27 minutes, in boots, packs, and uniforms. One of the men beside me started to struggle after about one mile, and two of us propped him up. After a mile of this exhausting effort, the corporal at the head of our column jogged back from the main group and told us that we could keep propping this laggard up if we wanted to, but if we did, this unfit man would probably cause us to fail the run, which would mean that all three of us would have to do the run again tomorrow, rather than just one of us. I'm translating from the original English, which was much more colourful and succinct than this, but hopefully you get the picture. Rather reluctantly we dropped the man, who fell away instantly, going straight down to his knees; he disappeared rapidly behind the group. I felt both shameful and relieved at the same time, which was an uncomfortable psychological mixture. However, the rest of us managed to cross the line in the required time, with me and my other dishonourable colleague just managing to stagger in at the rear with very wobbly legs. Fortunately, I never had to look in the doomed man's eyes again. I think he got onto the dropout bus and went home before we got back. All of which makes me wonder, just when are the Chinese and the Japanese going to drop their man? And once he's gone, and they've got over the trauma of leaving this doomed man behind, will they ever look back?]
Mr Schiff follows this introduction quickly with a discussion of the recent rise in the price of gold and why gold is still such a great investment, because of his certainty of the ongoing stupidity of the world’s central banks and the ongoing cupidity of the world’s governments and their treasury departments.
He also questions the growing market in deflationary insurance, for instance as sold by PIMCO, and wonders how he can get in on the other side of this action.
Loosing a few tangential arrows at the US press coverage of Chinese and Japanese currency manipulation, Mr Schiff then smashes his entrepreneurial cavalry horse into the frontline shield wall of Obama’s regulatory legions, before trampling upon the Keynesian money cranks hiding behind this wall and their bizarre discredited voodoo economics.
Rounding off our triumvirate of Schiff Report videos, with this final one dated September 19th, Mr Schiff discusses the strange statement from the Federal Reserve that they want prices to rise, rather than stabilise. I’ll leave you in the more-than-capable hands of Mr Schiff to walk you through this Fed statement, and why it had such an immediate effect on the US markets.
In the first of two new video blogs, Peter Schiff discusses why:
The Euro will rise against the Dollar
US Treasury bonds are in a gigantic bubble
The Obama $50 billion Dollar stimulus programme will fail
Paul Krugman needs to read more about Bastiat’s broken window fallacy
The Soviet Union economy from 1917 onwards was a single gigantic stimulus programme
Stimulus will continue in the US, even under Republicans
In his most recent video, Mr Schiff discusses most of the usual things, as above, but concentrates on a recent speech by Obama pre-positioning some upcoming tax rises in the United States:
For hard-core Schiff watchers, you may also be interested in his latest economic commentary, from Friday, August 27, 2010:
Watching economists and media analysts react to breaking economic news is a bit like looking at a flock of pigeons flying over the New York skyline. A true wonder of the urban landscape, the flocks can include hundreds of individuals who show an uncanny ability to stay in tight formation as the group quickly zig-zags between buildings. What may be even more remarkable than their ability to randomly fly while maintaining cohesion is the flock’s refusal to stick to any particular direction for very long, and their determination to fly feverishly without actually going anywhere. Sound familiar?
Today’s weak GDP numbers have finally caused the mass of economists to revise downward their formerly optimistic recovery forecasts, with many finally entertaining the possibility of a “double dip” recession. It should be obvious by now that these economists only have the capacity to describe where the economy is moving in the short-term…they have no ability to explain the reasons behind the macro trends or make predictions that go beyond the next data release. But economics is not dart throwing. It can be understood and properly forecast.
The major mental block is that most economists believe that an economy grows as a result of spending. Any policy that encourages spending and discourages savings and investment is considered beneficial. Unfortunately, these policies, which only succeed in growing debt and government, act more as an economic sedative than a stimulant.
On the subject of the “recovery,” I’d like to highlight some of my past predictions, and those of my colleague Michael Pento. With the benefit of hindsight, you can see that although these thoughts were widely dismissed as chronic pessimism at the time of their publication, the current situation supports our conclusions. Although some of our predictions, like for higher bond yields, have yet to materialize.
Michael and I may be birds of a feather, but we don’t blindly follow the flock. We believe economics is a scientific discipline with established laws, and that applying those laws will yield fairly accurate predictions over time. Most other economists say what they need to say to do the bidding of their employer (whether Wall Street or Washington) and maintain the respect of their peers. Good for them, but who should you trust when you are making investment decisions?
Selections from my past commentaries:
Monday, June 7, 2010
“Rather than a recovery, the jobs data seems to indicate that we are still mired in the first economic depression since the 1930s. Increased spending, financed by unprecedented borrowing, will prove to be just as temporary as a job opening at the US Census. When the bills come due, the next leg down will be even more severe than the last. The swelling ranks of the government payroll, and the shrinking number of private taxpayers footing the bill, will guarantee larger deficits and a weaker economy for years to come.”
Monday, March 1, 2010
“It is astounding how many economists, government officials, and Wall Street strategists construe the current economic conditions as evidence of a bona fide recovery. … The myopia leads us to enact policies that actually exacerbate our problems. The “remedies” are postponing, perhaps indefinitely, a true recovery.
The oracles who have described the nature of this imminent recovery do so based on their conviction that consumer spending is slowly returning to levels that existed prior to the recession.
However, missing from their analysis is any plausible explanation as to why consumers will be able to sustain such spending given the plunge in income and credit, and the lack of available savings. But most consumers are tapped out, millions are unemployed, and home equity has been wiped out. The only reasonable thing for them to do is to pay down debt and sock away as much money as possible to rebuild their savings.”
Monday, December 14, 2009
“Over the weekend, top White House economic adviser Lawrence Summers even pronounced that the recession is now over. …
Obama’s claim of success largely derives from the slowing tally of job losses, the seemingly renewed strength in the financial system, the pickup in home sales and home prices, and the positive GDP figures. But these ‘achievements’ fall apart under close examination.
First, a closer look at the jobs numbers shows that employment improved in sectors that benefited most directly from monetary or fiscal stimulus: government, healthcare, financial services, education and retail sales. Meanwhile, sectors such as manufacturing continued to shed jobs at an alarming rate. These dynamics actually exacerbate our economic imbalances.
While it is true that home prices have stopped falling, this represents failure, not victory. True success would be a drop in home prices to a level that homebuyers could actually afford. Instead, we have maintained artificially high prices with tax credits, subsidized mortgage rates, low down payments, and foreclosure relief. With 96% of new mortgages now insured by federal agencies, market forces have been completely removed from the housing equation. With so many government programs specifically designed to maintain artificially high home prices, devastating long-term consequences for our economy are inevitable.”
Friday, October 2, 2009
“In recent interviews, Treasury Secretary Geithner has been almost giddy in his descriptions of the recovery – all the while crediting his own policies for averting disaster. Americans are once again taking the government’s bait by spending money they don’t have to buy things they can’t afford…. But depleting savings and increasing borrowing does not a recovery make.
A prerequisite to any real economic expansion is the potential for business owners to earn profits. With increased regulation and higher taxes on the way, these incentives are being diminished. In fact, via a phenomenon called ‘regime uncertainty,’ our current policy path is actually encouraging businesses to contract in order to prepare for a more hostile business environment. There is no “jobless recovery,” only senseless cheerleading.”
Friday, July 31, 2009
“Because of the continued profligacy of the government and Federal Reserve, the imbalances that caused the current recession have actually worsened. We are now in an even deeper hole than when the crisis began. Rather than wrapping up a recession, we are actually sinking into a depression. If things look better now, it’s just because we are in the eye of the storm.
By holding up over-valued home prices, we prevent the prudent or less well-off from snatching them up and, in doing so, creating a new price equilibrium based upon reality. By maintaining artificially low interest rates, we discourage the very savings that are so critical to capital formation and future economic growth. By running such huge deficits, we further crowd-out private enterprise by making it harder for businesses to invest or hire. Since we have learned nothing from past mistakes, we are condemned to repeat them.”
Since our last roundup, Mr Schiff has produced three more videoblogs for all of us slavish Austro-Schiff diarists to view, discuss, and annotate. Let’s tackle each in turn:
Friday, August 27th: 2nd Qtr. GDP, Bernanke, economists, gold stocks, my crib
In this first report, a rather wide-eyed Peter Schiff opines into a fish-eye lens about the remarkable and completely unpredictable news on how the US government recently revised its GDP projections downwards. He next analyses those Bernanke statements, from out of Jackson Hole, which promised that this clueless Greenspan disciple would stand manfully by the ‘print’ button on the Fed’s printing press, under all possible circumstances, and how Nouriel Roubini has hedged his bets on predicting a double-dip recession, squeezing half a buttock over the fence by now predicting a 40% chance of such a thing occurring.
Why can’t Roubini make a solid prediction, asks Schiff, who himself is predicting a 100% probability of a double-dip recession?
Our Connecticut hero then pours scorn upon the scare stories of the Keynesian/Monetarist deflationists who have all forgotten that the maximum period of economic growth in both the UK and the US occurred in a century of monetary price deflation between the end of Napoleon in 1815 and the creation of the Federal Reserve in 1913.
In playful mood, Schiff also offers us a couple of anti-Keynesian economist jokes, my favourite of which was:
Q: What do you get when you cross a [Keynesian] economist with a Mafia Godfather?
A: An offer you can’t understand.
Schiff then covers a short-term fall in bond prices combined with increasing commodity prices.
[This reminded me of a Cassandrine prediction of the coming day when hyperinflation will suddenly happen in the US, which I read recently, written by Gonzalo Lira.]
Here is the BBC interview, mentioned above by Mr Schiff, which includes the segment with the unintentionally-hilarious Laura Tyson; Schiff appears at 3:55 minutes.
[On a personal note, it's really good to see that Schiff-style Austrianism is making inroads, for the first time to my knowledge, into a tax-consuming statist bastion like the BBC.]
Monday, August 30th: Markets, Obama, Krugman, Reich
In his second video blog, shot three days later, Schiff discusses one of the worst ever August periods for the US stock markets and contrasts this news with gold stocks hitting 52-week highs.
Moving on from there, Schiff thinks that a global recovery is real but that the US will de-couple from this and fall away into recession, especially when a fourth planned ‘stimulus’ package fails to work any better than the first three.
He finishes off by pointing out Obama’s confusion between savings and credit, and wonders if Paul Krugman is even more confused.
[Krugman probably needs to read either Frédéric Bastiat's essay on The Broken Window or its more modern treatment in Henry Hazlitt's Economics in One Lesson if he wants to know why Schiff is laughing at him so much.]
Friday, September 3rd: Jobs, global economy, SBA loans, stimulus, GI bill
Here’s a short synopsis covering the third member of this triumvirate of excellent Peter Schiff video blogs:
Schiff discusses the latest US jobs figures, including the loss of a further 27,000 manufacturing jobs, which Obama has been crowing over because these figures weren’t as bad as they had been predicted to be
The need for Obama to shrink his consumptive government and to lift the burden of taxation, business loan micro-management, and regulation, to allow US production to grow
The wasteful dangers of trying to stimulate the US economy by funding ex-GI soldiers from the Iraq war to study liberal arts degrees at over-priced colleges which can afford to over-charge for study due to government guarantees on student loans
In his usual delicate and roundabout way, in the first of two new videos, Peter Schiff criticises several recent media articles about how a new recessionary dip is impossible, due to the nature of the current upwardly sloping bond market yield curve.
[As Gary North explains, most ordinary US recessions are presaged by a downwardly sloping yield curve, where long-term interest rate yields are lower than short-term ones.]
With short-term interest rates at zero, Schiff argues it is impossible for the bond market yield curve to play any meaningful role in such forecasting, because no part of it can go lower than zero.
[You cannot push a man back any further when he is already hard pressed up against a wall; physicists call this a boundary value problem. In the past, the inverted yield curve signal did play a useful part in predicting recessions, because investors knew the Federal Reserve would engage in a standard cycle of first cutting interest rates to please incumbent US presidents, to 'stimulate' the US economy at crucial political times. Later, the Fed would then increase interest rates, in timetable fashion, to cut off the ensuing rise in price inflation.]
“The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting.”
Things have changed, says Schiff. The Fed has now boxed itself in, because it has reached an end game in maintaining this cyclical ‘heating’ and ‘cooling’ cycle. He explains why the Fed will now keep interest rates at zero for as long as it can, rather than raising them in the old fashion, thus invalidating the chartists’ yield-curve-must-invert prediction tool, based upon the Fed reflexively raising rates in ‘ordinary’ situations.
Schiff then argues why the bond yield curve shape actually indicates price inflation ahead, rather than the impossibility of a further ‘double-dip’ recession.
To continue his debt analysis, Schiff then comments upon the various US bond mutual funds being flooded with the savings of American investors, who are betting on US government bonds rather than stocks. Schiff thinks these bets are misplaced, because those savings are being wasted on useless government spending rather than useful productive investment in industry.
The government will not pay the last bond holder back in real purchasing power, says Schiff, but will pay back these bonds in newly printed Federal Reserve currency, when they face the position of being unable to roll US government debt over any more and the Fed steps in with its printing presses to save their day.
“The Fed chairman must do as the President wants or the Fed would lose its independence.”
Moving on from bonds, Schiff extends his earlier ideas on unemployment benefits and defends his core position on why he thinks the Dollar is going to ultimately collapse:
In his second video, Schiff comments upon the recent news of what the mainstream media thought was an unexpected 27% drop in US housing sales.
‘Why are they surprised?’ asks Schiff. The housing bubble has burst and cannot be reflated. If the government keeps trying to reflate this bubble, they will keep wasting all of the resources employed and it still won’t work.
The video goes on to discuss the continuing plunge of the Dollar against the Yen and also ends with a defence of Schiff’s own predictive record in the face of a hostile US media, all of whom only wish to hear that the Emperor is wearing a full set of rich embroidered clothing tailored from the finest silks and cottons:
Below is also the latest economic commentary article by Peter Schiff, published by Euro Pacific Capital, expanding on several of the issues discussed above. Look out particularly for the single line quote which precisely summarises, in a piquant nutshell, the main reasons behind the multi-decade war-torn hazardous strife of most of the African continent:
In a CNBC debate last week, former Labor Secretary Robert Reich presented a set of contradictory beliefs that unfortunately reflect the conventional wisdom of modern economists. In a discussion with Wall Street Journal columnist Stephen Moore, Reich correctly and comprehensively listed the reasons why American consumers could spend so lavishly before the crash of 2008 and why they can no longer keep up the pace. But instead of making the logical conclusion that former levels of spending were unsustainable and that spending should now reflect current conditions, he advocated that government take on additional debt so that tapped out consumers can spend like they used to.
To achieve this, Reich called for lowering taxes on working Americans and raising taxes on the rich. He argued that middle-income Americans are more likely to spend additional dollars while the rich are more likely to save and invest. As a “demand-side” economist, Reich made clear that spending is superior to savings and investing as a catalyst for growth.
To put it simply: Reich believes that the cart pushes the horse. In his worldview, businesses produce goods and services simply because consumers spend. Therefore, anything that increases spending fuels growth. Unfortunately, he fails to see what should be strikingly obvious: capital formation must precede production, which then allows for consumption.
In a complex society like ours, those relationships are hard to see. However, if we break it down to a simpler level, it becomes more obvious (as I try to accomplish in my new book: How an Economy Grows and Why it Crashes). For example, let’s take a look at a simple barter-based economy consisting of only three people: a butcher, a baker, and a candlestick maker.
If the candlestick maker wants cake, he can’t simply demand that the baker hand it over. The cake needs to be produced, and the baker has to expend labor and material to produce it. Unless the candlestick maker offers the baker something of value in exchange, the cakes won’t get baked. The ability of the candlestick maker to demand cake from the baker is a function of his ability to supply candles to trade. Without production, consumption can’t occur.
What if the candlestick maker gets sick and produces no candles? As the baker would be unwilling to give his cakes away, he would likely stop baking cakes for the candlestick maker. Economic activity would naturally contract until the candlestick maker recovers.
But according to Reich, if the candlestick maker doesn’t have anything to trade, the government should step in and give him candles. But where will the government get them? It could take them from the candlestick maker; but if he is not making candles, how will he pay the tax? Even if there were a few candles left to tax, any that the government took would simply transfer demand from the candlestick maker to the government. No new demand is created.
Alternatively,if the butcher is still healthy, the government could tax him, and give his steaks to the candlestick maker to buy cakes. However, this doesn’t create new demand either. It simply transfers demand from the butcher to the candlestick maker.
Some may feel that a barter-based metaphor doesn’t hold water because the ability to expand the money supply and create credit gives an economy far more flexibility. This is a deceptive argument. Although money is more efficient than barter, it doesn’t change the dynamic between production and consumption.
But Reich suggests that printed money can stimulate demand just as effectively as real candlesticks. But what good will the paper offer the baker if there are no candlesticks to buy? All the baker can do is bid up the prices of those goods, like steaks, that continue to be produced. Similarly, if the government simply prints money and gives it to people to spend, no new production occurs. Prices merely rise to reflect the increase in the supply of money relative to the supply of consumer goods.
In a more complex economy, the relationship between production (supply) and spending (demand) still holds. Every consumer either lives off his own productivity or the productivity of someone else. When individuals work, the wages earned result from the productivity of labor. The ability to consume is directly related to the production of goods or services that result from one’s efforts. However, if people waste their labor in unproductive jobs, little real demand is created.
In the Soviet Union, everyone had a job, yet workers had to stand in line for hours for basic necessities. Although everyone worked (for the government), production was too low. This lack of production meant wages delivered relativity little in the way of purchasing power.
Since production cannot be created by government stimulus, neither can demand. To the extent that there are savings, demand can be brought forward by stimulus – but only at the cost of future demand, plus interest. If stimulus could produce demand, then no nation would be poor. Taken to its logical end, Reich’s argument suggests that African poverty would be wiped out if African governments simply printed money more freely. In reality, Africans are not poor because they lack currency to spend; they are poor because their corrupt and inept governments inhibit production by soliciting bribes, denying property rights, abrogating contracts, preventing the accumulation of capital, and nationalizing profits.
Reich is correct about one thing: Americans are indeed broke. But rather than encouraging the country to spend itself deeper into debt, he should call for greater savings so that we have the means to invest in new businesses and new industries. That is the true road back to solvency, but it will only work if we have less government spending, fewer regulations, lower taxes (particularly on those with the highest propensity to save and invest), and higher interest rates.
Unfortunately, Reich and his allies are calling the shots in Washington. The country cannot recover until the only thing politicians stimulate is demand for new economic leadership.
In the first of two new videos, Peter Schiff discusses Bill Gross, of PIMCO, and his proposed complete nationalisation of Fannie Mae and Freddie Mac and how Mr Schiff thinks this will benefit Bill Gross and cost everyone else, as yet more resources are poured into consumptive house construction and therefore taken away from the building of new factories and other productive facilities.
Mr Schiff also predicts a second bankruptcy for General Motors, immediately following its unloading by the US government in a new IPO. Schiff’s Austrian-based advice is to stay away from this IPO:
He also examines the über-rosy assumptions which lie behind the Obama administration’s economic ‘plans’ (such as they are), with strong predicted economic growth this year at 2.5%, rising to growth of over 4%; interest rates staying almost permanently at 0%; and inflation also staying low. Schiff states that these are the economic assumptions of fantasy land. He predicts instead a weakening US economy, high interest rates, and high inflation, with all of this starting in either 2011, or 2012 at the outside.
Other topics he brings into his video blog are the importance of savings rather than spending, to grow an economy, and how many of America’s banks will go bust when interest rates rise, due to the continuing machinations of the US government in the housing market:
To supplement the video above, here is the article Peter Schiff wrote two years ago on how the US government takeover of Fannie Mae and Freddie Mac would pan out, which the mainstream stated at the time would be an enormous success:
Treasury Secretary Henry Paulson, the man who said that subprime was contained and that the Bazooka in his pocket would never be used, now assures us that the bailout of Fannie Mae and Freddie Mac will be costless to taxpayers. Despite the near euphoria that the plan has sparked on Wall Street, the move will go down in history as the biggest policy blunder of all time, and will be credited as a pivotal point in the financial collapse of the American economy. The ultimate cost to Unites States citizens will be in the range of hundreds of billions of dollars, perhaps more.
The original idea that gave birth to Freddie and Fannie, which is to make housing more affordable to average Americans, should now be seen as farcical. Their new goal is to keep housing prices high. Absent Freddie and Fannie, housing prices would fall sharply and the mortgage market would stabilize. Americans would once again be able to buy affordable houses with mortgages they could actually repay –just like their grandparents did. Instead they will keep overpaying for houses, burdening themselves with excessive payments in the process, and ultimately sticking taxpayers with the bills when they default.
In contrast to Paulson’s continuous misreading of the market, I have consistently predicted the failure of Freddie and Fannie. I did so in my book Crash Proof, and in numerous speeches, commentaries and television appearances. I also was quick to point out that Paulson’s Bazooka would not remain holstered for long.
There is absolutely no substance to Paulson’s insistence that based on the government’s first claim on the future profits of Fannie and Freddie, the plan offers protection for taxpayers. There will be no future profits, just more heavy losses. Americans will now have unlimited ability to continue to overpay for houses and commit to mortgages they can’t afford. In fact, the plan insures that eventual public sector losses will vastly exceed those that would have befallen the private sector in a free-market resolution.
Paulson claims that his goal is to stabilize the mortgage market. But the best way to do so would be to allow housing prices to fall to a market clearing level. As long as home prices remain artificially high, the risks of mortgage lending will keep credit tight, and the high costs of mortgage payments will keep potential buyers on the side-lines. With private lenders justly cautious, the government intends to hold open the lending spigots, without the pesky concerns over losses or financial risk. The hope is that the new lending will prevent home prices from falling further. It won’t work. The government “solution” will simply delay the fall of artificially high home valuations and temporarily preserve the illusion of prosperity.
In order to preserve current home prices, the government will be forced to maintain the lax lending standards that got us into this mess in the first place. Since all the losses will now be borne by taxpayers, those lax standards will be much more problematic. The moral hazard that existed prior to this bailout has become that much more hazardous. Every mortgage now insured by Fannie and Freddie is the equivalent of a U.S. Treasury bond. This allows anyone to borrow on the full faith and credit of the U.S. government so long has the money is used to buy a house. In addition, mortgage lending will now be a government function, run with Post Office-like efficiency.
Of course the biggest collateral damage caused by Paulson’s bazooka is the large hole ripped through the already tattered U.S. Constitution. If the government can do this, does anyone believe there is anything it can not do? In effect the Federal government now has absolute power to corrupt absolutely.
A windswept Peter Schiff, on August 17th, discusses more negative fundamentals for the US Dollar after news from China that the Chinese government are recently reduced their holding of US Treasuries by about 7% and increased their reserves of Euros and Yen. This follows the other news this week that China officially overtook Japan as the world’s second largest economy, after recently overtaking Germany as the world’s largest exporter and also overtaking the US to become the world’s largest consumer of energy.
Mr Schiff contrasts this growth of the Chinese economy with the strange economic statistic that the US imports more than Japan and Germany despite exporting less than either.
He also continues his recent thoughts on how the move in the US towards permanent unemployment benefit entraps people into enduring poverty:
Mr Schiff challenges Nobel Laureate Joseph Stiglitz on his recent Keynesian pronouncements about America needing more ‘stimulus’. Schiff explores the distinction between a government stimulus funded by taking money out of the private sector — via taxation, crowded-out borrowing, or money printing — and a market stimulus generated by free individuals seeking profits.
Schiff also reports the continuing fall of the Dollar index and wonders if this nine-week fall will beat the record of an eleven-week fall, though he does speculate that there could be a dead-cat bounce before the eleven-week record is impaled by the current run.
[The predicted dead-cat bounce did happen on August the 13th, after this video was recorded on August the 7th.]
Schiff finishes with his take on the speculation that Obama will be ordering Fannie Mae and Freddie Mac to ‘forgive’ the debts of various groups of irresponsible voters, who used their houses as ATM machines, to boost the Democrats in the upcoming US November elections. Mr Schiff is predictably robust when it comes to discussing such politically inspired moral hazard:
Mr Schiff discusses the once-supposed monetary exit plan for the Federal Reserve, which he predicted last year that they would never actually execute. This prediction was boosted this week when the Fed announced that it would not be shrinking its balance sheet. This disappointed the government-led US markets, because they wanted the Fed to announce that it was going to keep expanding its balance sheet by printing up even more new paper Dollars and by soaking up even more market assets with this scrip.
Schiff thinks these government-focussed speculators will not be disappointed in the long run, because the Federal Reserve only possesses one arrow in its quiver, which is pointed straight at the ‘On’ switch on a paper Dollar printing press; though the Fed does have to pretend that one day it will aim this arrow at the ‘Off’ switch.
The problem with the Fed’s paper stimulus is that the extra paper currency generated is employed to suck in more consumption goods from overseas, whereas what America really ought to be doing is producing more of its own real goods rather than cranking out yet more paper for the world to soak up. However, this will fail to happen as long as the Federal Reserve keeps intimating to the markets that it will keep printing more currency and keep accumulating US Treasury bonds, all of which is based upon ‘indefinitely’ low interest rates (as set by the Federal Reserve).
When interest rates eventually rise to avoid a Misesian crack-up boom, Schiff predicts there will then be a Dollar currency crisis and a US sovereign debt crisis and outlines how this will happen. He also thinks the Federal Reserve knows this potential outcome, though they are afraid of stating their thoughts out loud due to the panic that would then ensue; they have trapped themselves in a double-bind.
[One almost imagines that the strategic policy inside the Federal Reserve is now officially, "Hang On as Long as Possible and Wait for a Miracle".]
Mr Schiff discusses the dead-cat bounce of the Dollar index this week before moving onto the growth of unemployment culture in the US, and the moral hazard of the US instituting semi-permanent unemployment benefit [something we are very familiar with in the UK].
Businesses in the US are now having difficulty finding people to do low-paying work, he claims, because potential workers will then lose their unemployment benefit. Schiff calculates that an unemployed US person can now ‘earn’ $4,000 Dollars a month by keeping out of official employment, and that the incentive of having this ‘free’ income and all of the associated leisure time may even be tempting some people into becoming deliberately unemployed.
[No, surely not?]
It seems the Obama administration is hellishly bent on creating the same perverse anti-work welfare incentives and socialist poverty traps that we ‘enjoy’ in Europe, where unemployed people face huge regressive marginal taxes on their earnings from any new job, which becomes a massive incentive to remain permanently on the dole, particularly if your earning potential is at the lower end of the scale and you feel lost within the tax credit benefit labyrinth constructed by Byzantine bureaucrats.
[Which even someone with a PhD in quantum physics would struggle to deal with, here in the UK.]
