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archershipsFirst, if you’ve never heard of Peter Schiff before, watch the clip below to see why you might want to listen to him. It’s a compilation of clips from 2006-2007, during which he predicted the current housing collapse and recession:
Here’s what he says about the Fed’s recent decision to create $1.2 Trillion dollars out of thin air:
Note that a U.N. panel has recently recommended that central banks ditch the dollar as a reserve currency.
And China is expressing concern about the U.S.’s ability to pay its debts.
However, see this perspective on the ways Peter Schiff might be wrong.
Original: craschworks - comments
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Date: 2009-03-19 08:00 pm (UTC)The thing that I wonder about in all the hyperinflation worries is this -- when people are looking at the $1.2 trillion the government is creating out of thin air, how do the account for the several trillion dollars (created by fractional-reserve banking) that's just disappeared into thin air? While I don't doubt that creating fiat money is inherently inflationary, with the world financial system being what it is, it's not the only source of inflation and deflation, and I think the deflationary pressures from the evaporation of the mortgage market and much of the derivatives market (which is actually valued in the quadrillions of dollars, though due to the nature of derivatives there's a lot of double-counting involved there) may balance out much of it.
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Date: 2009-03-19 08:54 pm (UTC)no subject
Date: 2009-03-19 09:25 pm (UTC)no subject
Date: 2009-03-19 09:41 pm (UTC)In defense of Schiff...
Date: 2009-03-19 10:51 pm (UTC)Now that the Fed has injected an additional 1.2 trillion into the economy, we will get inflation. You can bet on it. It's the only way possible to pay for all those bailouts and "stimulus" packages.
Also, the Obama team seems just incompetent and ignorant enough of free markets to throw extra gas on the fire before they can be voted out of office. That could include price controls, rationing, and confiscating privately held gold when inflation gets out of control, as FDR did in the 30s.
Schiff is squarely in the Austrian school, economically, with a deep respect for free markets. His widely-ridiculed (at the time) analysis in 2006 and 2007 of what was wrong in the real estate and banking industries was so spot on, the man deserves some real credit for understanding macroeconomic trends.
If you haven't already seen Schiff's recent talk at the Mises Institute, I recommend it highly. It's entertaining as well as informative.
Re: In defense of Schiff...
Date: 2009-03-20 12:17 am (UTC)I know the Austrians are getting all hot and bothered about hyperinflation. For the time being, they're wrong, because they have made a fundamental error about the nature of a fiat monetary system in which fractional reserve lending is ubiquitous.
That error is: they do not include asset valuations in their calculation of the total value of money [which we'll call M(t)...putting it after M(0), M(1), M(2), and M(3)].
They don't count asset values because asset values are typically not realized directly in monetary terms (the old, "don't count your chickens" principle) to their thinking. The problem with that is, in a fractional reserve credit expansion, there is a feedback loop between the growing supply of credit dollars and the values of the assets that are bought with those dollars. This connection is most obvious in collateralized securities (subprime mortgages anybody?), in which inflated asset values are effectively monetized. My own home loan, for instance, is a 100% HELOC with a credit ceiling of 80% of the appraised value of my home at 2006 appraisal levels. I effectively monetized 80% of the inflated value of my house just under three years ago, and although its value has undoubtedly declined since this line of credit was originated, I can still draw cash on it (and do).
This is not an unusual arrangement, though it is an unconventional way to finance a house. Many people have brokerage accounts with ATM cards attached to them. People have assumed enormous amounts of leverage to purchase assets at very high prices, and monetized as much of those values as they could.
It has recently been estimated that, from the recent asset value peak achieved in 2007, the total value of all U.S. assets has declined on the order of 40%, while the total value of the entire world's assets has declined by 45%.
Think about those numbers for a second.
The total value of the entire U.S. economy asset base, including the money supply, in 2007 reached well over $100 trillion (and maybe even twice that...but who really knows for sure). Since that time then, at least $40 trillion has simply ceased to exist.
$40 trillion. Or more. Poof. Gone. Buh-bye.
Now, that much money does not suddenly disintegrate without having some rather severe deflationary effects. Lo and behold, that is exactly what we have been seeing in our economy: Deflation. The same thing happened to Japan following their 1990 market crashes. In fact, 28 years later, they are still stuck in a deflationary economy despite aggressive credit expansion policies by the Bank of Japan, including years and years of ZIRP.
This isn't rocket surgery, by the way. There are market watchers who predicted exactly this sort of deflationary effect (though Schiff and the Austrians are not among them). Mish, who I linked to above, is one of them. I have a book written by Bob Prechter back in the early 1990s that predicts exactly what's going on right now, with a far higher degree of accuracy than Schiff has so far managed (and who recently posted an 800% profit trading his predictions...something Schiff also can't match).
So, when $40 trillion (plus...and counting) has simply evaporated out of the U.S. economy, what is the net effect of the Fed printing up $1.2 trillion to buy Treasurys and Congress giving away TARP funds with Happy Meals? Nothing. Zip. Zilch. Nada. They might as well be pissing into the Grand Canyon to fill it up.
In fact, the Fed could buy $20 trillion in Treasurys with brand spanking new fresh greenbacks, right now, and its net inflationary effect in the near term would be nearly nothing.
Which is not to say that these policies, put in place during a deflationary spiral in which their net effect is basically nothing, aren't potentially hyperinflationary once things bottom out and turn around. They certainly could be at that point. But we've a whole lot of time and economic agony before we get to that point. Whether it's three years (optimistically) or thirty (Japanese-style), we're in for more deflation, not inflation.
Re: In defense of Schiff...
Date: 2009-03-20 01:04 am (UTC)Re: In defense of Schiff...
Date: 2009-03-20 03:45 pm (UTC)Gold is a tough one. As a commodity, it's value should be experiencing a lot of downward pressure in relation to dollars as they deflate, just like the rest of the commodity markets have collapsed. Some people, though, have a psychological attachment to gold and think of it as a kind of money substitute (the Austrians would say it IS money, but I digress). That has made gold very volatile and difficult to track in this market. I do intend to buy some gold, myself, but not for some time yet. If you bought gold when the price was down near the price of production seven years ago, you're probably in a good position, but I personally wouldn't buy it now.
When a major asset deflation like we are experiencing occurs, there really isn't any safe haven.
People should be taking every market rally as an opportunity to convert their assets to cash. Then, they'll be in a good position to take advantage of several generational opportunities that will be coming up in the next few years.
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Date: 2009-03-21 10:06 pm (UTC)http://tinyurl.com/clck4y
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