The Economic Hail Mary
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bornnraisedoffCMR
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The Hail Mary
by Peter Schiff
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 The loss of 159,000 government jobs in the month could have been a positive if those lost positions had been replaced by wealth-generating private sector jobs.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 statement 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 ? 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.
Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse. His latest book is How an Economy Grows and Why It Crashes.
Copyright © 2010 Euro Pacific Capital
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Comments
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I'm tired of all these claims that doom and disaster are coming "soon". It's easy to keep scaring people with this ? if you don't have to give anyone a time frame, and then they can just slow phase out their prediction and act like they never said it.
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shootemwon wrote: »I'm tired of all these claims that doom and disaster are coming "soon". It's easy to keep scaring people with this ? if you don't have to give anyone a time frame, and then they can just slow phase out their prediction and act like they never said it.
How can you give a time frame when you have very smart guys like Ben Bernanke willing to do all kinds of unorthodox things to slow it down.
And Schiff is predicting Doom, he is predicting Doom IF we stay the course. It is avoidable and remains to be seen if the necessary actions will take place TO avoid it. -
bornnraisedoffCMR wrote: »How can you give a time frame when you have very smart guys like Ben Bernanke willing to do all kinds of unorthodox things to slow it down.
And Schiff is predicting Doom, he is predicting Doom IF we stay the course. It is avoidable and remains to be seen if the necessary actions will take place TO avoid it.
Stay what course? Schiff wants to continue current policy? -
Did Peter Schiff predict the first "bubble burst" specifically the housing market? It was either him or someone from the Austrian school.
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lexico cold wrote: »Did Peter Schiff predict the first "bubble burst" specifically the housing market? It was either him or someone from the Austrian school.
Yeah that was him. I can't deny he looks pretty good for that one. He wasn't the only one to predict the coming trouble, but he really put his reputation into it more than others who weren't quite as bold in their forecasting. Still don't agree with his remedy though.
The sad part is, we can't really look at the current situation and assess whether the current economic school of thought needs to be scrapped, because there is none. Obama's stimulus was obviously not the prescription that Austrian supporters wanted, but Keynesian economists also trashed it pretty uniformly for being insufficient to turn around a recession as deep as this one. So basically, it's only kinda, sorta, not really Keynesian, which means the discussion is always gonna be "Things got worse after we passed the stimulus!" "Things would be even worse than this if we didn't pass it!" "No they wouldn't!" "Yes they would!", and so on and so forth.
It'd be nice if our policy makers would just choose one model and actually give it a try. -
shootemwon wrote: »Stay what course? Schiff wants to continue current policy?
If we stay the current course, it will be very profitable for him and people like George Soros.
But he would rather we do the right thing then it would be better for everybody. -
lexico cold wrote: »Did Peter Schiff predict the first "bubble burst" specifically the housing market? It was either him or someone from the Austrian school.
Yeah, but he wasnt the only one. George Soros, Jim Rogers, all kinds of people predicted it, it didn't take a rocket scientist. -
shootemwon wrote: »Yeah that was him. I can't deny he looks pretty good for that one. He wasn't the only one to predict the coming trouble, but he really put his reputation into it more than others who weren't quite as bold in their forecasting. Still don't agree with his remedy though.
The sad part is, we can't really look at the current situation and assess whether the current economic school of thought needs to be scrapped, because there is none. Obama's stimulus was obviously not the prescription that Austrian supporters wanted, but Keynesian economists also trashed it pretty uniformly for being insufficient to turn around a recession as deep as this one. So basically, it's only kinda, sorta, not really Keynesian, which means the discussion is always gonna be "Things got worse after we passed the stimulus!" "Things would be even worse than this if we didn't pass it!" "No they wouldn't!" "Yes they would!", and so on and so forth.
It'd be nice if our policy makers would just choose one model and actually give it a try.
Im bout to have a ? seizure because I actually agree with you for a change. Im just saying hear people out, we are in a rut right now and drastic measures will have to be taken to get us out of it. Either way its going to be rough, especially for the poor. -
The stimulus was the equivalent of using duct tape to fix a car engine...If Obama wanted to spend he should of spent ? the other side
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bornnraisedoffCMR wrote: »Im bout to have a ? seizure because I actually agree with you for a change. Im just saying hear people out, we are in a rut right now and drastic measures will have to be taken to get us out of it. Either way its going to be rough, especially for the poor.
Yeah, we need drastic measures and the sad part to me is that at this juncture I don't see a clear path to enacting comprehensive, consistent, and complete economic policy. And by that I mean any school of thought. Mine, yours, or someone else'. It's depressing because Obama actually could have done it. When he first came into office with a 70% approval rating, he could have gotten as big a stimulus as he wanted if he was willing to call out members of Congress who obstructed. I mean, Olympia Snow, Susan Collins? These are the people he watered down the Stimulus to win over? When the insanely Democratic popular president presents his plan to address the greatest economic crisis in 8 decades and a couple of republican senators from main say he needs to decrease the size or they won't give the support it needs to overcome a filibuster, Obama's response should have been "IT STAYS THE WAY IT IS, AND I ? DARE YOU TO VOTE AGAINST IT. BY THE WAY, CAN YOU SUGGEST SOME NICE HOTELS IN MAINE? I THINK I'M GOING TO DO A FEW PRESS EVENTS THERE TO EXPLAIN THE IMPORTANT OF MY STIMULUS BILL
Boom ? , that ? is passed, when you want it, how you want it, no questions asked. But anyway that's legislative strategy "told you so", moving on...
Now that Obama is too unpopular to twist arms like with the threat the of using the bully pulpit, Congress will laugh in his face if he asks them to pass what his economic advisoes told to do back when he had the chance. So he's a non-factor in giving us a real economic policy for the foreseeable future. The Republicans are poised to take the House and maybe the Senatebut even if they get the presidency in 2012, they won't implement a real economic policy either. Between the Bush-style neocons who can't practice what the preach about fiscal restraint or small government, and some of the ? know-nothings who are about to win on the Republican ticket, the support just won't be there. Probably be lucky to find 10 congressional republicans who both understand an actual economic school of thought and (b) want to implement it.
I think if we're going to try something, we should actually try it and then if it doesn't work, we can try something else, but I also know 90% of the public sees it as this:
Obama = LIBERAL ECONOMIC POLICY
Bush = CONSERVATIVE ECONOMIC POLICY
Nevermind that both those conclusions are laughable, instead lets go with "OMFG BOTH MODELS SUCK, I GUESS WE SHOULD JUST HAVE SPLIT-PARTY CONTROL OF THE GOVERNMENT SO EACH PARTY STOPS THE OTHER FROM ? EVERYTHING UP"
And that is why we are ? . -
bornnraisedoffCMR wrote: »Either way its going to be rough, especially for the poor.
Not if they ? the bourgeoisie and take their stuff.
btw, when is Schiff's old man getting out of prison? lol -
KTULU IS BACK wrote: »Not if they ? the bourgeoisie and take their stuff.
Poor people in America don't think like that. They want to keep conditions favorable for the rich so they get to enjoy it "when I win the lottery".
Look at all the ? trailer trash you see on the news from Tea Party rallies. These people didn't make it past 7th grade but they actually think that if the government just stopped interfering they'd be able to climb to the top. -
KTULU IS BACK wrote: »Not if they ? the bourgeoisie and take their stuff.
btw, when is Schiff's old man getting out of prison? lol
Dude gonna die in prison. I think he is like 90 already.
