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Peter Schiff - Krugman Strikes Again

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April 09, 2010 – Comments (8)

In a commentary two weeks ago, I rebutted dangerously silly arguments put forward by New York Times columnist Paul Krugman about how the United States should pressure China to drop its support for the U.S. dollar. Although there is far more happening in the world outside of Mr. Krugman’s brain than within it, fresh drivel from the acclaimed Nobel Prize winner compels me to turn my focus there once again.

In today’s column, Krugman analyzes the Greek debt crisis, arguing that the best solution for Athens would be to simply inflate away its debt burden with printing press money. Krugman laments that this sensible option is being foreclosed by the monetary priggishness of the German heavyweights in the European Union, who are ‘foolishly’ seeking to prevent inflation and impose fiscal discipline.

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8 Comments – Post Your Own

#1) On April 11, 2010 at 6:38 AM, devoish (98.18) wrote:

Tell Schiff I said no thanks, please don't "deflate" for me. Deflated dollars will make the cost of rebuilding US manufacturing capacity much higher, which increases the value of foreign manufacturuing that is already built. That might be good for the investors in those foreign manufacturing plants but it will not be good for our kids who have not yet accumulated cash, have not invested, and need paying jobs to get their own lives going.

Sorry, deflation rewards those investors/businessmen who removed jobs from the USA over the last twenty years and the politicians who helped them. More recently, and much worse it rewards the investment banks and hedgefunds whose bad judgement (or stealing from my persceptive) caused their financial crisis by increasing the value of the cash they acquired by selling mortgages backed by nothing, by "implying' (lying) they were guaranteed by the US Gov. when nothing fannie/freddie sold was Federally guaranteed since the 1970's.

No thanks, Mr Schiff, not interested.

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#2) On April 11, 2010 at 6:57 AM, devoish (98.18) wrote:

http://money.cnn.com/2010/03/09/pf/retirement_confidence/ 

The Congressional Budget Office (CBO) released a report on the growing wage gap in the U.S. This report states that the top 1% wage earners’ 2003 – 2005 wage increases exceeded the total income of the bottom 20% of wage earners during the same time period. The bottom 20% of wage earners reported a total income of $383.4 billion in 2005 compared to the top 1% wage earners’ income increase of $524.8 billion whose total income was reported as $1.8 trillion or 18.1% of the total income for all Americans. For an easy to read summary of the CBO report refer to the New York Times article, Report Says That the Rich Are Getting Richer Faster, Much Faster, by David Cay Johnston.

So while Americans are working harder and longer hours they are losing economic ground after adjusting for inflation whereas the top 1%’s increase in economic power and means has not been recorded since 1928

So basically our Mr Schiff, would promote a policy of deflation that helps those people with accumulated billions, buy twice as much for their money while making young college grads take pay cuts in his deflationary environment.

If Schiff has a policy to lower prices and investment income first and then paychecks second he might be on to something good for America, but let's face it, his plan is a handout to the old, not a solution for the young.

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#3) On April 11, 2010 at 9:51 AM, ETFsRule (99.94) wrote:

Schiff's an idiot.

Campaigning on the idea that we need less regulation of the financial industry? That might sound like a good idea to his Wall Street buddies in Fairfield county... but the rest of Connecticut is not going to buy it.

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#4) On April 11, 2010 at 9:53 AM, whereaminow (23.71) wrote:

devoish,

I think he's advocating honest money, market controlled currency that can't be manipulated by politicians or central bankers.

I don't have accumulated billions, but deflation would help me.  Do you think I'm going to complain when the price of milk goes down?  I have savings and no debt.  In other words, I lived beneath my means.

Do you advocate punishing me to bail out the bankrupt welfare/warfare State? 

Thanks,
David in Qatar

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#5) On April 11, 2010 at 8:31 PM, FleaBagger (28.91) wrote:

I don't want to live in devoish's logic-free, Kafkaesque nightmare, where freedom equals handouts to the rich. He takes inflation-adjusted decreasing wages as a reason to... increase inflation! Seriously? The answer to inflation eating away at the wages of the poor is to... inflate some more! Any other bright ideas? Maybe we can increase social security taxes to increase the take-home pay of the poor and middle class.

Here's some simple concepts for you: inflation decreases the value of the dollars Americans are getting paid with. It decreases their savings. It decreases the cost of corporations, particularly banks, that carry high debt levels. It increases the debt-adjusted value of foreign investments by increasing the numbers of dollars that they are worth, while the number of dollars borrowed to invest in them are static. So if you want banks to invest overseas, vote Devoish. If you want Americans to prosper at the expense of the central banking cartel, vote Schiff. 

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#6) On April 11, 2010 at 10:50 PM, devoish (98.18) wrote:

Fleabagger,

Yours is a simple, simple world of inflation and nothing else.

If i have nothing just out of college and you have ten dollars nearing retirement and the Gov't prints ten more, your dollars are worth half as much and I have a chance to collect a few as you are forced to spend twice as many and the Gov' money is added to the pool. Good for the grads who would otherwise have to hope you need a fourth house or a fifth car or hope their degrees would have worth to someone who only wishes to have cheap labor to extend his dollars further.

If Gov't gives those newly printed dollars to the wealthiest in the form of tax deductions they become wealthier. If the Gov't gives those newly printed dollars to the poorest in the form of unemployment checks or ssi increases, or Gov't paychecks they become wealthier, or at least have more money to spend.

So here's the simple concept. inflation decreases the value of the dollars Americans are getting paid with But if I'm paid twice as many, I am even. It decreases their savings. But not if that new money is added to my savings. It decreases the cost of corporations, particularly banks, that carry high debt levels. But only if the money is loaned cheaply to corporations and banks, not if the banks have to compete to get that money with higher interest rates offered to a million savers. It increases the debt-adjusted value of foreign investments by increasing the numbers of dollars that they are worth, while the number of dollars borrowed to invest in them are static. Good, the lenders have been given to easy a ride for decades. So if you want banks to invest overseas, vote Devoish. If you want Americans to prosper at the expense of the central banking cartel, vote Schiff  I do want international banks to invest overseas. I want them the f*#k out of my country. I want JPM gone and UBS gone and GS gone and good f'n riddance to the lot of them and get elected Gov't back in the job of responsible lending, something it did very well until freddie and fannie were sold to private investors.

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#7) On April 16, 2010 at 11:03 AM, JakilaTheHun (99.93) wrote:

I'm going to disagree with both devoish and whereaminow. 

Deflation isn't good for anyone. 

It sure as hell doesn't help hedge funds, who would be losing money hand-over-fist in a sustained deflationary cycle. Nearly all of them would go out of business. 

It certainly doesn't help investment banks, either, who would see their investments plummet.  Moreover, since no one would be engaging in securities offerings in a deflationary environment, it would hurt a core part of their business.

Deflation doesn't help commercial banks, who are forced to write down loans, as defaults increase.  This means they need more reserves to survive, which means less lending.  Credit contraction leads to less economic activity in general, which undermines economic recovery.  

Deflation likely doesn't help David in Qatar (contrary to his simplistic view that it does), because his wages would decrease (assuming he has a job),his investment income would decrease,  all his hard assets he owns would fall in value, and he'd have greater difficulty either (a) keeping a job or (b) growing his business.  Unless he has horded cash over the years (unlikely given his views) and lived in a cave, he would suffer, as well.

PIMCO would theoretically benefit since they are heavily invested in bonds; however, sustained deflation would significantly increase the number of defaults, so that's not even a given. 

All in all, there are very few people who benefit from sustained deflation.  And any "benefits" tend to be in relation to others, as opposed to absolute benefits.  

Deflation kills investment.  That's why it's destructive.  No one invests in a sustained deflationary environment, becuase you can't increase your wealth by investing.  The only way to increase your wealth is to hold onto your money.  Since money is merely a representation of resources, this means that vast amounts of resources are simply allowed to sit idle.  

 

Krugman is overrated by the media (who like him more for his personality than his economics) and underrated by the Austrians (who are even more overrated than Krugman).  Krugman at least understands the dangers of deflation and has a fairly sound understanding of monetary theory.  My issue with Krugman is that he finds a way to interject his political beliefs into otherwise, OK economic thinking.  And his political beliefs seem to be nothing more than "spend, spend, spend to help everyone!"

When Krugman is analyzing international currency issues, he tends to be right-on.  When he's analyzing domestic spending, he sounds like a Democratic Party hack, which is, what he is.  

 

Speaking of hack, Peter Schiff's economic wisdom is about as sound as feeding a baby crack.  The guy is a politician --- nothing more, nothing less.  His investment fund has performed rather poorly as he managed to lose money in spite of "predicting" the financial crisis (I put it in quotes since he's basically a perma-bear who is always predicting the same thing).  

Schiff is right about a few things and I agree with him on chastising Krugman on the deficit spending issue.  However, he's totally off on almost everything els.  His view that deflation will help everyone is the most idiotic view of all and displays why it would be dangerous to put someone like him in office.  He claims everyone would benefit becuase they could buy more with their money --- what he fails to mention is that without investment, there aren't all that many jobs to provide money.  Nor are the banks able to lend to people, which means even more job destruction.  Which kinda puts a giant hole in his "we'll be able to buy more because our money is worth more" theory.  That's only relevant if you have income to begin with. 

 

The best monetary policy is one that promotes price stability.  That is what the Federal Reserve Bank attempts to accomplish.  That is what Peter Schiff's world can not accomplish, since he essentially wants to put monetary policy back into the hands of politicians.  (Which is exactly how you end up with hyperinflationary episodes to begin with --- Schiff doesn't seem to understand this).

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#8) On April 19, 2010 at 2:17 PM, whereaminow (23.71) wrote:

Deflation likely doesn't help David in Qatar (contrary to his simplistic view that it does), because his wages would decrease (assuming he has a job),his investment income would decrease,  all his hard assets he owns would fall in value, and he'd have greater difficulty either (a) keeping a job or (b) growing his business.  Unless he has horded cash over the years (unlikely given his views) and lived in a cave, he would suffer, as well.

Economic fallacy. Addressed in detail here

Simple question: if deflation would ruin me (assuming I have a job of course =D), then why didn't deflation ruin American from 1776 - 1913?

One thing I can say about Jakila. If he has an axe to grind, research is not required.

If he did research, he would know that:

1. Peter Schiff is not a career politician. He has never held any office and initially refused to run for office in 2010.  It was only after voluntary donations for his campaign that didn't even exist yet reached a level too high to ignore that he threw his name in the hat.

2. Peter Schiff, by law, can not direct the investments of the funds that Jakila claims have lost money (each fund has returned greater than the S&P over the last 5 years.)  So blaming or congratulating Schiff for EuroPac's funds performance is pointless.

David in Qatar

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