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Peter Schiff on the Yuan: CNBC Fast Money Spotlight 21 June 2010

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June 21, 2010 – Comments (3)

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#1) On June 22, 2010 at 9:45 AM, JakilaTheHun (99.94) wrote:

Schiff is partially wrong and partially right.  However, I find his argument bizarre given his political stances.

Why do 'opponents of American deficit spending' always seem to believe that the Chinese currency peg helps the US?  The currency peg *IS* the reason for US deficit spending. 

You can blame reckless politicians --- that's fair to a degree --- but it's also like putting a steak in front of a dog, leaving for 48 hours, and expecting the steak to still be there when you get back.  Unless you have one hell of a disciplined dog, this approach will fail.  Politicians, by their nature, want to spend money, because they view it in their own self-interest (enhancing electoral prospects). 

The only way to control Congressional spending is to put the steak on a much higher table.  That "higher table" is higher interest rates.  Those higher interest rates aren't coming, so long as the Dollar Reserve system and the Chinese currency peg is still in place. 

 

Schiff is right that the currency peg hurts China.  He's somewhat right that free floating their currency will also help them.  However, it will expedite several underlying problems with the Chinese economy that have been masked by the peg. 

 

Schiff is wrong that "there is nobody else".  Japan will continue to buy Dollars in order to further their own neo-mercantilist agenda.  China will likely do the same even if they freely float their currency.  There is an underlying economic philosophy in China and Japan that is based on mercantilist thought and that's a big reason for the US's current account deficit.  However, the Dollar Reserve system will need to be eliminated before interest rates in the US finally hit a reasonable level. 

 

In the end, I think the currency peg and the Dollar Reserve system are both bad for the world economy --- including China and the US. The system has killed American manufacturing, which is some of the best in the world --- contrary to popular belief.  We would be more on the level of Germany if it hadn't been for the Dollar Reserve system and the currency pegs.  It is also one of the major causes for the US budget deficit.  

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#2) On June 22, 2010 at 9:55 AM, JakilaTheHun (99.94) wrote:

The only way to control Congressional spending is to put the steak on a much higher table.  That "higher table" is higher interest rates.  Those higher interest rates aren't coming, so long as the Dollar Reserve system and the Chinese currency peg is still in place.

This is also the reason why hyperinflation isn't coming.  Schiff seems to understand part of the ramifications behind the currency peg, but I can't say that all of his reasoning makes sense.

If Schiff believes the currency peg reduces interest rates, it would stand to reason that the currency peg also keeps inflation very low in the US.  Perhaps Schiff believes China free-floating its currency is inevitable; and this will trigger hyperinflation. 

However, he misses the bigger reason for low inflation and low interest rates --- the Dollar Reserve system.  Japan has continued to manipulate this system in order to affect trade even without the currency peg.  China seems to be doing the very same thing

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#3) On June 28, 2010 at 1:42 PM, FleaBagger (28.76) wrote:

Jakila - again you misrepresent the views of an Austrianist in order to lambaste him. Schiff has said many times that while seeming to help the U.S. in the present, the dollar buying of other countries is unhealthy for the U.S. long-term, and will result in a bigger final crash. That is why he's been publicly asking China to stop buying UST's. 

Also, when he says "there is no one else, there's just the Fed," he is specifically referring to taking up the slack that the departure of Chinese demand will leave in the UST market. And he is right. As China moves toward the ideal of not buying any UST's (probably much slower and more cautiously than it needs to), it will become more and more obvious that only the Fed has enough purchasing power to take up the slack. Japan's demand for UST's may be fungible and based, to an extent, on price, but when they're faced with the proposition of being the bagholder when the music stops, their buying will stop increasing to take up the slack: it may even drop below current levels.

China owns more US sovereign debt than Japan does. China owns more US sovereign debt than any other entity outside the Fed and the US gov't itself. (The US owning its own debt is obviously part of an accounting scandal that only a sovereign nation could get away with.) 

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