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Peter Schiff - Paul Krugman Versus Reality

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March 18, 2010 – Comments (28)

In his latest weekly New York Times column, Nobel Prize-winning economist Paul Krugman put forward arguments that were so nonsensical that the award committee should ask for its medal back.

Recent rhetoric from Washington has put the economic relationship between the U.S. and China squarely on the front burner, and Krugman is demanding that we crank up the flame. This week 130 members of Congress sent a letter to Treasury Secretary Timothy Geithner demanding that the Obama administration designate China as a "currency manipulator". Following that, a bipartisan group of senators introduced a bill that looks to force the Obama administration's hand. For its own part, Beijing invites criticism by continuing to deny its utterly obvious currency agenda.

As these tensions escalate, most economists urge Washington to tread lightly because of the negative fallout for America if China were to begin selling its enormous cache of U.S. Treasury bonds. Krugman pushes back, asserting that the U.S. risks little by playing hardball, and that China has more to lose. He asserts that a Chinese decision to end its purchases of U.S. Treasury debt would make only a marginal impact on long-term interest rates. Did you hear that Stockholm?

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28 Comments – Post Your Own

#1) On March 18, 2010 at 6:15 PM, JakilaTheHun (99.94) wrote:

Can't understand why political conservatives are incapable of admitting that other opinions on matters might be valid.  Inability to understand things from other views is not a sign of intelligence --- it is a sign of gross stupidity.  Simply declaring that something is "nonsensical" does not make it so.

Krugmas is also absolutely correct on this.  And I'm kind of sick of this whole 'let's pussyfoot around mercantilism' movement.  Ironically, the people who are taking this position tend to claim to be ULTRA FREE-MARKET, yet they don't seem to be very willing to defend the free markets.  We're suppose to feel sorry for ourselves over our deficit spending rather than address mercantilistic practices that are harming our economy --- and many other economies, as well.  (It's not as if Vietnam is helped by China's policies, either.)

But you want to talk about out of touch with reality --- Peter Schiff is very much so.  This is a guy that's been talking about hyperinflation for a few years and we now have about 1% inflation.  The guy is a bozo with a political agenda and he doesn't even have a particularly good investment track record.  

His argument doesn't hold any water, either.  In fact, it's kind of nonsensical ... or at least contradictory.  He claims China will sell its dollar-denominated assets, thereby weakening the dollar.  Well, so what?  

(1) A weakening dollar means more exports - that's good

(2) Rising interest rates mean Congress can no longer spend like drunken sailors - that's good

(3) Higher interest rates means less speculative trade - that's good

Why am I so terrified of China, again? 

Sure, higher interest rates will mean less economic growth in America for the next decade, but I'd rather have that than alternative of letting our economy slowly wither away and rot, while the hard work of American entrepreneurs is destroyed by forces overseas who are manipulating trade in violating of their own agreements and promises.  

Pete Schiff ought to rename himself Neville Chamberlain ... or maybe even Charles Lindbergh.  The nation is going through difficult times and we have a foreign power directly and obviously manipulating trade and he wants to pussy out and play some sort of capitulation game. 

Screw him.  Peter Schiff is a coward and a useless hack. 

Besides, anyone with half-a-brain-cell can see this any of the things Schiff claims China will do will harm it infinitely more than it will harm us.  Which is why, his argument is really 'nonsensical' when you get down to it.  Why would China shoot itself in the foot? 

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#2) On March 18, 2010 at 6:57 PM, ETFsRule (99.94) wrote:

Agree 100% with Jakila.

Schiff's prediction of "hyperinflation" was the economic equivalent of the whole "death panel" argument against healthcare. Just a steaming pile of anti-government fearmongering, with no substance behind it at all.

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#3) On March 18, 2010 at 7:54 PM, XMFSinchiruna (27.97) wrote:

Krugman is simply not living in a world that resembles reality. All the Keynesian apologetics in the world won't make him right. I'm sorry if that opinion offends anyone, but that is my view. I hope I'm wrong, because if he is right then we really have nothing to worry about. :)

Jakila:

"Inability to understand things from other views is not a sign of intelligence"

Believe me, it's not that I don't understand Krugman's point of view nor the economic paradigm within which he mistakenly operates. It's that I have identified therein crippling elements of illogic and fantasy thay render his positions easily refutable within a reasonable and objective debate. Niall Ferguson ripped his positions to shreds with similar precision.

History Will Not Judge Krugman Kindly

Reflation was never the right strategy

Like it or not ... the worst is yet to come.

If I am wrong, then time will be my judge.

Here is my comment #23 from this post back in June:

Krugman is seriously off the mark. Did anyone happen to catch the panel discussion on C-Span Friday featuring Krugman, Roubini, Soros, etc.? It was a fascinating discussion, but in my opinion Krugman's views did not stand up to the scrutiny of fellow panelist Niall Ferguson (despite Ferguson's less-than-gentlemanly demeanor in the discussion).

Here are some excerpts:

 

Niall Ferguson: This is the end of the age of leverage, which began, I guess, in the late 1970s, and saw an explosive rise in the ratio of debt to gross domestic product, not only in this country, but in many, many other countries. Once you end up with public and private debts in excess of three and a half times the size of your annual output, you are Argentina. You know, it's funny that people refer all the time back to the collapse of Lehman last September. Let's remember that this crisis actually began in June 2007. It fully became clear in August of 2007 that major financial institutions were almost certainly on the brink of insolvency to anybody who bothered to think about the impact of subprime mortgage defaults on their balance sheets.

But we were in denial. And we stayed in denial until September, more than a year later, of last year. Then we had the breakdown. Notice how psychological terms are very helpful when economics fails as a discipline. After the breakdown, we came out of denial and we realized that probably more than one major bank was insolvent. Then in September and October the world went into shock. It was deeply traumatic.

Now we're in the therapy phase. And what therapy are we using? Well, it's very interesting because we're using two quite contradictory courses of therapy. One is the prescription of Dr. Friedman—Milton Friedman, that is —which is being administered by the Federal Reserve: massive injections of liquidity to avert the kind of banking crisis that caused the Great Depression of the early 1930s. I'm fine with that. That's the right thing to do. But there is another course of therapy that is simultaneously being administered, which is the therapy prescribed by Dr. Keynes—John Maynard Keynes—and that therapy involves the running of massive fiscal deficits in excess of 12 percent of gross domestic product this year, and the issuance therefore of vast quantities of freshly minted bonds.

There is a clear contradiction between these two policies, and we're trying to have it both ways. You can't be a monetarist and a Keynesian simultaneously—at least I can't see how you can, because if the aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy must be to drive interest rates up.

After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don't quite know who is going to buy them. It's certainly not going to be the Chinese. That worked fine in the good times, but what I call "Chimerica," the marriage between China and America, is coming to an end. Maybe it's going to end in a messy divorce.

No, the problem is that only the Fed can buy these freshly minted treasuries, and there is going to be, I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates, which will also have an effect on mortgage rates—the precise opposite of what Ben Bernanke is trying to achieve at the Fed.

One final thought: Let's not think of this as a purely American phenomenon. This is a crisis of the global economy. I'd go so far as to say it's a crisis of globalization itself. The US economy is not going to contract the most this year, even if the worst projections at the International Monetary Fund turn out to be right; a 2.6 percent contraction is far, far less than the shock already being inflicted on Japan, on South Korea, on Taiwan, to say nothing of the shock being inflicted on Europe. Germany is contracting at something close to 5 or 6 percent. So we are faced not just with a problem to be dealt with by American policy, we are faced with a crisis of global proportions, and it's far from clear to me that the prescriptions of Dr. Friedman and Dr. Keynes together can solve that massive global crisis.

Paul Krugman: Let me respond to that a bit. Let's think about what is actually happening to the global economy right now. On the one side there has been an abrupt realization by many people that they have too much debt, that they are not as rich as they thought. US households have seen their net worth decline abruptly by $13 trillion, and there are similar blows occurring around the world. So the people, individual households, want to save again. The United States has gone from approximately a zero savings rate two years ago up to about 4 percent right now, which is still below historical norms; but suddenly saving is occurring.

That saving ought to be translated into investment, but the investment demand is not there. Housing is flat on its back because it was overbuilt; housing bubbles collapsed not only in the United States, but across much of Europe. Many businesses cannot get access to capital because of the breakdown of the financial system. But even those that do have access to capital don't want to invest because consumer demand is not there. Between the housing bust and the sudden decision of consumers to save, after all, we have a world with lots of excess capacity. The GDP report that just came out says that business-fixed investment, non-residential fixed investment, essentially business investment, is falling at a 40 percent annual rate.

This causes a problem. There are lots of people who want to save, creating a vast increase in savings, not only in the US but around the world, combined with a sharp decline in the amount that the private sector is willing to invest, even at a zero interest rate, or rather even at a zero interest rate for US government debt, which is what the Federal Reserve has the most direct impact on.

One way to think about the global crisis is a vast excess of desired savings over willing investment. We have a global savings glut. Another way to say it is we have a global shortage of demand. Those are equivalent ways of saying the same thing. So we have this global savings glut, which is why there is, in fact, no upward pressure on interest rates. There are more savings than we know what to do with. If we ask the question "Where will the savings come from to finance the large US government deficits?," the answer is "From ourselves." The Chinese are not contributing at all.

Those extra savings are, in effect, the savings that America has wanted to make anyway, but that US business is not willing to invest under current conditions. That is the way Keynesian policy works in the short run. It takes excess desired savings and translates them into some kind of spending. If the private sector won't do it, the government will. There is actually no contradiction between the Federal Reserve's actions and the actions of the US government with a fiscal stimulus. It's very much necessary to do both. By buying a lot of private securities, the Federal Reserve is essentially going out there and playing the role that the private banking system is no longer playing properly; by engaging in investment, the federal government is playing the role that businesses are not now willing to play. All that debt-financed spending on infrastructure by the Obama administration is basically filling the hole left by the collapse in business investment in the United States. There is not an excess demand for savings that is going to drive up interest rates. The only thing that might drive up interest rates—and this is a real concern—is that people may grow dubious about the financial solvency of governments.

Now, the great concern I have is that although we understand these things fairly well, there are thirty-eight Republican senators who say that the answer for the crisis is another round of Bush-style tax cuts that will reduce revenues by $3 trillion over the next decade.

This crisis has been so large and the political process has been so sluggish that the difficulties have been greater than expected. And yes, there are some green shoots. Things are getting worse more slowly, but we have not managed to head off a crisis that could turn out to be self-reinforcing, and leave us in this trap for many, many years.

Then, later...

Ferguson:

Well, if you listened carefully to what Paul Krugman said, he actually agreed with me. Because what he said was that everything is just fine as long as the financial credibility of the United States isn't called into question, but my point is that it will be called into question. Of course it will. According to the administration's crazily optimistic forecast for a recovery, it's going to be a 3 percent growth rate next year, 4 percent the year after that, 4.6 percent the year after that. If you believe those numbers, you'll believe absolutely anything, but they are there in the administration's budget document. Even if those numbers turn out to be true, the federal debt will rise over the next five to ten years to around 100 percent of gross domestic product.

But since those numbers are clearly wrong, and the trend growth rate of the US will be much closer to 1 percent than to 4, it seems reasonable to anticipate a much more rapid explosion of federal debt to somewhere in the region of 140 or 150 percent of gross domestic product. Even if the private savings rate rebounded to its highest point in the postwar period, it would still account for no more than 5 percent of gross domestic product. But this year's deficit, as I said earlier, is likely to be north of 12 percent of gross domestic product. So it doesn't quite add up.

The Fed has committed itself to buying $300 billion worth of treasuries this year, but clearly it will have to buy a great many more than that. Remember, $1.7 trillion or so are coming onto the market. And you assume that the credibility of the United States in the eyes of Americans, as well as foreign investors, is going to withstand this? At some point the United States does start to look like a Latin American economy, not only to people abroad but maybe to people at home. If the Fed's balance sheet explodes to up to $3 or $4 trillion, who knows how big it could get. At what point do people stop believing in the US dollar as a reserve currency, or even as a store of value for their own savings?

    After this exchange, Paul Krugman gets visibly agitated, and pleads with Ferguson to take the discussion of current account balance numbers OFFSTAGE! Ha! That's no way to win a debate, Mr. Krugman!

 

 

 

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#4) On March 18, 2010 at 9:10 PM, whereaminow (42.76) wrote:

Wow, if I listened to Jakila I would have to assume that Mercantilism is a sound economic strategy that benefits the nation as a whole, not the discredited economic agenda that was overthrown by classical liberalism ushering in the greatest expansion of wealth and productivity in human history.

I guess it's a good thing I can think for myself.

It is getting thick around here.  I'm still waiting for Jakila to bring forth evidence that food and energy costs crashed in 2008 to support his position that anyone claiming rising prices in 2008 is out of their minds (never mind that even wages increased by 2.6% in 2008.)

I may be waiting for some time.

Now for some humor.

Here's a classic line from Thomas Woods, referring to Krugman's repeated calls for interest rate cuts in the early 2000's (the primary cause of the bubble):

"Working for The New York Times means never having to say you're wrong, because if you weren't wrong, you wouldn't be working for The New York Times in the first place." - Tom Woods, from the Mises Circle Talk, Mises U. 2009

David in Qatar

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#5) On March 18, 2010 at 9:27 PM, whereaminow (42.76) wrote:

Can't understand why political conservatives are incapable of admitting that other opinions on matters might be valid.

Which opinions?  Ron Paul called Fannie Mae and Freddie Mac's implosion in 2003.  He described it in detail and it came 100% true.  During the primary campaigns in late 2007, early 2008, he's the only one out there saying the economy is about to tank. He's getting laughed at. 

Peter Schiff called the housing crash right before it happened.  Ludwig Von Mises called the 1929 stock market crash while Fisher and Keynes lost their savings.  Von Mises turned down a high paying banking job in late 1929 precisely because he saw a crash coming.  Henry Hazlitt predicted the breakup of Bretton Woods.

Gold is up from $35 in 1971 when the dollar went free fall, umm i mean unbacked, to $1100 today.  That's what?  What is that on an annual percentage?  Someone pull out a calculator. 

Jim Rogers co-ran one of the most successful funds in history and is considered one of the greatest investors of all time. 

Hold gold.  Invest in good companies in foreign markets.  Listen to Jim Rogers, Ron Paul, Peter Schiff, and the Austrian School.  If that's your main investment advice, I think you are doing well, no?  Whose advice is better?  What other investment or economic "guru" has a better record?  What school of economic thought has a better track record for both economics and investing than the Austrian School?

I'll wait.

And then, when you finally capitulate, maybe you can learn a little about praxeology and the marginalist revolution that occured in economics only 140 years ago.  You have some catching up to do.

David in Qatar

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#6) On March 18, 2010 at 9:37 PM, whereaminow (42.76) wrote:

His argument doesn't hold any water, either.  In fact, it's kind of nonsensical ... or at least contradictory.  He claims China will sell its dollar-denominated assets, thereby weakening the dollar.  Well, so what?  

(1) A weakening dollar means more exports - that's good

Good for people that sell products overseas.  Bad for consumers that want to buy foreign goods. You know, not everybody is an auto maker.  Every policy is good for some people and bad for others. 

(2) Rising interest rates mean Congress can no longer spend like drunken sailors - that's good

The minute interests go up, we get another harsh dose of reality.  That is good!  Only, that's not what Krugman wants.  In fact, it's the opposite. I don't understand how you can defend Krugman against Schiff, when in fact, you are saying Schiff is right and Krugman is wrong.  Now THAT'S nonsenical. 

(3) Higher interest rates means less speculative trade - that's good

See the comment above. 

Why am I so terrified of China, again? 

See the comment above... again. It's actually Krugman that has been waging Jihad against China for some time now.  First, they saved too much and that caused the American housing bubble.  (Yes, he really blamed our housing bubble on China.)  Now, they are devaluing their currency too much, which as you pointed out above is great for their exporters, but as I remind you (or maybe you didn't know this at all) it actually hurts the majority of Chinese citizens!

So yes, indeed, why are we afraid of China.

David in Qatar

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#7) On March 18, 2010 at 9:41 PM, whereaminow (42.76) wrote:

Sure, higher interest rates will mean less economic growth in America for the next decade, but I'd rather have that than alternative of letting our economy slowly wither away and rot, while the hard work of American entrepreneurs is destroyed by forces overseas who are manipulating trade in violating of their own agreements and promises.  

Pete Schiff ought to rename himself Neville Chamberlain ... or maybe even Charles Lindbergh.  The nation is going through difficult times and we have a foreign power directly and obviously manipulating trade and he wants to pussy out and play some sort of capitulation game. 

Any want out there want to do some research?  Look up all the protectionist trade policies that the United States has engaged in against China in the last ten years.

Here are some tips: 

Steel tariff hikes under Bush and Obama, tariffs on tires, oh and of course, devaluing the dollar and thus punishing America's largest creditor, the Chinese. I'm sure there are dozens more.

It's a two sided story.  We engage in Mercantilism.  They retaliate and vice versa.

Of course, you have to be willing to believe that governments operate in their own self interest and not in the interest of their people to believe that.

But that's a CRAZY idea :)

David in Qatar

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#8) On March 18, 2010 at 9:52 PM, ETFsRule (99.94) wrote:

Whoa, slow down there, David. We're not talking about 1929 here.

Out of curiosity... if you had to choose, would you say that Schiff's prediciton of hyperinflation in the United States was correct or incorrect?

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#9) On March 18, 2010 at 9:57 PM, whereaminow (42.76) wrote:

ETFsRule,

By when did Schiff say Hyperinflation would arrive?  And by what percentage?  If it he said Hyperinflation in 2009, then he was clearly wrong.  Can you cite where he said that?

I don't know of any Austrian School economist that says "inflation will come by X date."  That's not how inflation works.  The money has to actually step through the economy.  (Cantillon Effect)  When that happens, who knows?

But when it does....

But I will admit that Schiff was in the minority among the Austrian School that predicted hyperinflation.  Almost all predict Stagflation or borderline Mass Inflation (10%-20%).

David in Qatar

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#10) On March 18, 2010 at 10:35 PM, ETFsRule (99.94) wrote:

Well, of course he's very vague with all of his predictions, so he never gives an actual timeline. That's because he's just a fearmonger, not an economist.

But he has said that we would experience hyperinflation "in the short term". And on Youtube there is a video with him, Glenn Beck, and Marc Faber, where Faber says it is "100% certain" that we will have hyperinflation comparable to Zimbabwe, and Schiff agrees with him. Anyway there are a lot of Schiff's predictions all over the web, they aren't hard to find.

What's really interesting, is how wrong he was about the financial collapse. Yes, he did predict that a collapse would happen. But, he also believed in decoupling, which was 100% wrong. And he advised people, right before the collapse, to move out of US equities and into international equities. This is what he was telling people to do back in 2008. And if anyone was dumb enough to actually listen to him, they would have lost even MORE than if they had simply held onto their US equities. So, he was only "right" in the sense that you can be "right" every once in a while by throwing darts at a dartboard. He obviously had no understanding of the underlying issues:

http://globaleconomicanalysis.blogspot.com/2009/01/peter-schiff-was-wrong.html

(notice the fearmongering rhetoric about Weimar and Zimbabwe)

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#11) On March 18, 2010 at 10:36 PM, ETFsRule (99.94) wrote:

And, can you tell me which Austrian economists are predicting mass inflation of 10-20%, and what is their timeline?

I just want to know how long to wait before I can say that they were wrong.

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#12) On March 19, 2010 at 12:48 AM, davejh23 (< 20) wrote:

"And, can you tell me which Austrian economists are predicting mass inflation of 10-20%, and what is their timeline?

I just want to know how long to wait before I can say that they were wrong."

Do you trust the government's CPI reports?  ShadowStats recently reported that inflation, as measured during the Clinton administration and previously, is running slightly above 10%.  Based on these statistics, which are closer to what I've observed in real life, we can declare that they're already correct.

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#13) On March 19, 2010 at 10:26 AM, whereaminow (42.76) wrote:

ETFsRule,

Which Flation Will Get Us? by Gary North (another Austrian School economist/investor that predicted the housing crash)

What do I envision? Economic growth under 2% per annum, coupled with price increases of 5% per annum or more

Why I Expect Serious Stagflation by Robert Murphy, Austrian School Economic Historian  

Let me try one last thing to get my point across. Suppose in 2007 you were handed a piece of paper and a pencil, and were asked, "Come up with a list of bullet points for how to generate severe stagflation in the years 2010 through 2019."

Wouldn't your list look pretty similar to what has already happened?

But perhaps instead of desperately hoping to try and find one Austrian School economist that made a bad call, why not ask yourself, "how is it that these guys are right so often when the other Economic schools are so wrong so often?"

If you seriously attempted to answer that question, your outlook would change dramatically.

David in Qatar

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#14) On March 19, 2010 at 2:00 PM, ETFsRule (99.94) wrote:

"how is it that these guys are right so often when the other Economic schools are so wrong so often?"

Except, that simply isn't the case. Austrians are rarely right about anything. They rarely even make predictions or attempt to make any serious analysis. Austrians spend most of their time trying to shoot holes in mainstream and Keynesian economists.

The reason I focused on Schiff, is because that's what this blog post was originally about: the recent "tiff" between Schiff and Krugman over hyperinflation, interest rates, etc. And as it turns out, in this instance Krugman was right and Schiff was wrong. Can we agree on that at least? 

Again, if Schiff knew that this economic collapse was coming, shouldn't he have been able to use this knowledge to outperform the market, and give good advice to his investors? As we have seen, that was not the case. His Europacific Crap-ital funds have underperformed the market since the start of the crisis. Way to go, Nostradamus!

If I wanted to put in the time, I could probably debunk all of these sources that you are spewing out. But I'm not going to devote my life to it. I have seen more than enough to know that their economic philosophies are wrong and do not work.

"What do I envision? Economic growth under 2% per annum, coupled with price increases of 5% per annum or more"

Starting when? And for how many years?

Anyway, it's hard to take any of this analysis seriously, because there really is no analysis. How did he come up with the 2% number, rather than 3% or 4%? He is just pulling numbers out of thin air. That's the problem with Austrians - it's nothing more than a "common sense" way of thinking, and that's why it fails when its proponents try to analyze the economy in any meaningful way.

It's also interesting how both of those links rely on the CPI to prove their points. I thought Austrians were too good for the CPI? Anyway, in the 2nd link, he is simply wrong about inflation. He uses non-seasonally adjusted figures, which is just stupid. There are reasons people use seasonally-adjusted numbers.

And he tries to extrapolate a 4-month period, to show that annual inflation was at 4.3%? Well, whatever nonsense he was trying to pull, we can now see that he was completely wrong. Look at the CPI numbers for yourself if you don't believe me. Most of his article is just typical dogma, and when he actually used numbers, he was patently incorrect.

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#15) On March 19, 2010 at 2:47 PM, whereaminow (42.76) wrote:

ETFsRule,

Except, that simply isn't the case. Austrians are rarely right about anything. They rarely even make predictions or attempt to make any serious analysis. Austrians spend most of their time trying to shoot holes in mainstream and Keynesian economists.

Cite sources please.  Prove to me that you've actually read and understand Austrian Business Cycle Theory, and for that matter Keynesian multiplier theory, or to be even more sporting how about something of significance ever said by Keynes, Friedman, Mises, or Hayek.

The reason I focused on Schiff, is because that's what this blog post was originally about: the recent "tiff" between Schiff and Krugman over hyperinflation, interest rates, etc. And as it turns out, in this instance Krugman was right and Schiff was wrong. Can we agree on that at least? 

Did you even read Schiff's article?  I don't think you did.  Krugman is calling for the monetizing of debt.  Do you disagree that inflation is primarily a monetary phenomenon?  What evidence do you have that debt can be monetized without leading to drastic inflation, even hyperinflation?  Again, cite sources please. 

Again, if Schiff knew that this economic collapse was coming, shouldn't he have been able to use this knowledge to outperform the market, and give good advice to his investors? As we have seen, that was not the case. His Europacific Crap-ital funds have underperformed the market since the start of the crisis. Way to go, Nostradamus! 

Again, cite source please.  EuroPac not only has thousands of clients, but Schiff is an investment broker and can not direct any of the funds in the individual accounts.  So you will have a difficult time supporting either claim a) that EuroPac has underperformed or b) that Schiff lost money for his clients. 

If I wanted to put in the time, I could probably debunk all of these sources that you are spewing out. But I'm not going to devote my life to it. I have seen more than enough to know that their economic philosophies are wrong and do not work.

Well that's the problem. You haven't put in the time.  Until you do, you will continue to lower yourself to unsupported conjecture with an obvious bias.

Anyway, it's hard to take any of this analysis seriously, because there really is no analysis. How did he come up with the 2% number, rather than 3% or 4%? He is just pulling numbers out of thin air. That's the problem with Austrians - it's nothing more than a "common sense" way of thinking, and that's why it fails when its proponents try to analyze the economy in any meaningful way.

So.... common sense... is just stupid?  Hmm..  Did you read North's article? 

It's also interesting how both of those links rely on the CPI to prove their points. I thought Austrians were too good for the CPI? Anyway, in the 2nd link, he is simply wrong about inflation. He uses non-seasonally adjusted figures, which is just stupid. There are reasons people use seasonally-adjusted numbers.

Who makes the seasonal adjustments?  Nuff said.

And he tries to extrapolate a 4-month period, to show that annual inflation was at 4.3%? Well, whatever nonsense he was trying to pull, we can now see that he was completely wrong. Look at the CPI numbers for yourself if you don't believe me. Most of his article is just typical dogma, and when he actually used numbers, he was patently incorrect.

The article was written in June 2009.  It's at the top of the page.  That's where they usually put the date.

David in Qatar

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#16) On March 19, 2010 at 3:08 PM, whereaminow (42.76) wrote:

Here's some more. For those with intellectual curiousity and no axe to grind:

Frank Shostak describes the housing bubble in 2003.  Says we are near the peak.  (Peak came in 2004.)

Mark Thornton disects the crumbling of real estate in summer 2006.

In the midst of general economic euphoria in April 2006, Thorsten Polleit points to the Fed's low interest rates and says we are headed for trouble.

In 2004, Antony Mueller criticizes Greenspan's penchant for bailouts (calling him Mr. Bailout) saying they sow the seeds for future crashes and, wait for it... Bailouts!

in 2003, H.A. Trask talks about the problems of Reflation, particularly the idea that we can reflate out of the dot com bust, saying it will just make it worse down the road.  Hmmm....

Keep searching folks. You'll find the answers.

David in Qatar

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#17) On March 19, 2010 at 4:59 PM, alexxlea (58.63) wrote:

What really matters is that as long as idiots are willing to believe that numbers mean something, they mean something, and as long as we're willing to allow such people to exploit people and the land in exchange for imaginary numbers we're fine.

 

Aside from that nothing else really matters.

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#18) On March 19, 2010 at 5:01 PM, ETFsRule (99.94) wrote:

"Again, cite source please.  EuroPac not only has thousands of clients, but Schiff is an investment broker and can not direct any of the funds in the individual accounts.  So you will have a difficult time supporting either claim a) that EuroPac has underperformed or b) that Schiff lost money for his clients. "

Ok, here are my sources: 

CEUAXAmerican Funds EuroPacific Gr 529A38.05Mutual FundNASCEUBXAmerican Funds EuroPacific Gr 529B37.43Mutual FundNASCEUCXAmerican Funds EuroPacific Gr 529C37.33Mutual FundNASCEUEXAmerican Funds EuroPacific Gr 529E37.76Mutual FundNASCEUFXAmerican Funds EuroPacific Gr 529F38.04Mutual FundNASAEPGXAmerican Funds EuroPacific Gr A38.35Mutual FundNASAEGBXAmerican Funds EuroPacific Gr B37.96Mutual FundNASAEPCXAmerican Funds EuroPacific Gr C37.45Mutual FundNASAEGFXAmerican Funds EuroPacific Gr F-138.16Mutual FundNASAEPFXAmerican Funds EuroPacific Gr F-238.35Mutual FundNASRERAXAmerican Funds EuroPacific Gr R137.11Mutual FundNASRERBXAmerican Funds EuroPacific Gr R237.32Mutual FundNASRERCXAmerican Funds EuroPacific Gr R337.67Mutual FundNASREREXAmerican Funds EuroPacific Gr R437.74Mutual FundNASRERFXAmerican Funds EuroPacific Gr R538.32Mutual FundNASRERGX

"So.... common sense... is just stupid?  Hmm..  Did you read North's article?" 

Stop playing dumb, David. I know you're not this stupid. My point is that he doesn't show any sort of numerical analysis. How did he arrive at his final number of 2%? How do you know that 1% or 3% wouldn't be more accurate than 2%? The point is that he is avoiding the use of any numbers in his analysis, and then to form a conclusion, he just pulls a number out of thin air.

"Who makes the seasonal adjustments?  Nuff said."

Actually, not "nuff said". Besides, as I pointed out earlier, we now can see that in 2009 the inflation rate was not as high as Murphy was claiming. Not only were his methods ridiculous, but his conclusion was clearly wrong.

"The article was written in June 2009.  It's at the top of the page.  That's where they usually put the date."

Yeah... I saw the date. What does that have to do with my point? Do you agree that he was making a pathetic attempt to manipulate the CPI statistics? Or do you honestly believe the CPI was being inflated at a rate of 4.3% at the time of his article?

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#19) On March 19, 2010 at 6:37 PM, TMFLomax (29.19) wrote:

Thanks for this post and the good discussion that digs deeper into this issue than I know about, quite frankly. Still, when I read Krugman's piece, the thought that crossed my mind was just that he'd gone nanners or something. (Oh, we have the upper hand here, HUH?) And unfortunately it's not like really delusional thinking hasn't been running rampant these days. +1 rec...

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#20) On March 19, 2010 at 7:20 PM, whereaminow (42.76) wrote:

ETFsRule,

Every single one of those funds has beat the market over the last 5 years.  Every single one.   

You can quibble with Schiff's timing all you want. Even Schiff admits he timed the gold surge wrong in the first half of 2008. He was off by 6 months.  He's not a God. 

Your beef with Schiff, and by extension all Libertarians, is clearly personal.  You don't wish to know or understand anything about their ideas.

Attack, slander, marginalize.  That's your strategy.  It's not unique or particularly clever.  Lucas1985 employed the same tactics with me for months.  Alex1963 tried it before him.  There will always be one.  It's no big deal.

But here's what you can't do:

1. You can't explain our ideas.  If you could, you would show how they're wrong.

2. You can't explain your ideas either and why they're right.  That's why you have to stick to personal attacks and marginalizing.

Keep at it though.  It's working great for us. We're growing.

David in Qatar 

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#21) On March 19, 2010 at 10:04 PM, ETFsRule (99.94) wrote:

"Attack, slander, marginalize.  That's your strategy."

Oh, please. That's been your strategy all along. I'm the only one trying to get into the issues with facts, figures, meaningful ideas, etc.

Please, defend his "2%" figure. He put it out there, and there should be a reason for it. But you can't defend it, because you can plainly see that he just pulled that number out of thin air, as a wild guess. That's not a personal attack, it's just the truth, and you KNOW it's the truth. It's just one example, but it illustrates how Austrians are incapable of turning their ideas into real-world solutions, using dates, numbers, estimates, statistics, etc. These aren't abstract concepts... these are the tools that simply must be used in the real world.

You can't show his methodology for arriving at that figure, because there wasn't one. Everytime I make a point, such as this one, you are unable to respond. Now you're trying to "take the high road", when in fact what you are really trying to do is avoid responding to the content of my posts, because you have no rebuttal.

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#22) On March 20, 2010 at 12:48 AM, buildgreen (< 20) wrote:

I know no one will listen to me because I have a low rating. Its a terriable huburis on your part but whatever. 

 ETFs rule is comming with a better argument. The other is going to the attack, slander, hosile mode that seems to be a trademark of the person. I would like to see an actual factual response to the points in point #21 which by the way was asked over and over again. 

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#23) On March 20, 2010 at 12:03 PM, whereaminow (42.76) wrote:

ETFsRule,

Growth under 2% with inflation over 5% is the definition of stagfaltion.  That is exactly what North is predicting.  He is saying, this is what we are going to get: stagflation.  Stagflation is growth under 2% with inflation over 5%.

I don't see why this is so hard to understand.  The analysis is right there in the article.  Shall I reprint the whole thing?

Here you go.

Which Flation Will Get Us?  by Peter North

One of them will. That's if things work out really well. Two or three will if things go according to the Austrian theory of the business cycle.

Americans have been living in the eye of the monetary hurricane. Prices have been stable. In July, both the Consumer Price Index and the Median CPI were flat compared to June.

There are five flations to consider.

Deflation
Inflation
Stagflation
Mass inflation
Hyperinflation

 

We had better consider all of them.

FLATION: MONETARY OR PRICE?

We should always keep in mind the fact that there are two ways to define flation: (1) as a change in the money supply; (2) as a change in the price level.

This assumes two more things: (1) we can accurately define money; (2) we can accurately identify the price level. Both are questionable.

The Federal Reserve three years ago dropped M3. It said that M3 was useless as an indicator of future prices. That was a long time coming. The FED was correct. M3 was the most misleading of these M's: M1, M2, M3, MZM. It always vastly overstated the looming rise in the CPI. There is no doubt which M is best in this regard: M1. For my detailed Remnant Review article on this, go here.

Furthermore, there is more to an M than predicting future consumer prices. There is also the question of predicting the business cycle. There is no agreement here among economists.

Then there is the price level. Which basket of goods and services should statisticians use? What relevance should a statistician place on any of a hundred commodities and services? This weighing will change when consumer tastes change. No index survives intact over time. They all are revised when there are major changes, from the CPI to the Dow Jones averages.

I look for trends. I use M1 and the Median CPI.

The crucial fact is monetary policy. According to the Austrian theory of the business cycle, the cycle is completely the outcome of prior central bank monetary policy. Booms and busts are the result of central bank monetary inflation, followed by reduced expansion. The other schools of thought reject this theory. The other schools of thought are wrong. For an introduction to this issue, see Chapter 5 of my mini-book, Mises on Money.

DEFLATION

Most of those who forecast deflation have in mind price deflation. A few think monetary deflation will take place because of bankrupt banks, but the position is difficult to defend. The FDIC can keep bank doors open. There are no runs on banks involving currency withdrawal. There are only runs involving the transfer of digital money to other banks. This does not affect the money supply.

Price deflation can come through the free market. It results from steady increases in economic output in an economy with stable money. Here is my slogan: "More goods chasing the same amount of money." A gold coin standard economy provides such a world, as long as central banks do not protect insolvent banks. So does 100% reserve banking, which we have never had. This is not the scenario offered by deflationists.

Here is their scenario. Banks create credit. Fiat money lowers interest rates. People borrow. This is consistent with Austrian economics. This credit structure cannot be sustained indefinitely. Austrianism also teaches this.

Here is where the schools of opinion depart. The deflationist says that people in general cannot pay their debts. They default. So, prices fall. Not just prices of market sectors that were bubbles, but all prices.

There is a problem with this argument. If you find that half of the things you regularly buy cost less, you buy the same amount, or maybe a little more, and then buy more of something else. This includes the purchase of capital goods.

You don't put currency in a mattress. You buy something with the money that falling prices allows you to keep. You buy more of B when the price of A falls . . . or more of A.

Simple, isn't it? But those who call themselves deflationists do not understand it or believe it.

The same money supply is out there. Someone owns each portion of it. You own some. I own some. We both would like to own more . . . at some price. But the credit contraction of a popped market bubble does not affect the money supply if the central bank or the Treasury or the FDIC intervenes and prevents a fractional reserve bank from going bust and taking all of the digital money with it.

This is economic logic. If the logic is incorrect, then there should be detailed theoretical criticisms of it. Or, given the weaknesses of human thought, maybe logic does not correspond to reality. Economists are famous for constructing detailed theories that do not conform to reality. But the free market theory of price changes as the result of the supply and demand for money in relation to the supply and demand for products and services is straightforward. It undergirds all of economic theory. Throw it out, and what remains of economic theory?

If a central bank creates a boom with fiat money, and then ceases to inflate, it can create deflation. How? By refusing to bail out busted banks. It allows the money supply to contract as bankrupt commercial bank deposits disappear. Fractional reserve banking implodes. That will create a deflationary depression. We have not seen anything like this since 1934: the creation of the FDIC.

Don't bank on this just yet.

INFLATION

Monetary inflation produces price inflation. On this, Chicago School monetarists and Austrian school economists agree.

If the central bank expands the money supply, prices will rise. This takes time. Economists debate about the lag time: 6 months, a year, 18 months. But monetary expansion will raise prices. The new money has to go somewhere. It has to wind up in someone's bank account.

If the central bank expands the monetary base by buying assets of any kind, it creates money to buy them. The recipients of those assets spend the money. If the Treasury gets it, Congress spends it. (In both theory and practice, if Congress gets its collective hands on money, it spends it. All economists are agreed on this point.)

The expansion of money by the central bank is the source of economic booms and specific asset bubbles. The expansion of money temporarily lowers the interest rate. Someone borrows this newly created money.

America suffered from monetary inflation from 1914 to 1930. Then, with a 3-year hiatus of collapsing banks, we have suffered from 1934 until today. The dollar has fallen by 95% since 1914. No, I don't believe the CPI tells us this exactly. But I can follow the trend. The trend is up for prices and down for purchasing power.

For as long as the Federal Reserve creates money, we will have price inflation. The only thing that can retard this is if the FED raises reserve requirements or commercial banks send excess reserves to the FED. The monetary effects are the same: increased reserves are the result. This reduces the multiplier of fractional reserve banking.

Price inflation of under 10% per annum is what I call inflation. But before we get to this, we will suffer from stagflation.

STAGFLATION

This was the burden of the 1970's. There was monetary expansion and massive Federal deficits. Why, the Federal deficit was a staggering $25 billion in 1970, and as bad the next year. Unthinkable!

The dominant Keynesian theory was that Federal deficits would overcome recessions. The central bank need only inflate enough to cover part of the Federal deficit. But there were two major recessions in the 1970's. Unemployment rose, and prices rose. That combination of events was dubbed stagflation.

That we can have economic stagnation in today's world is obvious. Just about every mainstream economist and forecaster is predicting slow economic growth next year. The familiar V-shaped recovery is not a popular forecast these days. More typical is the forecast of Muhammed El-Erian, the CEO of PIMCO, the largest bond fund in the world. He calls this "the new normal."

Global growth will be subdued for a while and unemployment high; a heavy hand of government will be evident in several sectors; the core of the global system will be less cohesive and, with the magnet of the Anglo-Saxon model in retreat, finance will no longer be accorded a preeminent role in post-industrial economies. Moreover, the balance of risk will tilt over time toward higher sovereign risk, growing inflationary expectations and stagflation.

 

This scenario is a combination of slow growth and rising prices. Today, we have no growth and flat prices. So, slow growth and rising prices is not much of a stretch conceptually.

I think stagflation is likely, once the recovery comes. But we are seeing a gigantic Federal deficit. Ross Perot in 1992 spoke of a giant sucking sound. He said that was the sound of jobs lost to Mexico. I think it is the sound of the Federal government sucking up all excess capital in the United States and much of the world. This money will not be going into the private sector.

What is the basis of a sustained economic recovery? Increased capital formation. We are seeing capital destruction.

For a time, we will suffer from stagflation. It will not be stagdeflation. It will be staginflation.

What do I envision? Economic growth under 2% per annum, coupled with price increases of 5% per annum or more.

MASS INFLATION

This phenomenon will appear when the Federal deficit cannot be covered by private investment and purchases by foreign central banks. This seems certain within a decade. I think it is likely before the end of the next President's term. I think the Social Security trust fund will cease to provide a surplus that is used to purchase nonmarketable Treasury debt, as it is today. The trustees will have to sell some of these nonmarketable Treasury debt certificates back to the Treasury. The Treasury in turn will have to sell conventional Treasury debt to cover the redemptions by the trust fund.

This stage will be the indicator that the present borrow-and-spend model has failed. The FED will be called upon to supply the difference between purchases of T-debt by the public and borrowing by the government. When the FED complies, the rate of monetary inflation will rise. Prices will also rise.

I define mass inflation as double-digit price inflation above 20% but below 40%. Americans have not seen this. No industrial nation has seen this except after a major military defeat.

The disruption of the capital markets will be extreme. The government will absorb virtually all capital formation. There will be no net capital formation. There will be capital consumption.

The international value of the dollar will fall. But other Western nations will be pursuing comparable policies. It is not clear how far the dollar will fall. It depends on the competitive race to national self-destruction. Every Western nation faces the day of reckoning: the bankruptcy of Social Security/Medicare.

At this point, the FED will have to make a choice: put on the brakes or destroy the dollar.

HYPERINFLATION

The worst-case scenario is hyperinflation. Ludwig von Mises called this the crack-up boom. It leads to the destruction of the currency. The economy will move to barter or to alternative currencies. The division of labor will collapse.

No modern industrial economy has suffered this since the recovery after World War II. The West is not Zimbabwe. The West is not a backward agricultural nation that still has functional tribal organizations to help their members.

Think about the implications of your money not buying anything of value. How would you live? You are urban. You are dependent on a complex system of computerized production and distribution. It is all governed by profit and loss. The profit-and-loss system will cease to function at some point. That is when the economy shifts to a new monetary system.

This would be the destruction of wealth on the scale of a war. It would create a new social order.

I do not think the Federal Reserve will allow this. This would destroy the banking system. The FED's unofficial but primary job is to preserve the biggest banks in the banking system. If it's a question of providing fiat money for the government's debt vs. destroying the dollar, the FED will cease buying Treasury debt.

That will be the turning point.

DEFLATION

Then we will get the crash. The FED will protect the biggest banks, which will swallow the assets of smaller banks. A lot of smaller banks will go under. They will take deposits with them.

We will get bank runs. People will demand currency. The FDIC will be busted. These banks will go under. So will depositors' money. It will be "It's a Wonderful Life" without the 6 o'clock escape hatch in the script.

You had better have your money in Potter's Bank, not the Bedford Falls Building & Loan.

The contraction of digital money will be matched by a truly serious recession. Bankruptcies will be widespread. Unemployment may not rise, but only because the final phase of mass inflation had created so much unemployment.

This will be a period of restoration. The cost of the restoration will depend on how bad the dislocations of the mass inflation had been. If they are very serious, which I would expect, the time of recession will be tolerable if you have currency and a job. But the investment strategies of hedging against mass inflation will produce losses. An opposite set of strategies will appear. Be a debtor in mass inflation. Be a creditor in the post-inflation recovery.

If the Federal Reserve intervenes again, repeat the cycle from the top. But the numbers will be much larger.

CONCLUSION

Pick your flation. You can try to beat it, but each successive flation threatens your capital.

We are entering a period of capital consumption in the United States. I think this problem will afflict the West. The same political promises have been made. They will be broken.

He who sustains his lifestyle through these flations will be blessed indeed. Getting rich will be miraculous.

September 5, 2009  

David in Qatar

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#24) On March 20, 2010 at 12:13 PM, whereaminow (42.76) wrote:

Jeremy Warner, writing for the London Daily Telegraph, is smack-on in his criticism of Paul Krugman.  Some paragraphs:

Paul Krugman, a Nobel Prize-winning economist, has taken to advocating a 25 per cent “surcharge” – he refuses to use the more descriptive term of “import tariff” – on goods from China as a way of bringing the Chinese leadership to heel over currency reform. So potentially dangerous and out of character is this idea that when I first read it, I assumed he was being ironic. But sometimes the cleverest of people can also be the most stupid, and he’s now said it so often that you have to believe he’s serious….

What he’s advocating is trade retaliation so extreme that it would make the 1930s look like a stroll in the park. Contrary to Professor Krugman’s naïve assumption that the Chinese would soon cave in and allow their currency to float if confronted by such hard-ball tactics, I am certain that nothing is more guaranteed to produce the opposite response.

Professor Krugman’s suggestion mines a rich seam of populist US thinking and rhetoric which grows ever more vocal and worrying as the recession persists. What makes Krugman and other highly regarded economists who toe the same line so dangerous is that they give intellectual respectability to a fundamentally disreputable idea.

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#25) On March 20, 2010 at 1:43 PM, AvianFlu (34.92) wrote:

Milton Friedman was an expert monetarist.
Friedman said inflation was caused by an increase in the money supply.
He said that it was not possible to predict when inflation would start after the money supply was increased.
However, if you read as many books of his as I have, you can find passages saying that IN GENERAL inflation starts to increase typically within 18 to 24 months of the increase in money supply.

We are now in the 18 to 24 month period from the first massive money printing experiment. (refer to St. Louis fed money supply chart). So it would not be surprising to find inflation just starting to appear now...or maybe even as late as in the fall of this year.

However, I must point out that the money supply was not increased once and left alone. It has been increasing with regularity every month since september 2008. Each one of those increases will translate to an increase in inflation....18 to 24 months later plus or minus.

So our little party has yet to begin. It is premature to claim that those who predicted inflation are wrong. The situation is developing just as it always has throughout recorded history. Check back two years from now. If inflation has not happened then I will gladly admit that they are wrong. That will give the monetarist theories time to play out.

 As for Krugman, I figure that he deserves his Nobel prize just as much as Barack Obama does.

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#26) On March 20, 2010 at 1:58 PM, whereaminow (42.76) wrote:

LOL, the article above is by GARY North, not the Porn Hall of Famer Peter North.  Where do you think my mind is today?  Hilarious.

So, anyway.... ETF's, do you understand why Gary says growth less than 2% with inflation over 5?  It's not pulled out of a hat.  It's the definition.

Now, is there any other baseless accusation above that I haven't responded to?  You said I was avoiding the issue.  Did I avoid it?  Are we cleared up now?

Ok, good.

Now, I'm going to ask to explain the Austrian Theory of the Business Cycle and the term praxeology.  If you can do that, we can move forward.  They are not incrediblty difficult concepts.  Once you understand them, you will see that Austrians do not "pull stuff out of a hat."

David in Qatar

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#27) On March 20, 2010 at 2:08 PM, dbjella (< 20) wrote:

AvianFlu

I think your post is great.  I have no clear indication from this blogt where inflation is today.   

I know that from 2008, I make 25% less per hour, I have more "non working time" searching for work between contracts, contracts are shorter in duration, my rent has remained the same, my food is about the same give or take a little, I can't eat out as much so I can't comment on dining prices, fuel is down, medical is up quite a bit, dentist is up slightly,  my utilities are slightly up, cable is up and so is my cell phone. 

Logically things don't seem to add up.  Our gov't is spending considerably more than they take in, state and local gov'ts are scrambling to make up tax shortfalls they are itching to raise taxes.  I am not sure what the Fed is really doing (what is wrong with an audit), but they claim to be buying up toxic mortgages and helping banks.

I will remain optimistic for me and my family, but as far as the nation is concerned I am more worried each day.  Our nations solution to our problems seems to spend it away.  I have no idea if healthcare is going to work, but I struggle to find well run, cost efficient gov't services, so I am skeptical when gov't says trust me.  

Will all of this translate into inflation?  I don't know, but hey what do I know :) 

 

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#28) On March 20, 2010 at 6:56 PM, ETFsRule (99.94) wrote:

"So, anyway.... ETF's, do you understand why Gary says growth less than 2% with inflation over 5?  It's not pulled out of a hat.  It's the definition."

No it's not. There is no widely-accepted definition of stagflation based on those specific numbers. My "accusation" was not baseless, and you are wrong once again.

There was no need to post the article. I read the entire thing, understood every word of it, and that is why I criticized it. Any "analysis" in the article is rudimentary at best. Most of it is a bunch of definitions and statements like, "this might happen, or that could happen, or maybe this other thing could happen... etc, etc". Why didn't he just write "anything's possible" and save us all some time?

And you still have not provided any Austrian sources who predict inflation of 10-20%. I wonder if there are any out there with the guts to make such a specific prediction, and attach a timeline to it?

"Your beef with Schiff, and by extension all Libertarians, is clearly personal."

I assume you meant to say "political", not "personal". I know absolutely nothing about his personal life. Anyway, I think it's funny that you would make an accusation like this... and then you would go on to defend his fund's performance, obviously for political reasons. Talk about the pot calling the kettle black! Why did you choose a 5-year comparision, by the way? Maybe because if you go back a little farther..  say, 10 years... his funds have underperfomed the market?

Look at AEPGX. Over the life of the fund, roughly 25 years, it has underformed the S&P 500 by about 200%. 200%! And you choose to defend his performance. Why???

Anyway, I have no desire to follow your endless barrage of talking points and link-spamming.

/thread

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