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Peter Schiff: The Truth About Bailouts



November 21, 2008 – Comments (6) | RELATED TICKERS: GM , F

As the Federal bailout bonanza prepares to spread beyond the mortgage and financial sectors to fill Detroit's depleted coffers, few economic or policy analysts have spared a thought for the destitution of the U.S. government itself. Put simply, our government doesn't have enough spare cash to bailout a lemonade stand let alone a bloated and failing industry that is losing tens of billions of dollars per month. Washington can only offer funds that it has borrowed from abroad or printed. Unfortunately, the nation is in the grips of a delusion that money derived from these sources has the power to heal. But history has clearly shown that borrowed or printed money only has the power to destroy.

The argument that energizes the pro-Detroit camp is that the government should extend the same courtesy to the rank and file auto workers that it lavished upon the fat cats of Wall Street. While two wrongs certainly do not make a right, the fact remains that the Wall Street firms are still floundering despite the bailouts. What's worse, the money spent was either printed or borrowed from abroad. Both options are destructive to America.

When it comes to bailouts, the real discussions are not centered in Washington but rather in Beijing, Tokyo, and Riyadh. With no money of our own, our ability to bailout our own citizens is completely dependent on the world's willingness to foot the bill. While I am sure that Bush and Paulson are doing their best to convince the world that open ended financing of the United States is in the global interest, my guess is that, unlike Congress, our foreign creditors will see through the self-serving nature of our plea.

Like any bailout, our foreign creditors should consider the moral hazard of rewarding bad behavior, and the old investment adage of not throwing good money after bad. By continuing to "lend" us money, the world is merely delaying the necessary rebalancing of our upside down economy. By continuing to subsidize our reckless and outsized consumption, the world merely delays the inevitable re-balancing and exacerbates the underlying problem at the root of the current global financial crisis.

If Washington bails out General Motors, the funds will never be recovered. GM will simply burn through the bailout money and then be back for more. Talk of designing a new fleet of "green" cars that will pave the way to profitability by spurring a new buying spree is simply delusional. Given the staggering "legacy" costs of health care and pensions for millions of current and former workers, Detroit cannot produce cars profitably. Unless these costs are seriously brought down, and there is very little chance that they will be, Detroit will remain a bottomless money pit.

Similarly any money that the world lends to America to finance more consumption will never be repaid. We will simply blow through it, and be back, hat in hand, begging for more. As we painfully learned in the housing bust, lending people money that they cannot pay back makes no sense. This applies equally to foreign central banks lending to America as it does to commercial banks lending to homeowners.

So for the same reasons that Washington should not bail out General Motors, the world should not bailout America. Like GM, our economy is in desperate need of a restructuring. Spending must be replaced with savings, and consumption with production. The service sector must shrink and manufacturing must expand to fill the void. The dollar must fall, wages in America must be brought down to a competitive level, and hopefully government spending and burdensome regulation can be reduced.

This transformation will not be fun, but it is necessary. Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base. Only by swallowing this tough medicine now will our sick economy ever recover. By accepting a lower standard of living today, we will eventually be rewarded with a higher one tomorrow.

6 Comments – Post Your Own

#1) On November 21, 2008 at 4:08 PM, cubanstockpicker (20.98) wrote:

we should have put those 700 bilion to better use.

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#2) On November 21, 2008 at 4:25 PM, abitare (29.47) wrote:

FYI - Peter Schiff is live on Bloomberg.

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#3) On November 21, 2008 at 4:31 PM, kdakota630 (28.77) wrote:

Thanks for the heads-up!

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#4) On November 21, 2008 at 4:46 PM, jgseattle (26.16) wrote:

cuban - the story of lobbing and a government run by people who are more concerned about being reelected than doing what is right.

Because of the focus to be reelected no actions will be taken taht will hurt the electorate back home.  So look for more bail outs.

I understand the debt is huge but I am for a massive stimulant package based around infrastruture and alt energy say $500 + Billion maybe up to $1T.

Not to worry about paying it back the dollar will be devalued and then we can repay it. 

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#5) On November 21, 2008 at 4:59 PM, russiangambit (28.66) wrote:

I remember that when we had perestroika in Soviet Union, all kinds of US and IMF experts would come, look at our misery and say, it is OK, this is necessary pain to work out the excesses and inefficiencies and become a free market society.

Somehow, I find it ironic, that when it comes to the US itself, politicians and experts are doing everything possible to avoid even a bit of pain that is necessary to work out the excesses.

I don't need to tell you that americans are not that popular in Russia anymore.

And the ultimate irony, of course, that it is impossible to stop the inevitable pain . All bailouts are accomplishing is making sure that the payback is going to be long and painful.

One of my cowerkers asked me, so what are you going to do about it, about our gloomy future? And I said, I am making sure my kids are getting the best education they can. This is all I know to do. The capital in your head is something nobody can take away, which cannot be said about wordly posessions.

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#6) On November 21, 2008 at 5:12 PM, cubanstockpicker (20.98) wrote:

"I understand the debt is huge but I am for a massive stimulant package based around infrastruture and alt energy say $500 + Billion maybe up to $1T." An alternate energy program built for the people, by the peoples money would socialize energy, amd only hiring companies to provide maintenance would be a far better idea with the american people benefiting from a large investment in a multimegawatt heliostat plant or wind farm(s).

The government has forgotten what true free market is. Who does the best job at the best price. When people start complicating the formulas with deriviations, "which the inventor himself said in 2005 his system was never intended and should have never been used in this fashion", to accelerate growth. We should permanantly etch this into the countries policies and make it impossible to happen again. I am sure every american right now wishes for balanced stable growth than this BULL RUN we just had. And for these market gurus to say they will just keep doing the same with more money we dont have with the expectation this might work, why didnt we just wait till the banking system capitulated, then the government as any savvy investor would buy the pieces of highest value at highest worth.

Not these intangible values so they can stay fat and pretty. Think of this, what is so different about Citi than last month? Yet now it is worth the same value per share price as any other crappy stock.


If conplex instruments caused this problem, then outlaw them, and let the government buy them out on pennies on the dollar. It Would have wiped out a ton of the super-rich, would you have cared? But this mess wouldnt exist buying every toxic asset at a huge discount and paying out the rest to reduce the leverage.

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