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What Peter Schiff Doesn't Understand

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February 04, 2011 – Comments (4)

After reading an excellent blog by Dave in Qatar about Peter Schiff, a comment answering the question posed by the blog just wouldn't do it justice.  So I'm elaborating here and let me add, this pertains to many more people than Peter Schiff.

First off, I'm not a follower of the Austrian school of economics.  It's too rigid for my Libertarian ways.  Don't tell a bank fractional reserve banking is evil, just let the people who bank at such places take their own risks.  Which is why I hate the FED so much because they are far more rigid - requiring that we accept paper notes, forcing the U.S. Treasury to sell debt via the FED, not allowing individuals to borrow at the FED window at the rates the richest bankers in the world are allowed to receive.  

Before I get off tangent, and I will, lets get back to Peter Schiff.  He made the great call on the housing market and he's been calling for hyperinflation.  First off, Peters wrong for two reasons:

1) The Fed has printed ~ $3.5 trillion in the last two years.  The US is currently a $15 trillion economy, and lets not forget to add in the WORLD economy where this money floats around, we're talking about a world economy that is approaching $85 trillion dollars.  The U.S. has added 30% to our economy and some estimates for the rest of the world is about 20% more fiat currency for the rest of the word (don't ask me to cite a source because I'm pulling it out of my a**).  

Therefore the world has added 20+% to its currency stockpiles, and in a normal market we'd expect to see 20+% inflation.  One could argue that with fractional reserve banking you might even see 100% inflation as each dollar is loaned out over and over again.  Schiff's problem is that he's assuming the extra dollars will turn into inflation, but we're in a deflationary cycle (or were) and inflation is probably alot closer to 7% annually (yes, I'm putting in FOOD & ENERGY because they are more core than TV's and Tupperware).  But even if we were in a normal economy, such a dumb move by world central banks would never create hyperinflation, just high inflation.  And that's why Schiff is wrong on his hyperinflation call.  

Personally, I'm fulling expecting high single digit inflation for the next 5 years or more.  No, I am not relying on the gov'ts phony numbers where they substitute corn oil for olive oil.

2) While I spent a lot of time on #1, #2 is far more complicated yet requires SIGNFICANTLY less words.  What Shiff fails to understand, and if he does he doesn't grasp the magnitude, is how long a sham can play out.  Schiff knows that a fiat currency is based in confidence and nothing else, but how long does it take to destroy confidence?

For 30 years the Egyptians have watched their economy struggle and while they've lost confidence in Mubarak, they haven't lost confidence in their fiat currency.

The smartest investors saw the crazy printing of money by the U.S. during the 1960's, but the link to gold didn't break until 1971 - nearly ten years.

CONFIDENCE is not a formula.  The people can be manipulated by the media, their ignorance and the educational system.  The end will come very quickly, not slowly.  For example, don't expect 7% inflation in 2011 followed by 11%, 15%, 18%.  It will stay stagnant for a while around 7% for five years or so, then it will hit with a vengeance - jumping immediately over 20%.

My Prediction:
This is a tough call because I don't know the political will of the newly elected Republicans, but lets assume the new boss is the same as the old boss.  The year 2016 will be absolutely devestating if the current system stays the same.  Stagflation will be the norm.  Oil will be over $200 barrel and the average American will be 25% poorer than today.  From today until 2016 we will putter along as we are now.  Then the confidence will break.

Let me add, my prediction is assuming some Volcker wannabe doesn't take the reigns of the FED.

4 Comments – Post Your Own

#1) On February 04, 2011 at 5:12 PM, Valyooo (99.40) wrote:

I agree with a lot of what you said, but I kinda think next year is going to be the year of no confidence.  Employment is finally picking up which spurs velocity which will spur inflation, add in the 2012 fears, add in Ron Paul possibly getting some more press for presidency, add in with China not buying our debt anymore, other countries and possibly muni's defaulting, and I think thats when it all breaks down.  I don't think that fiat will stop being used, I just think silver will go up a lot.

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#2) On February 04, 2011 at 5:15 PM, RonChapmanJr (32.98) wrote:

Why 5 years of 7% inflation?  Why not 2 or 10 years?

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#3) On February 04, 2011 at 5:33 PM, leohaas (30.99) wrote:

"The Fed has printed ~ $3.5 trillion in the last two years."

How did you come up with that number? Or did I read you incorrectly and they are part of the umbers you were pulling  out of your a**"

Do you mean M2? Or are we talking M1 here? Or just the currency component of M1? According to the Federal Reserve,  M2 increased from $8.3T to $8.8T from Jan 2009 through Dec 2010. That is an increase of about $0.5T. M1 went from almost $1.6T to $1.9T, an increase of about $0.3T. The currency component of M1 went from $828B to $915B, less than a $0.1T increase...

Other than that, you nailed it why Schiff and all other hyperinflationists were wrong: deflation (caused by massive deleveraging which is still going on) was threatening to drive money supply down rapidly. All the stimulus (or "stimulus" as you no doubt prefer) was designed to counteract that. And it did. Schiff's failure to see this is a biggie. It suggests he does not understand how fractional reserve banking and "stimulus" work! Or maybe that he is just stubborn in recognizing that they do work...

PS.  I don't see why the "sham" you are talking about cannot go on for quite awhile longer. It has been going on since FDR. What is so special about 2016?

PPS.  The comparison with Egypt is completely misplaced. We have not lived under 30 years of dictatorship, with hunger and massive unemployment. We are the richest country in the world. Most people here are still gainfully employed. Our farm subsidies will prevent us from going hungry. Ever.

PPPS.  Keep on impeaching those statistics you don't like. It allows you to make almost any argument!

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#4) On February 05, 2011 at 9:17 AM, whereaminow (< 20) wrote:

Our farm subsidies will prevent us from going hungry

Wow, just wow.

Or maybe that he is just stubborn in recognizing that they do work...

I never took you for a utilitarian. A poor argument either way, however. Can you please compare America with a central bank propping up frb's from 1913-2010 to America without the central and a 100% gold standard from 1913-2010.

After you do your calculations, then tell me which one works.

See, empirical evidence only takes you so far.

Soooooooo.... now what? Just throw numbers and baseless claims around... like the guy you are criticizing?

Or actually use reasoning.  You tell me.

Here's what I know. WIthout government intervention, economies historically recover to full capactiy in 18 months. See every American crash prior to the creation of the Federal Reserve as historical exhibit A.

How many months are we at now? And still with 9% unemployment (haha, sure)?

So....

David in Qatar

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