The attempt to create inflation, or better yet the attempt to reinflate has proven quite succesful over the recent months when it comes to asset prices. Commodities, equities, high yield bonds and other 'risk' assets have risen exponentially, as have interest rates on treasuries and mortgages. This Januari we've received a clear signal however that this trend has stalled. This isn't just a pull back and there's a very good reason for that. That reason is the huge amount of debt that's already present in the form of sovereign debt, household debt, corporate debt and many other forms. This debt provides us with a ceiling in the inflation that can be created and the percentage that interest rates can rise. Whenever global interest rates rise too high too fast this will reinitiate the deflationary trend. I believe that we've reached that point in Januari and that markets have reacted correspondingly.
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Peter Schiff was Right.
- Thread starter achilles28
- Start date
Quote from Kassz007:
In moderation, higher taxes and printing can help to solve the debt problem. The scenario you have layed out is what would happen in a case of raising taxes to the extreme, and printing to the extreme. The USA is in for higher tax rates in the future, face the facts. It doesn't mean they'll automatically be whipped into deflationary armageddon. In fact, just the opposite will occur. Printing will deter deflation and will debase the USD at the same time, making it easier to pay off their enormous debts. The Fed has to print, because if deflation were present, then it really would be Depression 2. But it's not, so it won't be.[/B]
Higher taxes and monetization (weak USD) result in the same Armageddon.
75% of the American economy is consumption. Higher taxes mean less disposable income. Monetization means a weaker USD = higher commodities. That's a double tax on the US consumer in a shit economy running a 1.2 Trillion dollar budget deficit.
In order to first begin to pay down the debt, we must first incur NO Debt.
Even if we allocate another 700 Billion per year (higher taxes), to "pay off" the debt, the debt is still growing at 500 Billion a year because the budget deficit is 1.2 Trillion a year !!!!!
The only option is quantitative easing. Just straight print and pay. Even if the FED suppresses bonds, this is a currency crisis and inflationary Depression.
Basically, in order to maintain current spending AND pay off the debt via monetization, the FED would have print off another ~2 Trillion a year, just to widdle down the debt at 700 Billion a year (halve the debt in 10 years).
2 Trillion a year, over-and-above what the FED already monetizes.
Here's the math:
3.8 Trillion budget for 2011.
2.6 Trillion in Federal Revenues.
1.2 Trillion budget deficit
700 Billion for debt principle paydown.
In order to pay down the debt, the FED must monetize all new debt + 700 Billion pay off in principle of existing debt = 1.9 Trillion in monetization.
What happens do the US Dollar then? Gets flushed = rampant inflation = inflationary recession/depression, housing crash.
Quote from Kassz007:
This is difficult to acquire, no?
Canadians and Americans can open a bank account in China, fund it in CAD or USD, and convert. Repatriating is more difficult. I've got internet banking and can e-wire funds from my Canadian account to China, while in Canada. Nice. Helps to know people in the export biz to repatriate large sums. So I've heard. It's the money going out China (tries) to put the brakes on. Not in.
Quote from jedwards:
I agree that the US is painted into a corner, but my point is that the world doesn't want to see them in that corner.
All those things that you mention will occur if there's a loss in confidence in the US. Although there is a bunch of real reasons why we should not have confidence in the US anymore, especially because of its debt load, I don't believe that the world will lose its confidence in the US, and they are willing to continue to extend its confidence to it. It's kind of like a lover that abuses you time and time again... you could dump them and move on, but there is no one else better around, and they do pay for the bills, so you might as well stay with them. I'm half-joking and half-serious with that example, it pretty much explains the mentality.
Until there is a more viable country that people can pour their money into, I think people will have the most amount of confidence in leaving their money in the US. If Europe weren't in such a bad situation, I think they could very well have been the candidate, but given how fragile they are at this point.
Until China becomes more transparent and until there is more internal consumption such that they are self-sustainable, they are not viable either.
You can buy the yuan, however, since they are pretty much pegged to the US, it's basically a proxy for the US dollar. In order for the yuan to take off they would need to break free from their peg, which is unlikely at this point. They will continue this until the US no longer becomes their primary source of consumption.
All I'm saying is two fundamental problems arise with this:
Indefinite low rates + a global recovery = massive USD inflation.
Will global bond holders remain steadfast in the US Treasury market when they're hemorrhaging money at 150$ oil +?
If they do, it just means oil is going 250$. How much pain will US debt owners take before they hit their uncle point? There's a limit, no matter how much faith the world has in the dollar.
This spells an inflationary depression and currency crisis for America.
Low rates cannot stay forever during recover. Otherwise, it's a redux of the 70's or Japanese blowup. There's no way out. Inflationary Depression, deflationary Great Depression, or Default.
The problem is inflationary depressions have to go through deflationary depressions to "heal". Inflation than necessary deflation is way more destructive than just deflation.
Schiff is saying Bernacke will just do a Zimbabwe and never get to the deflation part.
Quote from jedwards:
Peter Schiff was right about the housing crisis back in 2006/2007, but the conversation was about Jim Rogers. Peter Schiff's timing was impeccable, and everyone laughed at him and he got the last laugh.
The only problem is that his trading picks weren't good. I believe he lost money in 2008 because of flight to safety, and in 2009 he made money from the Chinese markets. Not sure how he's faring right now with the chinese markets down 15+% since August though.
The question now is whether or not his prediction of armageddon will be correct. As I've said previous, I think basically he's right, but I think it won't be enough for the world to lose confidence in the US... not yet anyway.
I agree. Schiff got it really wrong in 08. My guess is he doesn't understand credit destruction properly and that deflation moves currencies.
Quote from FerdinandAlx:
The attempt to create inflation, or better yet the attempt to reinflate has proven quite succesful over the recent months when it comes to asset prices. Commodities, equities, high yield bonds and other 'risk' assets have risen exponentially, as have interest rates on treasuries and mortgages. This Januari we've received a clear signal however that this trend has stalled. This isn't just a pull back and there's a very good reason for that. That reason is the huge amount of debt that's already present in the form of sovereign debt, household debt, corporate debt and many other forms. This debt provides us with a ceiling in the inflation that can be created and the percentage that interest rates can rise. Whenever global interest rates rise too high too fast this will reinitiate the deflationary trend. I believe that we've reached that point in Januari and that markets have reacted correspondingly.
Public and *Private* debt is THE reason why interest rates must stay low, indefinitely.
This is why we'll eventually get a currency crisis. There's too much debt on either side, and simply can't be serviced when it refinances higher.
Print and spend into oblivion. Jimmy Rogers, Faber, and Schiff are right. Yuan-demoninated assets, commodities, metals. Hate to say it, but this is the play.
The only point of contention is whether this is the end or we get one more recovery, debt bubble, then crash.
Quote from achilles28:
I agree. Schiff got it really wrong in 08. My guess is he doesn't understand credit destruction properly and that deflation moves currencies.
Schiff is a hard core gold bull who views gold as money and stocks as a hedge against his scenario of global currency debasement and economic collapse.
So he hedges gold while conventional wisdom dictates gold is the hedge.
Quote from Debaser82:
Schiff is a hard core gold bull who views gold as money and stocks as a hedge against his scenario of global currency debasement and economic collapse.
So he hedges gold while conventional wisdom dictates gold is the hedge.
Interesting. Thanks.
Schiff rationalizes dollar strength with the flight to quality argument, which is true. But only partly true. He's well-versed in the process of credit creation and yet subsequently passes up the deflationary effects of negative loan creation on dollar strength only to talk up "new money" printed to boost the gold rationale, albeit with net smaller M3. It's disingenuous, he talks his book, obviously, and got burned in 08. Another example is capital formation. Under a hard money system, capital comes from savings (his mantra, which is true). But under a fiat-fractional reserve system, capital comes from debasement. Theft of value from the other guys wallet via printing. He doesn't acknowledge this either. Anyway, Schiff knows all this. Still, he's a great communicator, and once those pitfalls are known, very worthwhile to listen to. Faber is the most sophisticated of the three (Rogers, Schiff, Faber) simply because his presentation of credit growth/destruction is made transparent in his analysis. Unlike Rogers and Schiff who's conclusions are right (hyperinflation), but their long-hand is wanting.