 Too Big to
Burst
Peter Schiff
February 24, 2006
It is widely believed that
the Federal government has an unofficial policy that some banks
and other financial institutions are simply too big to fail.
As a result, it is assumed that the government will take any
action necessary to ensure that they do not. It now appears to
me that there is a similar doctrine in effect for bubbles, in
that some are simply too big to burst. Housing, which is the
lynchpin holding together the entire U.S. economy, certainly
fits that category. To paraphrase Winston Churchill "never
in the field of economics has so much been owed by so many to
just one thing."
Through the wealth effect and
cash-out equity extractions, the housing bubble has enabled Americans
to consume far beyond their collective means. The result is a
bubble economy, where incomes, jobs, tax revenue, corporate earnings,
and the solvency of our lending institutions, are all dependent
upon sustained, stratospheric home values. When prices return
to earth, the economic impact will be catastrophic.
This dismal reality is certainly
not lost on those in Washington. The only way for housing prices
to stay high is for the Fed to keep inflating. Conveniently,
the captain currently at the helm of the monetary ship of state
just happens to be Ben Bernanke, who as a Fed governor spoke
about the Fed's ability to fend of deflation by using the handy
invention of the printing press. Though his words may have may
have spoken in reference to consumer prices, his actions will
certainly be concentrated on asset prices, especially housing.
Like a lounge club magician, the Feb distracts the audience with
short-term rate hikes, while behind its back it monetizes long-term
government bonds. It creates the illusion of its being an inflation
fighter, while in reality it is an inflation creator. No wonder
it wants to further cover its tracks by no longer reporting M3!
What other explanation is possible after Wednesday's bond rally
following an unexpected .7% rise in January consumer prices,
which amounts to an annualized rate of inflation of almost 9%?
Even if one takes a more moderate look at the year over year
rates, the CPI has risen 4%. Why would anyone buy ten-year government
bonds yielding 4.5%, when the real after-tax yield, adjusted
for 4% inflation, is negative 1%? Other than leveraged short-term
speculators, the only buyer would be the Fed, which has an agenda
other than investment merit.
My guess is that the Fed's goal is to keep long-term interest
rates low long enough to allow millions of homeowners to refinance
their adjustable rate mortgages into 40 or 50 year fixed-rate
loans, and to create enough inflation to cause nominal incomes
to rise sufficiently in order to enable homeowners to make higher
debt payments and prevent nominal home prices from collapsing.
However, while the use of the old-economy technology of the printing
press may allow the Fed to prevent nominal home prices from falling,
it can not accomplish the same feat with respect to real home
prices, which will plunge as the relative price of everything
else surges. The danger is that the controlled inflation the
Fed is attempting to manage turns into a wild fire, with implications
far worse then the mere severe recession it is attempting to
postpone. But since their immediate political concern is the
next election, that is a risk they are willing to take. Unfortunately
it is their constituents that will bear the costs if the gamble
fails.
The U.S. dollar will likely
be biggest casualty of this scheme and the gold the biggest beneficiary.
To learn the best ways to get out of the dollar, download
my free research report available at www.researchreportone.com
and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
To discover the best way to buy gold, visit www.goldyoucanfold.com
February 24, 2006
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
Archives
 Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
321gold Inc
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