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Biting the Hand that Feeds you

Peter Schiff
March 30, 2006

This week, as statistics revealed that China has surpassed Japan as the world's largest holder of foreign reserves, the U.S. Congress continues to threaten China with 27% tariffs on their exports to the U.S. The move, which is akin to a cornered gunman turning the pistol on himself and threatening to pull the trigger, reveals the extent to which American politicians fail to comprehend the true nature of the current Sino-U.S relationship.

In desperate need of capital, America is hardly in a position to insult those providing it, or dictate the terms by which they do so. However, the latest tough talk on China comes shortly after Congressional action which blocked key purchases of American assets by foreign interests. Such posturing sends a very dangerous message to our creditors. If as a nation we have decided to sell off our cows to pay for imported milk, we can not complain when our trading partners actually show up to collect the animals.

For a nation so dependant on the kindness of strangers, it is amazing just how arrogantly we treat them. There were no valid reasons to block Chinese owned CNOOC from acquiring US-based Unocal, especially considering that 80% of the latter's assets were outside the U.S. The same holds true for blocking DP World's proposed acquisition of various U.S. port facilities, especially since the subject ports were already foreign-owned to begin with. Our failure to allow the deal appears to have been racially motivated; hardly the message we want to send our Middle-East allies.

As a result of the unprecedented foreign-financed consumption binge in the U.S., it is likely that nearly every major U.S. asset will ultimately pass into foreign control, including most companies in the S&P 500 and trophy properties in major U.S. cities. As America lacks the industrial capacity necessary to redeem its IOU's with actual consumer goods, access to capital goods and domestic assets is all that gives its currency value. Restrictions on the ability to acquire such assets will diminish foreign interest in accepting dollars in exchange for exports, and will dissuade foreign governments from holding huge reserves of dollars that they cannot hope to spend.

On a somewhat related subject, I happened to run across a French businessman, traveling to Australia via Singapore. He confessed to me that he used to fly that route though Los Angeles, but that now he avoids U.S. airports whenever possible. He further confided that this preference was common among Europeans and Australians alike, as a result of the added security hassles and the rude manner in which foreigners were treated by American airport security personal. You know we have a problem when the French accuse the Americans of being rude!

In conclusion, the U.S. is hardly in a position to continuously bite the hands that feed it. The obvious danger is that one day those hands will tire of being bitten and instead look for more friendly mouths to feed.

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March 30, 2006
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922


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.

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