Greenspan, Be Careful What
You Wish For
posted April 26, 2005
Yesterday, [Apr 21] as Alan
Congress that the federal budget deficit is unsustainable, he
simultaneously encouraged China to stop sustaining it. Since
he has failed to forecast so many obvious looming economic problems
in the past, such as the return of enormous budget deficits,
resurgent inflation, and the real estate, stock, and bond market
bubbles, it comes as no surprise that he also fails to realize
that America's ability to finance its debt now teeters atop China's
foolish currency peg. By encouraging China to remove it, Greenspan
needs to be cautioned to be careful what he wishes for, as he
just might get it.
In his testimony, Greenspan cautioned that "The federal
budget is on an unsustainable path, in which large deficits result
in rising interest," which in his opinion "would cause
the economy to stagnate or worse" unless the situation were
reversed. However, he also commented that "Fixing the renminbi
to the dollar is beginning to significantly work to the detriment
of the Chinese economy." That in so doing China is "preventing
the growth in the terms that would be most valuable for China
in the decades ahead."
With respect to floating the renminbi he offered the following
advice; "So as far as I'm concerned, it is very much in
their interest to move." He even added that "As you
can imagine, we in U.S. government have been in conversations
with them to indicate that, in our judgment and in our experience,
they should be moving sooner rather than later. I have no way
of projecting when they will move. That they will move, I am
Hello, how clueless can one man possible be? By publicly advising
China to float its currency, Greenspan is in effect asking the
Chinese to do two things; 1) raise the prices that it charges
Americans for the goods it sells them, and 2) stop buying hundreds
of billions of dollars worth of U.S. Treasury bonds. While such
a move would certainly benefit the Chinese, who would earn more
for their exports and find more productive uses for their savings,
it would clearly have the opposite effect for Americans, who
would simultaneously be forced to pay both higher prices and
interest rates. Most adversely effected would be the U.S. government
itself, which would see the cost of financing its national debt
skyrocket at the very moment recession would likely undermine
its ability to pay. Talk about putting your head in a noose,
throwing the rope over a three limb, and daring your adversary
not to pull!
Greenspan is right that the status quo is a bad deal for China.
At present, all that China it receives in return for much of
its exports to America is inflation. Since America does not supply
China with sufficient quantities of real goods in exchange for
its exports, the Bank of China must expand its money supply to
absorb all the excess dollars for which no American products
are available. In the process it also purchases hundreds of billions
of dollars worth of U.S. government securities. As a result the
Chinese suffer a reduced standard of living, as they are forced
to pay higher prices for consumer goods and squander a significant
portion of their savings. Americans however, benefit greatly
form China's sacrifice by enjoying artificially low consumer
prices and interest rates.
If China were to follow Greenspan's advice, the result would
be a one-two combination punch right to the chin of the U.S.
economy. The left jab: By increases the cost of Chinese imports
(and those from other Asian countries whose currencies would
like rise along with the Renmimbi) the U.S. inflation rate, as
measured by the CPI, would clearly rise, increasing the "inflation
premium" required to be paid by the U.S. government on its
outstanding debts, the majority of which have extremely short
maturities, and thus will have to be re-issued at higher interest
rates. Also the prices of non-Asian imports, such as oil, would
also likely rise, as wealthier Asians bid them up. The right
hook: Since the Chinese government would no longer be buying
as many dollars, it would no longer need to buy as may U.S. treasuries.
Given that higher consumer prices and interest rates would likely
push the U.S. economy into recession, exacerbating the already
enormous budget deficit, demand for U.S. debt would be reduced
at the very time it was needed the most. The result, Knock out.
April 22, 2005
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C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
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
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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