The Phantom Recovery
Jun 8, 2010
In recent months, GDP numbers have
rebounded - primarily as a result of record low interest rates
reliquifying the credit market and government stimulus jolting
consumer spending. Although the "positive growth"
has delighted Obama's economic brain trust, it has done little
to boost the fortunes of Main Street. As I have said many
times, GDP largely measures spending, and spending is not growth.
Last Friday we received the latest indication that the real
economy is not recovering in the slightest. The Labor Department
reported that non-farm payrolls increased by 431,000 jobs in
May. In a press statement, the President himself crowed at the
news, noting that the official employment rate fell to 9.7% from
9.9%. However, just inches below the headline, red flags were
everywhere. Only 41,000 of those jobs were generated in
the private sector - far below the median forecast of 180,000. Even
more troubling was the fact that the Census Bureau alone accounted
for 411,000 new jobs, which were almost exclusively
Rather than a recovery, the jobs data seems to indicate that
we are still mired in the first economic depression since the
1930s. Back in 1931, two full years after the Crash of 1929,
there were still very few people who thought that the recession
then underway would one day be called the Great Depression. (See
my commentary from March 1st "Don't
Bet on a Recovery").
Increased spending, financed by unprecedented borrowing, will
prove to be just as temporary as a US census job (unless, in
the name of stimulus, Obama decides to make "people counting"
a permanent function of the US government.). When the bills
come due, the next leg down will be even more severe than the
The swelling ranks of the government payroll, and the shrinking
number of private taxpayers footing the bill, will guarantee
larger deficits and a weaker economy for years to come. In
addition, the artificial spending has prevented a much-needed
restructuring from taking place, leaving our economy far less
efficient than before the crisis began. In other words,
we have dug ourselves into a much deeper hole while failing utterly
to build any means to climb out.
One reason that we have thus far been spared the full wrath of
Washington's poor decisions is that we are still benefiting from
problems abroad, particularly in the eurozone. As sovereign
debt issues have temporarily caused a flight to the dollar, our
economy has benefited from lower interest rates and restrained
However, EU member-states have shown some willingness to
confront their problems by cutting government spending - correctly
ignoring US government suggestions that they do the opposite.
Just today, newly elected UK Prime Minister David Cameron prepared
his constituents for austerity. Citing a budget deficit that
is currently running at 11 percent of GDP, Cameron indicated
that government spending would have to fall in order to maintain
solvency and a high standard of living.
on to say, "Greece stands as a warning of what
happens to countries that lose their credibility, or whose governments
pretend that difficult decisions can somehow be avoided."
This type of realistic sentiment is completely absent in our
current leadership in Washington, even though the US deficit
is 9.9 percent of GDP and mounting. Meanwhile, the tough decisions
being made by European governments will start to rebuild investor
confidence in the euro.
Once the euro finally stabilizes against the dollar, I expect
commodity prices to resume their rise, especially oil. Normally,
the uncertainty created by the disastrous oil spill in the gulf,
and the resulting moratorium on deep-water drilling, would have
sent crude oil prices skyrocketing. However, fears of a
global slowdown, euro weakness, and general risk aversion have
held prices in check. As Asia continues its growth and Europe
regains its footing, I expect a delayed surge in oil prices,
which will put yet another obstacle on the road to US recovery.
Our last remaining leg of support has been the activity
of Asian central banks, who have continued in their herculean
efforts to prop up the dollar and bail out Americans with low
interest rates and cheap imports. However, when sovereign
credit risk eventually rears its head in America, look for Asian
policymakers to finally wise up. Once that prop is removed,
there will be no questions about the gravity of our situation
- and little dispute that it amounts to a depression.
The real danger will be if we follow our own foolish advice that
Europe appears to have rejected. Treasury Secretary Timothy
Geithner has bluntly suggested that European governments should
print and spend money in order to keep their economies out of
recession. In reality, cutting government spending is a
far better stimulus. Maintaining lavish budgets through
the use of the printing press will only result in disaster. Not
only will such action fail to avert a double-dip recession, but
it will practically ensure an inflationary depression.
As I have said before, we can't simultaneously grow the economy
and grow government. The latest jobs report shows that we are
just growing government. If that trend doesn't soon reverse,
investors will start betting on the collapse of the dollarzone.
to buy Peter Schiff's best-selling, latest book, "How
an Economy Grows and Why It Crashes."
For a more in depth analysis of our financial problems and the
inherent dangers they pose for the US economy and US dollar,
you need to read Peter Schiff's 2008 bestseller "The
Little Book of Bull Moves in Bear Markets" [buy
here] And "Crash Proof 2.0: How to Profit from the
Economic Collapse" [buy
For a look back at how Peter
Schiff predicted the current crisis, read his 2007 bestseller
"Crash Proof: How to Profit from the Coming Economic
More importantly, don't wait
for reality to set in. Protect your wealth and preserve your
purchasing power before it's too late. Discover the best way to buy gold at
www.goldyoucanfold.com, and subscribe to
our free, on-line investment
Jun 7, 2010
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.