Aug 30, 2010
Watching economists and media analysts react to breaking economic
news is a bit like looking at a flock of pigeons flying over
the New York skyline. A true wonder of the urban landscape, the
flocks can include hundreds of individuals who show an uncanny
ability to stay in tight formation as the group quickly zig-zags
between buildings. What may be even more remarkable than their
ability to randomly fly while maintaining cohesion is the flock's
refusal to stick to any particular direction for very long, and
their determination to fly feverishly without actually going
anywhere. Sound familiar?
Friday's weak GDP numbers have finally caused the mass
of economists to revise downward their formerly optimistic recovery
forecasts, with many finally entertaining the possibility of
a "double dip" recession. It should be obvious by now
that these economists only have the capacity to describe where
the economy is moving in the short-term... they have no
ability to explain the reasons behind the macro trends or make
predictions that go beyond the next data release. But economics
is not dart throwing. It can be understood and properly forecast.
The major mental block is that most economists believe that an
economy grows as a result of spending. Any policy that encourages
spending and discourages savings and investment is considered
beneficial. Unfortunately, these policies, which only succeed
in growing debt and government, act more as an economic sedative
than a stimulant.
On the subject of the "recovery," I'd like to highlight
some of my past predictions, and those of my colleague Michael
Pento. With the benefit of hindsight, you can see that although
these thoughts were widely dismissed as chronic pessimism at
the time of their publication, the current situation supports
our conclusions. Although some of our predictions, like for higher
bond yield, have yet to materialize.
Michael and I may be birds of a feather, but we don't blindly
follow the flock. We believe economics is a scientific discipline
with established laws, and that applying those laws will yield
fairly accurate predictions over time. Most other economists
say what they need to say to appease their employers (whether
on Wall Street or in Washington) and maintain the respect of
from my past commentaries:
Monday, June 7, 2010
than a recovery, the jobs data seems to indicate that we are
still mired in the first economic depression since the 1930s.
Increased spending, financed by unprecedented borrowing, will
prove to be just as temporary as a job opening at the US Census.
When the bills come due, the next leg down will be even more
severe than the last. 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
astounding how many economists, government officials, and Wall
Street strategists construe the current economic conditions as
evidence of a bona fide recovery. ... The myopia leads us to
enact policies that actually exacerbate our problems. The "remedies"
are postponing, perhaps indefinitely, a true recovery.
The oracles who have described the nature of this imminent recovery
do so based on their conviction that consumer spending is slowly
returning to levels that existed prior to the recession.
However, missing from their analysis is any plausible explanation
as to why consumers will be able to sustain such spending given
the plunge in income and credit, and the lack of available savings.
But most consumers are tapped out, millions are unemployed, and
home equity has been wiped out. The only reasonable thing for
them to do is to pay down debt and sock away as much money as
possible to rebuild their savings."
the weekend, top White House economic adviser Lawrence Summers
even pronounced that the recession is now over. ...
Obama's claim of success largely derives from the slowing tally
of job losses, the seemingly renewed strength in the financial
system, the pickup in home sales and home prices, and the positive
GDP figures. But these 'achievements' fall apart under close
First, a closer look at the jobs numbers shows that employment
improved in sectors that benefited most directly from monetary
or fiscal stimulus: government, healthcare, financial services,
education and retail sales. Meanwhile, sectors such as manufacturing
continued to shed jobs at an alarming rate. These dynamics actually
exacerbate our economic imbalances.
While it is true that home prices have stopped falling, this
represents failure, not victory. True success would be a drop
in home prices to a level that homebuyers could actually afford.
Instead, we have maintained artificially high prices with tax
credits, subsidized mortgage rates, low down payments, and foreclosure
relief. With 96% of new mortgages now insured by federal agencies,
market forces have been completely removed from the housing equation.
With so many government programs specifically designed to maintain
artificially high home prices, devastating long-term consequences
for our economy are inevitable."
interviews, Treasury Secretary Geithner has been almost giddy
in his descriptions of the recovery - all the while crediting
his own policies for averting disaster. Americans are once again
taking the government's bait by spending money they don't have
to buy things they can't afford.... But depleting savings and
increasing borrowing does not a recovery make.
A prerequisite to any real economic expansion is the potential
for business owners to earn profits. With increased regulation
and higher taxes on the way, these incentives are being diminished.
In fact, via a phenomenon called 'regime uncertainty,' our current
policy path is actually encouraging businesses to contract in
order to prepare for a more hostile business environment. There
is no "jobless recovery," only senseless cheerleading."
of the continued profligacy of the government and Federal Reserve,
the imbalances that caused the current recession have actually
worsened. We are now in an even deeper hole than when the crisis
began. Rather than wrapping up a recession, we are actually sinking
into a depression. If things look better now, it's just because
we are in the eye of the storm.
By holding up over-valued home prices, we prevent the prudent
or less well-off from snatching them up and, in doing so, creating
a new price equilibrium based upon reality. By maintaining artificially
low interest rates, we discourage the very savings that are so
critical to capital formation and future economic growth. By
running such huge deficits, we further crowd-out private enterprise
by making it harder for businesses to invest or hire. Since we
have learned nothing from past mistakes, we are condemned to
from the writings of Michael Pento, Chief Economist at Euro Pacific
June 30, 2010
cause of the Great Depression in the 1930s, and the Great Recession
beginning in 2007, was one and the same: an overleveraged economy.
Excessive debt levels are the direct result of the central bank
providing artificially low interest rates and of superfluous
lending on the part of commercial banks.
The easy money provided by banks eventually brings debt in the
economy to an unsustainable level. At that point, the only real
and viable solution is for the public and private sectors to
undergo a protracted period of deleveraging. The ensuing depression
is, in actuality, the healing process at work, which is marked
by the selling of assets and the paying down of debt. Unfortunately,
our politicians today are focused on fighting this natural healing
process by promoting the accumulation of more debt."
pending downfall will surprise the many investors who have been
tricked into believing that a government can print and spend
its way to prosperity.
Many economists also believe that the consumer will spend us
into a viable recovery. They are mistaken here as well. Household
debt as a percentage of GDP was "just" 46% back in
1983--that was the last time the unemployment rate was 10%. Today
household debt is 96% of GDP. That's correct; consumers have
more than twice the level of debt as they did during the last
serious recession. Can they be counted on to pile on more debt
at this juncture?
In order to believe the economy is on the brink of a lasting
recovery we need to see that banks are lending money to the private
sector in order to purchase capital goods that are used to create
wealth. However, total loans and leases at commercial banks were
down 7.7% in December from a year earlier. The only money banks
are lending is to the government. Without capital being extended
to small businesses they cannot expand production or hire new
Treasury and Federal Reserve truly believed the economy and the
stock market were on a sustainable recovery path, talk of extending
and increasing the home buyer's tax credit would be off the table.
The Fed would already be reducing the size of the monetary base.
The truth, however, is that no one in government really believes
in this recovery. If they did, they would be hiking interest
rates and the deficit would be shrinking.
The government's realization of our precarious economic condition
means its largess will continue. Near term, that may ease some
pain. So did the artificial stimulus that gave rise to the housing
boom. In the end, a protracted period of a near-zero interest
rates, along with endless economic stimulus, will spawn another
bubble and not a genuine recovery."
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
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Aug 29, 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.