Peter Schiff vs. Art Laffer
Although I would love to refute all of his absurd positions, two in particular stand out as worthy of discussion.
First, Laffer compared today's current account deficits to those experienced during America's first two hundred years as a developing nation. This flawed comparison ignores that as a developing nation America borrowed to invest. Those current account deficits funded the construction of vast infrastructure, such as roads, canals, ports, and rail roads, as well the formation of capital equipment, farms, and factories, all of which fueled American productivity. Such investments enabled the production of vast quantities of consumer goods, which America sold back to its creditors, to both pay interest and retire principle. In the end, America's creditors got consumer goods, and America became the wealthiest industrial nation the world had ever seen, in the process turning its current account deficits into enormous surpluses.
In a "night and day" contrast, today's current account deficit has the much more limited role of solely financing consumer spending. Borrowing to produce is the way poor nations become rich. Borrowing to consume is the way rich nations become poor. By squandering borrowed money on consumption, America has no way to repay the principal of its debts, let alone the interest. Borrowing to build factories is not the economic equivalent of borrowing to buy flat panel, high definition televisions, and it's amazing that Laffer can't see the difference.
Second, Laffer confused legitimate
wealth creation with the mere paper appreciation of stocks and
real estate. Real wealth creation refers to additions made to
the capital stock or improvements made to land; such as constructing
new homes, building new factories, opening new mines, laying
new infrastructure, planting new farmland, etc. However, if an
unimproved house simply appraises for twice its value of five
years ago, how is society any wealthier as a result? The house
provides no more shelter now than it did then. If stock prices
rise merely as a result of multiple expansions, what real wealth
has been created?
America's paper wealth however is merely a dream that will soon vanish. Perhaps it's our gargantuan trade deficit that will actually provide the wake up call. When it does all that will remain will be the debt. As higher interest rates make servicing that debt impossible, the dream will become a horrific nightmare. Perhaps if I drew it out on a napkin Laffer might finally get the picture.
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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