Saturday, January 24, 2009

More From Economic Guru Peter Schiff

Once again, Peter Schiff tells us exactly, "where we're at."

We're pleased to present another Peter Schiff opinion piece this afternoon, this time from the normally staid and ordinarily wimpy Wall Street Journal. Mr. Schiff, (whose views we've previously featured numerous times on WCF,) postulates (with WSJ editorial approval) that our major international creditors, China, Japan and Saudi Arabia (among others), are unlikely to continue financing our ongoing U.S. Treasury Securities shell-game, which shifts all the economic sacrifices of the world economy to these these creditors' own nations, while the U.S. continues to Par-tay. The US has developed some exceedingly bad habits, Schiff sez, such as financing the phony US consumer economy, which has been financed most recently through unsustainable and maxed out home equity loans and reckless credit card borrowing.

Midway through the article, Schiff cuts to the chase, identifying the root problem with the bogus Bush43 Service Sector-driven Economic Model, and efforts on the part of anybody in the current Obama administration to revive it:
The root problem is not that America may have difficulty borrowing enough from abroad to maintain our GDP, but that our economy was too large in the first place. America's GDP is composed of more than 70% consumer spending. For many years, much of that spending has been a function of voracious consumer borrowing through home equity extractions (averaging more than $850 billion annually in 2005 and 2006, according to the Federal Reserve) and rapid expansion of credit card and other consumer debt. Now that credit is scarce, it is inevitable that GDP will fall.
Neither the left nor the right of the American political spectrum has shown any willingness to tolerate such a contraction. Recently, for example, Nobel Prize-winning economist Paul Krugman estimated that a 6.8% contraction in GDP will result in $2.1 trillion in "lost output," which the government should redeem through fiscal stimulation. In his view, the $775 billion announced in Mr. Obama's plan is two-thirds too small.
Although Mr. Krugman may not get all that he wishes, it is clear that Mr. Obama's opening bid will likely move north considerably before any legislation is passed. It is also clear from the political chatter that the policies most favored will be those that encourage rapid consumer spending, not lasting or sustainable economic change. So when the effects of this stimulus dissipate, the same unbalanced economy will remain -- only now with a far higher debt load.
Our view here at Weber County Forum is that we'll never recover as a nation from our current economic mess, unless and until we understand a few primary concepts:
1) Until housing prices descend to point where median housing prices match up with median US incomes, we'll never go "forward" with the housing market, and;
2) We need to "go for the gusto", until we're successful in bringing the factories and other engines of economic production back to our own shores.
Write it down so you don't forget it.

Tapping the equity of rapidly declining (formerly bubbled-up) real estate "values" obviously won't get us to the "promised land," as has been painfully proven within the last economically devastating year.

Neither will our current U.S. " posturing," wherein which we "pose" as a productive economy, even though we no longer actually produce anything that's economically notable.


We need MORE cranky, savvy and jagged reader comments right here right now!


Ogden Realtor said...

You're right, Rudy. The economy, which is really trying hard to deflate, at least until median housing prices match median incomes in Most US markets, signals the big problem in the US credit squeeze.

Regarldless of what Oboma does, it'll probably be useless, until housing prices are allowed to deflate.

RudiZink said...

Exactly right, Ogden Realtor!

We'll never recover as an economy, until the smartest US entrprenueurs are confident that they can economically produce their own Products, marked "Made in the USA,"

Cat said...

We've been stupid in America Rudi; I totally agree with with you.

We need to harness all the smart folks in America, and re-establish our home-based industrial manufacturing facilities.

Without manufacturing, we'll soon become another third-world country... assuming we're not there already.

Dave E. said...

There's no way we'll ever revive this bogus credit-based economy we've been living in for the past twelve years.

Retreat from credit, and start saving your money, people, if you can.

disgusted said...

i was reading the china daily blog and a came across this interesting perspective from someone in china as to how he views their countrys funding of our deficit. hopefully this persons opinion doesnt become a national position soon or were screwed.

"I think China continuing to buy US treasury bonds so that the US can continue to keep its interest rate low so that its people can continue to buy China's goods is already an assumption that may no longer be valid in today's situation because the US govt is using China's money to bailout its corporations and in the case of the US automotive industry, for instance, their trade unions of automotive workers already have a lock on the future financial health of that industry since the cost of their severance and retirement benefits is the thing which makes US automobile production too costly to maintain in the first place. So we have the situation that the Chinese worker is subsidizing the American worker to reduce the future well-being of the Chinese worker. That is so paradoxically anti-socialist.

It is also extremely painful to think that (a) there may be conditions and market factors to prevent earlier redemptions of those bonds- the investor is locked into the condition of the investee; (b) the US can just print more money, weakening the payback value but gaining more forex edge from making US goods cheaper to export, in which process (c) appreciating the renminbi too high for the comfort of locals.

Tell me where i am wrong here, please, because i am suffering in great pain just thinking what is happening."

georgeleef said...

When junior runs up huge debts beyond his ability to pay, Mom and Dad take away the credit card before he can do more damage. I think Peter Schiff is suggesting that the rest of the world might do essentially the same thing for the foolish, profligate United States if it were to decline to buy the effusions of federal debt that most of our political class is expecting to "stimulate" our economy. Every spendthrift eventually faces the day of reckoning, including the US government.

danny said...

The idea that the US economy needs to deflate and that the US economy needs more than financial services to prosper (like manufacturing) are correct.

But the idea that our consumption needs to be funded by foreigners buying US debt is not necessarily true. That has been the model: They make things, we buy them, and they loan the money back to us. It's clearly unsustainable and now is crashing as it needs to.

But what will happen when the foreigners refuse to buy our debt is this: The Federal Reserve will create money out of thin air and buy the debt, as they (Bank of Japan) did in Japan for over a decade and continues to do.

People need to realize that the reason the dollar has lost 98% of its value since the Federal Reserve came into being is because that is how banks make money.

Inflation, while holding interest rates low, is how you do away with debt (by reducing the value of the dollars in which the debt is priced). It's how you accomplish the Keynesian ideal of discouraging saving and encouraging spending (because when interest on savings is less than inflation it makes sense to take your money from savings and spend it.)

So the Federal Reserve has set the rate of interest that favored cronies pay, all the way to zero. The loans that were just given to GMAC were also almost zero. The Fed is even selling debt to favored companies that are not in banking at all.

You can see all the money the Fed is piling on its cronies almost daily, here.

The end result is the little people (who can't borrow at 0%) will lose their savings and retirements (by having then wiped out by inflation), and the elites (who can borrow at 0% and buy US treasuries at 2-3%) will recover their losses and be bailed out with money that isn't theirs.

The code words they use for it are, "quantitative easing".

Note that not even the messianic Obama talks about raising the living standards of the middle or lower classes, but simply of finding a way to let them BORROW more! Let's get "credit flowing" he says!

Plan to get poorer, people.

Curmudgeon said...

Bob Reich's column today, on "Lemon Socialism." Interesting take on things, I thought. Link here.

democrat said...

The economy is always worse when republican are in office.

Utah has had the worst economy in the U S for 28 years.

The highest education debt that is on the local school districts. Meanwhile Huntsman gives the rich a tax break from 11% down to 5% and calls it a flatter tax and now wants to raise fees to make up for his mistake.

Curmudgeon said...

Comment bumped to front page

ozboy said...


you wrote:

"Utah has had the worst economy in the U S for 28 years."

to which I ask - what rock have you been living under all this time?

Roxante said...

Ozboy is right.

Utah has prospered while the other States have suffered. After all Utahans invented Cold Fusion at the U of U and some dude (Fransworth or Fartblossom?) invented television. And damn it, Al Gore was NOT the inventor of the Internet, it was some Utah dude...what's his or is it her name? A BYU grad of course.

Huntsman is not a RINO, but a full fledged conservative just as Leavitt was. Leavitt and his family had nothing to do by the way with releasing whirling disease into Utah's Rainbow trout via the family owned trout hatcheries. Scott Matheson was an imposter who ran Utah into the ground at every turn.

And Orin Hatch promised faithfully that he would only serve one term (err...that was 8 or 10 terms ago? So I might not have that one right. Bennett was NOT in any way involved in the Watergate scandel and coverup via the family business in DC.

And the Utah legislature is the best and most fiscally responsible and the ultimate in GOP conservatism. Just check out the PEW rating last year. Rumors that they legislate "family friendly" (decoded as "big assed Mormon families...whether poligamist or not) laws is nothing more than "negative Gentile spin".

NO SIR! Utah's State of the State is and has alwasy been STRONG and Healthy and rated by LDS controlled agencies, as the very best and strongest economy in the entire Country. Yes sir...rrie!

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