Sunday, January 20, 2013

Peter Schiff On The Trillion Dollar Coin

The coming and going of the idea of the trillion dollar coin, says Peter Schiff, CEO of Euro Pacific Capital, will one day become just a ‘footnote’ when opposed to the debt crisis we are currently in. The fact that this idea was totally rejected by both the Federal Reserve and the President, however, is a positive sign, showing us that after all it is not irresponsible congressmen and ‘out-of-touch academics’ that run the economic policy of the United States. In fact, Schiff claims, during the past five years, the government has created more than one trillion ‘out of thin air’. The difference is that the platinum coin of a trillion dollars is blatantly dishonest and this is easy for the public to see – this means no one would be expected to take the bait. Americans may be totally willing to be fooled, but they would not accept to fall for such a simple trick.

People have acquired the instinct to judge the value of a coin by its metal content. That’s how we know a quarter is bigger than a dime, says Schiff. Because of that, people have rejected the idea of the platinum coin. Everybody thinks that putting such a high value on such a small piece of metal is an act of deceit and despair. And they are right to think so.

These people, however, do not seem to have a problem with so many pieces of paper being printed. The number of zeros on bills does not impact acceptance. It is generally believed that the value of paper money is not derived from paper but from numbers. Originally, this wasn’t so. When money was first put into use, they were promissory notes intended to pay particular amounts of gold. When the use of paper became typical, hardly anyone cared when they removed the gold backing. Thus, the public would probably have been more tolerant towards the printing of a bill of one trillion dollars, than towards the creation of a trillion dollar coin by the government. However, the Fed could not legally hand over to the government that money, claims the Euro Pacific Capital CEO. It is the government that mints coins, not the Fed. So the government didn’t have to depend on the Fed about creating value ‘out of thin air’. This is the reason why the idea of the platinum coin was so seductive, even though ‘unsellable’.

The same thing is being done by Fed, however. They are using the best computing possible along with sophisticated accounting. The Fed purchases private banks’ government bonds in order to, as Schiff says, ‘expand its balance sheet’. Then in return, the banks get credited by the Fed with out-of-thin-air-created funds. Afterwards, the funds are passed by the banks through loans to the general public. But it must be pointed out that the Fed doesn’t have the resources needed to buy these bonds. A Fed computer ‘creates’ the funds. This is easier than the minting of a trillion dollar coin – after all, in that situation something more is required than just the production of a computer code. Window dressing lacks – this is the only difference.

A similarly meaningless distinction is now being made in regard to the raising of the debt ceiling. In a press conference, the President stated that the reluctance of the Republicans towards raising the debt limit was equal to a person buying and enjoying a meal and then leaving the restaurant without having paid the bill. Obama is arguing that if the person had no cash, the use of a credit card would be more responsible. However, the President does not pay attention to the fact that this person has the intention of paying his credit card bill using another card, later repeating this process until he loses all of his cards. Thus, in the end the issuer of the diner’s last card ‘gets stiffed’, instead of the restaurateur. Schiff defines this as a distinction with no difference, as with the trillion dollar coin.

More than 16 trillion dollars in funded obligations are currently counted by the Federal Government. In 10 years from now, expectations are that we will add about 10 trillion dollars, if not more. A balance in the annual budget is not in the least expected in the near future. All future bills we face will be paid by a massive-scale future borrowing. People who have an ounce of integrity, Schiff says, would have to get prepared for the possibility of a debt rollover that is ever increasing, turning out to be a ‘limited prospect’. This kind of understanding will mean someone is about to ‘get stuck’ with the bill. In the CEO’s opinion, this is just as irresponsible as ditching after dining.

In truth, failing to raise debt ceiling cannot be viewed as a commitment to abandon obligations. This is a decision to put a stop to borrowing. The government is able to meet all the obligations by means of tax raises, spending cuts and entitlement reforms. It chooses, however, not to act on it.

Peter Schiff claims that America is sending a message to its creditors – the US is not willing to repay debts using tax power. It will continue to rely on borrowing more. Thus, it gives us a sign that it refuses to deal with our fiscal problems in a responsible way. Schiff points out that it’s a pity so many people cannot accept these simple facts.

Sunday, January 13, 2013

Peter Schiff on the inflation propaganda

Economists such as Peter Schiff who think that the expansion of money supply would bring nothing but the best to the economy are dismissing the concerns about inflationary hawks and are pointing to low inflation which has been occurring during the current activism of the Fed. In a blog aimed at Schiff himself, Paul Krugman wrote that the sub 2.5 per cent increases in the CPI over the past couple of years is enough to prove him wrong but the thing is that Krugman and many others have suggested that the CPI overstates inflation and also that it would be better if the Federal Reserve helped with less strict methods.

However, Schiff thinks that there's plenty of evidence to prove Krugman wrong. For instance, in the period from 1999 to 2002 the BLS (the Bureau of Labor Statistics) "Newspaper and Magazine Index", which is a component of the CPI increased by 31.1 per cent. But the ten most popular newspapers' perusal of cover prices showed an average price increase of 131.5 per cent over the same period, which is about 3.5 times faster than the Bureau of Labor Statistics stats.

Peter Schiff gives another example of the fact that the CPI is meaningless – the health insurance costs by saying that according to the BLS people can breathe easily because of the fact that the HII increased a 4.3 per cent in the years between 2008 and 2012. Schiff believes that the BLS cannot be trusted as it fails to report the actual prices of health insurance and newspapers and magazines. Moreover, Peter thinks that the method in which prices are reported is designed in order for the increases to be factored out, whereas the newer methods of CPI are designed to report on product changes, consumer choices, spending patterns and substitution bias. Schiff believes that they are concentrated on the cost of living not the cost of things. According to Global Investor Newsletter, people selected BLS prices changes for 20 everyday services and goods over 2 separate 10-year periods. The items include milk, gasoline, eggs, new cars and others.

Furthermore, Peter Schiff says that apart from statistical problems which hide inflation, there are many macroeconomic factors which contributed to the prices' being kept low despite of quantitative easing. U.S. trade deficits and accumulation of the foreign central bank dollar mean that lots of the printed money ends up not in U.S. shopping centers, but in foreign bank vaults. Meanwhile, dollars flow out, consumer goods flow in and a lid is being kept on domestic prices, which, as a result, exports U.S. inflation as foreign central banks are monetizing the U.S. deficits and their surplus is recycled into U.S Treasuries.The U.S. government has been borrowing inexpensively because of the demand had pushed down bond yields. According to Peter Schiff, when things reverse, yields will climb, the price of bonds will fall and all these will drown America in inflation.

The investment guru is arguing that the federal government is under counting inflation in a recent video. He granted that the money which was pumped into the system by means of monetary and fiscal stimulus should have resulted in inflation. He also said that CPI – the Consumer Price Index is designed to miss the rising prices.

Monday, January 7, 2013

Peter Schiff: The Hidden Truth of Higher Prices

Peter Schiff, the CEO and Chief Global Strategist of Euro Pacific Capital, an SEC-Registered Investment Adviser and a full service broker/dealer, reveals the hidden truth of higher prices in his revent commentary.

In dismissing the inflationary warnings of Austrian School economists, the pro-stimulus Keynesians have largely refrained from attacking the root of our logic. (Given that this involves defending the position that money printing does not lead to inflation, their reluctance is understandable). Instead they point to the lack of "evidence" that shows prices going up in step with money supply increases. Paul Krugman himself unpacked these arguments in a recent blog post designed to specifically discredit my views.

According to Krugman, the sub 2.5% increases in the Consumer Price Index (CPI) over the past few years are all that is needed to invalidate the fears of the inflationists.

However, there is plenty of evidence to suggest that the measurement tools used by Krugman and his cohorts to measure inflation are as deeply flawed as their arguments. And to conclude that inflation has been quelled requires a dismissal of the macroeconomic forces that have temporarily blunted the impact of an overly loose monetary policy. Since the 1970's the preferred government inflation metrics have changed so thoroughly that they bear scant resemblance to those used during the "malaise days" of the Carter years. Government and academia defend the integrity and accuracy of the modern methods while dismissing critics as tin hat conspiracy theorists. But given the huge stakes involved, it's hard to believe that institutional bias plays no role. Government statisticians are responsible for coming up with the methodology and the numbers, and their bosses catch huge breaks if the inflation numbers come in low. Human behavior is always influenced by such incentives.

Friday, January 4, 2013

Peter Schiff on Congress Avoiding the Cliff

The Federal Government has made a huge mistake, according to Peter Schiff. Instead of making spending cuts and tax increases, they made a deal which leads to decreasing taxes and increasing spending – the absolute opposite.

Schiff says that the question of Moody’s Research should be brought up – whether it will cooperate with S&P and together downgrade the US Treasury debt. After the 2011 act on budget control, Moody’s Aaa rating was extended. In a statement from August 8, they said that in their expectation an economic recovery will occur in 2013, additional initiatives for reducing the budget deficit will be put to work and that the political parties share their objectives towards the deficit reduction. Now that it is known Moody’s was wrong and the Congress’s ‘straight jacket’ was deemed illusory – Schiff says – it is unlikely that the rating agency will downgrade the US.

Supposedly, they pushed the actual budget negotiations into 2013 and at that time a new confrontation with the debt ceiling will occur. But how can something significant be expected at all? The most recent deal came from a Congress removed almost two years from the election to come. Thus, Congressmen were spared the political pressure. Yet, they chose to abandon sound policy and go with political expediency. According to the Euro Pacific Capital CEO, the fiscal problems will remain ignored. That is until Congressmen are forced to do something about it, when a currency crisis hits. Schiff expects deficits of 2 trillion dollars per year, before the President leaves office. At that point, unfortunately, the solutions possible will be more ‘draconian’ to politicians and economists, than everything they are considering at the moment.

Because of the extensions of the tax rates in the middle class, the tax increases on people making over 400 000 dollars will not do when it comes to higher tax revenues. They will result in 60 billion annually instead, in new revenue. However these increases will make many high-tax-state individuals lose more than half of their income to taxes.

Schiff expresses the opinion that tax increases on the wealthy will cause lower investment in business, which would do much more damage to the economy. He claims most of the rich people will be more willing to reduce their spending on investment and savings, than to cut back on education, vacations, health care and such. It should be clear, however, that these rate increases will lead to more tax hikes on the US entrepreneurial class. According to a recent statement of President Obama, necessary cuts in entitlement programs and spending will only be considered, if they come together with additional increases in the taxes of the wealthy. Simply said, the budget agreement’s hikes of late had no effect at all.

It shouldn’t be denied Washington’s recent ‘fig leaf’ will impact markets significantly. The ‘relief rally’ is fair, given the clear signs of the government ‘printing its way out’ of the problems it faces. In the past, when the government was not paying serious attention to national solvency, investors would sell their bonds and make interest rates go higher in order to hold fiscal profligacy in check. But now when the Federal Reserve is buying the majority of the government’s debt, roadblocks of this kind do not exist. There is absolutely no point in staying on the sidelines – claims Schiff – given that fiscal and monetary stimulus is pushing up the prices of bonds and stocks. Fundamentals no longer drive markets - stimulus does. However, it is quite important to consider the rally’s nature. He says they would make investors turn their attention to the increasing prices of oil and gold and make an against-the-dollar rally of every leading currency, with the exception of the Japanese yen.

The government is making sure the danger to the economy of the United States will grow, by taking the risk out of investment. As long as the world allows the US to remain a nation fuelled with debt, Americans will always stay this way – says the EPC CEO. And this is by no means a way to generate a sustainable growth of economy. It is exactly the opposite – this will only cause government growth, the exhaustion of economic vitality, and finally – the US dollar collapse.

The leaders of Congress and the President are going to take credit for a false tax cut. False - because in reality, this tax cut will turn out as a huge increase. The real cause for the taxpayers’ trouble is Government spending. Schiff believes that inflation awaits for sure. Due to the growth of deficits, economy will face the loss of more purchasing power than the quantities that would have been lost in the event of expiration of the Bush tax cuts. This kind of Fiscal Cliff, in Schiff’s opinion, won’t be so easy to overcome.

Thursday, January 3, 2013

Peter Schiff: The ultimate price we will have to pay will be much higher

Peter Schiff expressed his disappointment of the US Congress, stating that the governing body of the United States have put its own political self-interest ahead of the national interest. According to Schiff, the current crisis in the USA and the rest of the world is not real and when the real one arrives it will be horrific

"This one will come not because we went over the fiscal cliff, but because we avoided doing so. Going over the fiscal cliff merely represented a small downpayment on the solution. By failing to make it, the ultimate price we will inevitably pay will be that much higher", said Schiff.