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.