Peter Schiff is right...again
Mark Anderson
January 30, 2009
There are a few Peter Schiff nay-sayers out there. They say that, since Schiff's portfolio retrenched in 2008, his investment advice is all wrong. I will concede that I believe Peter was wrong on mining equities, but this is relatively minor in terms of his abstract message and advice. Peter was wrong on mining equities precisely because he is right about the dollar. Don't confuse mining equities with precious metals. All companies are subject to the same economic laws. Inflation creates pseudo rates of return for all companies, eventually leading to a contraction of capital. My position has been strictly physical precious metals, because you don't want to be in the dollar. Foreign equities, I don't know enough about.
If you don't understand the structure of capital and the difference between non-productive consumption and productive consumption, then you may not understand anything I say. Peter Schiff is absolutely right. We are being set up for a dollar collapse. The money supply need not be increased in nominal terms for this to happen. That we haven't had necessary bank runs doesn't bode well for the dollar. You won't have to notice that your bank account increases in nominal terms for the hyperinflation to happen.
The problem is that after years of inflationary-financed statism and consumption, we are insolvent. The most common error I see people making is conflating liquidation with deflation. The problem isn't that the money supply has shrunk, but that the bank accounts of Americans have shrunk. The loan market is completely insolvent and if you have a bank account in the United States, you are broke. What the Fed has done, however, is re-create our "savings" on a printing press. The Fed has made lost deposits real. This act alone - even without monetary aggregates increasing - is hyperinflationary.
Fractional reserve banking works insofar as not everybody tries to exercise control over their deposits at once. That the Fed has gone ahead and made all of these deposits real is frightening.
I will say right now that we need some market cleansing bank runs(1), which would force the money supply to contract faster than the contraction of the bubble economy. My prediction is that people won't realize that the dollar is bankrupt until after we burn through what remains of capital and the real pool of savings, and store inventories are exhausted. We are living through a slow-motion run on real wealth. As the bubble economy contracts, we will encounter a situation where you have dollars in the bank, but nowhere to spend them. In fact, if we all ran out and spent all our dollars - i.e., no liquidity preference, which is the supposed solution to the economic mess taken to its logical conclusion - this would precipitate hyperinflation.
BTW, there is a good reason why gold has surpassed the S&P 500. Some people believe that inflation is equities-friendly. WRONG! What has been happening the last several years? The stock market has tanked in both nominal and real terms. If a firm is insolvent, no amount of inflation changes this. Productivity is measured by one's income, not by paying for things with inflation. Inflation creates more systemic problems, and nurtures the very inefficiency which engenders insolvency. Inflation further impairs the fundamentals of the economy. Thus even if the Fed can keep the stock market from falling in nominal terms - or make it rise in nominal terms - it is going to tank in real terms.
Unfortunately, some people don't believe inflation is coming because the stock prices of worthless companies have deflated. That isn't true deflation (i.e., dollar revaluation). One should be asking why worthless companies haven't hit zero. To see the inflation, don't look at the price of air. Look at the prices of commodities. If we keep pretending that our consumption can be paid for with inflation and not production, the dollar will collapse. If Peter Schiff has a "problem," it is that he can see things that most people can't.
(1) It is important to understand that insolvency can't be regulated away, nor can it be spent away. There is no proper role for the government to guarantee one's solvency, much less the solvency of an entire industry. Bankrupting the dollar by trying to inflate away insolvency engenders greater crises. If banks are insolvent, and there is a run on the banking system, how should this be dealt with? For that, read my previous commentary: The FDIC's fascist ruse
In that commentary, I wrote:
"If the free market were allowed to function, the government's role would be limited to enforcing contracts. If homeowners default, the bank would foreclose. But if the bank defaults, the bank's creditors - i.e., its depositors - would take over its assets. Thus, in the event of a bank run, depositors would then take possession of the bank's housing inventory.
"But what does the FDIC do? If a bank fails, the FDIC sends in federal regulators to protect the bank's assets from its depositors. In many instances, the FDIC has arranged shotgun mergers with investment banks on Wall Street, turning investment banks into bank holding companies. So we can see this sleight-of-hand trick - under the guise of protecting depositors - is really designed to transfer real assets (i.e., housing inventories) from failed banks to Wall Street, while promising depositors nothing more than globs of Ben Bernanke's 'liquidity.'"
If you don't understand the structure of capital and the difference between non-productive consumption and productive consumption, then you may not understand anything I say. Peter Schiff is absolutely right. We are being set up for a dollar collapse. The money supply need not be increased in nominal terms for this to happen. That we haven't had necessary bank runs doesn't bode well for the dollar. You won't have to notice that your bank account increases in nominal terms for the hyperinflation to happen.
The problem is that after years of inflationary-financed statism and consumption, we are insolvent. The most common error I see people making is conflating liquidation with deflation. The problem isn't that the money supply has shrunk, but that the bank accounts of Americans have shrunk. The loan market is completely insolvent and if you have a bank account in the United States, you are broke. What the Fed has done, however, is re-create our "savings" on a printing press. The Fed has made lost deposits real. This act alone - even without monetary aggregates increasing - is hyperinflationary.
Fractional reserve banking works insofar as not everybody tries to exercise control over their deposits at once. That the Fed has gone ahead and made all of these deposits real is frightening.
I will say right now that we need some market cleansing bank runs(1), which would force the money supply to contract faster than the contraction of the bubble economy. My prediction is that people won't realize that the dollar is bankrupt until after we burn through what remains of capital and the real pool of savings, and store inventories are exhausted. We are living through a slow-motion run on real wealth. As the bubble economy contracts, we will encounter a situation where you have dollars in the bank, but nowhere to spend them. In fact, if we all ran out and spent all our dollars - i.e., no liquidity preference, which is the supposed solution to the economic mess taken to its logical conclusion - this would precipitate hyperinflation.
BTW, there is a good reason why gold has surpassed the S&P 500. Some people believe that inflation is equities-friendly. WRONG! What has been happening the last several years? The stock market has tanked in both nominal and real terms. If a firm is insolvent, no amount of inflation changes this. Productivity is measured by one's income, not by paying for things with inflation. Inflation creates more systemic problems, and nurtures the very inefficiency which engenders insolvency. Inflation further impairs the fundamentals of the economy. Thus even if the Fed can keep the stock market from falling in nominal terms - or make it rise in nominal terms - it is going to tank in real terms.
Unfortunately, some people don't believe inflation is coming because the stock prices of worthless companies have deflated. That isn't true deflation (i.e., dollar revaluation). One should be asking why worthless companies haven't hit zero. To see the inflation, don't look at the price of air. Look at the prices of commodities. If we keep pretending that our consumption can be paid for with inflation and not production, the dollar will collapse. If Peter Schiff has a "problem," it is that he can see things that most people can't.
(1) It is important to understand that insolvency can't be regulated away, nor can it be spent away. There is no proper role for the government to guarantee one's solvency, much less the solvency of an entire industry. Bankrupting the dollar by trying to inflate away insolvency engenders greater crises. If banks are insolvent, and there is a run on the banking system, how should this be dealt with? For that, read my previous commentary: The FDIC's fascist ruse
In that commentary, I wrote:
"If the free market were allowed to function, the government's role would be limited to enforcing contracts. If homeowners default, the bank would foreclose. But if the bank defaults, the bank's creditors - i.e., its depositors - would take over its assets. Thus, in the event of a bank run, depositors would then take possession of the bank's housing inventory.
"But what does the FDIC do? If a bank fails, the FDIC sends in federal regulators to protect the bank's assets from its depositors. In many instances, the FDIC has arranged shotgun mergers with investment banks on Wall Street, turning investment banks into bank holding companies. So we can see this sleight-of-hand trick - under the guise of protecting depositors - is really designed to transfer real assets (i.e., housing inventories) from failed banks to Wall Street, while promising depositors nothing more than globs of Ben Bernanke's 'liquidity.'"