Peter Schiff on Treasury collapse

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jackely

Peter Schiff on Treasury collapse

Post by jackely » Fri Mar 30, 2012 6:31 am

After watching the Youtube of Peter Schiff's accurate predictions concerning the housing bubble, I tend to listen when he speaks.

If I know PPer's as well as I think I do, I don't expect anybody to read this and dump their LTT's.

But I'm wondering the PP would look like if he is correct?

http://www.forbes.com/sites/afontevecch ... ound-2013/
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Re: Peter Schiff on Treasury collapse

Post by doodle » Fri Mar 30, 2012 6:51 am

I went through an Austrian economic phase about a year ago where I had some of these worries. However, once one starts to expand their understanding of other economic schools of thought, these fears tend to dissipate. Check out Warren Mosler, Bill Mitchell, or Steve Keen for a few economists who take an opposite view on things.

Schiff (as well as his counterparts Rogers, and Faber) say a lot of things like "we are never going to be able to pay them back" that sound scary but really make absolutely no sense.

I have started to ignore the Austrians because their apocalyptic talk is really counterproductive to my emotional and investment well being.
Last edited by doodle on Fri Mar 30, 2012 6:58 am, edited 1 time in total.
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Re: Peter Schiff on Treasury collapse

Post by Gumby » Fri Mar 30, 2012 8:29 am

He's right and wrong.

Peter Schiff says, "If you invest in gold, then the economy doesn’t benefit from savings, I want investment to go to plants and equipment".

This is false. He makes it sound like the money you spend on gold goes into a garbage can somewhere. It's not true. That would be like saying that trading money for a dining room table somehow prevents people from investing money. They are both collectables. The second you pay someone for gold or a dining room table, that individual has the power to spend your money however he or she pleases (such as on investments that go to plants and equipment).

Peter Schiff says, "We consume more than we produce and we borrow abroad, but we are never going to be able to pay them back."

Despite enormous deficits, the US hasn't missed a debt payment since the Continental Congress. A country whose debt is denominated in its own sovereign fiat currency — of which it is the sole issuer — will always have the power to pay back its debt. So, his statement is pure fear mongering.

See: YouTube: The U.S. Debt is a myth!

It's important to understand that all our money, except coins, come from debt. The entire money supply is debt. So, this notion that there is too much debt is really a blurring of the facts. There can certainly be too much debt-based money, but the issue has nothing to do with solvency. The whole reason people hold Treasuries in the first place is because they are risk-free — the bond market knows that the US government will always be able to make the payment.

Peter Schiff then says, "While households have reduced their leverage, government debt has ballooned on the back of stimulus programs, but, argued Schiff, the government’s debt is the people’s debt, thus overall leverage has actually increased."

He's right and he's wrong. Since we happen to live in the confines of a debt-based monetary system, the government's "risk-free" debt is actually the private sector's savings. In other words, in order for our base money supply to exist, the government must spend base money into existence and simultaneously issue Treasury Bonds (i.e. our "debt") — Treasury bonds also serve to soak up excess private sector savings into a risk free savings vehicle. In fact, all government spending of base money into the private sector just gets used to buy up Treasury Bonds — this is especially true since the Treasury doesn't accept bank credit as a form of payment, and only accepts government-issued base money at the Treasury auctions. (If the Fed helps this process along, they do so only by removing another equal asset from the private sector.) All private credit is backed by that government-spent base money and debt. So, Peter Schiff would have you believe that the government's debt is somehow equal to private debt and that we all have to pay it all back tomorrow with money that doesn't come from debt (gold?). But that's not true. All our money (except coins) come from debt.

So, private debt and Public debt are two very different things. In fact, they are polar opposites... and that's the problem. When the government issues "too much debt" the problem isn't an issue of solvency. The problem is stability. And that's where Peter Schiff is correct.

What Peter Schiff is really talking about is what Hyman Minsky theorized over 50 years ago...

See this 4 minute video: YouTube: Crash Course on Hyman Minsky, by L. Randall Wray

So, if you think of Treasuries as this very safe, risk-free, asset for the private sector... Minsky realized that a "ballooning deficit" meant that more and more risk-free Treasuries in the private sector would actually be used as a foundation for leverage, many times over, by banks — causing the economic system to become more and more fragile as time went on. Imagine a giant Ponzi scheme where the only real money backing the scheme was a pile safe base money and Treasuries. The more safe base money and Treasuries you have, the bigger the Ponzi scheme of private credit becomes. Minsky also understood that the Fed's intervention — while often necessary — would simply paper over the problems, causing people to forget until the next, bigger, problem came down the pipe. Wash, rinse, repeat.

In other words, every time a financial crisis ensued — and a giant private credit Ponzi scheme imploded — the government would be forced to step in and provide lots of safe Treasuries and base money — which would only serve to make the next private credit Ponzi scheme even larger than the one before it...causing each crisis going forward to be even larger than the one that preceded it.
Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous to financial markets. Minsky claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts.

This slow movement of the financial system from stability to fragility, followed by crisis, is something for which Minsky is best known, and the phrase "Minsky moment" refers to this aspect of Minsky's academic work.

...

Hyman Minsky's theories about debt accumulation received revived attention in the media during the subprime mortgage crisis of the late 2000s.

Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.

The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.

If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.

Source: http://en.wikipedia.org/wiki/Hyman_Minsky
So, if you want to learn the truth about why large deficits are bad, look to Minsky... who was at least 50 years ahead of his time. It has nothing to do with solvency, and everything to do with stability of the highly leveraged private sector.

Since our entire money supply (except coins) comes from either private or public debt, there's no way for our economy to avoid this increased fragility without more regulation or changing the system entirely (a change which will likely never happen). So, Peter Schiff's predictions may very well come true someday soon — but not for the reasons he would have you believe.

All this continuously increasing private sector fragility makes the Permanent Portfolio even more appealing. We hold the PP as a way to ward of the effects of this debt-based instability. In a world where all money comes from debt, Treasuries (and gold) are the only way to virtually eliminate credit risk. Yes, Treasuries can crash, but Treasuries only tend to crash when either stocks, gold or cash are king. Either way, the Permanent Portfolio as a whole will allow you to ride out future "Minsky moments" with much less overall volatility than other investment strategies.
Last edited by Gumby on Fri Mar 30, 2012 9:35 am, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
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Re: Peter Schiff on Treasury collapse

Post by moda0306 » Fri Mar 30, 2012 9:40 am

Peter Schiff is excellent at micro.  Micro fundamentals (debt-to-income ratio... price-to-rent ratio... savings rate) were SCREAMING at us that there was a huge housing bubble and he realized it.  I commend him for standing up to the nay-sayers on housing, and if I needed a CFO of a company, he'd be great.

However, he's hopelessly wrong on macro.  He just doesn't get it.  He looks at the US like we're a user, not an issuer, of a currency, and he does use some of those buzz-phrases like "we can't pay them back," and "printing billions of dollars" that tend to indicate that someone doesn't understand the mechanics of the treasury, fed and macroeconomics.

I'll eat my words if we have hyperinflation, but until then I'll say take anything he has to say on macro with a grain of salt, because he sees the U.S. just like he sees the firms he manages, and tries to apply the same rules to them.

Gumby, your post is great, and goes to show how much power lies in what MMT/MMR calls the "horizontal" money sector where base money is leveraged.
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Re: Peter Schiff on Treasury collapse

Post by melveyr » Fri Mar 30, 2012 10:06 am

Also, Peter Schiff recommended foreign stocks and commodities as a way to deal with the crisis... Those positions got slaughtered.

He didn't understand how Treasuries would perform in a financial crisis then and he definitely doesn't understand them now.
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Re: Peter Schiff on Treasury collapse

Post by moda0306 » Fri Mar 30, 2012 10:17 am

Bravo, melveyr.

Great point.  He carries so much anti-government baggage with him that he can't rise above it (like HB could... and with HB I wouldn't call it baggage) and see how our currency system actually works.
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Re: Peter Schiff on Treasury collapse

Post by MediumTex » Fri Mar 30, 2012 10:29 am

I tend to think that a measure of humility is necessary for real insight, and I see no humility in Schiff whatsoever.

I view Schiff as just another financial entertainer.

Peter Schiff and Michael Pento ought to put together a financial comedy act.  I would like to see that.

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Re: Peter Schiff on Treasury collapse

Post by doodle » Fri Mar 30, 2012 10:36 am

Has anyone heard of this idea before: As long as real economic growth rates are higher than the real interest rate, the economy must have a bubble forming somewhere to function properly. Maybe these "Minsky moments" referred to in the video above are necessary???

http://traderscrucible.com/2011/05/05/c ... his-worth/

I think the premise is that under such a scenario the economy is somehow starved for money and therefore creates its money by bubbling up some particular asset...stocks, houses, etc.

Does the topic of the article make sense to anyone?
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Re: Peter Schiff on Treasury collapse

Post by Gumby » Fri Mar 30, 2012 1:11 pm

doodle wrote: Has anyone heard of this idea before: As long as real economic growth rates are higher than the real interest rate, the economy must have a bubble forming somewhere to function properly. Maybe these "Minsky moments" referred to in the video above are necessary???

http://traderscrucible.com/2011/05/05/c ... his-worth/

I think the premise is that under such a scenario the economy is somehow starved for money and therefore creates its money by bubbling up some particular asset...stocks, houses, etc.

Does the topic of the article make sense to anyone?
Fascinating perspective.

There are many ways to look at these crises. And they all have truths in them, but it's impossible to know which is correct. For instance, here is a very interesting look at the financial crisis from a Marxist perspective. Whether you agree with the perspective or not, the video offers an interesting summary of flaws in our private credit system, as well as covers the different mainstream ways we look at these crises...

[align=center]Image[/align]

(Cool white-board animation too!)

I actually really enjoyed this video — very interesting perspective. If nothing else, the video should explain just how easy it is to form different perspectives of the same problem — which, again, is why the Permanent Portfolio is the best way to navigate these differing opinions.
Last edited by Gumby on Fri Mar 30, 2012 1:40 pm, edited 1 time in total.
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Re: Peter Schiff on Treasury collapse

Post by Gumby » Fri Mar 30, 2012 1:34 pm

By the way, while Peter Schiff is predicting that Treasuries will crash in 2013... Treasuries are actually crashing today! Schiff was waaaay off :)

Don't get too excited though. Treasuries are just correcting back to match up with the irrational euphoria of the stock market (i.e. Treasuries should have gone down when the stock market was going up since December). Looks like the assets are rebalancing themselves!
Last edited by Gumby on Fri Mar 30, 2012 1:40 pm, edited 1 time in total.
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Re: Peter Schiff on Treasury collapse

Post by moda0306 » Fri Mar 30, 2012 1:39 pm

Gumby,

1) Your link to the Marxist stuff seemed to not take.

2) Treasuries are hardly "crashing," though I know you really didn't mean it.

I bet we'll see a 2.7% 30-year treasury before we see a 7.2%.
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Re: Peter Schiff on Treasury collapse

Post by Gumby » Fri Mar 30, 2012 1:43 pm

moda0306 wrote: Gumby,

1) Your link to the Marxist stuff seemed to not take.

2) Treasuries are hardly "crashing," though I know you really didn't mean it.

I bet we'll see a 2.7% 30-year treasury before we see a 7.2%.
Yeah, I know. I agree. I was just having some fun. It is interesting to see Treasuries finally correcting to the stock market. We often worry about Treasuries crashing when we start up a PP, but the truth is they do what they are supposed to do — set interest rates.

Try again on the video. It's from YouTube, so you may not be able to see it at work.
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