Peter Schiff on Treasury collapse

[Gumby]

If the US continues to increase its debt and simply increases the money supply to cover it, that makes each dollar worth less, correct?

You're referring to the Quantity Theory of Money. It was disproven in the 1930s. In reality, predicting inflation is not that simple. If it was, we would have had very high inflation years ago.

Here's how Harry Browne explained it on his investment radio show (recorded on 12/12/04):

Harry Browne: Inflation results from the supply of money increasing faster than the demand for money. Now, mostly what we hear though is that inflation results from the increase supply of money. In other words, an increase in the supply of money is "A" and inflation is "B". When you get "A" then "B" follows. But what happens is periods like the past few years when the money supply has been increasing at a fairly rapid rate, and yet, we do not see any appreciable price inflation whatsoever. So, what we're seeing here is that the money supply has increased, but the consequence has not ensued. And that's because of two things. One of which is timing, and the other is that other factors can be introduced. So, what we do mean to say, really, is that an increase in the supply of money makes the inflation rate greater than it would be without that increase in the supply of money. We also take into account the demand for money — the desire of individuals to hold money in their pocket, to hang on to money, rather than spending, saving, or investing it. And if that is increasing as fast as the supply of money, then there is no increase in the inflation rate. So, all other things being equal, the increase in the supply of money leads to an increase in the price inflation rate. But, there are other things that have to be considered and that case, mostly the demand for money. These other factors always play a part, but we can't always see them.

Source: https://web.archive.org/web/20160324133 ... -12-12.mp3 (skip to 13:20)

See also...

Some interesting Japan graphs...

Note: This cannot be unseen and might lead to a different perspective, and possible brain re-wiring.




Notice how expansions in the money supply do not always result in inflation. There is always supply and demand at play. Schiff is focusing on supply while ignoring demand (among other more fundamental failings).

[MediumTex]

If you're trying to figure out what's going on with inflation, I think you need to know what's going on in at least the following categories:

1. Is private sector credit expanding or contracting?

2. What is the velocity of money?  Are people spending or hanging onto money?

3. How does the growth in the money supply compare to the expansion of the overall economy?

4. What is the unemployment level?  Higher unemployment suggests there is little upward wage pressure and thus less additional discretionary income to fuel higher prices.

There are a lot of ther factors, but these seem especially important to me.

[Gumby]

Also, in a twist of wonderful irony, have you ever noticed that inflationistas haven't raised their fees very much for their books, services or speaking engagements over the past few years? Some haven't raised them at all. They still want to get paid in "worthless" dollars.

For instance...

On a slightly different note, I always find it interesting how those pushing the hyperinflation theme love to collect U.S. Dollars. For instance, if you visit Shadow Stats you can buy a subscription to their services for a fee – in U.S. Dollars. Now, a hyperinflationist would argue that they are using those dollars to buy hard commodities so that’s a valid point, but the problem is that there are no signs of hyperinflation in the Shadow Stats subscription service. In fact, in real terms, the subscriptions are deflating! If one goes back and reviews the cost of the service it has remained remarkably stable in price:

[align=center][/align]
[align=center](Figure 1 from July 16th, 2006)[/align]


[align=center][/align]
[align=center](Figure 2 from May 12th, 2008)[/align]


[align=center][/align]
[align=center](Figure 3, from August 28, 2011)[/align]


According to the US government inflation should have caused those subscriptions to surge to $197 in 2011. But your Shadow Stats subscription has actually gone down in price since 2006 because inflation has risen a total of 13%+ according to the CPI. Of course I am cherry picking here and I am not showing the data in terms of gold or what could be viewed as a general decline in our standard of living. In fact, I think one could make a good case for the idea that our standard of living has declined since 2006 (not the case since 1913 when the Fed was founded or since 1971 when we went off the gold standard, but that’s a different matter). But you can see the irony regardless.

Source: Why Is There Deflation in Hyperinflation Forecasts?

And if you go to Shadow Stats today, in 2012, the price still hasn't changed from what it was in 2006.

[Lone Wolf]

I think Schiff's great.  He's a genuinely funny guy and he's like no other financial pundit in holding the government's feet to the fire for their moral hazard, market distortions, and central planning.  Some great calls along with some really bad ones, for sure.

I think he's way off-base on China, for example, but I really like hearing his perspective.  I'm ambivalent on his Treasury call.  On the one hand, I hate Treasuries.  On the other hand, I know that I hate them, so I should ignore myself... and they've made me a lot of money. 

To the OP and kshartle -- try to look past the way you got sort of gang-tackled in this thread.  Don't think before starting a Permanent Portfolio you have to embrace the notion that "Peter Schiff is wrong" or that "trendy wackadoodle economic theory X is right".  The PP philosophy could IMO be stated as "Peter Schiff (or whoever) is a smart person and may be right.  Predicting the future is very hard, though, and he may get this one wrong.  Perhaps his timing is perfect -- or perhaps his predictions could unfold over 12 years rather than 12 months.  We just don't know.  Let's hedge our bets."

[MediumTex]

To the OP and kshartle -- try to look past the way you got sort of gang-tackled in this thread. 

+1.

The goal with most of these discussions, IMHO, should be to make it clear that none of us knows for sure what's going to happen.

The PP protects you whether people like Schiff are right or wrong.

[moda0306]

LW,

How much of a will do you have to gamble your inflationist position?  I'd love to get some bets going on the inflation/deflation debate, with the amount indexed to CPI or Billion Price Index or something, of course .  It's one of the more fun debates and it seems to me the inflationists are pretty universal that they think it will happen over the next couple/few years, so it's not very long-term.

I'm not talking much money, but I think it'd be fun... not to sound like the awful Art Laffer or anything.

Isn't there a website where this can be accomplished?  Either way, S&P has just upgraded Moda debt to AAA, so no worries!!!

I'm thinking something along the lines of some combination of betting on where ST rates will go and where inflation will go...

Regarding Schiff... it's not so much the conclusion he reaches that I have a problem with, it's his boggled analysis of the constraints of the monetary system.  Can the fed control interest rates, or can it not?  Can the treasury have trouble "funding" its spending, or can it not?  Don't gov't deficits create net private sector savings... the very thing PS says we're short on?  Does our $500 billion annual trade deficit indicate that as a world reserve currency issuer, foreign demand for our currency is both a) in relatively high demand, currently, and b) mean that we somehow have to supply that demand while also meeting our own base-currency needs?

These are questions that I don't think I ever hope to hear truly answered by Schiff.  There is just a lot of nuance missing there.  I don't think I've ever read/seen a very solid, deep analysis from him, and if I want to see funny financial blowhards, I'll watch Kristen Wiig do her Suze Ormann impressions. 

[AdamA]

I'm still in the very steep part of the learning curve on all of this stuff, so perhaps this is a dumb question but:

If the US continues to increase its debt and simply increases the money supply to cover it, that makes each dollar worth less, correct? So what creditor is happy about having a loan repaid at a lower value than they lent it (even though the enumerated amount in dollars may be the same)?

Surely there is some downside to an increasing national debt... there's no such thing as a free lunch, is there?

Don't approach it like a physics problem.  No matter how logical the argument, no one can predict if we'll have inflation, deflation, prosperity or "tight money."  Own the bonds because they offer you protection from deflation.  Period.  Any thinking you do beyond that should just be for fun.

[Greg]

Anyone interested in a little Schiffing?

http://video.foxbusiness.com/v/16718083 ... than-2008/

[Pointedstick]

Anyone interested in a little Schiffing?

http://video.foxbusiness.com/v/16718083 ... than-2008/

Even when I was a hardcore Austrian, I gotta admit that this guy seemed like a jerk.

[Alanw]

Anyone interested in a little Schiffing?

http://video.foxbusiness.com/v/16718083 ... than-2008/

I have to admit, he is consistent in his opinion.  At least for the last 10 years.  If QE3 is on the way, shouldn't we load up on stocks and commodities?

[Greg]

Anyone interested in a little Schiffing?

http://video.foxbusiness.com/v/16718083 ... than-2008/

I have to admit, he is consistent in his opinion.  At least for the last 10 years.  If QE3 is on the way, shouldn't we load up on stocks and commodities?

Let me introduce you to my good friend, the Variable Portfolio. I'm sure you two will get together just dandy with those thoughts.