Peter Schiff on Treasury collapse

[moda0306]

Gumby,

Great point on Peter's ability to identify a credit bubble.  All basic micro indicators were screaming at us that there was an unsustainable housing bubble... even with the reduced interest rates and tax-deductibility, there was no justification for the prices being paid.  Somebody looking at a price/rent or debt-to-income ratio chart could see that unless rents & incomes were to rise substantially, the prices were simply too high.

So step 1: someone could obviously see there was a problem.  But I still give Schiff a slight, asterisk-laden tip of the cap for having the balls to scream it from the mountain tops.

But as you point out, his suggestions on how to hedge against it were completely off base.  Why?  Because he doesn't understand macro.  This is a point of pride in the Austrian community... they don't accept that things are different on a macro level than a micro level.  That's fine for personal philosophy, but when you're trying to make money on predictions, it might help to realize that there's a difference between one person getting in the left lane to go faster, and the entire freeway trying to get into the left lane to go faster.

MT... yes, his beat down of Laffer was amazing.  If I'd seen that then I probably would have sold my home then and become one of his avid followers...

[Gumby]

I'm still amazed that Schiff has the balls to say that Greece is better off than we are. Does this look like a population that is happy with their monetary system?...

[align=center][/align]

Uh, no. 20.7% unemployment in the face of austerity is what happens when you squeeze a debt-based sovereign currency user and replace their government with unelected technocrats. I can imagine Schiff trying to calm the crowd down... "Hey, c'mon everybody, austerity is a good thing!"

[Gumby]

The next time someone says something negative about Marxism and how the U.S. won the fight against communism, you might ask them which aspects of Marx's description of communism we defeated and what specifically about Marx's philosophy they disagree with.

Holy crap...

Karl Marx. Capital, Volume One
Chapter Thirty-One: Genesis of the Industrial Capitalist


The discovery of gold and silver in America, the extirpation, enslavement and entombment in mines of the aboriginal population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a warren for the commercial hunting of black-skins, signalised the rosy dawn of the era of capitalist production. These idyllic proceedings are the chief momenta of primitive accumulation.

...

The system of public credit, i.e., of national debts, whose origin we discover in Genoa and Venice as early as the Middle Ages, took possession of Europe generally during the manufacturing period. The colonial system with its maritime trade and commercial wars served as a forcing-house for it. Thus it first took root in Holland. National debts, i.e., the alienation of the state – whether despotic, constitutional or republican – marked with its stamp the capitalistic era. The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt.[7] Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of the blasphemy against the Holy Ghost, which may not be forgiven.

The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would. But further, apart from the class of lazy annuitants thus created, and from the improvised wealth of the financiers, middlemen between the government and the nation – as also apart from the tax-farmers, merchants, private manufacturers, to whom a good part of every national loan renders the service of a capital fallen from heaven – the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy.

7. William Cobbett remarks that in England all public institutions are designated "royal"; as compensation for this, however, there is the "national" debt.

Source: Karl Marx. Capital Volume One. Chapter Thirty-One: Genesis of the Industrial Capitalist

Can't believe I'm saying this, but Marx nailed it.

Debt-based money really is just a continuation of "primitive accumulation" — it's an invention of the early Medieval banking system, designed to make bankers richer and the people poorer. This is what Thomas Edison and Henry Ford were talking about in 1921 along with the Secret of Oz.

Honestly, this is why Schiff, and most Americans, are often so confused by the national debt. When you have a debt-based monetary system, such as ours, the debt is where our national wealth comes from.

[AdamA]

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.

Yeah, it's like he predicted it was going to rain and then went for a walk outside wearing sunglasses and a flowered bathing suit instead of an umbrella and raincoat.

[moda0306]

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.

Another surprise of the treasury market that seems to be completely forgotten is the debt ceiling fiasco, the subsequent S&P downgrade, and the performance of treasury bonds during that period.

I thought for sure that as the debt-ceiling date approached, stocks and treasuries would dive and gold would skyrocket... or at least that this would be the tendency as uncertainty spread.  I'm willing to bet Schiff would have agreed.  How wrong I was... all treasuries but the ones in immediate risk of being affected by the debt-ceiling date did well.  Further, and slightly more predictably, the S&P downgrade sent rates dropping and treasury values soaring.  The market did this... not the fed...

I'm patiently awaiting nominal rates to go negative.  I love the bond market.

[Gumby]

I thought for sure that as the debt-ceiling date approached, stocks and treasuries would dive and gold would skyrocket... or at least that this would be the tendency as uncertainty spread.  I'm willing to bet Schiff would have agreed.  How wrong I was... all treasuries but the ones in immediate risk of being affected by the debt-ceiling date did well.  Further, and slightly more predictably, the S&P downgrade sent rates dropping and treasury values soaring.  The market did this... not the fed...

And the ones who actually got this right were the MMT guys...

YouTube: Mike Norman: 'US debt is a myth!'

Look at the date on that video. Apr 6, 2011 — it's when the debt-ceiling crisis really first started brewing. Even when he explains it in plain English, the host still doesn't understand him since it's all so backwards to mainstream gold-standard era thinking.

[moda0306]

Gumby,

Can't watch that now... did he actually predict that rates would tumble as the crisis approached?

My feeling was that if congress were to display that it was really willing to push us to default, then MMT would cease to be correct in a way because we'd actually have default risk on US treasuries.

[Gumby]

did he actually predict that rates would tumble as the crisis approached?

When asked by the host if a rating downgrade would lead to skyrocketing interest rates, he said:

There is no issue of solvency. There cannot be an issue of solvency. The United States is always going to be able to pay its debts. I think a lot of what's going on here is fear mongering. Look, if you look at Japan, for example, which had its credit rating downgraded several times by the rating agencies the ten year yield on the Japanese Government Bond — the equivalent of our Ten Year Treasury — is yielding 1.5%. So the interest rate will be unaffected.
Source: http://youtu.be/4HJ54RRB7OU

It wasnt really a prediction, but he, and other MMTers, believed that a rating downgrade would generally lead to lower rates over time. For instance a month after appearing in that video, he clarified his position on rates continuing to fall...

The yield on 3-month T-bill fell to a record low today of .02%.

Back in 1980 the national debt was $800 bln and T-bill rates were 17%.

Today the national debt is $14 trillion and the rate the gov’t pays on T-bills is virtually zero!

THERE IS NO CORRELATION BETWEEN INTEREST RATES AND GOV’T DEBT FOR A COUNTRY THAT ISSUES ITS OWN CURRENCY AND WHERE ITS DEBTS ARE DENOMINATED IN THAT CURRENCY!

Bond yields are likely to continue falling as well. Japan’s debt is three times as large as the U.S. and the yield on 10-year Japanese government bonds is 1.5%. That’s probably where our 10-year is going.

Source: http://mikenormaneconomics.blogspot.com ... -lows.html

MMTers definitely nailed that comparison to Japan. It was a general consensus that I remembered seeing at the time. I remember also having a hard time believing it until I saw it happen! That's when I realized that the MMTers were on to something.

My feeling was that if congress were to display that it was really willing to push us to default, then MMT would cease to be correct in a way because we'd actually have default risk on US treasuries.

The MMTers didn't see it that way. They believed that the Treasury would never allow itself to default, and the Fed would loan to the Primary Dealers to become its own Treasury buyer of last resort, if necessary, to keep rates where they wanted them.

http://mikenormaneconomics.blogspot.com ... limit.html

There were too many back door options to keep the money flowing even if the debt-ceiling wasn't raised. In reality, it was all just political theater — which is exactly what MediumTex told us a year ago when we were all freaking out about it!

[moda0306]

Interesting how things work when you actually understand thet machinations of the system and don't let politics drive your view of everything.

[Gumby]

Interesting how things work when you actually understand thet machinations of the system and don't let politics drive your view of everything.

Here's a good one from Warren Mosler, dated July 23, 2011:

Consequences of debt ceiling extension outcomes
Posted by WARREN MOSLER on July 23rd, 2011

If Congress does get a bill to extend the debt ceiling to the President, he will sign it.
The US economy will continue to muddle through, with an extended soft spot and modest growth.

If Congress doesn’t get a bill to the President,
And if the US Treasury goes cold turkey to a balanced budget,
spending only as revenues accrue,
I forecast the following consequences:

Interest rates on US Treasury securities will fall, and not rise.

The US unemployment rate will move geometrically towards 100% until US Treasury deficit spending resumes.

Source: http://moslereconomics.com/2011/07/23/c ... -outcomes/

The problem is that there were a few different possible outcomes: Raising the debt ceiling or not raising it, getting downgraded or not getting downgraded, etc. But, in general, MMTers didn't see how Treasury rates would rise when the government controls them so well.

So, on July 28th, 2011 Mosler wrote:

The danger is from the spending cuts, not the potential downgrade
Posted by WARREN MOSLER on 28th July 2011

The headlines are all about the risks of default or a too small deficit reduction package causing a downgrade of US debt.

And while markets react to those issues, they all miss the point.

The consequences of a downgrade to US govt debt are minor at best.
Note that when Japan was downgraded below Botswana,
with a debt/GDP ratio nearly triple that of the US,
interest rates remained the lowest in the world

The real risk comes from the spending cuts.

No debt ceiling extension is the worst case-
Government spending falls by some $150 billion/month as expenses can’t exceed revenues
Fed Chairman Bernanke mentioned that might reduce GDP by a full 6%
And that’s just the first order effect, as a falling economy means falling tax revenues,
Which means further reductions in Treasury spending in a pro cyclical nightmare.

And if they do extend the debt ceiling it will be with prescribed spending cuts.
This too adds drag to the economy.
The more the cuts are meaningful and immediate, the more the drag on the economy increases.

Because the markets don’t yet understand this,
the feedback they are giving is misleading policy makers,
and encouraging them to make deeper, more meaningful cuts.

Source: http://moslereconomics.com/2011/07/28/t ... downgrade/

I think one of the reasons many people were drawn to MMT last year is that it understood the operational realities of the Treasury bond market very well.

[MediumTex]

There were too many back door options to keep the money flowing even if the debt-ceiling wasn't raised. In reality, it was all just political theater — which is exactly what MediumTex told us a year ago when we were all freaking out about it!

Ah yes, I was just thinking back to the day I did it for doodle.

[flyingpylon]

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?

[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.