Peter Schiff on Treasury collapse

[jackely]

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/

[doodle]

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.

[Gumby]

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.

[moda0306]

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.

[melveyr]

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.

[moda0306]

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.

[MediumTex]

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.

They could call their first album "They're Stupid, We're Golden".

[doodle]

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?

[Gumby]

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][/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.

[Gumby]

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!

[moda0306]

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%.

[Gumby]

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.

[moda0306]

My dive into using EE bonds for a chunk of my LTT portion when rates were at 2.76% was timed relatively well... by accident, of course.

[Gumby]

My dive into using EE bonds for a chunk of my LTT portion when rates were at 2.76% was timed relatively well... by accident, of course.

I never quite understood the swap EE bonds for LTT. Wouldn't you rather have a higher return on your cash than applying a hack to your LTT allocation? Obviously I'm missing something that I haven't considered.

[moda0306]

When bonds were yielding under 3% for 30's and 2.5% for 20's, I noticed that a EE bond was a tax-deferred better deal at 3.53% over 20 years.  Of course, it has to be held to maturity to get that yield, so the general rule is 1) use it only as a portion of your bonds.. maybe 20% max, and 2) count some of it as cash, as the required duration isn't there.

This works much better for someone who's in their accumulation phase, as most of their bonds will be held... not used to rebalance.

As you hold them longer and longer, you have to shift more and more of the total value to counting as cash, since there is a shorter duration there to deal with.  But, as you get closer and closer to the doubling of value, the implied rate to the original maturity (20 year mark) goes up and up.

[MediumTex]

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][/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.

We often seem to take it as a given that we have turned away from Marxism and that allowing unfettered capitalism may be the source of some of our problems.

However, consider what Marx said were the fundamental tenets of communism in "The Communist Manifesto".  They are as follows:

1. Expropriation of landed property, and the use of land rents to defray state expenditure

2. A vigorously graded income tax

3. Abolition of the right of inheritance

4. Confiscation of the property of all emigres and rebels

5. Centralization of credit in the hands of the State, by means of a national bank with state capital and an exclusive monopoly

6. Centralization of the means of transport in the hands of the State

7. Increase of national factories and means of production, cultivation of uncultivated land, and improvement of cultivated land in accordance with a general plan

8. Universal and equal obligation to work; organization of industrial armies, especially for agriculture

9. Agriculture and urban industry to work hand-in-hand, in such a way as, by degrees, to obliterate the distinction between town and country

10. Public and free education of all children.  Abolition of factory work for children in its present form.  Education and material production to be combined.

Here are my comments on these requirements for a communist society:

1. Expropriation of landed property, and the use of land rents to defray state expenditure

Comment: Our current property tax system is based on the premise of taking a percentage of property value annually in the form of a tax, along with the rents the federal government takes from use of public lands for things like mineral production and the taxes the government assesses on income generated from the use of real estate in general.

2. A vigorously graded income tax

Comment: We've had this one for years.

3. Abolition of the right of inheritance

Comment: In 2013 the top estate tax rate will be 55%.  If Warren Buffett had his way it would be higher.

4. Confiscation of the property of all emigres and rebels

Comment: "Rebels" of course have their property taken through a variety of legal measures.  "Emigres" are people who attempt to leave a country with their assets.  If you have been paying attention it is impossible not to notice that taking your money out of the U.S. or finding a foreign location where it can be securely stored has gotten much more difficult in recent years.  For U.S. citizens, Switzerland is basically no longer an option at all.

5. Centralization of credit in the hands of the State, by means of a national bank with state capital and an exclusive monopoly

Comment: The Fed.

6. Centralization of the means of transport in the hands of the State

Comment: The two primary means of transportation in the U.S. are by car and by air.  If you choose to travel by car you must participate in a variety of state sponsored registration, tracking and tax/fee arrangements.  You must register yourself and pay a fee to get a drivers license and you must register and pay a fee to have a street legal vehicle to drive.  The drivers license database has proven to be a wonderful tool for use by the state in tracking people and the public roads have proven to be a wonderful tool to periodically detain people as needed.  The air travel system is many times worse in terms of state control, surveillance and use of this transportation tool as a way of tracking people and detaining them when the state deems it to be necessary.

7. Increase of national factories and means of production, cultivation of uncultivated land, and improvement of cultivated land in accordance with a general plan

Comment: Although farmers probably just see it as successful political lobbying, the system of land cultivation in the U.S. is basically one giant government program.  As far as the means of production generally, the U.S. tax code has clearly been used to manipulate the allocation of capital and it has ironically pushed a lot of factory production to another country that explicitly calls itself communist.

8. Universal and equal obligation to work; organization of industrial armies, especially for agriculture

Comment: This one is not occurring in a way that I can see, though one interpretation of the governmental bureaucracy is that it is a giant make work program for many otherwise un-employable people.  As far as agriculture goes generally, the automation of so many farm functions makes the "agricultural army" a basically obsolete concept (for now, anyway).

9. Agriculture and urban industry to work hand-in-hand, in such a way as, by degrees, to obliterate the distinction between town and country

Comment: I would say that globalization in general has been targeted at achieving this goal.

10. Public and free education of all children.  Abolition of factory work for children in its present form.  Education and material production to be combined.

Comment: This one is exactly what has happened, and it has been predictably used to indoctrinate children into a certain worldview that in the social sciences is based on many fantasies and distortions of history and reality with a strong tilt toward statism as the natural configuration of society.

***

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.

It is bizarrely ironic that some of the richest people in the world today are accumulating their wealth in economies that are either currently or recently considered "communist" (e.g., China and Russia).  In our own country, it seems as if many corporations have concluded that it makes more sense to embrace communist principles by attempting to influence government policy to help protect them from additional competition in certain markets, rather than seeking less government involvement in the economy generally.  Companies will say they want less regulation, but where regulation provides them with a competitive advantage, they rarely want that type of regulation relaxed.  I seriously doubt, for example, if financial institutions would be very excited if the government said it would no longer backstop their operations in the form of deposit insurance, bailouts and the Fed as lender of last resort.

[Tyler]

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

I'm not an economist, and have no real interest in macro predictions.  This guy may be a genius who will be proven 100% right.  Who knows.

But that's the reason I like the PP in the first place -- I'm pretty confident that no matter what happens we're about as well positioned to handle it as anyone can reasonably expect. 

[jackely]

I'm not an economist, and have no real interest in macro predictions.  This guy may be a genius who will be proven 100% right.  Who knows.

But that's the reason I like the PP in the first place -- I'm pretty confident that no matter what happens we're about as well positioned to handle it as anyone can reasonably expect. 

I'n not an economist either, nor did I stay at a Holiday Inn Express last night, but I did buy a house in 2006. I now wish I had paid more attention to people like Mr. Schiff at a time when most other experts were scoffing at the very idea of a housing bubble, kind of like some people in this forum are assuring me  there is no such thing as a Treasury collapse.

I hope they are right but I agree with you about the PP. Still seems like the most reasonable way to weather through all the possible storms.

[MediumTex]

I'm not an economist, and have no real interest in macro predictions.  This guy may be a genius who will be proven 100% right.  Who knows.

But that's the reason I like the PP in the first place -- I'm pretty confident that no matter what happens we're about as well positioned to handle it as anyone can reasonably expect. 

I'n not an economist either, nor did I stay at a Holiday Inn Express last night, but I did buy a house in 2006. I now wish I had paid more attention to people like Mr. Schiff at a time when most other experts were scoffing at the very idea of a housing bubble, kind of like some people in this forum are assuring me  there is no such thing as a Treasury collapse.

I hope they are right but I agree with you about the PP. Still seems like the most reasonable way to weather through all the possible storms.

Schiff has clearly made some great calls.

But he has also made some terrible calls.

The problem is it would have been impossible to know which ones were great and which ones were terrible beforehand.

[Kshartle]

I consider myself a student and fan of both Peter and Harry, having read all of their works, and actually speaking with Peter on one occasion as a caller into his radio show. As far government goes, I agree with Harry completely that government plays no beneficial role in society whereas Peter argues that some government "services" are vital and encourages political engagement (he is a Ron paul campaigner and former Senatorial candidate himself). So from a philosophical point of view Harry is light years ahead of Peter.

When it comes to economics however......there is no comparison. Harry tries to make the point that there is no value in attempting to allocate resources into asset classes that the investor expects to outperform. This might make sense if the investor is only concerned with the stability of the principle in dollar terms. It does not make sense if someone is generally trying to add significant wealth with ones investments. The Permanent portfolio will never do this. It can't except possibly over a very long period of time. With the 50% allocation to government bonds it's unlikely even over the long-term.
Peter is looking at the massive government debt and the crushingly low interest rates which make it rather obvious that stocks and gold will outperform in the long run. The fed has promised low interest rates through 2014. Many of the members are calling for low rates through 2015 or 2016. If they carry out their promise they must create inflation and push up gold just to maintain the pitiful interest rates. The US government cannot maintain it's spending without additional borrowing so the political pressure on the Fed will be powerful. Investors holding dollars will be punished. His premise on foreign stocks and gold are very sound. If you listen to him he will say over and over that he doesn’t believe anyone can call a top or a bottom. Short term movements are impossible to predict and even medium-term movements are incredibly difficult. It’s the long-term movements based on sound economic principles that he’s talking about. Making a call on 2013 or 2014 as the bursting year of the treasury bubble is a bold statement but remember, he has a book coming out, a radio show, an unconventional message that is in direct opposition to the government cheerleaders on CNBC and everywhere else.

I believe he’s correct and own no treasuries myself. I love the permanent portfolio concept for retirees unable to handle significant fluctuations emotionally. If interest rates move above 10% and the government starts operating in a surplus then it would be a brilliant strategy for everyone.

[MediumTex]

I consider myself a student and fan of both Peter and Harry, having read all of their works, and actually speaking with Peter on one occasion as a caller into his radio show. As far government goes, I agree with Harry completely that government plays no beneficial role in society whereas Peter argues that some government "services" are vital and encourages political engagement (he is a Ron paul campaigner and former Senatorial candidate himself). So from a philosophical point of view Harry is light years ahead of Peter.

When it comes to economics however......there is no comparison. Harry tries to make the point that there is no value in attempting to allocate resources into asset classes that the investor expects to outperform. This might make sense if the investor is only concerned with the stability of the principle in dollar terms. It does not make sense if someone is generally trying to add significant wealth with ones investments. The Permanent portfolio will never do this. It can't except possibly over a very long period of time. With the 50% allocation to government bonds it's unlikely even over the long-term.
Peter is looking at the massive government debt and the crushingly low interest rates which make it rather obvious that stocks and gold will outperform in the long run. The fed has promised low interest rates through 2014. Many of the members are calling for low rates through 2015 or 2016. If they carry out their promise they must create inflation and push up gold just to maintain the pitiful interest rates. The US government cannot maintain it's spending without additional borrowing so the political pressure on the Fed will be powerful. Investors holding dollars will be punished. His premise on foreign stocks and gold are very sound. If you listen to him he will say over and over that he doesn’t believe anyone can call a top or a bottom. Short term movements are impossible to predict and even medium-term movements are incredibly difficult. It’s the long-term movements based on sound economic principles that he’s talking about. Making a call on 2013 or 2014 as the bursting year of the treasury bubble is a bold statement but remember, he has a book coming out, a radio show, an unconventional message that is in direct opposition to the government cheerleaders on CNBC and everywhere else.

I believe he’s correct and own no treasuries myself. I love the permanent portfolio concept for retirees unable to handle significant fluctuations emotionally. If interest rates move above 10% and the government starts operating in a surplus then it would be a brilliant strategy for everyone.

A Japanese investor could have made the same argument above in 1992 and would have been crushed as stocks continued to drift lower for 20 years, while Japanese government bonds continued to provide outstanding returns.

Japan never has had the inflation that Schiff's thesis suggests is inevitable.

In the U.S., over the last 30 years long term treasuries have outperformed stocks, and that period includes one of the greatest bull markets for stocks in history.

I understand the logic of what you are saying, but reality still has a way of surprising us.

[moda0306]

If the gov't starts running surpluses and the fed raises rates to 10%, I'm not sticking with the PP, I'm putting all my money in T-Bills, selling my house, and finding out how to prepare for 20% unemployment.  

All kidding aside, if there's anything imagineable that would slaughter the PP, it's a huge hike in ST interest rates... gold would plummet, LTT's would plummet (if the market believed this to be a longer-term move), and stocks would plummet.  It would be 1981 on steroids... especially if you balance the budget to boot.

[Kshartle]

A Japanese could have made the same argument above in 1992 and would have been crushed as stocks continued to drift lower for 20 years, while Japanese government bonds continued to provide outstanding returns.

Japan never has had the inflation that Schiff's thesis suggests is inevitable.

In the U.S., over the last 30 years long term treasuries have outperformed stocks, and that period includes one of the greatest bull markets for stocks in history.

Well.......JPY 10 yr bonds have been 2% or less since '98 so definately not outstanding. They've been at 1% for about half of the last decade.

As for LTTs beating the US stock market over the last 30 years......this is a strong case for the treasury bubble argument, not a case for buying treasuries. The 30 year yield was a little over 13% in Dec of '81 and so the returns on a LTT fund have averaged 13% since then. They are at 3.4% now and so that will be the average for the 30 years of TLT or whatever. I'm not saying the US stock market will beat that. It might just based on the inflation needed to keep the rates down. Schiff isn't arguing that US stocks are the place to be though. He's arguing for investment in non-US countries that meet the following criteria:

From the Europac site:
Country Selection
The team reviews and focuses on the countries it views to have the best
fundamentals. Selection criteria include
- an expected 1-2 year trade surplus
- high real interest rates
- low debt-GDP ratio
- favorable real GDP growth estimates
- stock market price-to-earnings valuations that are attractive
relative to expected earnings growth.

As far as inflation in Japan.......the Japanese have printed trillions upon trillions to weaken the Yen and prop up the dollar for a long time now. Imagine how much the Yen could have appreciated in that time and low prices could have fallen for the Japanese without non-stop intervention from their banks. No wonder their economy has been stagnent for so long. The BOJ won't let interest rates rise and the economy re-structure, just like the fed. Don't confuse rising prices and inflation. The Japanese have had massive inflation inflicted upon them by the BOJ to their detriment.

The Japan-US comparisons fail in my opinion since the only thing in common is the high government debt. The Japanese are still barely net exporters I think but for most of this time were big exporters with a high savings rate and very little foriegn ownership of their debt and low unemployment. They are quite different than the US but I'm staying away until the BOJ lets rates rise. Here's an article I found interesting:

<http://www.europac.net/commentaries/bottom_line_9>

[Kshartle]

If the gov't starts running surpluses and the fed raises rates to 10%, I'm not sticking with the PP, I'm putting all my money in T-Bills, selling my house, and finding out how to prepare for 20% unemployment.  

All kidding aside, if there's anything imagineable that would slaughter the PP, it's a huge hike in ST interest rates... gold would plummet, LTT's would plummet (if the market believed this to be a longer-term move), and stocks would plummet.  It would be 1981 on steroids... especially if you balance the budget to boot.

If you count government workers.....the military.....the underemployed and those who've quit looking we're probably damn near 50% right now. Not to mention all the people going back to or staying in school because there's no work.

If the government was running surpluses and rates were over 10% I bet dividends would be quite high and P/Es in the single digits suggesting the stock market as a much better play so let's hope you don't abandon stocks entirely. 

We had a pretty good hike in interest rates during the 70s already and the PP averaged double digit returns, keeping ahead of inflation as billed. This was of course due primarily to gold.

10% interest rates and a balanced budget are not what we have to fear. The reason I won't touch the PP and consider it too risky is because of the suppression of interest rates. As long as the government distorts the market and prints and keeps rates low the US will not prosper and the dollar will continue it's 40 year descent. With the occasional bear market rally like we saw for the last of 2011 of course. 

Schiff will say over and over during his broadcasts that he only concerned with being on the right side long-term. He's not worried about short-term movements since that can't be predicted or even keeping score in yearly increments like I think most of us are obbsessed with. Treasuries can rally sure.....but sooner or later the bondholders and US stockholders are going to feel the pain of either higher rates or a rapidly depreciating currency.

I think he's right and let me tell you his books are every bit as good a read as Browne's. Pick 'em up guys I urge you.

[Gumby]

and the government starts operating in a surplus

A surplus is when the government is taking in more money through taxes than it spends. All a surplus does is suck base money out of the private sector — which is only useful when high inflation is beginning to take hold.

Since our entire money supply (except coins) comes from debt, it's pretty much impossible for the government to run a surplus for more than a very short amount of time without completely removing the base money supply from the private sector.

The Treasury only accepts base money when you pay taxes or buy government securities (i.e. the Treasury can't receive bank credit.). Every dollar of base money that is removed from the private sector reduces private credit by much, much more. The money to pay taxes, and buy government securities, literally comes from previous government spending base money into existence and offsetting it with debt. There can be no other way with the debt-based monetary system we currently have.

I think he's right and let me tell you his books are every bit as good a read as Browne's. Pick 'em up guys I urge you.

Hardly. Schiff resorts to fear mongering. He really doesn't understand the operational side of the Treasury and the Fed. He thinks that the government needs to have "revenue" to spend. It doesn't. He thinks that the US could be the next Greece. That is fundamentally false, as Greece is a currency user and not a currency issuer. He thinks the Fed could monetize the debt. It can't. The Fed actually can't conduct its operations with the private sector without government debt existing in the first place.

If you sit around predicting a bubble and a subsequent crash, you will eventually be correct. It's like predicting a hurricane. Eventually hurricane season arrives and you're proven correct.

This is not to say that Peter Schiff isn't skilled at seeing storms brewing on the horizon. He knows a private credit bubble when he sees one. I'll give him that. And as Minsky theorized over 50 years ago, these private credit storms are often fueled by the leveraging of safe and risk-free government securities. So, there is likely a strong relationship between high deficits and private credit bubbles.