Saturday, August 17, 2013

Damned Horse!

Note: We first want to announce that we are changing our approach to this blog a bit. Now and in the future, we intend to write shorter weekly posts with more focus. We need to claw back some time from the longer weekly posts so that we can invest that time into a tosoc book and other projects. The intent is that these shorter posts will have more in them than updates but less than in our previous efforts. Occasionally we may revert to our previous style in the attempt to tie things together.


Today let us talk about Peter D. Schiff, CEO of the broker-dealer Euro Pacific Capital Inc., and his book The Real Crash. As we said about Meredith Whitney in Deer in the Headlights II, we generally like his descriptions (with reservations) but are not impressed with his prescriptions. First, regarding his descriptions, he sees things exclusively from the wrong side of capitalism. Also, his view is too narrow.

For example, he thinks that borrowing to produce things is always good while borrowing to consume is always bad. As we have pointed out before, however, consumption has to match production if production is to be done at a profit. It can be very bad to borrow in order to produce things that no one can buy or wants to buy. His view is far too simplistic.

He also thinks that reducing U.S. consumption and paying off debt with the savings would be a good thing. It would be good for the worldwide rich, yes. It would create a depression for the U.S. poor, however. It might be catastrophic for the worldwide poor. The trouble is that U.S. consumption supports about 17 percent of the worldwide GDP. If the U.S. decreases consumption to any signficant extent, a billion people could be threatened with starvation. The fact is that the world badly needs to keep U.S. consumers employed and spending, for the time being at least. That is why there is almost no chance of Mr. Schiff's dollar hyperinflation in the near future. The world will continue to buy U.S. debt because it has to.

Mr. Schiff presents a rather unsophisticated view of government debt as well. He compares it to corporate and even individual debt. He also sees it as bad debt to finance consumption rather than good debt to finance production. He is incorrect. Sovereign government debt of currency-printing nations is quite different. The primary purpose is control of the money supply and interest rates. Governments need large and active bond markets so that they can buy and sell in them, either printing money and increasing the money supply (buying bonds) or decreasing the money supply (selling bonds). Paying off the debt is generally not especially important.

Rather than the debt itself, the issue is servicing the debt. Can the nation keep up on its debt payments?

Regarding Mr. Schiff's prescriptions to cure our financial ills, his plan is basically to bring on economic catastrophe. Decrease consumer spending, increase savings, and pay off debt. He does not emphasize these aspects, but it means deflation, lower wages, and a massive increase in U.S. unemployment. After which, he assures us, the economy will "heal itself." He thinks austerity is needed. What it really means is more poverty for those who are already poor.

A rich man rode his horse into a swamp one day. He got off, looked around at the mess he was in, and exclaimed, "Damned horse!" That is how Mr. Schiff sounds to those of us on the other side of capitalism.

We do not need to be ridden into another economic swamp. What we need is partnership, not domination. We need currencies and markets that suit us and are controlled by us, not one currency and one market dominated by the rich. Competing directly with the rich is a loser's game. The better way to deal with them is collectively.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

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