Peter Schiff believes America is still in a bubble. He discusses debt, the Federal Reserve, inflation, propping up prices, and artificially low interest rates that can't go on forever.
Well what a lot of those alarmists didn't realize is the QE just ended up propping up the housing inflation that had already happened before the sub-prime bubble burst. Substituting one form of inflation (caused by massive amounts of mortgage equity in the market) by another form of inflation. The Fed made a very conscious concerted effort to avoid the risk of deflation at all costs, which would have happened if the air was let out of the overinflated housing market. Of course they should have prevented it from getting so inflated in the first place, but you can't go back and change things in the past.
How did QE prop up housing, exactly? Through the purchase of mortgage + .`-1toxic assets? I would agree that an influx of mortgage equity caused by poor risk management created inflation in housing, but the response to limit deflation was shared by the Fed (
Lending out massive amounts of money at bare bottom interest rates through expanding the money supply. You put more money out there for people to borrow, it tends to drive up the prices. Then they bought up massive amounts of mortgage equity that weren't worth what they said they were with. If all those foreclosed homes had simply been dumped into the marketplace it would have sent home prices hurdling downwards. One really has to wonder whether "deflation" would have been such a bad thing. It simply would have sent prices in the market back to where they should have been before.
nice try but money supply really didn't expand because lending or velocity was reduced. Fed was more worried about deflation. Do you understand?
Is Schiff an alarmist? I wouldn't agree with your characterization of QE as a method to "prop-up" housing inflation, but rather as a terrible way to prevent the inevitable liquidity crisis that would have spread like necrotizing fasciitis across the globe had bad debt created not been removed from the books of the nations largest banks. Though, I concede that what you said and what I said are probably two sides of the same coin. I agree that mortgage equity, driven by lowered standards, increased sharply relative to the capacity to repay. Where we may differ is where we point the finger. Fundamentally, imo, the failure can be traced to a lack of risk management. Brokers and wholesale banks (shadow banks) took the loans knowing that they would sell them off before most buyers had a chance to make their first payments. Commercial banks that securitized them knew they would just resell the mortgages back to the public as securities. The government failed in in the oversight role and other portions of the government were encouraging the crisis as it made for good political news. As far as the Fed, yes, it feared deflation and it purchased securities and lowered the interest rate, but by itself would have been inadequate. The government also participated by increasing the deficit which, in the long run, added very little money to the economy, rather it just transferred trillions in private losses to the government's books. Having said that, if we don't agree on anything, we agree on the fact that this should have never been allowed to happen.
The problem with that theory is the effect that deflation has on salaries and prices relative to long term debt. So deflation happens and prices adjust because of dollars increasing value. Employers pay less because the dollar goes farther, but long term debt stays the same. Now the nation will spend more servicing long term debt which will cut into demand. Course this would be great for those that hold little debt and not so great for those that do.
For once we agree, and what you've just outlined soundly refutes Milton Friedman's Quantity Theory of Money.
wrong of course. Friedman did not say much about velocity simple because he assumed it was mostly constant which it had been when he wrote monetary history. In later years like when talking about Japan he recommended more money until velocity picked up.
yes, deflation is bad for debtors but bad for everyone else too since there is no reason to buy anything when prices are falling and then you get a depression.
what risk when the Greenspan Put is in place and F/F are guaranteeing or buying 75% of all subprime and Alt A mortgages??????
and yet it always happens where you find libsocialism. When you have a libturd monopoly controlling the entire system a significant mistake sinks the entire system. Do you understand?
The Fed did not understand why inflation was so low either, it wasn't just Schiff. The Fed Reserve Bank of St Louis posted many articles on this issue around 2013/2014 (https://fred.stlouisfed.org/). The link between the velocity of money, money supply, and prices was examined in detail, no definitive conclusion but the general consensus was that even though a huge amount of money was injected into the economy, there was no corresponding price increases because the money was not circulating - and that's why QE1 (200 did not have the expected result and was followed by QE2 (2010) and QE3 (2012), which also did not have the expected result. The fear within the Fed was (and I assume still is) that the economy would pick up and before the Fed/Treasury could pull all that cash back out of the economy, all that cash would start circulating and prices would explode. Because the effects of taxes and interest rates lag the economy, the Fed/Treasury has to stay ahead of the economy, it has to anticipate when the economy will truly recover and implement its slowdown policy "early".
Its actually simple to explain: deflation is good for the saver and bad for the borrower; inflation is bad for the saver and good for the borrower. The govt attitude of hating deflation and loving inflation can be explained very simply: the biggest borrower in the world is the US govt.
it seems to me the Fed understood it very very well which is why they kept easing so successfully despite huge warnings from the austrian libertarians who have not had a new idea since the 1920's.
And you are wrong. Go read the Fed's own research and articles on FRED, QE did not do what it was supposed to do, hence QE1 was followed by QE2 and QE3 none of which did what was expected or desired.
That's true mostly of the political appointees. The career people at the Fed had a better understanding but lacked the influence to drive policy. This is an indictment of Friedman's QToM and confirmation of exactly what I keep saying. 1) Banks don't lend reserves (reserves do not and cannot circulate). 2) The quantity of money in circulation does not drive inflation, rather the demand for goods and services. But "all that cash" isn't circulating in the economy, you just said it yourself. It's held as bank reserves which do not circulate in the economy, period. I agree, however, I don't agree that moderate inflation in an economy with spare capacity suffers irreparable harm from inflation because inflation happens when demand exceeds supply. Inflation can be a job creator and can spur growth as companies look to increase market share and benefit from the economies of scale. Despite the low unemployment numbers, the nations productive capacity is 3% lower than the 44-year average and 9% lower than recent highs.
The extra cash is not all sitting in bank reserves. Remember this from President Bush in 2007 with the recession looming: "This work begins with keeping our economy growing. … And I encourage you all to go shopping more." Remember all the talk from the govt (during Bushs last 2 years, and through obama's first 4 years) about making more credit available for consumers and businesses? And all the complaints from the govt that businesses were too cautious, too pessimistic about the future, and were not spending money but were "hoarding" money? And what was the stated purpose of QE1 (and 2 and 3)? To increase private sector spending by basically lowering interest rates and increasing inflation so that saving is not financially attractive. There is a lot of cash in the pockets of people and businesses. The govt has pushed and pushed and pushed to get it moving, and when the dam breaks the Fed fears it will be an avalanche.
The money the Fed created via QE is all sitting in banks. Sure, I'm just making the distinction between money created via QE and private credit created by people who are borrowing to fund purchases. Again, absolutely. Let's look at household spending in the years before the crash and the years after.... Look how the private sector went below zero and the public sector basically took its place. The money created and spent by the Federal government is what made the difference, not money created via borrowing (or money created via QE), it was until 2014 that consumer debt got over $400 billion in nominal terms (non-inflation adjusted terms) is less than it was in 1999! The government didn't "borrow" the money that's why the deficit increased by 100% over 8 years. Look at the Domestic Financial Sector in 2009. -$1.7 trillion. QE1 was about purchasing the bad debt to lessen the losses, not necessarily to push rates down, though it definitely had that effect. Again, this was part of it and the reason the recovery (if you want to call it that) has taken so long. The idea that you can increase reserves and that will increase consumer spending proportionately is a failure of the QToM. Just look at the numbers above. Aggregate consumer spending (the difference between repayments and new borrowing for the 4 years 2008-2011 was -$50 billion dollars. Since then it's been $1.8 trillion, that's just $360 billion per year on average, again, you have to go back to the mid-late 1990's to find consumer spending that low.
what??? it lowered interest rates, saved housing/banking industry, and probably prevented depression or very long steep recession.Did somoeone tell you they should have tightened rather than eased??????
Depends on how much deflation you prefer? As prices begin to fall, production will slow, inventories will be depleted, all of which forces unemployment, demand will drop, then you have a race to the bottom! Of course, in parallel, society and the economy will be in chaos due to the uncertainty. Considering the current fragility of the markets and lack of savings and other external factors (like the looney-tune threatening nations with military actions) I'd say deflation will be a bad thing...
A few of Schiff's previous claims: 2002 Schiff predicts a severe bear market in the next couple years, with substantial inflation, the Nasdaq going to 500 and the Dow 2000 to 4000, and maybe below 2000. http://seekingalpha.com/article/1068...hiff-right-now 2005 "The big, big story of 2005 could be the collapse of the dollar." -- Peter Schiff, founder of Euro Pacific Capital in Newport Beach, Calif., Jan. 2, 2005 http://images.businessweek.com/ss/05/12/worst_predictions/source/3.htm 2008 $2000 gold in 2009: Peter Schiff Predicts $2,000 Gold in 2009 http://www.goldstockbull.com/articles/peter-schiff-predicts-2000-gold-in-2009/ Oct 2008: In the end, by refusing to allow market forces to work their cure, our economy will inevitably die from the disease. Our economy will now face death by hyperinflation, which will cause a complete loss of confidence in the dollar and result in prices and interest rates skyrocketing out of sight. The evaporation of our national wealth will lead to civil unrest, food and energy shortages, and the possible imposition of marshal law. If such a scenario unfolds, what is left of our Constitution will surely be completely shredded. http://www.europac.net/newsletter/newsletter15.htm#shiff 2/6/09 Peter Schiff: Stimulus Bill Will Lead to "Unmitigated Disaster" The fiscal stimulus bill being debated in Congress not only won't help the economy, it will make the recession much worse, says Peter Schiff, president of Euro Pacific Capital. ... The problem, he says, is the government is trying to perpetuate a "phony economy" based on borrowing and spending. With the U.S. consumer tapped out, the government is "now taking on the mantle" of consumer of last resort, he continues, predicting the bond bubble will soon burst - if it hasn't already - ultimately leading to a collapse of the dollar and an "inflationary depression worse than anything any of us have ever seen." 9/25/09 Dow 9748 1:40 The worst is not over, according to Euro Pacific Capital's Schiff, who predicts the Dow will fall another 90% from current levels when measured against gold, rate at a one to one ratio with gold, and that gold will hit $5000/oz in the next several years.
