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Since the US economy has failed to recover as widely predicted, pressure
on the Federal Reserve to conjure a solution has increased. In fact, the Fed
now faces the hardest choices in its history. It can either redouble its
past efforts to re-inflate America’s bubble economy (risking the
destruction of the US dollar) or it can stop pumping and let the economy
deflate to a self-sustaining level. Unfortunately, both choices
guarantee severe economic pain – but only one offers the possibility of
ultimate success.
Today’s news that the economy lost 95,000 jobs in September
confirms that record doses of stimulus have failed to create a real
recovery. The loss of 159,000 government jobs in the month could have
been a positive if those lost positions had been replaced by
wealth-generating private sector jobs. But the 65,000 jobs generated by
businesses didn’t come close. Worse still, most of these jobs came from
the goods-consuming service sector rather than the goods-producing
manufacturing sector (which lost another 6,000 jobs). The unemployment rate
has now been above 9.5% for 14 consecutive months, the longest such streak
since monthly records began in 1948. More importantly, the real
unemployment rate, which factors in discouraged and under-employed workers,
rose from 16.7% to 17.1%.
Armed with this weak jobs report, the Fed seems poised to make good on
its plan for other round of quantitative easing (in English: printing
money). Recent statement from top Fed governors have
made that sentiment clear. Apparently they feel that they must do something,
even though Fed inaction would be far better for the economy. At a time when
we should be trusting the markets to grind out three
yards in a cloud of dust, we have put our faith in the Fed’s ability to
fling a Hail Mary pass, even though all previous attempts have failed.
Most people assume that the “crash” I referred to in my 2007
book “Crash Proof: How to Profit from the Coming Economic
Collapse” occurred in 2008. Those who actually read the
book know otherwise. The financial crisis that resulted from the bursting of
the housing bubble, accurately foretold in my book, was not the crash itself,
but merely the overture to a much more tragic economic opera for which the
curtain is just now rising.
I argued that the housing bust would threaten the financial system with
collapse and that the government would react with stimulus and bailouts
– thereby making the situation much worse. That is exactly what
happened. I did not believe then, and I don’t believe now, that
the process of liquidating bad debt would kill us. But I do believe we will
succumb to Washington’s “cure” of endless stimulus.
Many now claim that government deficits and Fed easing prevented a repeat
of the Great Depression. From my perspective, calamity was not averted
but merely delayed. The price for the reprieve will be a far more severe
downturn, which I now think will surpass the Great Depression.
In Crash Proof, I talked about how our economy suffered
from the co-morbid diseases of asset bubbles, excessive debt and consumption,
and insufficient savings, capital investment, and production. These
conditions did not arise as a result of market forces, but from foolish
monetary, fiscal, and regulatory policies that distorted market
forces. The proper cure would have been to remove the distortions and
allow the markets to correct.
Unfortunately, as I forecast, the opposite occurred. Washington lacked
the economic understanding and the political will to allow for a painful
adjustment to take place. So, instead, they cranked up the printing presses
and administered the equivalent of economic heroine. The drugs succeeded
in postponing the pain, but at the expense of exacerbating the underlying
condition. As the high wears off, a more debilitating hangover will set
in.
By electing to bail out the financial sector, prop up housing prices,
allow excess spending and borrowing to continue, and maintain superfluous
government and service-sector jobs, the government has pushed our economy to
the edge of a very dangerous precipice.
The right choice is to admit past mistakes and reverse course. The
Fed must raise interest rates aggressively, shrink its bloated balance sheet,
and allow the real recession to finally run its course. It will be much
more painful now than it would have been in 2008, but at least this time the
pain will end and real recovery will take hold. By forcing the federal
and state governments to slash spending, sound monetary policy will allow
market forces to rebuild a solid foundation upon which future prosperity may
be built.
The wrong choice is for the Fed to continue quantitative easing as
planned, allowing the government to grow at the expense of the economy. This
will widen the economic imbalances that lie at the root of our
problems. As a side effect, the US dollar will continue spiraling
downward as it becomes clear to foreign creditors that the Fed has no
interest in protecting their investments. A weaker dollar will lead to higher
inflation and higher interest rates, which will make the Fed’s task
that much more difficult.
In the end, our bubble economy will not just deflate, it will
burst. The dollar will collapse, consumer prices will skyrocket, real
credit will completely evaporate, millions more will lose their jobs, and our
economy will change in ways few of us can imagine. Our standard of
living will plummet and legions of middle- and upper-class Americans will be
impoverished. It is not a pretty picture, but unfortunately, it’s
the one our government is painting. Unfortunately, we are running out of
time to change artists.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach,
CA 92660
Toll-free: 888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in
depth analysis of the tenuous position of the American economy, the housing
and mortgage markets, and U.S. dollar denominated investments, read my new
book : The Little Book
of Bull Moves in Bear Markets" (Wiley, 2008).
More
importantly take action to protect your wealth and preserve your purchasing
power before it’s too late. Protect your wealth and preserve your
purchasing power before it’s too late. Discover the best way to buy
gold at www.goldyoucanfold.com , download
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equities available at www.researchreportone.com
, and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
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