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Damn the Torpedoes

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Published : June 10th, 2012
926 words - Reading time : 2 - 3 minutes
( 15 votes, 5/5 ) , 13 commentaries
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Category : Gold and Silver





Last week in an interview on CBS Network News, Economist Mark Zandi, the chief economist for Moody's, unwittingly revealed a central error of the global economic establishment. Zandi has made a career out of finding the middle ground between republican and democrat economic talking points. As a result of this skill, he has been rewarded with large quantities of airtime from media outlets that want to appear non-partisan, despite the fact that his supposedly neutral analysis often leaves listeners frustrated.

When asked about the recent deterioration in the global economy, Zandi said that "the worst possible scenario" at present would occur if Greece were to leave the Eurozone. He claimed that the economic gyrations and liquidations of bad debt that would result from such an exit would be sufficient to create a vicious cycle that could drag the global economy back into recession. As a result, he urged policy makers to take whatever steps necessary to maintain the current integrity of the 17 nation Eurozone.

Given what most economists now know, few would actively argue that Greece's entrance into the Eurozone back in 2001 was a good idea. In fact most concede it was a terrible idea based on bad forecasting and outright fraud. There is little disagreement over the fact that Greece grossly misrepresented its financial position in order to gain initial entry into the monetary union. It is also widely agreed upon that in the ensuing decade Greece exploited its monetary advantages to borrow irresponsibly.

Much has been written about how the fundamental misfit between Greece's economy and currency gave birth to a deeply flawed system that was destined to run off the rails. Most also agree that the countries like Greece and Germany are too economically and culturally disparate to exist under the same monetary umbrella. But despite all this, Zandi wants to maintain the status quo. In his opinion, it is so imperative to prevent the deflationary consequences of an economic restructuring that it is preferable to prop up a failed system, perhaps indefinitely, rather than allow a newer, healthier system to replace it. In the process, the moral hazard created not only assures that Greece will become an even greater burden on Europe, but so too will other nations whose leaders will be emboldened in their profligacy by the anticipation of similar help.

From Zandi's perspective (and he is certainly in the majority on this point) the goal of economic policy is to keep GDP growing. It follows then that he will oppose large-scale debt liquidations which drag down GDP in the short term. But sometimes debt needs to be liquidated. Bad ideas need to be abandoned. Once economies stop throwing good money after bad, capital is freed up to flow into more economically viable purposes. But economists and politicians never look at the long term. Their job seems to be to manage the economy for the next election.

The same "damn the torpedoes" mentality dominates economic thinking with respect to the U.S. economy as well. Years of artificially low interest rates, and government subsidies that direct capital towards certain sectors and away from others, has created an economy with too little savings and production, and too much borrowing and consumption. The ultra-low interest rates currently supplied by the Fed serve to perpetuate this unsustainable artificial economy. Higher rates would work quickly to redirect capital to the more productive sectors. But high rates could bring deflation and liquidation, which few economists are prepared to risk.

We have too many shopping malls selling stuff, but not enough factories making stuff. We have too many kids in college studying liberal arts, and not enough in the workforce acquiring skills that will actually increase their productivity. Banks are loaning too much money to individuals to buy houses, and not enough money to entrepreneurs to buy equipment. We have too many tax-takers riding in the wagon, and not enough taxpayers pulling it. The list is long, but the solutions are short.

We need to let interest rates rise to market levels, and allow the economy to restructure without government interference. We need to stop beating a dead horse and hitch our wagon to an animal that can really pull. The process will be painful for many, but like ripping off a band-aid, the pain will be over relatively quickly. However, since a painful restructuring means recession, politicians resist the cure with every fiber of their beings. So instead of a genuine recovery, one that will provide productive jobs and rising living standards, we get a phony recovery that produces neither.

Preserving a broken system merely to avoid the pain necessary to fix it only makes the situation worse. Propping up sectors that should be contracting prevents resources from flowing to other sectors that should be expanding. Keeping workers employed in nonproductive jobs prevents them from gaining productive employment elsewhere. Encouraging activity or behavior the market would otherwise punish discourages alternatives that it would otherwise reward.

Unfortunately, leaders on both sides of the Atlantic put politics above economics, and economists like Mark Zandi provide the cover they need to get away with it.

Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. To learn more, please visit or call (888) GOLD-160.

For the latest gold market news and analysis, sign up for Peter Schiff's Gold Report, a monthly newsletter featuring original contributions from Peter Schiff, Casey Research, and other leading experts in the gold market. Click here to learn more.



Data and Statistics for these countries : Germany | Greece | All
Gold and Silver Prices for these countries : Germany | Greece | All
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Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for nineteen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services. Mr. Schiff holds NASD Series 4,7,24,27,53,55, & 63 licenses.
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From what I can see, SW is a Bernake BOT.
Rate :   6  5Rating :   1
Most definitely not a BOT of Bernanke.

Schiff posts an article which is a fair summary of what's wrong with the economy of the USA and then says there are not enough taxpayers pulling the wagon????

Why doesn't he mention cutting government spending?
Rate :   2  7Rating :   -5
Look at his statement in context to the rest of the paragraph. Its a simple read. Too many people grabbing the money coming in and there arent enough paying taxes to keep all the grabbing hands filled. The grabbig hands could be defined as belonging to social security recepients (and how many are among the millions that get social security who are too lazy to get a job, even before the 2008 event) and the bloated government payroll.

I believe that if you read more of Mr. Schiffs articles, you'll find that he has much to say about reducing government spending, not to mention the governments medling in matters beyond its mandate which of course requires mountains of freshly printed Bernake bucks to keep running.
Rate :   7  1Rating :   6
Good point. I have read much of his opinions but in this instance I felt that he was being a tad hypocritical.
I assume he employs people at his dealership so that is a good thing.

I stand by my opinion that he is a salesman not a producer/maker of things so he is not really contributing to what he deems as solutions.
Rate :   2  6Rating :   -4
If you could explain please. What do you see ?
Greetings from... Europe.
Rate :   0  1Rating :   -1
I'm pretty sure I did explain... Yup I did.

Could be worth it for you to reread the whole article and then delve into other articles by Mr. Schiff.

Look at the mall comment. People on social security are at shopping malls buying things they don’t need made in China or some other third world country with debt money (credit cards) to impress people they don't like instead of getting off the couch and looking for work or starting up a new business.

Is any of this helping you clear the fog?

I feel I have to ask though, why do you have an issue with Mr. Schiff? What if a dentist were to write an article containing the same details? Would that still cause you to ask the same questions? Does it matter what his profession is, either way jobs are created in any business where people are willing to step up and invest THEIR money.
Rate :   8  1Rating :   7
Will be back later. It's 01:24 here now. Time to dig in. For sure.
Rate :   0  1Rating :   -1
I gave you an up arrow for sarcasm, you know...the lowest form of wit.

Re your question.
I do not have an issue with Mr Schiff and as I said ( if you can in fact read and understand) he employs people and that is a good thing. It is also a good thing that people are working in shopping malls.

Mr Schiff is completely different to a dentist because Schiff is a seller of financial advice. In the same manner of an artist for e.g. exhibiting their work,he is open to praise or criticism of his work. I chose to point out his hypocrisy.
Rate :   2  6Rating :   -4
I'll give you an up arrow for replying in kind, seems I'm not the only one using low level whit.

Your pointing out hypocrisy or making it up? Search as I might I don't see what you’re getting at, could be I can’t see it because I've glazed over from all the irrelevant comments or your making it up. I’m going with the second option.
Rate :   7  0Rating :   7
Well, the arrows have it.
Congratulations !
Rate :   0  1Rating :   -1
From what i can see at europacmetals, Mr.Schiff is a financial adviser and bullion dealer.
He is a salesman first and foremost. Likely he is good at what he does.

People work in those shopping malls that he states are too prevalent, selling things, (just like him)
He wants them to go and work in factories of which he says there are not enough.

Maybe he could help obtain a genuine recovery by putting his hard earned where his advisory mouth is, and start a foundry minting bars or making other stuff for sale e.g. carts to pull more tax

Rate :   2  8Rating :   -6
Just wondering what the said financial adviser and newsletter writer actually 'produces by his job or makes stuff' that is of any real wealth/worth to the community.
Rate :   4  10Rating :   -6
I think you have a valid point there.
But if he were a producer I'd sell his stuff if we could agree on terms and conditions.
Rate :   4  1Rating :   3
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Well, the arrows have it. Congratulations ! Read more
S W. - 6/12/2012 at 10:07 PM GMT
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