Watching economists and media analysts react to breaking economic news
is a bit like looking at a flock of pigeons flying over the New York skyline.
A true wonder of the urban landscape, the flocks can include hundreds of
individuals who show an uncanny ability to stay in tight formation as the
group quickly zig-zags between buildings. What may be even more remarkable
than their ability to randomly fly while maintaining cohesion is the
flock’s refusal to stick to any particular direction for very long, and
their determination to fly feverishly without actually going anywhere. Sound
familiar?
Today's weak GDP numbers have finally caused the mass of economists to
revise downward their formerly optimistic recovery forecasts, with many
finally entertaining the possibility of a "double dip" recession.
It should be obvious by now that these economists only have the capacity to
describe where the economy is moving in the short-term...they have no ability
to explain the reasons behind the macro trends or make predictions that go
beyond the next data release. But economics is not dart throwing. It can be
understood and properly forecast.
The major mental block is that most economists believe that an economy
grows as a result of spending. Any policy that encourages spending and
discourages savings and investment is considered beneficial. Unfortunately,
these policies, which only succeed in growing debt and government, act more
as an economic sedative than a stimulant.
On the subject of the “recovery,” I’d like to
highlight some of my past predictions, and those of my colleague Michael
Pento. With the benefit of hindsight, you can see that although these
thoughts were widely dismissed as chronic pessimism at the time of their
publication, the current situation supports our conclusions. Although some of
our predictions, like for higher bond yields, have yet to materialize.
Michael and I may be birds of a feather, but we don’t blindly
follow the flock. We believe economics is a scientific discipline with
established laws, and that applying those laws will yield fairly accurate
predictions over time. Most other economists say what they need to say to do
the bidding of their employer (whether Wall Street or Washington) and
maintain the respect of their peers. Good for them, but who should you trust
when you are making investment decisions?
Selections from my past commentaries:
Monday, June 7, 2010
“Rather than a recovery, the jobs data seems to
indicate that we are still mired in the first economic depression since the
1930s. Increased spending, financed by unprecedented borrowing, will
prove to be just as temporary as a job opening at the US Census. When the
bills come due, the next leg down will be even more severe than the last.
The swelling ranks of the government payroll, and the shrinking number
of private taxpayers footing the bill, will guarantee larger deficits and a
weaker economy for years to come.”
Monday, March 1, 2010
“It is astounding how many economists, government
officials, and Wall Street strategists construe the current economic
conditions as evidence of a bona fide recovery. ... The myopia leads us to
enact policies that actually exacerbate our problems. The “remedies”
are postponing, perhaps indefinitely, a true recovery.
The oracles who have described the nature of this
imminent recovery do so based on their conviction that consumer spending is
slowly returning to levels that existed prior to the recession.
However, missing from their analysis is any plausible
explanation as to why consumers will be able to sustain such spending given
the plunge in income and credit, and the lack of available savings. But most
consumers are tapped out, millions are unemployed, and home equity has been
wiped out. The only reasonable thing for them to do is to pay down debt and
sock away as much money as possible to rebuild their savings.”
Monday, December 14, 2009
“Over the weekend, top White House economic
adviser Lawrence Summers even pronounced that the recession is now over.
…
Obama's claim of success largely derives from the
slowing tally of job losses, the seemingly renewed strength in the financial
system, the pickup in home sales and home prices, and the positive GDP figures.
But these 'achievements' fall apart under close examination.
First, a closer look at the jobs numbers shows that
employment improved in sectors that benefited most directly from monetary or
fiscal stimulus: government, healthcare, financial services, education and
retail sales. Meanwhile, sectors such as manufacturing continued to shed jobs
at an alarming rate. These dynamics actually exacerbate our economic
imbalances.
While it is true that home prices have stopped falling,
this represents failure, not victory. True success would be a drop in home
prices to a level that homebuyers could actually afford. Instead, we have
maintained artificially high prices with tax credits, subsidized mortgage
rates, low down payments, and foreclosure relief. With 96% of new mortgages
now insured by federal agencies, market forces have been completely removed
from the housing equation. With so many government programs specifically
designed to maintain artificially high home prices, devastating long-term
consequences for our economy are inevitable.”
Friday, October 2, 2009
“In recent interviews, Treasury Secretary Geithner
has been almost giddy in his descriptions of the recovery – all the
while crediting his own policies for averting disaster. Americans are once
again taking the government’s bait by spending money they don’t
have to buy things they can’t afford…. But depleting savings and
increasing borrowing does not a recovery make.
A prerequisite to any real economic expansion is the
potential for business owners to earn profits. With increased regulation and
higher taxes on the way, these incentives are being diminished. In fact, via
a phenomenon called ‘regime uncertainty,’ our current policy path
is actually encouraging businesses to contract in order to prepare for a more
hostile business environment. There is no “jobless
recovery,” only senseless cheerleading.”
Friday, July 31, 2009
“Because of the continued profligacy of the
government and Federal Reserve, the imbalances that caused the current
recession have actually worsened. We are now in an even deeper hole than when
the crisis began. Rather than wrapping up a recession, we are actually
sinking into a depression. If things look better now, it’s just because
we are in the eye of the storm.
By holding up over-valued home prices, we prevent the
prudent or less well-off from snatching them up and, in doing so, creating a
new price equilibrium based upon reality. By maintaining artificially low
interest rates, we discourage the very savings that are so critical to
capital formation and future economic growth. By running such huge deficits,
we further crowd-out private enterprise by making it harder for businesses to
invest or hire. Since we have learned nothing from past mistakes, we
are condemned to repeat them.”
Selections from the writings of Michael Pento, Chief
Economist at Euro Pacific Capital:
June 30, 2010
“The cause of the Great Depression in the 1930s,
and the Great Recession beginning in 2007, was one and the same: an
overleveraged economy. Excessive debt levels are the direct result of the
central bank providing artificially low interest rates and of superfluous
lending on the part of commercial banks.
The easy money provided by banks eventually brings debt
in the economy to an unsustainable level. At that point, the only real and
viable solution is for the public and private sectors to undergo a protracted
period of deleveraging. The ensuing depression is, in actuality, the healing
process at work, which is marked by the selling of assets and the paying down
of debt. Unfortunately, our politicians today are focused on fighting this
natural healing process by promoting the accumulation of more debt.”
January 12, 2010
“The pending downfall will surprise the many
investors who have been tricked into believing that a government can print
and spend its way to prosperity.
Many economists also believe that the consumer will
spend us into a viable recovery. They are mistaken here as well. Household debt
as a percentage of GDP was "just" 46% back in 1983--that was the
last time the unemployment rate was 10%. Today household debt is 96% of GDP.
That's correct; consumers have more than twice the level of debt as they did
during the last serious recession. Can they be counted on to pile on more
debt at this juncture?
In order to believe the economy is on the brink of a
lasting recovery we need to see that banks are lending money to the private
sector in order to purchase capital goods that are used to create wealth.
However, total loans and leases at commercial banks were down 7.7% in
December from a year earlier. The only money banks are lending is to the
government. Without capital being extended to small businesses they cannot
expand production or hire new employees.”
November 2, 2009
“If the Treasury and Federal Reserve truly
believed the economy and the stock market were on a sustainable recovery
path, talk of extending and increasing the home buyer's tax credit would be
off the table. The Fed would already be reducing the size of the monetary
base. The truth, however, is that no one in government really believes in
this recovery. If they did, they would be hiking interest rates and the
deficit would be shrinking.
The government's realization of our precarious economic
condition means its largess will continue. Near term, that may ease some
pain. So did the artificial stimulus that gave rise to the housing boom. In
the end, a protracted period of a near-zero interest rates, along with
endless economic stimulus, will spawn another bubble and not a genuine
recovery.”
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).
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