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More than just a mere
liquidity or credit crisis, the current financial storm represents the death
throes of the old global economic order, and perhaps the birth pains of a new
one. The sun is setting on the borrow and spend culture that has defined us
for a generation. Our long ride on the global gravy train is finally coming
to an end, and once it does nothing will be the same. The sooner we come to
grips with this the better.
Despite the myriad of
proposals that are coming from Washington and other world capitals, we must
understand that this crisis cannot be cured by governments. In the United States, credit is gone because savings are gone. Our shallow pool of savings has
been depleted through bad loans, and we can no longer entice foreigners to
lend us their available savings. Given that we are already too loaded up on
existing debt they we cannot realistically repay, who can blame them for not
wanting to lend us more?
As a result, the free
market is trying to put an end to our spending spree. Without savings or home
equity to fall back on, Americans struggling with rising prices are finally
being forced to cut back. This has terrified our leaders and is causing them
to dismantle the remaining structure of our free enterprise-based economic
system.
The intention of all
these daily federal interventions is to keep the credit spigots open so
Americans can go even deeper into debt to buy more stuff they can't actually
afford. This should be clear enough to anyone who listens to what our leaders
are actually saying. When speaking about the need for an even larger fiscal
stimulus package, Barney Frank, chairman of the House Financial Services
Committee, said, "We have to prop up consumption." He has it
backwards. The government has been propping up consumption for far too long,
and the best thing they can do now is remove the props so spending can be
replaced by savings.
The sad reality is
that we borrowed and spent our way into this crisis, and we are not going to
borrow and spend our way out of it. Legitimate credit can only be supplied if
there are genuine savings to finance it. Savings can't be magically concocted
into existence by a printing press, but can only be created by consumers who
spend less than they earn. Efforts to fool the market will not work and will
ultimately lead to a monetary disaster and runaway inflation.
Were the government
to allow market forces to work, Americans would now have to pay cash for
their consumption. That would mean no instant credit for new cars, plasma
TVs, appliances, consumer electronics, clothing, furniture, etc. Unless
buyers actually had the cash in their checking accounts these purchases would
have to be deferred. From an economic perspective this is precisely what the
doctor ordered. But for an economy based 72 percent on consumer spending, the
medicine will go down hard.
Ultimately, a serious
reduction in consumer and mortgage credit, combined with an increase in
personal savings, would again provide a pool of needed capital for businesses
to produce products and provide employment opportunities. However, the danger
is that this potential credit could be completely crowded out by massive
borrowing by the Federal Government. In addition, prices for such things as
houses and college tuition will fall sharply, as the credit artificially
propping them up disappears. People would still be able to buy houses and
send their kids to college only they would pay much lower prices when they
do.
However, if the
government keeps creating inflation to artificially sustain consumer
borrowing and spending, there will be no savings left to fund anything and
prices will be so high that despite massive consumer spending there will be
few goods that Americans could actually afford to buy.
For a more in depth
analysis of our financial problems and the inherent dangers they pose for the
U.S. economy and U.S. dollar denominated investments, read my new book
"Crash Proof: How to Profit from the Coming Economic Collapse." Click here to order a copy today.
For an updated look
at my investment strategy order a copy of my just released book ‘The little Book of Bull Moves in Bear markets.” Click here
to order your copy now.
More importantly,
don't wait for reality to set in. 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 my free
Special Report, "The Powerful Case for Investing in Foreign
Securities" at www.researchreportone.com. Subscribe to my
free, on-line investment newsletter, "The Global Investor" at http://www.europac.net/newsletter/newsletter.asp.
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 "Crash Proof: How to Profit
from the Coming Economic Collapse." Click
here to order a copy today.
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 my free research report on the powerful case for investing in
foreign 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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