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  1. #11
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    Don't Bet on a Recovery

    by Peter Schiff


    It is astounding how many economists, government officials, and Wall Street strategists construe the current economic conditions as evidence of a bona fide recovery. It is a testament to the power of the rose-colored glasses handed out by our nation's leading universities that such a feeling could be widely held despite the clear and present danger that compounds daily. 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. New data released today seems to support this view, with consumer spending up 0.5% in January.

    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. In fact, the same January spending report showed that personal income increased by only 0.1%, while the savings rate slowed to the smallest since 2008.

    I would challenge those who fantasize about a consumer-led recovery to describe where the spending money will come from. 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.

    Beyond the question of "how" the spending could be achieved, is the deeper question of "why" such activity should be sought at all. Excessive spending, fueled by an insane housing bubble and catalyzed by reckless monetary and fiscal policy, was the reason that our current recession became unavoidable. Why would we want to go down that road again?

    During the run-up to the crash, excess spending had created economic distortions that have yet to be resolved. Too many resources, including land, labor, and capital, were devoted to servicing an unsustainable economic model in which Americans borrowed money to buy homes, products and services they really could not afford. In many cases consumer behavior was influenced by overly optimistic assumptions regarding real estate–related riches.

    However, now that the real estate bubble has burst, Americans are coming to terms with a more sober reality. Many have cut up their credit cards, dramatically reduced their spending, and have squirreled away as much money as they can. This change in behavior should necessitate a dramatic shift in the labor market as workers move away from jobs associated with consumer spending and toward jobs associated with real production, primarily for exportable goods.

    The real problem is that monetary and fiscal policy designed to re-inflate the burst spending bubble is preventing this transition from taking place. As a result we are not creating the jobs we need to replace – the ones we have lost in mortgage servicing, home improvement, and real estate sales (which we never really needed to begin with). As these jobless remain unable to find alternative employment, our economy will continue to languish.

    Some will argue that the new jobs created by government stimulus spending will provide the additional purchasing power necessary to revitalize consumer spending. There are two problems with this expectation. First, those jobs being "created" by the government are outnumbered by those being destroyed by government domination of resources. Second, even if it were possible for job growth to return, having hopefully learned from their mistakes, workers will be far more frugal with their paychecks than they were in the past.

    Others hope that rising real estate prices will give consumers more confidence to spend. The reality is that housing prices are still too high and will likely fall further. But even if they did rise, consumers will still be reluctant to resume their shopping spree. Home equity extraction loans, which just a few years ago turned houses into ATMs, are now much harder to come by. When it comes to spending, it's not just about confidence; it's about cash.

    The only possible way consumers can spend is if the government gives them the money. However, since the government cannot legitimately give money to one American without first taking it from another, the most likely means of doling out cash will be to run it off the printing presses.

    That, in a nutshell, is our government's plan for economic recovery. Print a bunch of money and give it to consumers to spend. This is not a plan for recovery but a recipe for disaster. Those betting that this program can succeed in putting together a healthy and sustainable economy simply do not understand the nature of their wager. The smart money is going the other way.

    March 2, 2010

    Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse.

  2. #12

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    Quote Originally Posted by Blank View Post
    There's nothing that could have been done beforehand--it would've needed the support of the masses, which were too busy overconsuming to notice a problem.

    I've said it before, and I'll say it again. The real problem behind the system is our ridiculous credit system.
    Hang on a moment, consumers were behaving like consumers? Well, hell, if they behaved any differently would it still be capitalism?

  3. #13

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    Well this thread certainly does read like a late eighties Marxist forecast.

    The economy will collapse, its inevitable, it will collapse under the weight of its own contradictions comrade!

  4. #14
    Oberon
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    Quote Originally Posted by Fecal McAngry View Post
    People familiar with the Austrian School of economics knew this would happen and were ignored, and are telling people things will get worse and are still being ignored.

    Youtube Peter Schiff, Ron Paul, go to LewRockwell.com and so on.

    Those on the left & Neocons are the worst of the bunch:
    Krugman-in-Wonderland
    I get my personal daily dose of gloom-n-doom from Karl Denninger at the Market Ticker blog.

  5. #15
    Oberon
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    Quote Originally Posted by Lark View Post
    Well this thread certainly does read like a late eighties Marxist forecast.

    The economy will collapse, its inevitable, it will collapse under the weight of its own contradictions comrade!
    It will collapse under the unbearable weight of the collusion between big government and big business. They've been playing the left and the right against the middle for years and all the while stealing us blind. Pretty soon this goose is going to lay its last golden egg, and that will be that.

  6. #16
    Senior Member Feops's Avatar
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    I'd like real estate values to drop more. The market is Canada only tapered off slightly in 2008/09 and spiked back up again. It's a good 25% over-valued at the moment (relative to adjusted family income) and will probably not stop climbing until Q3. Some say it's a bubble, others not. I think it is, but the banks here played their cards better, so its bursting will be soft.

    I hate debt, but in hindsight the smart move would have been to throw myself into it before prices peaked. The only saving grace at the moment are lending rates allowing manageable payments, but who can say what those will be in five years.

    "Government and Big Business" have no interest in killing themselves. They want a strong healthy economy. A major factor is public perception so there is a bit of a dilemma between advocating spending to the drive the machine and saving to keep the machine from breaking. "Moderate your spending" is not a sexy ad campaign.

  7. #17
    Oberon
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    Quote Originally Posted by Feops View Post
    "Government and Big Business" have no interest in killing themselves.
    Tell that to the legislators who revoked Glass-Steagall, allowing banks to do service banking and investment banking at the same time. Tell that to Barney Frank and company, who exerted political pressure on Fanny Mae and Freddie Mac to relax lending criteria, enabling those agencies to write crap mortgages. Tell that to several chairmen of the Federal Reserve and regulators at the FTC, who looked the other way while investment banks commoditized those mortgages, and while bond rating agencies stamped a big fat "AAA" on those collections of crap mortgages. Tell that to the company officers of AIG and Goldman Sachs, who took government bailout money (i.e. taxpayer money out of your pocket and mine) and promptly put it right in their own pockets.

    It was the huge market demand for commoditized mortgages that cause the housing market to run like a Ponzi scheme for about 20 years. Now that nobody wants to invest in mortgages any more, the price of housing will drop down to its utility value, meaning what it's worth to have a roof over your head. However, that price readjustment cannot be completed until all the foreclosures have been flushed through the system... a process that is being hindered by government efforts to prop up underwater homeowners.

    Watch in the coming year for federal efforts to require that big retirement funds invest X percent of their money in Treasury Bills. That will be a sign that the Fed, having exhausted its usual avenues to borrow, will have turned to borrowing from our 401Ks. This will not be resisted by companies like the one that manages my retirement account, J.P. Morgan, because after all one hand washes the other... and Barney Frank and Ben Bernanke have much more in common with each other than either of them do with you and I.

  8. #18
    Senior Member cafe's Avatar
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    Big business doesn't want to kill itself, but I think business philosophy in the last 20 or so years has been extremely short-sighted -- it only seems to really care about the end of the quarter.

    Government doesn't want to kill the economy either, but the majority of the legislators do want campaign funds and a soft place to land when they leave office, so they allow big business to lead them around by the nose.

    If it was some other country we'd call it corruption.
    “There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.”
    ~ John Rogers

  9. #19
    Dreaming the life onemoretime's Avatar
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    Quote Originally Posted by cafe View Post
    Big business doesn't want to kill itself, but I think business philosophy in the last 20 or so years has been extremely short-sighted -- it only seems to really care about the end of the quarter.

    Government doesn't want to kill the economy either, but the majority of the legislators do want campaign funds and a soft place to land when they leave office, so they allow big business to lead them around by the nose.

    If it was some other country we'd call it corruption.
    The system has developed to where the most effective strategy for success is that of a sociopath. Sociopaths don't have any concept of long-term planning; it's all short-term success. Consequently, as things like the Madoff scandal come to their logical conclusion, the whole house of cards collapses upon itself.

  10. #20
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    Quote Originally Posted by oberon View Post
    It will collapse under the unbearable weight of the collusion between big government and big business. They've been playing the left and the right against the middle for years and all the while stealing us blind. Pretty soon this goose is going to lay its last golden egg, and that will be that.
    I thought a huge part of the problem is that America doesn't have any big businesses -- large producers -- anymore? (Asking, not being sarcastic.) I.e., that we have all of these ancillary (or parasite, to be less flattering but perhaps more accurate) industries like the so-called "finance" industry shifting money around according to voodoo formulas and producing precisely squat.
    Dost thou love Life? Then do not squander Time; for that's the Stuff Life is made of.

    -- Benjamin Franklin, Poor Richard's Almanack, June 1746 --

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