Skip to comments.The Real Crash (Peter Schiff)
Posted on 05/23/2012 6:24:48 AM PDT by blam
The Real Crash
May 22, 2012 - 5:20pm
I first came to national attention back in 2008 and 2009 when the housing and credit markets imploded. I became known as the guy that other market experts laughed at when I warned of trouble brewing in the seemingly indestructible American economy. After the wheels ground to a halt in mid-2008, people noticed that my book Crash Proof, originally released in early 2007, read like a detailed preview of many of the events that eventually unfolded.
Three years later I am now catching heat from many who assume that my predictions actually fell short. They argue that I was able to anticipate the crash but that I severely underestimated the resiliency of the American economy. They admit that we took an unexpected blow to the chin, and that it left a lingering bruise, but they argue that we never hit the canvas like I predicted we would.
However, they mistakenly assumed that the crash I was warning about was solely a housing led credit bubble. While that was part of it, I never saw it ending there. The crash that most concerned me was the one that would result from the governments response to the initial crisis. My concern was not that our economy would succumb to the disease that I had diagnosed, but instead would be taken down by the cure that the government unleashed to combat it.
When the governments delaying tactic, which involves continuous borrowing and money printing is no longer tenable, the dollar could collapse, interest rates and consumer prices could soar and the U.S. economy could implode. Thats the real crash that I was warning about, and the one we all need to be worried about now.
This is the subject of my new book The Real Crash: Americas Coming Bankruptcy, How to Save Yourself and Your Country. For now it is just a prophecy but as with my first book, it soon may be regarded as history. Unfortunately, the policies of both the Bush and Obama administrations, and the Ben Bernanke led Federal Reserve, have vastly raised the chances that my catastrophic view will come to pass. However, its not all gloom and doom I devote a large majority of the book to solutions. The real crash may be inevitable, but what we do in response is not. We can follow on the path that I recommend back to prosperity, or we can continue on our current course which I believe will lead to economic ruin.
When looking back from a point in the future, I believe that the years immediately after the credit collapse of 2008 will stand out as a period of dangerous economic negligence. We have bought ourselves some time by sweeping enormous problems under the rug. Through a combination of political cowardice, economic ignorance, and false confidence, we are digging ourselves into a hole so deep that it may take generations to crawl out.
Most people assume that half way through 2012 we have made some important positive strides since flirting with the brink of economic catastrophe in the dark days of 2008. Although no one is wildly celebrating the below trend 2 to 3 percent GDP growth, we are continuously reminded that we have turned the corner and that our situation is better than many other regions around the world. But what has really changed?
Immediately prior to the crash, the United States economy was experiencing unprecedented consumer debt levels, persistently high trade deficits, historically large government budget deficits, high-energy prices, and a moribund manufacturing sector. Four years later, all of these problems have gotten worse. And unlike four years ago, we are now saddled with the highest unemployment rate in generations and levels of public debt that would have been unimaginable then. Yes we are no longer technically in recession. But I believe that is just an illusion created by perhaps the cheapest, and most obvious, trick ever devised.
I had argued that our economic growth prior to the crisis was largely a function of the real estate bubble. When that bubble popped, I knew that the economy would have to shrink. And thats just what happened. From 2008 to 2009 our national GDP (of around $14 trillion) contracted by $212 billion. To prevent any further dips, the government aggressively spent, borrowing heavily to do so. To the relief of just about everyone, these moves did stop the nominal contraction. From 2010 to 2011 the U.S. GDP expanded by $502 billion, and from 2011 to 2012 it added an additional $508 billion. All told, from the end of 2008 the U.S. economy added a cumulative $798 billion in GDP. But those gains came at a very high price.
The combined federal deficits for the same time frame come in at a staggering $4.2 trillion! In 2009 alone the feds chalked up a chart breaking $1.4 trillion in debt (the deficit was a mere $161 billion in 2007). In other words, we borrowed five times more than we grew. This strategy for growth is no different from an individual who loses half his income, but continues to spend by running up credit card debt. Could this be described as economic growth? But thats just how we are describing our current economy, and for the large part, expert economists, politicians, investors, and academics all agree.
I felt certain before writing Crash Proof that the government would never let the economy contract far enough to restore balance and sustainability. I knew the spending and deficits would head off the charts. I thought those realities would push down the dollar and cause foreign creditors to shun American government debt. However, I did not factor in the reprieve we have gotten from the false perception that Europe is in even worse shape than we.
As the curtain eventually falls on the drama unfolding in Europe, the world will refocus its attention on the more spectacular events in the U.S. The sovereign debt crisis that is now playing out in Europe will cross the Atlantic, and when it opens here The Real Crash may indeed finally begin. The average American will have a front row seat but will hardly enjoy the show.
Schiff is stuck on hyperinflation as the future enemy. I feel deflation will win out. Inflation tried in 2011, through commodities, but when the slowing world wide economy could no longer support the inflation driven prices, commodities crashed.
There is no wage driven support for inflation. We seem to be entering a period of deflation, that will be hard to resist based upon changing world wide economies and demographic changes.
There is no peaceful way back from here.
It’s almost comical how everyone puts this in purely economic perspective.
It’s like saying the engine on your airplane, which is at 30,000 feet over the Himalayas is gonna fail and it could quit altogether if something isn’t done. But then they fail to say what will happen if it quits. What happens is that it crashes in the mountains.
Same thing here. This kind of instability doesn’t lead to people living in smaller houses and driving a worse car. It is international. Countries go to war over this kind of stuff.
We (U.S.) are rapidly heading down the road to a single option.....inflation. Painful, but probably the only choice available IMO.
President Washington fails to improve, Doctor. Shall we apply more leeches?
Hey, that's the same thing we did in '08; apply leeches. We should be better soon.
—When the pain of austerity (Republicans) becomes so great, people will vote them out of office and replace them with Democrats and defecit spending will resume to hyperinflation. (IMO)—
That is how I see it. It is the political courage Schiff talks of. And we have the leaders we do because of the electorate we have. And they vote their wallets.
That is why the ultimate last gasp will be hyperinflation. Reminds me of the guy who died in the desert in the end of the last bond film. He was found with motor oil in his stomach. If you’ve seen the movie, you know what I’m talking about.
If the Lord waits, future historical documents will record that the civilized world of the early 21st century died with motor oil in its stomach.
I believe we will have both. Necessities will inflate in a terrifying way, and what appears on the CPI will deflate.
—There is no wage driven support for inflation.—
Sounds like stagflation.
Ultimately, they’ll have to inflate just to pay the interest on the debt. No higher wages necessary. It’s like printing money in your basement to pay your visa bill and house payment.
Democracies always go for austerity.
“When the pain of austerity (Republicans) becomes so great, people will vote them out of office and replace them with Democrats and defecit spending will resume to hyperinflation. (IMO)”
I agree completely with the premise that people will switch parties more frequently when economic growth fails to appear. But this political instability will only lead to more economic instability which will limit growth and reaffirm people’s inherent fear of the future which will cause them to spend less, which leads to deflation not inflation.
for inflation to take hold, there has to be a demand component in the economy that has the power to demand wage increases to match price increases. There is no demand side to the equation. Companies aren’t hiring wages are decreasing. Housing values are still decreasing.
If inflation shows up, it will be in the form of a bubble within a specific area or group, such as commodities which we had in 2010-2011. But when the world economies began to slow this bubble popped.
China’s economy has begun to slow, Europe is contracting the US is stagnant. All that deficit spending was done to try and stop deflation. The result was a surge in the stock market. Bernanke tried to force savers to put their money in financial vehicles by lowering interest rates so low as to make saving unproductive. Where else to go but the market to try and get a decent return. The money didn’t flow into the main economy.
"... it is precisely from the persistent and lazy habit of thinking only of some particular industry or process in isolation that the major fallacies of economics stem." - Henry Hazlitt,
“Ultimately, theyll have to inflate just to pay the interest on the debt.”
In a round about way the dollar will go through periods of intended/unintended devaluation. With Europe in trouble, and China slowing there is a flight to safety and the dollar.
To ward off interest on debt inflation, the Fed has already proven that you can keep interest rates low by just buying your own debt. You can’t forever, but the Fed can keep that game going for a long time. Right now there is no alternative to the US dollar on the world stage. A lot will depend upon how severe the slowdown is in China. If its severe enough you can look forward to a prolonged period of worldwide shrinking demand.
“... it is precisely from the persistent and lazy habit of thinking only of some particular industry or process in isolation that the major fallacies of economics stem.” - Henry Hazlitt,
That is why you also have to look at the long term effects of the changing demographics world wide.
In the US the baby boomers are retiring, cutting back on their spending. They will also want to down size their larger homes for something smaller, putting continued downward pressure on housing.
Europe is aging rapidly. Japan is aging even quicker and even China with their one child policy will be facing a huge demographic headwind in the future.
Bernanke didn't want the money to flow (so much) into the economy...that would have driven price and interest rate increases and the government could not afford the interest payment on the debt if interest rates rise.
Bernanke is in a trap.
If he stimulates the economy with more money printing and interest rates increase...he cannot afford increased interest payments, he'd have to borrow/print more money to make those payments. This is where we're headed...he WILL print more money eventually....if not, you are correct, we will slide into a deflationary spiral with no way out.
It is just a choice of the method of death.
(Keep in mind that I'm a retired chip-maker and have no education or training in this area)
“It is just a choice of the method of death.”
This is the sad truth, no matter which economic path wins out, we are in trouble.
In the 70's the Phillips curve (an "inverse relationship between the rate of unemployment and the rate of inflation') was tossed.
This crisis might redefine the concepts of inflation and deflation. Government manipulations might give us both. Deflating housing prices - inflating food costs - deflating oil (as world economies fail) increasing natural resource costs, falling wages... We can have it all!
“This crisis might redefine the concepts of inflation and deflation.”
You may be right we could be in totally unchartered waters. There has never been this much world wide debt before. Somewhere sometime this has to be deleveraged. There is just no other way to end the equation. Some say future growth will pay this debt off, but where would this growth come from? If we could come up with a cheap form of energy, that would take a big load off the economy and spur growth. We have tried to bring about growth through bubbles, the dotcom of the 90’s and the housing bubble of the 2000’s but what is the next form of growth?
Dumb question - who owns all this debt? I know we are in debt, Europe is in debt, latin america. Is it the middle east and China carrying all the worlds debt? Things will end badly for them as well.
Recommended reading: "Capitalism, the Unknown Ideal," by Ayn Rand.
“Things will end badly for them as well.”
I think the debt is just tied up in paper. China buys some of our debt, bought commmodities for a while, or recently buying physical assets in the US. England buys our debt the Japanese also. Its just everyone holding each others debt. If there is a default or problem with anyones currency the world shudders, look at Greece.
“Recommended reading: “Capitalism, the Unknown Ideal,”
That is if you can break the crony capitalism that has developed in the US.
Everyone wants to hit the reset button, but no one wants to fix the programming. Debt is so much more fun than real wealth.
The term “crony capitalism” is an apt perversion of the true meaning of capitalism.
The term crony capitalism is an apt perversion of the true meaning of capitalism.
The true capitalist is still out there, the small businessman but he is drowned out by the likes of JP Morgan, BOA, Goldman, GE etc...
They buy congress and reap the rewards.
War will be the result of malfunctioning economies.
We are not “heading down the road” to inflation. Inflation is.
” Bernanke is in a trap.
If he stimulates the economy with more money printing and interest rates increase...he cannot afford increased interest payments, he’d have to borrow/print more money to make those payments. This is where we’re headed...he WILL print more money eventually....if not, you are correct, we will slide into a deflationary spiral with no way out.
It is just a choice of the method of death.
(Keep in mind that I’m a retired chip-maker and have no education or training in this area) “
I’ve got news for you, Blam. Your understanding of the economy is top notch. Moreover, you aren’t tarnished by political/business allegiances. The problem is every bit as straightforward as you portray it. Bernanke painted himself into a corner.
We’ve been living in a faux economy for so long no one knows the value of anything. I still remember the Clinton regime claiming that they had eliminated the economic cycle. Economies expand and contract. Government never contracts and it has been preventing contractions that should have occurred.
We incrementally got to where we are I can only hope that we can do a 180 and start moving in the opposite direction. It must be incremental or a Republican President will only last one term and will be demonized in such a way that it would likely result in another 8 demonrat years.
I agree with you 100% as well as Cuban Leaf’s comments to you.
Reminds me of an old song from Jim Morrison in the 60’s....
“This is the end...my only friend, the end” as he contemplates death.
In my opinion, post of the day, and probably the decade.
Let’s not forget the municipal and state debt too. Greece’s economy is only the size of Connecticut. California’s is the size of France.
Let’s also not forget that we have everything we need in the US to get us out of this - energy. We have it in spades.
Why we lack the political will is beyond me.
“There is nothing new under the sun. Von Mises described where we are now and will be. “
Thanks, I’ll give them a try.
Why we lack the political will is beyond me.
The Marxists who want us to fail lack the political will and sadly, are a growing faction.
“It must be incremental or a Republican President will only last one term and will be demonized in such a way that it would likely result in another 8 demonrat years.”
Will events and time allow us incrementalization?
Those are the kindest words ever said to me on these economy/finance/investing threads.
Since nearly every other country in the world is worse off than we are MAYBE.
I'm starting to think that too. I've been accumulating 5c pieces on the theory of "poor man's silver" - if inflation heats up, the nickel is a store of value, etc. I've been monitoring Coinflation to keep track of commodities and noticed today, courtesy the Greek's ongoing crisis, that for the first time in a few years, the nickel is BELOW melt value. Since nickel is an industrial metal, this does not bode well.
...Until they got a Democrat elected President.
Who can forget the raised eybrows of that Canadian scumbag Peter Jennings throughout the campaign of 1992 as he began what seemed like every nightly ABC newscast with, "More bad news for George Bush tonight..." Yep, Jennings and the rest of them took their cue from James "It's the economy, stupid" Carville and ran like hell with it.
And who can forget the New York Times congratulating Clinton in February 1993 for bringing the nation out of its recession, even though the data that showed improvement in the economy was from a previous quarter, before Clinto even took office? Sure, the New York Times did acknowledge its error when called on it, and even printed a correction a few days later - - deep in the paper where casual readers wouldn't notice it.
Of course, the President is not a Republican, but a Democrat. The Democrat "mainstream" newsrooms worked hard to get their communist scumbag Ubama elected and you better believe they will do everything in their power to protect him. Lying about the economy is "job one".
What we are witnessing now from the Democrat "mainstream" newsrooms is an approach to reporting on the state of the economy that would make "Baghdad Bob" blush. They relentlessly continue to report on the status of the make-believe "recovery" as if anybody with an IQ over 75 even buys the premise that there is a recovery at all. You can only wonder if the Democrat anchors, reporters, and pundits inwardly roll their eyes at their own brazen hypocrisy.
Love Peter schiff. He is my fav economist by far.