Wednesday, March 16, 2011

Peter Schiff's take on the economic consequences of Japan's recent disaster

One of my favorite economists, Peter Schiff, speaks on Japan and dismisses some of the nonsense being discussed on the lame stream media with regards to the economic consequences of the mega earthquake. If you haven't heard it yet, there are numerous economists claiming that the earthquake will be "positive" for the Japanese economy as the rebuilding effort will spur growth and add jobs. Shit, why dont we just carpet bomb California if disaster equals growth? Morons.



And one of the Schiff's classics, this video is entitled "Peter Schiff was right." In this clip, Schiff was preaching doom for the US housing market and economy while being laughed at by the media pundits.



Peter Schiff is a adherent to the Austrian School of economics. A basic introduction:

The Austrian theory of the business cycle varies significantly from mainstream theories. Economists such as Gordon Tullock, Bryan Caplan, and Nobel laureates Milton Friedman and Paul Krugman have said that they regard the theory as incorrect.

In contrast to most mainstream theories on business cycles, Austrian School economists focus on the credit cycle as the primary cause of most business cycles. Austrian economists assert that inherently damaging and ineffective central bank policies are the predominant cause of most business cycles, as they tend to set "artificial" interest rates too low for too long, resulting in excessive credit creation, speculative "bubbles" and "artificially" low savings.

According to the Austrian School business cycle theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable "credit-fueled boom" during which the "artificially stimulated" borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas which would not attract investment if the money supply remained stable.Economist Steve H. Hanke identifies the financial crisis of 2007–2010 as the direct outcome of the Federal Reserve Bank's interest rate policies as is predicted by Austrian school economic theory.[93] Some analysts such as Jerry Tempelman have also argued that the predictive and explanatory power of ABCT in relation to the recent Global Financial Crisis has reaffirmed its status and, perhaps, cast into question the utility of mainstream theories and critiques.

Austrian School economists argue that a correction or "credit crunch" – commonly called a "recession" or "bust" – occurs when credit creation cannot be sustained. They claim that the money supply suddenly and sharply contracts when markets finally "clear", causing resources to be reallocated back toward more efficient uses.


Again lets focus on this particular quote:

This boom results in widespread malinvestments, causing capital resources to be misallocated into areas which would not attract investment if the money supply remained stable.

The operative words here are malinvestments, misallocated, and money supply. Easy credit (the expansion of the money supply because credit is a form of money) leads to speculative bubbles whereby malinvestment tends to be a reoccuring theme. Using some painful real life examples such as the dot com bust, the housing bust and the tuition bubble exemplify the malinvestment that easy credit creates. But for easy credit an excess supply of homes would never have been constructed. Absent easy credit law school tuitions would never skyrocket to 35k plus per year. Absent easy credit the Nasdaq would have never hit 5000 points only to crash down to 1200 within 18 months of its peak. The list goes on and on.

Why such a discussion on credit and booms? Because the easy money policy utilized by the Federal Reserve is a primary cause of America's economic woes. In fact, it is a cause of many student woes as they are stuck with high debt levels with scant employment opportunities. Factor in human greed with easy money, and you get a recipe that is ripe for disaster. Enter your local TTT stinking shithole.

Subprime

10 comments:

  1. You have got to be kidding me. I used to date him.

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  2. Believe me, I would not make that up. We fought ALL the time.

    He was my best friend's brother's roommate at Berkley, so I first met him when I was in high school. I dated him briefly when I moved to LA in 1990, and then a little more seriously in 1995.

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  3. BOJ has already expanded their QE program from 5 to 10 Trillion Yen (120billion), to have the scale of QE 2 in the US, they need to implement the full size 30 Trillion Yen. As the government already indebted up to 200% of GDP, they are treading a fine line going forward. Japanese corporate, government and individuals own up to 850 billion worth US Treasuries. If they need to dip into their savings for reconstruction. Keep an eye for the yield curve on US debts.

    Bank of Japan Policy options

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  4. Very well said intrinsic value. Unless Benicopter decides to go gobble up those treasuries as well lol. In the end I believe the fed will inflate its balance sheet somewhere close to $5 trillion. At that point we start hitting the danger zone.

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  5. Schiff's not an economist. He's a stock broker.

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  6. @ 9:05 am

    You are correct that Mr. Schiff is not a PHD carrying economist in the strict sense of the word. However, his understanding of economics trumps the vast majority of the groupthink captured turds running this place. Take for example Bernanke's failure to see the subprime debacle as it blew up in his face. These PHD's may understand their complicated models, but the world is a bit more tricky than anything that can be understood by a computer. So yes, Schiff is an economist.

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