This
is Just the Beginning By Peter Schiff, Euro Pacific Capital
February 6, 2009
The
intense scrutiny recently paid to my investment strategy in
the immediate wake of the financial crisis of the last six
months has unfortunately obscured the central element of my
larger economic forecast. The standard line has been that
although I was able to predict the crash, in the form of the
housing collapse and the credit crunch, my expected fallout
of a weaker dollar and global decoupling has been proven false.
However, this assumes that the crash has fully played out.
In reality, all we have heard thus far is the overture.
In 2008, the bubble economy that I had meticulously described
years ago finally hit the pin that I knew was out there. The
corporate losses, frozen credit markets and plunging home
prices were the opening salvo in the unfolding economic crisis.
However, the vast majority of air has yet to leak out of the
bubble. As it does, the U.S. economic crisis will kick into
a much higher gear. I have positioned my clients to withstand
the full fury of the gale, and when it finally comes, the
question "was Peter Schiff right?" will finally
be answered.
Thus far, our economy has actually been spared the worst
due to the temporary strength in the dollar and the recent
desirability of our Government's debt. These movements derailed
the short-term performance of many of my investment recommendations
(though clearly not to the extent alleged by my critics) and
threw a life-line to the downing U.S. economy. The demand
for U.S. Treasuries has led to one of the sharpest dollar
rallies on record, which has helped bring about just as pronounced
a decline in commodity prices. As a result, although consumer
income has fallen, so too have prices and interest rates.
The stronger dollar gives the Federal Government plenty of
cover to a pursue a policy of rampant monetary inflation in
order to re-inflate the collapsing bubble. Even though the
Federal Reserve has thrown trillions of new dollars into circulation,
those dollars have actually gained purchasing power - contrary
to economic law. This, along with inventory liquidations and
going-out-of-business sales, has kept a lid on consumer prices.
The continued, although misguided, appeal of U.S. debt has
also made it possible for the government to garner cheap financing
for its equally misguided and massive bails-outs and stimulus
packages.
In addition to cushioning the blow for us, the dollar rally
has exacerbated the pain abroad. As money has rushed to our
aid it has created a global credit crunch. The rest of the
world is not only dealing with losses on toxic U.S. credit
instruments but is also shouldering the burden of financing
our new borrowing as well. As foreign currencies have fallen,
foreign consumers have not received as large a windfall as
Americans have from falling commodity prices.
In effect, Americans have been using these life-lines to
pull the rest of the world into the stormy seas. However,
there are signs that those holding the lines are about to
cast them adrift. The dollar rally has run out of steam, gold
has clearly broken out, and commodity prices are moving back
up. 2009 is already the worst year ever for US. Treasury bonds
and foreign stock markets are once again outperforming ours.
This week President Obama claimed that failure to pass his
economic stimulus bill will have catastrophic consequences
for the U.S economy. The reality is the catastrophe will be
far greater with his plan then without it. If the trends of
January and early February of 2009 continue, the rug will
be completely pulled out from beneath the U.S. economy, and
the full cost of the President's "economic depressant
package" will be apparent to all.
If foreign capital does not continue to pour into Treasuries,
interest rates and consumer prices in the U.S. will soar.
At that point, we will finally be confronted with the real
crises that I have long predicted. When the day of reckoning
arrives our policy response will be critical. If we continue
on the course our new President has mapped out, the catastrophe
will far exceed the scope of any he hoped to avoid.