Peter Schiff on the Chinese bailout package

[socialize_me]

This was sent to me in an email from EuroPacific's newsletter


China's Stimulus Spells Trouble for U.S.

This week, Asian markets were initially energized by China's announcement of a near $600 billion economic stimulus package for its own economy. Although I have never been a fan of government-fueled stimuli, the relative wisdom of the plan hinges on the source of funds the Chinese government decides to utilize. Their best choice would be the country's nearly $2 trillion in foreign reserves, the largest portion of which is held in U.S. Treasury and agency debt. This pile of dollars, which really amounts to no more than a subsidy for U.S. consumers, does nothing to benefit Chinese citizens.

If it does decide to employ this ocean of cash, China will become a net seller of U.S Treasuries just as the U.S. Government itself will be pushing up its issuance of new Treasury bonds into record territory. With two huge sellers and few major buyers (just about every major creditor nation having problems of their own), the Federal Reserve will become the only reliable customer. As a result, not only will the Fed monetize our own economic stimulus packages, but will be forced to provide the same service to the Chinese.

Most economists feel that China will maintain the status quo by borrowing or printing the funds for their own stimulus while continuing to hoard its trillions of existing U.S. dollars. Most also believe that the Chinese will substantially increase their dollar holdings in order to finance America's never-ending string of bailouts and its ballooning Federal deficit, which is soon to pass $1 trillion annually. These optimists are in for a rude awakening.

The Chinese cannot follow such a course without unleashing intolerable inflation at home. Selling down their vast reserves of U.S. debt and using the proceeds for domestic infrastructure projects (or anything else for that matter) is a vastly superior stimulus mechanism than "lending" to Americans so we keep "buying" their products. When Chinese authorities finally figure this out the United States will suffer the consequences.

As they have in the past my critics will cavalierly dismiss this view. However, as the following compilation of some of my 2006 and 2007 television appearances attests, my economic predictions have proved extremely prescient:

Click here to watch it on YouTube.

However, given recent global stock market and currency volatility, some are questioning the wisdom of my investment strategy. I am confident that the short-term effects suffered by foreign stocks and currencies as a result of financial de-leveraging and losses on bad U.S. debt will prove temporary. If so, my market forecasts will ultimately prove just as accurate as my economic predictions. Those who are currently patting themselves on the back for having had the apparent foresight to stay in U.S. dollars will be singing a different tune when the music stops playing.

Sincerely,

Peter Schiff
President and Chief Global Strategist
Euro Pacific Capital

[Xenophage]

I understand basic economic fundamentals and austrian theory, and I believe its the only theory that has proven itself consistently to be true... but this prediction doesn't necessarily rely on Austrian theory, and I keep thinking Schiff is quite likely to be wrong about some of this stuff. The more predictions he makes, the more likely he is to be wrong about one of them, and as soon as he is it will be used against us as "proof" that Austrian economics is wrong.

He doesn't give himself any wiggle room :)

[danberkeley]

this has already been posted by... MEEEEEEEEE!!!!!! :D

[ArrestPoliticians]

I understand basic economic fundamentals and austrian theory, and I believe its the only theory that has proven itself consistently to be true... but this prediction doesn't necessarily rely on Austrian theory, and I keep thinking Schiff is quite likely to be wrong about some of this stuff. The more predictions he makes, the more likely he is to be wrong about one of them, and as soon as he is it will be used against us as "proof" that Austrian economics is wrong.

He doesn't give himself any wiggle room :)

Yes I have to agree. He piles on ANOTHER set of theories on top of the basic Fed induced business cycle that a lot of other Austrian economists predicted. I don't know that I DISAGREE with him on anything but I worry about three issues:

#1 What makes him think that Central Banks will not co-ordinate monetary inflations so as to prop up the dollar standard? The fact that this has already occurred within the past year worries me. He seems to have a naive, high school history view of foreign powers and their motivations. He denied the possibility of any motivation by the nations of the world for a world central bank, when this has been openly promoted by just about everyone since Keynes.

#2 He continually blames Americans for spending like drunken sailors without proving that savings are high in the countries he invests it. I remember when he was on Australian TV and was talking about American consumption excesses, and the Australian econ professor with him said "Its like that here too!".

#3 He invests in centrally planned economies like China, which have to be due for a soviet style collapse sooner rather than later in spite of market reforms. Market Socialism doesn't work long term.

[danberkeley]

#1 What makes him think that Central Banks will not co-ordinate monetary inflations so as to prop up the dollar standard? The fact that this has already occurred within the past year worries me. He seems to have a naive, high school history view of foreign powers and their motivations. He denied the possibility of any motivation by the nations of the world for a world central bank, when this has been openly promoted by just about everyone since Keynes.

The dollar doesnt need to go down against other currencies to collapse. The dollar and other currencies could collapse together. This is why he is so heavy into gold.


#2 He continually blames Americans for spending like drunken sailors without proving that savings are high in the countries he invests it. I remember when he was on Australian TV and was talking about American consumption excesses, and the Australian econ professor with him said "Its like that here too!".

I dont know the numbers of the top of my head, but I think Australia have a higher savings rate.


#3 He invests in centrally planned economies like China, which have to be due for a soviet style collapse sooner rather than later in spite of market reforms. Market Socialism doesn't work long term.[/QUOTE]

The stock market has already collapsed in China, but as far as central planning in concerned, the Chinese government is loosening its grip on the Chinese economy, while the US government is tightening its grip on the US economy.

[Xenophage]

Yes I have to agree. He piles on ANOTHER set of theories on top of the basic Fed induced business cycle that a lot of other Austrian economists predicted. I don't know that I DISAGREE with him on anything but I worry about three issues:

#1 What makes him think that Central Banks will not co-ordinate monetary inflations so as to prop up the dollar standard? The fact that this has already occurred within the past year worries me. He seems to have a naive, high school history view of foreign powers and their motivations. He denied the possibility of any motivation by the nations of the world for a world central bank, when this has been openly promoted by just about everyone since Keynes.

#2 He continually blames Americans for spending like drunken sailors without proving that savings are high in the countries he invests it. I remember when he was on Australian TV and was talking about American consumption excesses, and the Australian econ professor with him said "Its like that here too!".

#3 He invests in centrally planned economies like China, which have to be due for a soviet style collapse sooner rather than later in spite of market reforms. Market Socialism doesn't work long term.

Very good analysis. I share those exact concerns!

I also think its quite likely we'll rebound from this economic downturn whereas some foreign countries will not. I think China in particular is unlikely to continue its high economic growth figures. Simple world events can make big impacts...

What if Obama decided to tax all Chinese imports at 10%, and subsidize new factories built in the U.S. with 5% tax cuts? Something as simple and seemingly tiny as that could be devastating to the Chinese economy while spurring new economic growth here at home. I'm not predicting that will happen, I'm just saying it *could*.

I can also see the doomsday scenarios that Schiff outlines.

Like you, I don't think I really disagree with him either... I'm just more cautious about admitting other possibilities.

Then again, maybe Schiff really is a prophet :P

[JAlli41]

What if Obama decided to tax all Chinese imports at 10%, and subsidize new factories built in the U.S. with 5% tax cuts? Something as simple and seemingly tiny as that could be devastating to the Chinese economy while spurring new economic growth here at home. I'm not predicting that will happen, I'm just saying it *could*.

I would highly doubt this would happen, especially if larry summers ends up being the head of the treasury.
A) Obama is anti-pollution and the manufacturing sector is often pollution heavy.
B) The neo-liberal/neo-keynsians whom Obama runs with (Goolsbee, Summers ect.) believe that the natural progression of industrialization is that countries leave their manufacturing sectors behind for service sector jobs, to give aid to manufacturing companies, especially those who are non-union would be anathema to what the neo-liberal economists believe. That being said, they may right now say we've gotta do anything we can to get the economy moving. I've got a feeling however that plan would be more likely to entail WPA go dig a hole and fill it up when you're done type new deal jobs rather than coming in the form of tax cuts or credits to stimulate the private sector.

[ghengis86]

This was sent to me in an email from EuroPacific's newsletter

do you have an account with EuroPac? are you happy with the returns on your investment? anybody else for that matter have an opion on this?

[Thunderbolt]

So much hate for Ron Paul's economic adviser?

[socialize_me]

So much economic advisor for Ron Paul's hate?

[Carole]

I would highly doubt this would happen, especially if larry summers ends up being the head of the treasury.
A) Obama is anti-pollution and the manufacturing sector is often pollution heavy.
B) The neo-liberal/neo-keynsians whom Obama runs with (Goolsbee, Summers ect.) believe that the natural progression of industrialization is that countries leave their manufacturing sectors behind for service sector jobs, to give aid to manufacturing companies, especially those who are non-union would be anathema to what the neo-liberal economists believe. That being said, they may right now say we've gotta do anything we can to get the economy moving. I've got a feeling however that plan would be more likely to entail WPA go dig a hole and fill it up when you're done type new deal jobs rather than coming in the form of tax cuts or credits to stimulate the private sector.
Not only that, but China has all those US Treasuries. We owe them 600 billion.

They (China) are not going to put up with anything we do that might hurt them. They have us over a barrel. Call it extortion or blackmail. We cannot add a tax, because they would just dump those treasuries and destroy us (not that we are not already self-destructing).

:eek:

[Malakai]

It's different for China since they actually have a treasury with money in it.

The only upside to this insane gov spending is that it's making China's 2 trillion seem like not that much LOL