by Peter Schiff, president of Euro Pacific Capital and author of Crash Proof 2.0: How to Profit from the Economic Collapse

During President Obama’s high profile visit to China this week, the most frequently discussed, yet least understood, topic was how currency valuations are affecting the economic relationship between the United States and China. The focal problem is the Chinese government’s policy of fixing the value of the renminbi against the U.S. dollar. While many correctly perceive that this ‘peg’ has contributed greatly to the current global imbalances, few fully comprehend the ramifications should that peg be discarded.The common understanding is both incomplete and naive. Most analysts simply see the peg as China’s principal weapon in an economic struggle for global ascendancy. The peg, they argue, offers China a competitive advantage by making its products cheaper in U.S. markets, thus allowing Chinese firms to gobble up market share and steal jobs from U.S. manufacturers. The thought is that were China to allow its currency to rise, American manufactures would regain their lost edge, and both manufacturing firms and the jobs formerly associated with them would return. In this narrative, the struggle centers on the United States’ diminishing leverage in persuading the Chinese to lay down their unfair weaponry. It’s a sympathetic picture, but it tells the wrong story.

While the peg certainly is responsible for much of the world’s problems, its abandonment would cause severe hardship in the United States. In fact, for the U.S., de-pegging would cause the economic equivalent of cardiac arrest. Our economy is currently on life support provided by an endless flow of debt financing from China. These purchases are the means by which China maintains the relative value of its currency against the dollar. As the dollar comes under even more downward pressure, China’s purchases must increase to keep the renminbi from rising. By maintaining the peg, China enables our politicians and citizens to continue spending more than they have and avoiding the hard choices necessary to restore our long-term economic health.

Contrary to the conventional wisdom, when China drops the peg, the immediate benefits will flow to the Chinese, not to Americans. Yes, prices for Chinese goods will rise in the United States – but so will prices for domestic goods. As a corollary, the Chinese will see falling prices across the board. As anyone who has ever been shopping can explain, low prices are a good thing.

In addition, credit will expand in China while it contracts here. When China abandons the peg, it will no longer need to swell its currency reserves by buying Treasuries or other dollar-denominated debt instruments. Other nations will no longer feel the pressure to keep their currencies from rising, so they too could throttle down on their onerous dollar purchases.

As demand falls for both dollars and Treasuries, prices and interest rates in the United States will rise. Rising rates will restrict the flow of credit that is currently financing government and consumer spending. This change will finally force a long overdue decline in borrowing. So, not only will Americans lose access to the consumer credit that funds their current spending, but the things they buy will also get more expensive.

Our short-term loss will be in sharp contrast to the gain felt by foreigners, who will be rewarded with falling consumer prices and a more abundant supply of investment capital. In other words, the American standard of living will fall while that of our trading partners will rise.

However, this does not mean that I want the Chinese to maintain the status quo. In the long run, the U.S. economy will benefit from the abandonment of a system that guarantees our dependency and inevitable downfall. De-pegging will force the hand of U.S. politicians toward pursuing realistic policies. The Chinese will come to their senses eventually because it is in their interest to do so. Meanwhile, the longer the peg is maintained, the more indebted we become, the more out of balance our economy grows, and the more our industrial base shrivels. In short, the longer they wait, the steeper our fall.

A weaker dollar will price many imported products beyond the reach of most Americas, giving our hollowed out manufacturing sector the opportunity to rebound. However, if our industry has any chance of getting off the mat, we must reduce taxes, repeal regulations, reform our cumbersome legal system, and, most importantly, replenish our savings to finance the necessary capital investment.

If we position ourselves to deal with the consequences, tough love from China will provide a path back to genuine economic growth.  However, if our politicians continue to misread the problem and push us deeper in the red, the inevitable ‘rebalancing’ could be truly ruinous.

But for the sake of argument, let’s assume human-caused global warming is indeed happening. Conceding this, it turns out that . . .

The effort to curb carbon emissions will be far more harmful than global warming itself!

Please send Congress a letter demanding that they defeat the cap & trade bill and oppose any global climate treaty.

Here’s what I wrote in my letter . . .   

Efforts to curb global warming make as much sense as spending $2 to save $1.

The International Energy Agency believes we must cut carbon emissions in half if we want to stop global warming. They also estimate that this will cost $45 trillion.  http://www.iea.org/press/pressdetail.asp?PRESS_REL_ID=263

Yet Dr. William Nordhaus of Yale calculates that the economic losses from global warming, if we do nothing to curb carbon emissions, will reach just $22 trillion this century. Dr. Nordhaus also estimates that proposals made by The Stern Review and Al Gore to curb carbon emissions would cost $17-25 trillion more than doing nothing:  http://nordhaus.econ.yale.edu/dice_mss_072407_all.pdf

And all of this assumes an effort in which the whole world cooperates, with no cheating!

If Congress imposes cap & trade on the U.S., or ratifies a climate treaty, it will not stop global warming. Instead, it will only damage the U.S. economy and drive more jobs overseas. That’s because  . . .

Many developing countries will not agree to participate!

We would be hypocrites to condemn them for this. They only want what we already have. Most importantly, there are sound environmental reasons why we should want them to gain our level of affluence . . .

Wealthy nations like ours do better at protecting the environment!

* Our water is safer and our air is cleaner.
* We can afford to protect species from extinction.
* We can afford research that constantly discovers how to do more with less, allowing us to grow more and more affluent while imposing fewer burdens on the environment.

Environmental protection will benefit from a wealthier world, not suffer from it.

Developing nations will not sacrifice their progress just to please Western politicians, and we shouldn’t want them to do so. If we really care about the environment, then we need these nations to become richer, not poorer.

The proposed schemes for a cap & trade law and a global climate treaty will . . .

* Fail because of cheating or non-participation
* Cost at least $2 for every $1 we gain, and probably far more
* Impoverish America and the world, thereby destroying the innovation and environmental protections that free market affluence makes possible

Do not spend $2 in a vain attempt to save $1. Do not support a scheme that cannot work. Instead, support the economic progress that makes environmental protection possible. Do this by opposing the cap & trade bill, and any global climate treaty. Let free market innovation and affluence pave the way for solutions that will really work.

END LETTER

You can send your letter using DownsizeDC.org’s Educate the Powerful System.

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Let’s Downsize DC!

James Wilson
Assistant Communications Director
DownsizeDC.org

SOURCES

Information that inspired links and points above originated with Global Warming 101: Costs by William Yeatman at GlobalWarming.org.

D o w n s i z e r – D i s p a t c h
is the official email list of DownsizeDC.org, Inc. & Downsize DC Foundation

Paul’s amendment passed, first by voice vote, and then by roll call vote later in the day. The final tally was 43 for Paul’s bill and 26 against.

Earlier I posted Grayson and Watt debating Watt’s amendment and Ron Paul introducing his substitute amendment. Below are four new videos from the markup hearing. This includes the voice vote and the final roll call vote so you can hear which of the committee members need to be voted out of office in their next election cycle.

First up is Ron Paul arguing (yet again) why Fed transparency is not a call for injecting Congress into Fed policy decisions.

Next we have Barney Frank patting himself on the back again for bringing Ron Paul’s Fed audit legislation up in the committee. There’s a bit of humorous back and forth then Congressman Hensarling rips Frank for his comments a bit by calling them “irrelevant”.

Here are the leadup comments from Alan Grayson and co., then the voice vote on adopting Ron Paul’s substitute amendment.

And finally, the official roll call vote of Ron Paul’s substitute amendment. Ron Paul wins!

This was an important step in the process, but the amendment is going to be tacked on to the larger regulatory reform bill being deliberated now.

Watch Ron Paul introduce the bill earlier today in the committee in the video below.

The clip below shows Alan Grayson arguing against Mel Watt’s amendment and then Watt’s rather angry response. Stay tuned for more clips…

by Peter Schiff, president of Euro Pacific Capital and author of Crash Proof 2.0: How to Profit from the Economic Collapse

As the unemployment rate crossed the double digit barrier for the first time since Michael Jackson learned to moonwalk, President Obama announced that he will convene a “jobs summit” to finally bring the problem under control. Using all the analytic skill that his administration can muster, the President is determined to figure out why so many people are losing their jobs and then formulate a solution. That’s a relief; for a while there, I thought we were in real trouble! In fact, the absolute last thing our economy needs is more federal government interference. If Obama really wants to know what’s behind entrenched joblessness, he should start by looking at the man in the mirror.

Obama is pursuing, with unprecedented vigor, the same policies that have for decades undermined our industrial base and yoked us to an unsustainable consumer/credit driven economy. This doubling down on Washington’s past failures is destroying jobs at an alarming rate. Today we learned that the September trade deficit surged by 18.2%, the largest gain in ten years. Much of the deficit resulted from Americans spending Cash-for-Clunkers stimulus money on imported cars – or “American” cars loaded to the sunroof with imported parts. In exchange for more domestic debt, we have succeeded only in creating foreign jobs.

An article in this week’s New York Times by veteran writer Louis Uchitelle confirmed a fact that I have been alleging for years. Uchitelle pointed out that foreign outsourcing of component manufacturing has led to consistent overstatement of U.S. GDP and productivity. The connection goes a long way to explain why we keep losing jobs even as GDP is apparently expanding.

As our economy becomes less competitive due to higher taxes, burdensome and uncertain regulations, and capital flight, more manufacturing and services will be outsourced to foreign firms. However, the flaw in GDP calculation allows the output of those foreign workers to be included in our domestic tally. Since we count the output but not the worker responsible for it, government statisticians attribute the gains to rising labor productivity. To them, it looks like companies are producing more goods with fewer workers.

The reality is that we are producing less with fewer workers. The added “productivity” comes from higher unemployment and larger trade deficits. This is a toxic formula that will have lethal economic consequences.

Don’t expect the brain trust at the President’s job summit to fret much about these details. That public relations stunt will likely ignore the root cause of the economic imbalances and instead stress the need for government spending on training and education, i.e. more public debt. The unemployed do not need government theatrics, they need actual jobs. But as long as the government props up failed companies, soaks up all available investment capital, discourages savings, punishes employers, and chases capital out of the country, jobs will continue to be lost.

To really fix the unemployment problem, the President must look past his peers in government and academia to understand how jobs are actually created. In the private sector, all individuals have a choice to either work for themselves or someone else. Since labor is far more productive when combined with capital (office equipment, machinery, business models, and intellectual capital), those who lack these assets themselves often choose to work for others who have sacrificed to accumulate them. This increased productivity is shared between the worker and the owner of capital, and both are better off.

However, for one person or company to choose to offer a job to another, there must be an incentive to do so, and they must have the necessary capital. In the first place, employers must commit to paying wages and benefits, comply with government mandates and regulations, and subject themselves to potential lawsuits from disgruntled employees. All of these costs must be measured against the extra profits an employer hopes to earn by hiring an additional worker.

If profit opportunities exist, jobs will be created. Otherwise, they will not. Of course, anything the government does to raise the cost of employment, such as a higher minimum wage, mandated heath care, or greater regulatory burdens, not only prevents new jobs from being created but also causes many that already exist to be destroyed. Anything that diminishes the profit potential of extra hiring will diminish the number of job opportunities that are created. Also, since it is after-tax profits against which employers measure risk, the higher the marginal rate of income tax, the less likely employers will be able to hire.

Finally, in order to hire workers, employers must have access to capital to expand operations. Anything the government does to discourage capital formation automatically diminishes job creation. By running the largest federal deficits in history, Barack Obama is diverting all available capital to the Treasury, and is in effect waging a war against private capital formation.

If the President’s summit truly intends to find the root cause of unemployment, his advisers don’t need Bureau of Labor statistics or complex modeling software, just the courage to drop their dogmatic belief in central planning and embrace the laws of economics.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff’s 2008 bestseller “The Little Book of Bull Moves in Bear Markets” and his newest release “Crash Proof 2.0: How to Profit from the Economic Collapse.” Click here to learn more.

More importantly, don’t let the great deals pass you by. Get an inside view of Peter’s playbook with his new Special Report, “Peter Schiff’s Five Favorite Investment Choices for the Next Five Years.” Click here to dowload the report for free. You can find more free services for global investors, and learn about the Euro Pacific advantage, at www.europac.net.

His appearance was so positive that they end up telling him that he should come on the show as a special guest (as they have from time to time) for the full 2 hours of the show. Paul makes a joke in response. Check it out below.

by John Browne – Senior Market Strategist, Euro Pacific Capital

Last week, the Fed extended its emergency economic powers, which include lending to the money center banks at zero interest. A few days later, the Fed’s plan was reinforced by similar announcements from the rest of the G-20. The road map the authorities are providing for the near-term global economy can’t be much clearer. There will be no cessation of the seemingly endless supply of cheap dollars being pumped into the financial system. With the world apparently in complete accord on the need for ever more liquidity, stock markets are staging an easy-money rally. The main line media is almost euphoric. But what should investors make of this seemingly good news?

This time last year, the world faced a meltdown of its financial systems and a potential depression. Fed Chairman Ben Bernanke, a renowned expert on the Great Depression, coordinated an international rescue of the toxic financial system. Although the bill for these operations has yet to come due, almost all agree it will prove costly to present and future generations. For now at least, the most significant impact of these policies has been the creation of a liquidity bubble in stocks and a surge in commodities.

However, any efforts to reduce these stimuli will result in an immediate correction toward our previous depressionary trajectory. Acceptance of this uncomfortable truth is a political third rail. Therefore, it is highly unlikely that any major government will change course. Rather, the change will be thrust upon them.

It could have been argued that some of the actions taken last year were worth the cost if they had corrected the dangerous deficiencies in the financial system. But after a year, what has changed? The same behemoth banks remain, but even larger and yet more demanding of federal salvation. That particular risk has been increased rather than reduced.

Indeed, the four largest banks have been given well over $1 trillion of TARP funds to trade. In addition, with a zero-cost of Fed funds and a positive yield-curve, the banks have been able to generate massive profits without having to incur the risks of lending to the private sector. With such a license to steal, their stock prices have risen dramatically, sending false signals to other market participants of a broader economic recovery. Soon, these burdens to the taxpayer will pay some $140 billion in year-end bonuses. Far from a disaster, it seems as global financial crisis has been a godsend to Wall Street.

The banks also have been allowed to continue manipulating accounting rules to hide their toxic assets, including their multi-trillion-dollar exposures to the murky derivatives market. In addition, the banks continue to face escalating loan, mortgage, and credit card defaults, and an impending crunch in the commercial real estate market.

Despite popular impressions, it is clear that the bailed-out banks still face trouble. Indeed, they face enough trouble to potentially threaten the whole system again.

Could this be the reason that, despite its cautious optimism on the economy, the Fed is intent on maintaining an open source of free money for the banks? If the Fed’s public optimism were to be believed, then why is there a need to continue the “emergency” TARP, bank subsidies, and economic stimulus? Could it be that the Fed is still fearful of a second financial panic? More importantly, will this fear lead to limitless liquidity – even at the cost of the value of the dollar?

The Fed’s laxity would be contained somewhat if the Washington had its fiscal house in order. Unfortunately, with an official projected national debt of $20 trillion by 2015, the Administration is in no position to push for a strong dollar. Nor has Mr. Obama shown any interest in reining in the debt, instead occupying himself with a generous new healthcare entitlement. If the debt cannot be brought under control, a higher interest rate will push the U.S. government toward outright default.

This toxic cocktail of fiscal and monetary constraints on the U.S. dollar may be what prompted India to buy some 200 metric tons of gold from the IMF, China to hoard a large part of its own massive gold production, and other government parties to the shady Central Bank Gold Agreement to lose enthusiasm for selling their gold.

In a recession, gold should be falling in price. But with a Fed Chairman who seems unwilling to hit the brakes even as we head for a cliff, and an Administration that doesn’t seem to care, creditor nations are jumping off the dollar train for a terra firma made of money metals. Wise investors should follow their lead.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff’s 2008 bestseller “The Little Book of Bull Moves in Bear Markets” and his newest release “Crash Proof 2.0: How to Profit from the Economic Collapse.” Click here to learn more.

More importantly, don’t let the great deals pass you by. Get an inside view of Peter’s playbook with his new Special Report, “Peter Schiff’s Five Favorite Investment Choices for the Next Five Years.” Click here to dowload the report for free. You can find more free services for global investors, and learn about the Euro Pacific advantage, at www.europac.net.

Economic theory and massive amounts of empirical evidence make a strong case for maintaining the Fed’s independence. When central banks are subjected to political pressure, authorities often pursue excessively expansionary monetary policy in order to lower unemployment in the short run. This produces higher inflation and higher interest rates without lowering unemployment in the long term. This has happened over and over again in the past, not only in the United States but in many other countries throughout the world.

The Fed’s independence is critical to its credibility. During the financial crisis, this credibility allowed the Fed to take extraordinary action to prevent a possible depression without triggering inflation. But eventually the Fed will have to scale back its unprecedented monetary accommodation. When it does move to tighten monetary conditions, it must be allowed to do so without political interference.

This is a tired argument at this point. The bottom line, once again, is that the Fed cannot “maintain its independence” when it is not independent to begin with. It is politicized already and it is plainly obvious to most observers without an axe to grind. The fact that this opinion piece appears in the WSJ at all is evidence in itself of this. It’s always important to consider the sources. The authors of the piece are both “in bed with the Fed”, so to speak.

Anil Kashyup was “an economist for the Board of Governors for the Federal Reserve System. He currently works as a consultant for the Federal Reserve Bank of Chicago, and serves as a member of the Economic Advisory Panel of the Federal Reserve Bank of New York, and as a Research Associate for the National Bureau of Economic Research (NBER).” His faculty bio page is here.

Frederic Mishkin is a former member of the board of governors of the Federal Reserve (2006-2008). Perhaps more telling is the following juicy bit:

In 2006, Mishkin co-authored a report called “Financial Stability in Iceland”. The report maintained that Iceland’s economic fundamentals were strong. The report was commissioned by the Icelandic Chamber of Commerce in response to critical coverage of the Icelandic economy and certain Icelandic companies in the international business media.

Iceland subsequently experienced a spectacular collapse within a year of Mishkin’s good report.

So, considering the sources, this WSJ opinion piece should be ignored and ostracized as the comments on the article are already showing.

There is also a lot more to learn about, like the suppression of the gold price.

Hope to see many attend the Constitution rEVOLution Tea Party on November 22nd at Philadelphia’s City Hall and at the FED.  I will be giving a campaign speech at the gates of the FED this time around, and you won’t want to miss it!!

For the Republic!!

Jake Towne

November 8, 2009

If you don’t know what Freedom Watch is then please check out http://freedomwatchonfox.com/. It’s an online only show hosted by the Judge catering to freedom-loving people everywhere.

Check out the excellent discussions from the show today below.

by Peter Schiff, president of Euro Pacific Capital and author of Crash Proof 2.0: How to Profit from the Economic Collapse

Two dissatisfied customers comment about a restaurant. One says, “The food here is terrible.” The other replies, “I know, and such small portions!” In many ways, they could be describing our current employment picture. Not only are the portions shrinking, but the jobs themselves are steadily losing quality.

Today’s release of the October jobs report showed the loss of another 190,000 jobs had pushed the official unemployment rate to 10.2%, only the second time since the Great Depression that unemployment was quoted in double digits (factoring in workers who had given up job hunting altogether or have settled for part-time work would push that rate to 17.5%). That didn’t stop Wall Street pundits from trying to fashion a silk purse of this sow’s ear. The ‘green shoots’ crowd focused on the slowing pace of job losses, the nascent economic ‘recovery’ (even if it is jobless), and the projected improvement in 2010. No mention was even made of the quality of what few jobs were being created.

The analysts completely ignored the continued trend of replacing goods-producing jobs with those jobs that require production from other sources. For example, we lost 61,000 manufacturing jobs last month, but added 45,000 jobs in education and health services. In particular, the addition of health workers is nothing to celebrate. Just as a family’s economic position is not improved by higher medical bills, the country as a whole does not benefit from increased health-care spending. Until this trend reverses, our unbalanced economy will not regain its stability, a real recovery will never take hold, and the overall job outlook will get much bleaker.

By spending trillions of dollars of borrowed money, President Obama hopes to engineer a recovery and create jobs. However, he has only succeeded in digging America into an even deeper hole than the one he inherited from his predecessor. He believes that if we can simply push up spending to levels seen during the “good times,” then those favorable economic conditions will return. The reality, of course, was that those good years came with a heavy price-tag that we have barely begun to pay.

In a press conference today, the President claimed that the latest extension of unemployment benefits will not only help the unemployed, but the overall economy as recipients spend the money. If spending government-granted money really were a benefit to the economy, why not simply increase the amounts endlessly? Why limit the benefits to the unemployed? Let’s make this recovery a real barn burner: send out million-dollar checks to everyone! Of course, what Obama and his economic advisors do not understand is that money spent by recipients of unemployment benefits is money not spent or invested by taxpayers. It’s a transfer of wealth, not a creation on new wealth.

In addition, policymakers are also struggling with diminishing returns on ultra-low interest rates. No matter how much monetary alcohol the Fed tries to pour down consumers’ throats, the swill simply will not go down anymore. Consumers have already had enough and are trying to sober up – by refusing to spend irrationally. The excess liquidity simply weakens the dollar and spills over into other pools, such as goods prices, money metals, commodities, and investment assets.

During the boom, we spent money we did not have to buy things we did not produce and could not afford. As a result, we are now deeply in debt and must sharply reduce our spending to replenish our savings. By focusing solely on consumer spending, the Administration is neglecting the capital investments necessary to improve our infrastructure and productive capacity.

To generate legitimate economic growth and meaningful jobs, we must reverse the trends that brought us down. Consumers may have led us into this recession, but they can’t lead us out. The road to recovery is a one-way street, and it’s paved with savings, capital investment, and production. It’s not an easy road, but we must follow it to ensure our future prosperity.

As a first step, our politicians must stop pushing us backward. Rather than imposing more market-distorting regulations, we should repeal those most responsible for inefficient resource allocation. Rather than creating new moral hazards, we should withdraw guarantees for large financial institutions and irresponsible consumers. Rather than continuing the Greenspan policy of keeping interest rates too low, we should let them rise. Rather than trying to prop up asset prices, we should let them fall to market levels. Rather than increasing the burden of bureaucracy on the economy, we should look for ways to lighten the load. Rather than encouraging people to borrow and spend, we should reward those who save and produce.

Until we acknowledge these fundamental errors, more of our citizens will lose their jobs. As those that stay employed are funneled into unproductive industries like the federal bureaucracy, the country will sink further into stagnation. Worse still, everyone taking jobs in these sectors will be laid off in the next phase of the crisis – and will have lost this opportunity to build practical skills for the new economy.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff’s 2008 bestseller “The Little Book of Bull Moves in Bear Markets” and his newest release “Crash Proof 2.0: How to Profit from the Economic Collapse.” Click here to learn more.

More importantly, don’t let the great deals pass you by. Get an inside view of Peter’s playbook with his new Special Report, “Peter Schiff’s Five Favorite Investment Choices for the Next Five Years.” Click here to dowload the report for free. You can find more free services for global investors, and learn about the Euro Pacific advantage, at www.europac.net.