by Peter Schiff, CEO of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 10am to noon Eastern time every weekday, and streaming at www.schiffradio.com.
Earlier this week the Federal Reserve ignited a firestorm in the global markets by admitting that the U.S. economy is facing downside risks. Although it continues to sugar coat the unpleasant reality, never has such a stunningly obvious statement resulted is so much turmoil.
Once again we are seeing the knee-jerk market reaction to seek refuge in the perceived safety of the U.S. dollar and U.S. Treasuries. However I expect investors will soon discover that such assets are firmly in the eye of the storm. As the tempest moves on, those enjoying the dollar’s current stability may soon find themselves battered by a category five monster.
Market disappointment was compounded when the Fed failed to follow up its dire outlook with a new round of quantitative easing (QE). Instead, through a policy entitled “Operation Twist” the Fed promised to sell $400 billion of short-term Treasuries and use the proceeds to buy an equivalent amount of long-term Treasuries. The markets evidently perceived this “balance sheet neutral” policy as too timid.
From my perspective, the Twist really amounts to another Fed “Hail Mary” pass that will fall short of the end zone. But, by putting the squeeze on banks and further restricting credit availability to small business the move will likely do more harm than good.
From Chris Powell of the Gold Anti-Trust Action Committee comes the news:
Last week U.S. Rep. Ron Paul, R-Texas, chairman of the House Subcommittee on Domestic Monetary Policy and Technology, held a hearing on his proposed Free Competition in Currency Act of 2011 (H.R. 1098), which would repeal legal tender laws, restrictions on private mints, and taxes on gold and silver, since such taxes interfere with the metals’ circulation as money. Testifying were the executive director of the Foundation for the Advancement of Monetary Education, Lawrence M. Parks, and George Mason University Economics Professor Lawrence H. White. Video of the hearing is not quite an hour long and you can watch it here:
The full text of the legislation is simple and concise and can be found here:
The legislation would seem to legalize the Liberty Dollar coins whose issuer recently was convicted on vague charges in federal court in North Carolina. Professor White quotes New York Sun editor and Wall Street Journal contributor Seth Lipsky to the effect that it doesn’t make much sense to suppress private money that is sound to protect money that is unsound.
Unfortunately the Free Competition in Currency Act has no co-sponsors and its introduction and this week’s hearing seem to be mainly an educational exercise. But that’s where everything starts.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
On Tuesday, September 13, Peter Schiff, the CEO of Euro Pacific Capital, www.europac.net will testify before the House of Representatives Subcommittee on Regulatory Affairs, Stimulus Oversight and Government Spending. The hearing entitled, “Take Two: The President’s Proposal to Stimulate the Economy and Create Jobs” will examine federal job creation efforts. Mr. Schiff, author of many best-selling books including “How an Economy Grows and Why it Crashes” is well known for his views on how federal regulatory activism and irresponsible monetary and fiscal policy is actively destroying jobs in America. The following statement from Mr. Schiff will be read into the Congressional Record this morning. Within a few days, video of the hearings will be available on the Committee’s website. Please feel free to excerpt or repost with the proper attribution and all links included.
How the Government Can Create Jobs
Testimony by Peter D. Schiff
Offered to the House Sub-Committee on Government Reform and Stimulus Oversight
September 13, 2011
Mr. Chairman, Mr. Ranking member, and all distinguished members of this panel. Thank you for inviting me here today to offer my opinions as to how the government can help the American economy recover from the worst crisis in living memory.
Despite the understandable human tendency to help others, government spending cannot be a net creator of jobs. Indeed many efforts currently under consideration by the Administration and Congress will actively destroy jobs. These initiatives must stop. While it is easy to see how a deficit-financed government program can lead to the creation of a specific job, it is much harder to see how other jobs are destroyed by the diversion of capital and resources. It is also difficult to see how the bigger budget deficits sap the economy of vitality, destroying jobs in the process.
In a free market jobs are created by profit seeking businesses with access to capital. Unfortunately Government taxes and regulation diminish profits, and deficit spending and artificially low interest rates inhibit capital formation. As a result unemployment remains high, and will likely continue to rise until policies are reversed.
The markets are going through another sell-off phase, yet the traditional notions of a ‘safe haven’ are changing. No longer is the US dollar the default shelter; instead, gold, the Swiss franc, and the Japanese yen are the preferred assets.
All three of these havens – gold, francs, and yen – have been surging upward this month. Two of them, however, are being actively devalued by central banks desperately (and foolishly) trying to curtail appreciation. The Swiss and Japanese are enlisting both policy measures and all the banker-speak they can muster to stem the tide of investment flows into their currencies.
The game is Last Haven Standing, and Spielberg has already acquired the movie rights.
by John Browne, Senior Market Strategist at Euro Pacific Capital
The basic unwillingness of politicians to face economic and financial realities has caused the United States and European Union to face currency collapse. The politicians are content literally to paper over the problem with massive amounts of newly printed currency. This means that savvy investors, facing major real losses, are turning increasingly to gold. In essence, even though currencies are no longer on a gold standard, they are increasingly being “redeemed” for gold in the marketplace.
For decades, fiscally irresponsible US Administrations have gradually reduced the world’s richest nation, with a currency perceived as ‘good as gold,’ to the position of the largest global debtor, with a debased currency. Furthermore, US stock markets have offered little real return. Indeed, the Dow stands just below 11K, down over 3K points from its all-time high on October 9, 2009. Discounting for inflation shows a loss close to 4K points, or a fall of over 25 percent from its all-time high. Meanwhile, equities in emerging markets have often shown handsome returns.
The recent political wrangling in Washington has damaged the financial credibility of the United States, prompting a long overdue debt downgrade by ratings house Standard & Poor’s. This removes a fundamental pillar supporting the dollar as the global reserve asset of choice.
by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)
Paul Krugman sounded the war cry this Sunday on Fareed Zakaria’s program Global Public Square. After all, he asserted, only spending equivalent to another World War could lead us back to prosperity. That, and a healthy dose of inflation.
Krugman argued that inflation would address our debt problem by reducing our bill in current dollar terms and that the Second World War was a giant stimulus plan that actually worked. Thankfully, he added the refrain, “Hopefully we don’t need a world war to get there,” but I sensed a tinge of regret in his voice. After all, the Keynesian economist’s favorite pastime is seeing people waste their lives digging holes in the ground or sacrifice their lives in war. Both acts create economic growth according to the topsy-turvy logic of men like Krugman.
The truth is that wars are a miserable misallocation of capital and usually leave financial ruin in their wake. The US did not boom in the ’50s because we fought World War II, but because we resoundingly won. It was the byproduct of having an unscathed manufacturing base, solid infrastructure, an intact military, most of the world’s gold, and the only reserve currency.
by John Browne, Senior Market Strategist at Euro Pacific Capital
Last week Fed Chairman Bernanke raised eyebrows and denied history when he asserted in front of Congress that gold doesn’t qualify as money. Yesterday he took the unprecedented step of announcing that the Federal Reserve would keep interest rates near zero for at least the next two years. In very short order thereafter it required much more of the money that he believes in (U.S. dollars) to buy the money that he doesn’t believe in (gold).
In any event, it was beyond unusual for the Fed to make such an explicit time commitment on monetary policy. To underscore this fact, three voting members of the Federal Open Market Committee came out against the policy. Such dissent within the Fed’s ranks has not been seen in decades. But Bernanke’s shameless appeasement of market fears did interrupt, if only for a few hours, the free fall on Wall Street. Wiser investors, understanding how a more activist Federal Reserve will destroy the value of the dollar, moved to gold, pushing the metal up to north of $1,750 per ounce.
by Andrew Schiff, Director of Communications and Marketing at Euro Pacific Capital (www.europac.net)
To an extent not fully appreciated by the investing public, financial markets are influenced by human emotion just as much as they are by economic data, corporate earnings, and dividend yields. Of all human motivations, fear is perhaps the most powerful. When people get scared, the “fight or flight” instinct forces us to take action.
Simple dangers prompt simple responses. If we unexpectedly encounter a bear on our driveway, we immediately run into the house and call animal control (or, in the country, grab the shotgun). But it’s harder to know what to do when financial danger stalks the stock market. To be honest, most investors are clueless. Is that really a bear? Is it dangerous? What qualifies as a house?
by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)
The reliance upon the U.S. dollar as the world’s reserve currency and “safe haven” asset has created a perverse, but deeply entrenched, mindset among global investors. In fact, many believe the major financial players have no alternatives to owning U.S. debt and dollars. They argue that the market for U.S. dollars and Treasuries is the only financial pool large enough to handle the massive liquidity that sloshes around the globe on a daily basis. This idea makes a mass exodus from U.S. debt holdings seem impossible. This provides a nice explanation why the U.S. Treasury bonds can rally even while the government openly flirts with default and ratings agencies issue downgrades. But just because an illogical event occurs habitually does not mean it is logical or tenable.
The sophomoric reasoning behind the dollar “exceptionalism” argument is like assuming a stock can never fall unless a significant portion of shareholders decide to sell. In reality, a buyers strike is all that is needed to puncture a market. If the U.S. experienced just one disastrous Treasury auction, prices could nose-dive and yields could skyrocket across the board on all U.S. debt.
But the problem doesn’t just lie with the United States. Investors around the world are finally beginning to understand that central bank’s thirst for creating inflation, in order to keep their banks and governments solvent, will never be quenched.
by John Browne, Senior Market Strategist at Euro Pacific Capital
Although I believe gold still faces a very rosy future, an agreement in Washington that avoids default and growing concerns of a global economic slowdown could create significant near-term headwinds for gold investors.
While the dysfunction of the US government is on stark display over the debt ceiling negotiations, other areas of the world show similar policy confusion. In the European Union, great doubts exist as to how the leaders will be able to stem the tide of serious sovereign debt contagion without inviting recession and an uptick in inflation. In China, commentators seem to lack confidence that the economy can maintain its impressive growth rate if its major trading bloc partners fall back into recession. This uncertainty has created a level of financial fear that has contributed to gold’s run up to more than $1,600 per ounce. However, this also means that any weakening of these fears could lead to a pull back in gold. An agreement in Washington, however meaningless, may be such a trigger.
Liberty Maven
by Peter Schiff, CEO of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 10am to noon Eastern time every weekday, and streaming at www.schiffradio.com.
by John Browne, Senior Market Strategist at Euro Pacific Capital
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