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.

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!

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

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.

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.

That’s just a little over $30,000 per year.

Clearly the banking lobby is satisfied with Mr. Watt’s performance.

Last Friday, Rep. Ron Paul reported that our Federal Reserve Transparency Act (HR 1207) was “gutted” in Rep. Watt’s subcommittee.

In defense of Rep. Watt, however, it’s not totally his fault. His district is the most obviously gerrymandered in North Carolina, following I-85 like a snake from Charlotte to Winston Salem. It is overwhelmingly Democratic, and his re-election has never been seriously challenged. Why should he represent the people when he is electorally invincible?

While we may not be able to hold Rep. Watt accountable, we can fight back. His attempt to eviscerate HR 1207 must be approved by the full Financial Services committee.

We can block that approval, and restore the original bill. It is especially important that each member of the Financial Services committee hear from their constituents the clear message that Rep. Watt’s proposed changes are unacceptable. And you must act now because . . .

The Committee could meet as soon as today (Wednesday).

Every Representative should receive a message. But if your Representative is on the Financial Services committee, they should also get a polite phone call from you.

Please review the list of committee members to see if your Representative serves on the Financial Services committee.

This is what I wrote to one member of the Committee . . .

You may be aware that Rep. Mel Watt’s subcommittee on monetary policy introduced changes to the Federal Reserve Transparency Act (HR 1207) that restrict inquiry around transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks, and staff.

These changes have the practical effect of killing the bill, and eliminating the transparency that our economy and financial markets require for stability and sustainable growth.

It is also clear that Rep. Watt does not fear for his re-election, given his willingness to put the narrow interests of the banking industry, his top donors over the last decade, above those of the American people. I’m hoping you will be more responsive to the people.

HR 1207 has over 300 cosponsors in its ORIGINAL form. I trust you will use your influence to remove Rep. Watt’s changes, and bring HR 1207 to a vote on the House floor in its original form.

I’m also sending a copy of this message to my two Senators so that they too will know how important this HR 1207 is to me.

END OF LETTER

You can send your letter to Congress using the DownsizeDC.org Educate the Powerful System.

NOTE: In a video message, Ron Paul indicated that it is especially important that constituents contact the 13 Democrats on the Financial Services committee who already co-sponsored HR 1207, with a VERY polite reminder that you STILL want them to support the ORIGINAL bill, and to resist Mr. Watt’s amendments.

For your convenience, here is that list . . .

Rep. John Adler, NJ (202) 225-4765
Rep. Travis Childers, MS (202) 225-4306
Rep. Steve Driehaus, OH (202) 225-2216
Rep. Alan Grayson, FL (202) 225-2176
Rep. Rubén Hinojosa, TX (202) 225-2531
Rep. Suzanne Kosmas, FL (877) 956-7627
Rep. Dan Maffei, NY (202) 225-3701
Rep. Brad Miller, NC (202) 225-3032
Rep. Walt Minnick, ID (202) 225-6611
Rep. Ed Perlmutter, CO (202)-225-2645
Rep. David Scott, GA (202) 225-2939
Rep. Brad Sherman, CA (202) 225-5911
Rep. Jackie Speier, CA (202) 225-3531

Thank you for being a part of the growing Downsize DC Army,

Dr. William (B.J.) Lawson
Commentator
DownsizeDC.org, Inc.

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

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

The GDP numbers out yesterday, which showed economic growth at 3.5% in the third quarter, brought a deafening chorus from public and private economists who all agreed that the recession is officially over. With such a strong report, they are happy to tell us that not only has the Fat Lady finished her aria, but she has left the building and is sipping champagne in the bath. As usual, it falls on me to rain on the parade.

Even the giddiest commentators admit that the upside GDP surprise resulted almost entirely from government interventions. But, by pushing up public and private debt, expanding government, deepening trade deficits, and pushing down savings rates, these interventions have succeeded only in putting our economy back on an unsustainable path of borrowing and spending. Accordingly, they have prevented the rebalancing necessary for long-term health. Could there be a simpler illustration of trading long-term pain for short-term gain?

Rather than asking these pre-K economists to make such a three dimensional leap, it may be easier just to give them a brief history lesson.

During the decade that corresponds to the Great Depression, annual GNP expanded for six years and contracted for four. After nose-diving in the early years of the decade, GNP turned positive in 1934 and then logged three more years of solid growth (the four year average annual growth rate was 8.5%). But does anyone really believe the Great Depression ended in 1934, when the economy first stopped contracting? Unemployment reached 19% in 1938, nearly the peak of the entire Depression, almost a full decade after the stock market crashed! Why will we be so much luckier this time around?

The unpopular truth is that rather than curing the economy, government stimulus has made it sicker. The Bush Administration and the Greenspan Fed pursued this policy recipe in the 2002-2003 recession. The result was four years of phony growth, greater global imbalances, and the development of unsupportable asset bubbles. Clearly we have learned nothing from those mistakes.

Third quarter ‘growth’ was largely driven by a 23% increase in residential construction (the largest quarterly increase since 1986) and a 3.1% increase in consumer spending, which included a 22% jump in durable goods purchases – mostly automobiles – and 2.3% gain in government spending. Since the increase in consumption outpaced the increase in production, the trade deficit expanded, reversing the positive trend for most of 2008 and 2009. Because the increase in spending outpaced the increase in incomes, the savings rate plunged from 4.9% in the prior quarter to 3.3%.

The sizzling numbers for housing and autos resulted from heady cocktail of policy stimulants: near-zero interest rates, government-guaranteed mortgages, Federal Reserve purchases of mortgaged-backed securities, tax credits for homebuyers, bailouts for auto finance companies and ‘cash for clunkers’ for car buyers.

But the last thing our economy needs is for scarce resources to be wasted through uneconomical incentives.

If the government were not ’stimulating the economy,’ higher interest rates and falling home prices would have hamstrung residential construction. That would have been the right move. Instead, based on the false economic signals of the ’stimulus,’ we continue to build houses for which no legitimate demand exists.

The same is true for cars. Because of stimulus money, Americans are buying cars that they otherwise would not have. In a free market, the money would have been used for a more constructive purpose. Perhaps it would have been saved, used to pay off existing debt, or spent on a less expensive mode of transport, like a used motorcycle.

The economy ran into a wall in 2008 because consumers bought houses and cars that they really could not afford. That is why the institutions that provided the loans, such as banks, Fannie & Freddie, and GMAC, went bankrupt. It should be obvious that the solution to our economic problems will not be found by redoubling these efforts. This is akin to a drunk having a few more drinks in order to get sober!

A recent article in the Wall Street Journal detailed the myriad ways in which Senators and Congressman are now compelling General Motors to make business decisions that are solely driven by the legislators’ own political considerations, not the best interest of the taxpayers who now own the company. Such a dynamic is now underway in nearly every facet of our economy. An efficient allocation of resources – the only path to economic growth – is only possible when market forces, not Beltway bureaucrats, call the shots.

In the end, this stimulus, just like prior doses, will only worsen the condition it is meant to cure. When it wears off, the resulting recession will be even bigger than the one that everyone assumes has just ended. Until the impulse to fight recessions with government stimulus is quashed, genuine economic growth will never return. A string of ever-worsening recessions will eventually lead to what will be the next Great (Inflationary) Depression. But for now, enjoy the bubbly.

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.

by John Browne – Senior Market Strategist, Euro Pacific Capital

Over the past two years, the federal government and the Federal Reserve have dispersed trillions of public dollars, run up enormous deficits, and kept interest rates at zero. In just about any economic textbook, this combination of policies would be described as the perfect recipe for inflation. Yet, with the exception of the usual increases in health care and education, prices by and large are not rising. Many have concluded that our economic leadership has simply outsmarted the textbooks.

The benign CPI figures are serving as a rallying point behind which the financial talking-heads are forming a parade of optimism. The low CPI is their ‘proof’ that inflation is not a pressing concern. This view is two dimensional.

Inflation is classically described simply as an increase in the money supply. Although these changes will impact price levels, it doesn’t necessarily follow that prices will rise when inflation is high. Instead, inflation may merely result in stable prices at a time when prices would otherwise be falling.

In the popular mentality, however, inflation is simply defined as prices rising. After decades of steadily rising prices, people seem to have forgotten that prices sometimes fall. In light of the bursting of a number of record-breaking, government-fueled asset bubbles, prices should be declining across the board (as they did in the Great Depression). The fact that prices are stable, or have even rallied in some sectors, indicates that inflation is already spreading across the economy.

After falling to just 6,547 in the months after the crash, the Dow has rallied past the 10,000 mark. This should strike even novice investors as unjustified. Jobs are still being lost, a massive healthcare entitlement and carbon tax are winding through Congress, and no one with at least one foot in the real world has a palpable sense of imminent recovery. Corporate earnings have fallen far behind the rally in shares prices, stretching valuation multiples to pre-crash levels.

While not quite as frothy, home prices are now moving up for all the wrong reasons. The seminal Case-Shiller Index of home prices is now up for the fourth month in a row. The index’s designer, Professor Robert Shiller, has stated recently that the current upward trajectory is unsustainable. In fact, the levels are still above the 50 and 100 year trend lines.

In the worst economic climate since the Great Depression, and after the largest housing bust on memory, single-family home prices should be falling well below the trend lines. But with a doubling of the monetary base and special interest programs like the homebuyers’ tax credit, home prices have stabilized and even increased in some markets. That’s the work of inflation.

With GDP growth now returning to positive territory, many inflation hawks ask why inflation has yet to truly manifest. The explanation can be found in the difference between monetary base and money supply.

The latest $1.9 trillion injection of government money was composed of some $900 billion of stimulus, of which only about 20 percent has been distributed. However, in its attempts to stabilize the financial system, the government has already spent some $1 trillion of TARP-type funds.

The TARP money, financed by an increase in the monetary base, has been provided to the banks at zero cost. And for the first time ever, the Fed is paying interest on bank reserves. Therefore, the banks can loan money to the Fed and to the government, via Treasury securities, at an interest rate spread of some 3 to 4 percent without risk. Given these incentives, it makes no sense to loan to anybody else. So, despite a massive increase in the monetary base, credit remains tight and price levels flat.

However, if the Fed stops paying interest on bank reserves or otherwise ‘persuades’ the banks to lend, the $1 trillion will be leveraged up by the banks and spewed out into the economy. Fractional reserve banking will transform a $1 trillion monetary base injection into a $9 trillion increase in money supply. When that happens, prices for everything will go through the roof.

So for now, inflation is like a ninja stalking our economy. It’s lurking in the shadows but can’t easily be seen. But once its strikes, it will be fast and deadly.

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.