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 supposedly compromising to raise the debt ceiling, Congress and the President have now paved the way for ever higher levels of federal spending. Although, the nation was spared the trauma of borrowing restrictions, the actual risk of default existed solely in the minds of Washington politicians.  But the real crisis is not, nor has it ever been, the debt ceiling. The crisis is the debt itself. Economic Armageddon would not have resulted from failure to raise the ceiling, but it will come because we succeeded in raising it. This outcome falls along the lines that I had forecast (See my commentary, “Don’t Be Fooled by Political Posturing” from July 9th).

Both parties are now pretending that the promised cuts in spending outweigh the increase in the debt limit. But the $900 billion in identified cuts are spread over a decade and are skewed toward the end of that period. There are an additional $1.4 trillion in cuts that the plan assumes will be identified by a bi-partisan budget committee. But similarly empowered panels in the past have almost never delivered on their mandates.

More importantly, none of these “cuts” are actually binding. There is plenty of time for future Congresses to reverse what was so laboriously agreed to over the past few weeks. My guess is renewed economic weakness will be used to justify ultimate suspension of the cuts. In addition, most of the spending reductions were already scheduled to take effect before this agreement. So what did we really get?

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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.

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by John Browne, Senior Market Strategist at Euro Pacific Capital

President Obama has continued and increased the reckless spending of the previous Administration. Now, as the federal debt reaches its statutory limit, he is spreading fear and panic in the hopes of having it raised.

Many of the key people responsible for America’s historic mess, including the President, Treasury Secretary Geithner, former NEC Director Summers, and Fed Chairman Bernanke, have pronounced publicly that a failure to lift the debt ceiling will cause a catastrophic Treasury debt default.

This is simply not true. The US Treasury has tax revenues that cover the service of its current (staggering) debt of some $14.3 trillion.

Yet, that doesn’t mean the US government won’t be forced to default in other ways. Failure to pay the
nominal interest and principal on bonds is only the narrowest definition of “default.” When a broader definition is used – which includes the use of inflation to erode the real value of US debt – the US government has in fact been in a state of continuous default for almost a century.

A 2011 dollar is worth just four cents in terms of a 1914 dollar. As that new money circulates, your dollar will lose some 53% of its purchasing power, productivity increases notwithstanding. That’s just in the last three years!

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by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)

The debt ceiling debate that has dominated the headlines over the past month has been thoroughly infused with a string of unfortunate misconceptions and a number of blatant deceptions. As a result, the entire process has been mostly hot air. While a recitation of all the errors would be better attempted by a novelist rather than a weekly columnist, I’ll offer my short list.

After having failed utterly to warn investors of the dangers associated with the toxic debt of entities like Enron, Fannie Mae, Freddie Mac, and AIG, as well as the perils of investing in mortgage-backed securities and sovereign debt of various bankrupt countries, the credit ratings agencies (CRAs) have now apparently decided to be more vigilant. Hence, many have offered conspicuous warnings that they may lower U.S. debt ratings if Washington fails to make progress on its fiscal imbalances. But then, just in case anyone was getting the impression that these rating agencies actually cared about fiscal prudence, Moody’s suggested this week that its concerns would be lessened if Washington were to make a deal on the debt. The agency has even suggested that America’s credit could be further improved if Washington would simply eliminate the statutory debt limit altogether. In other words, Moody’s believes that our nation’s problems are more a function of squabbling politicians rather than a chronic, unresolved problem of borrowing more than we can ever hope to repay.

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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

I have been forecasting with near certainty that QE2 would not be the end of the Fed’s money-printing program. My suspicions were confirmed in both the Fed minutes on Tuesday and Fed Chairman Ben Bernanke’s semi-annual testimony to Congress yesterday. The former laid out the conditions upon which a new round of inflation would be launched, and the latter re-emphasized – in case anyone still doubted – that Mr. Bernanke has no regard for the principles of a sound currency.

Tuesday’s release of the Fed minutes contained the first indication that a third round of quantitative easing (QE3) is being considered. The notes described unanimous agreement that QE2 should be completed, along with the following comment: “depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run.” Since the unemployment situation is deteriorating, and by all accounts will continue to do so, the Fed is essentially pledging to keep the spigot turned on. The committee also decided to look only at current “overall inflation” in making their judgments, as opposed to “inflation trends.” Since new dollars take awhile to circulate around the economy and raise prices, this means the Fed is sure to be too late in tightening once inflation starts to run away, causing more dislocations in the American economy.

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by John Browne, Senior Market Strategist at Euro Pacific Capital

The past few days have been very bad for the world’s largest banks. American behemoths Citigroup and Bank of America are down about 7% each. Across the Atlantic, things are far worse. BNP Paribas, Barclays, and Banco Santander are all down 13% or more… and Société Générale is down an astounding 16%!

Some pundits warn of an overreaction and suggest this is a buying opportunity for the beat-up financials. I disagree. Rather, I think the financials should now be considered toxic assets. Caution is justified.

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by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)

Those who take issue with the outlook of Austrian economists in general, and Euro Pacific Capital in particular, have pointed to the persistence of low bond yields as proof that our philosophy does not hold water. We argue that as the United States takes on ever more debt and prints greater quantities of dollars, that buyers of our debt will demand higher rates of interest to compensate for greater risk.  In fact, our philosophy leads us to believe that rates would currently be spiking as Washington debates whether to raise the debt ceiling yet again or default on existing debt. Instead, rates are hitting close to multi-year lows. As a result, our critics have found a seemingly valid issue. However, we believe that there are strong market reasons that are holding rates low for now that do not invalidate our central thesis.

Looked at objectively, there are a litany of reasons why rates should be much higher than they are.  Official government data from the Labor Department has year over year consumer inflation rising at 3.4%. With the Ten year note offering a paltry 3.1%, negative real interest rates now extend out over a decade! At the same time, total non-financial debt as a percentage of GDP is at the highest level on record and in our view there are no credible projections that show the trend reversing anytime soon. In addition, with the end of quantitative easing, the Federal Reserve will apparently no longer be soaking up 75% of all new Treasury issuance. Given this, does it make sense that yields on Ten Year Treasuries are trading 60% lower than their 40-year average?  Forget the flowers, where have all the global bond vigilantes gone?

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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

As attention focuses intently on the negotiations to raise the debt ceiling, House Republicans have made a great show of drawing a line in the fiscal sand. They claim that they will not vote for any deal that includes tax increases to narrow the budget deficit. But we all know how the game works in Washington. With the 2012 elections looming the Republican bluster is merely a bargaining chip that they will quickly toss into the pot when they sense a political victory. In fact there are signs that such a compromise is already underway.

House Republicans already have the power to avoid tax hikes and force significant spending cuts. All they have to do is refuse to raise the debt ceiling under any circumstances. That’s it. At that point the only discussion would be where to find spending to cut.

But Republicans want to raise the debt ceiling just as much as Democrats, they just want to gain political advantage in the process. They have widely accepted the Democrat stalking horse that a failure to raise the ceiling will lead directly to economic Armageddon. No party wants to be held responsible for such an outcome. Even if the expected Armageddon does not come, the Republicans will be blamed for any problems that follow a no vote on the increase, regardless of the true cause. As a deal is in everyone’s political interest, I am convinced it will happen.

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by Peter Schiff

Imagine a day when you go to buy a quart of milk, ask the price, and the cashier says, “that’ll be a tenth ounce silver.” As the US dollar’s decline accelerates, several efforts around the country are trying to make this vision a reality.

Historically, paying for items in silver or gold was actually quite common. We happen to live in an unusual time and place where generations have grown up trading exclusively in paper. While my parents still used dimes made of silver, we have now gone several decades with no precious metals in any of our official coinage. But this system of money by government fiat is unsustainable.

While the practice of bartering precious metals directly for goods and services has continued on a small-scale over the last few decades, the 2000s saw the beginning of organized efforts to revive gold and silver as money.

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by John Browne, Senior Market Strategist at Euro Pacific Capital

Last week, the Greek parliament voted by a narrow margin to pass an economically crippling austerity plan of some $40 billion in return for some $159 billon of fresh liquidity injections. Although many hailed the event as a needed first step on a long road to recovery, I believe the austerity program will make a bad situation worse.  It is a flawed solution that stems from a false premise: that Greece should continue to be part of the euro zone, and continue to use the euro as its currency.

To return to national economic viability Greece must abandon its use of the euro currency, which has become a financial straight jacket. Nevertheless, Greek politicians may have agreed secretly to accept the austerity in name only, in return for a liquidity bailout that will buy time for European unity to solidify. Once political unity is restored, we should expect more massive financial transfers from northern countries, present day Germany and Britain, to the subsidized southern regions.

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