Liberty Maven

Peter Schiff, president of Euro Pacific Capital and author of the soon-to-be-released How an Economy Grows and Why it Crashes.

While I attended an economic conference last week in Shanghai, I found it notable – but not surprising – that two former Secretaries of the Treasury, John Snow and Hank Paulson, as well as current Treasury Secretary Tim Geither, and former President George W. Bush were then in the country at the same time. The fact that so many key American power brokers (myself not included) were in China simultaneously is no coincidence. In an overly indebted world, the $2.5 trillion that China holds in foreign reserves is acting as a center of economic gravity, inexorably pulling all market participants into its orbit.

When a 10-ton elephant plods through a village of grass huts, the big question on everyone’s mind is: which way is he going to turn next? With China, that fundamental question translates to guessing when Beijing will make changes to the value of the yuan. These decisions will determine the overall direction of the global economy, and will set the path that everyone must follow. Unfortunately, no Americans, even those who travel hat-in-hand to China, have a seat at the table where these decisions are being made.

At the risk of beating a dead horse, let me reiterate my central thesis with respect to currency valuation: just as it is always better to be rich than to be poor, it is always better to have a strong currency than a weak one. Although this simple maxim puts me into conflict with much of the economic establishment, I hold its truth to be…well…self-evident.

The effect of current Chinese currency policy (which, despite Beijing’s protests to the contrary, is manipulation pure and simple) is to make the U.S. dollar more valuable and the yuan less valuable. As a result, the benefits of manipulation accrue to Americans, not the Chinese. We get pay raises; they get pay cuts. Americans use their stronger dollars to buy products they would otherwise not have been able to afford. On the flip side, the Chinese people do without products that they otherwise would have been able to afford had their government not transferred their purchasing power to us.

The same effect is experienced with interest rates. In order to manipulate the dollar’s value higher, the Chinese government has gobbled up more than $1 trillion of them.The Chinese then loan the dollars back to the U.S. through purchases of government and mortgage-backed debt, which reduces the cost of servicing our massive liabilities.

By the same token, if China were to stop manipulating the dollar higher, it would remove the props currently supporting our dysfunctional economy. American interest rates and consumer prices would soar, and our economy would collapse. Meanwhile, China would experience the opposite effect. Chinese consumer prices would fall, immediately raising living standards for average Chinese workers, whose higher real wages would finally allow them to fully enjoy the fruits of their labor.

What strikes me as particularly dangerous is that no one, not even the Chinese, appear to understand these fundamental dynamics. All of the Shanghainese with whom I spoke last week were unaware that a stronger yuan would be in their own best interest. The way most people see it, a stronger currency is a bullet that China must be prepared to take in order to save the rest of the world from further pain.

And so we watch the strange spectacle of China stubbornly resisting actions from which it will immediately and substantially benefit. In reality, an appreciating yuan is the bitter medicine Americans must swallow if our sick economy is every to regain its health. (An allegorical explanation of this is contained in my new illustrated book, “How an Economy Grows and Why it Crashes.”)

When Beijing finally comes to it senses, the transition will be unavoidably disruptive. For China, the long-term growth would far outweigh the short-term shock. America, however, would face a much less certain outcome. There is no question that, for Americans, the immediate effects would be very painful, with the gains only developing with time and prudent decision-making. Still, that does not mean we should resist the process, for the longer it is delayed, the more severe the pain and the longer the road back to prosperity.

Given this reality, why are our political leaders so adamant that China effectively pull the rug out from under our economy?  Are they really that clueless?  Perhaps they are – or perhaps they are a bit more devious. Perhaps they are using reverse psychology. Maybe they feel that the best way to get the Chinese to maintain the peg is to demand that they remove it. Historically, the Chinese have always resisted outside interference.

However, to paraphrase Abraham Lincoln, you cannot fool all of the Chinese all of the time. Soon they will see the light, and when they do, it’s lights out for American hegemony. If you think China is important today, just wait a few years. For example, while the Chinese automobile market is now the largest in the world, 90% of Chinese car buyers pay cash. In contrast, only 15% of American car buyers do so. In other words, Chinese consumers can actually afford their cars, while most Americans cannot. Without huge car payments, Chinese consumers are in much better shape not only to trade up to newer cars in the future, but to purchase other products as well. This suggests huge future growth, not only in automobiles but also in other consumer products as well.

This eruption of consumer demand, made possible by pent-up savings, is creating historic opportunities for investors. When the Chinese start using their wealth to expand their own economy rather than to subsidize ours, infrastructure may well be a primary beneficiary. (For more information on this, see Euro Pacific’s new special report: Investing in China’s Infrastructure.)

Whenever the Chinese government decides to end the peg, the Chinese economy will benefit as a result. While as citizens we can hope that U.S. leaders respond with the right policies to enable our economy to regain its former glory, as investors we should position ourselves to benefit from the more certain outcome.

In Barack Obama’s latest health care plan is a proposal to give the Health and Human Services secretary the power to block price increases in premiums by health insurers. That power, on its face, would be subjective and political. However, it would complete the take-over of American companies by this increasingly relentless socialist administration.

Look at the facts, these days government dictates how to make a product, the government dictates what to put in a product, the government dictates shipping methodology if the U.S. Postal Service is used, the government dictates working conditions with OSHA, the government dictates minimum pay for employees and who to hire with EEOC laws, the government dictates salaries and bonuses for management in some industries, and, at the end of the day, for its efforts, the government will be on hand to collect its fair share of the company’s profit through taxation if a company is fortunate enough to make a profit on its transactions.

Now the government wants to dictate to companies what they will charge for their products. 

What decision making is left for a company under this administration? Helping pick the color of tablecloths in the company mess hall?

This proposal will be the final nail in the de facto take-over of American business. And it neatly avoids the messiness and expense of actually having to buy or run companies ala General Motors or AIG. Free companies! What socialist politician wouldn’t be giddy with excitement over the prospect?

You just gotta admire that crazy Capitalist Socialism.

The government would love nothing more than for you to believe that they have all the answers. They want you to believe that through their laws you somehow magically become more free or more equal. This notion is a fallacy. Government by its very nature is force. Over time many people have attempted to seek methods to minimize government’s force over our lives, but as time moves forwards more and more laws are created limiting our options.

One of the key ingredients in attaining some semblance of freedom is to become financially independent. A new book, “5 Steps To Freedom“, by Jeff Nabers and Phoebe Chongchua supplies us with some extremely effective tools to escape financial slavery. Take elements of Tom Wood’s “Meltdown“, Ron Paul’s “Manifesto“, and Peter Schiff’s “Crash Proof” all rolled into one and you come very close to describing “5 Steps To Freedom”.

The five high level steps are:

1. Measure
2. Move
3. Maintain
4. Multiply
5. Mention

The first portion of the book is an education on topics such as:

Read More »

by John Browne – Senior Market Strategist, Euro Pacific Capital

In recent weeks, the financial world has been dazzled by strikingly high earnings reported by our leading investment banks… or at least what we used to call investment banks. The numbers are reminiscent of another era – the one that came to a crashing end last September. Today’s euphoria was keyed to the record $3.44 billion 2nd quarter profit announced by that branch office of the Treasury Department also known as Goldman Sachs. Wells Fargo, JP Morgan Chase, and State Street also chipped in with strong numbers.

The seeming health of these institutions, which are often referred to as the “backbone” of the U.S. economy, is currently being cited as strong proof that economic recovery is at hand. This conclusion is based on selective memory and dubious logic.

The more immediate question hinges on whether this rise in bank and corporate earnings can be sustained in the face of increased commercial real estate mortgage defaults, rising unemployment, and increased savings? Would it then be likely that the broad stock market can continue to rally while the financial sector sputters? If not, a serious correction in U.S. equity prices is a foregone conclusion.

In the early years of this century, major money-center banks and shadow banks incurred irrational risks and paid themselves unimaginably large bonuses. They were termed “gambling casinos” and deservedly drew fire when their bets went south. But instead of forcing these irresponsible firms to pay for their bad behavior, the federal government forced the general public to rescue them.

The Treasury and Fed instituted four key measures intended to boost the banks’ earnings, which in turn, would boost their share prices, improve their capital ratios and force their share prices upward.

First, Congress was pressured into giving instant approval to the $750,000,000,000 Troubled Asset Relief Program (TARP). This massive sum of public money was designed to buy toxic assets from the banks. However, the government soon realized that buying some toxic assets would create a real price and thereby threaten the inflated value of other toxic assets held by financial institutions worldwide. The initial TARP plan was dropped in favor of injecting billions of dollars into certain banks, leaving the toxic assets on their books. Meanwhile, the true values of these toxic assets were officially camouflaged by the initiation of “exceptional” accounting changes.

The injection of free TARP funds enabled the recipient banks to enter a charred landscape that was, nevertheless, bristling with easy profits. For example, $10 billion of TARP funds enabled Goldman Sachs to make leveraged trades during the bear market rally of the last four months. Though this is the same activity that caused its downfall, Goldman now assumes a government guarantee on its risk-taking. With no limits on their appetite for risk, record profits are theirs for the taking.

Read More »

By John Browne – Senior Market Strategist, Euro Pacific Capital

As 2009 moves past its midpoint, many market participants are briskly trying to forget the carnage of 2008 and the first quarter of 2009. But, before we get lost in the euphoria of the 36% Dow rally in the Spring/Summer of this year, a little hindsight is in order. In March, the Dow had plunged to 6,547, or some 53 percent down from its nominal 14,164 high in 2007. Despite the recent gains, we are still nearly 40% below the 2007 peak. This is a brutal truth that everyone seems to be ignoring.

Last week, Merrill Lynch, that storehouse of economic sagacity, announced that the recession was over. Even the bearish NYU economist Nouriel Roubini was reported as saying “the worst is behind us.” However, wishing earnestly for something does not make it so.

Admittedly, the financial meltdown that threatened in late 2008 appears to have been contained. In addition, the Fed’s actions in the credit markets have held interest rates down and turned the yield curve positive. The credit markets also have started to ease. In addition, the federal government’s injection of trillions of dollars into the economy has “boosted confidence” for those too short-sighted to know the consequences. This welcome news has provided impetus to equities.

In combination with reassuring remarks by senior administration officials and retail investors’ wish not to be left behind, money has started to move back into American equities. The resultant rally in stocks seems to have validated the preceding optimism.

Read More »

By John Browne, Senior Market Strategist, Euro Pacific Capital

In economics, as in many other “soft sciences,” facts are often overshadowed by theories. The dominant economic theory currently in vogue is that the massive government stimuli orchestrated by the Bush and Obama administrations would produce an economic recovery by the end of this year.

Thus, it is no surprise that media cheerleaders have seized on the recent steep, but thinly traded, rally to find the facts that appear to fit the theory. From where do these talking heads draw this conclusion?

In recent months, we have allowed for the probability that a bear market rally, driven by seemingly low price-earnings multiples, would take hold for the first half of 2009. Months ago, I had stated that the rally would reasonably last into the summer and that the Dow could reach 10,000 before the next major downturn begins.

In the depths of the stock market crash of 2008/9, buying opportunities certainly arose. By March 2009, stock markets appeared to have been oversold. Certainly price-earnings multiples on many stocks had been compressed to generational lows. Ignoring the fact that these low multiples were underpinned by pre-recession earnings data, investors declared a bottom.

However, as is the tendency with sudden declines, bargain hunters entered the market too aggressively. On relatively thin trading levels, this led to a steep rise in stock prices which, in turn, drew in investors who feared being left behind. A steep bear market rally was in place. This mirrored the pattern of the Great Depression, when the initial crash was followed by a 68 percent rally in 1930. But after that rally had fizzled, stocks then declined by an astounding 86 percent over the two subsequent years.

While we urged caution in this rally by highlighting, among other indicators, a 38 percent decline in corporate earnings, speculative traders made enormous profits as stock markets rose by over 40 percent. But as dismal economic statistics continue to rain on everyone’s parade, the cheers are beginning to subside. Last week, the unemployment figures were released and the Dow slid by some 223 points.

Now, even speculative traders are preparing for a drop. The new-found concern is due to three basic indicators:

First, the U.S. dollar, linchpin of all American (and most global) transactions, is appearing increasingly weak. 10-year Treasury yields, as low as 2.1 percent post-crash, and continuing to stay below 4 percent, indicate a persistent bubble in “safe” U.S. bonds and cash.      Read More »

President Obama stood before a captive audience at Georgetown University earlier this week and delivered yet another dishonest and misleading speech on the cause of our economic downturn.

He makes a feeble attempt at blaming all our ills on “predatory” lenders and “greedy” people at the GSEs Fannie/Freddie as well as AIG and others. He makes no mention of the actions taken that set the stage for conditions that make such things possible: government intervention. No mention of who caused the bubbles: government.  And of course, like any good puppet, he follows the script nicely by making sure there’s no mention of the Federal Reserve, the main culprit in all this mess.

See additional commentary on this topic by Sheldon Richman at The Future of Freedom Foundation.

Here is the full text of Obama’s prepared speech, if you would like to dissect it further:

Read More »

After completing Trace Mayer’s excellent ebook, “The Great Credit Contraction“, I stopped reading and said aloud, “Wow”. I started reading it with the intention of reading a few pages. Much to the detriment of sleep I ended up reading half the book in the first sitting.

The dollar truly is an illusion and gold is real money. Mayer’s book hammers this home in a profound way. One of the great things about the book is that it covers the fundamentals and history of money as we know it. If you ever wondered how the idea of fractional reserve banking came about then you should read this book. If you want an answer to the question, “What is money?”, then this book is for you.

Mayer utilizes several quotes from economists past and present to reinforce his points. He invokes the likes of Ron Paul, Lew Rockwell, Ludwig Von Mises, Alan Greenspan, and many others.

“The Great Credit Contraction” is a quick, educational, and enjoyable read and I highly recommend it.

Judge Napolitano’s liberty-full Freedom Watch show tomorrow will have the following guests and topics, as reported at FreedomWatchOnFox.com:

2:00-2:10 Glenn Beck and Shepard Smith start the show.

2:10 – 2:30 Peter Schiff (in studio) with Lew Rockwell (phone) including a special 10 minute segment from Schiff entitled “Protecting Your Assets, what you need to know about your money and investments.”

2:30 – 3:00 Ron Paul (from DC), Peter Schiff, and David Boaz (live from CATO)

Possibly other last minute guests as well.

The topics for the week will be: U.S. power to seize firms, possible 15 year depression, discussion of Austrian School of Economics, preview of Campaign for Liberty, St. Louis conference and much, much more.