Peter Schiff is probably, right now, the fore most advocate of Austrian Economics, so when I saw one of the financial bloggers I read
ripping him, I thought I'd need to post a reply.
What if one hundred years later: the little town has expanded to take up a whole country, and as the government took control of money and made it illegal for anyone else to produce money the majority of the citizens in the country stopped saving and got jobs in the service industry, contracting out most of the manufacturing jobs to another country across the sea, as they were doing this a lot of them paid for this using money obtained on credit from the second country.
Also, while all of this was happening, the government who had a monopoly over the money forced billions of it into the banking system and bullied them into lending it to people to buy houses who could not pay it back.
Then, the banks repackaged the loans and they were sold as AAA debt?
A bubble would be created in housing prices, because so many people would be bidding for them that the prices would shoot up, then as a result of the prices shooting too high builders would build even more houses, and people would start trying to speculate on the houses, using mortgages with no money down.
Once the housing prices dropped even a little all the speculators who had 'bought' houses with no money would just walk away and foreclosures would spiral upwards, then the money would start coming due to those who would not afford them in the first place.
As the housing prices were falling and foreclosures were mounting the idiots who bought the repackaged debt would face huge losses, which in the free market is the only signal that says stop doing what you're doing the market thinks the resources should be allocated elsewhere.
This is what happened in America, and Peter Schiff, Ron Paul, Lew Rockwell, Tom Woods, Walter Block and every other Austrian Economist predicted it starting in 2002 when the fed started decreasing the interest rates.
Yes, a broken clock can be right twice a day, but when a group of hundreds of economists and hundreds of thousands of their students have used logical theory to predict every recession or depression in the 20th century in any country and to explain all those before, it is most likely because they are correct.
Also, a few more things:
Schiff does not think everything in our economy would be going to zero if the government stayed out of it, he believes the malinvestment, which you mentioned as an overabundance of investment that didn't perform, would be liquidated and we would be out of it, this is what happened in 1920 and even after production dropped 21% in one year the downturn only lasted about a year and a half.
By 'plowing' money into the system the only thing that happens is price inflation and a perversion of incentives that tells bankers they can take whatever risk they want because the government will be there to back them up. These companies that are being propped up are too big to be allowed to stay alive, our already screwed up economy cannot take so much money being wasted on crap, when the money should be allowed to be allocated to more efficient firms and people who if they earn a profit would be, by definition, helping society.
With your debt in a 'real' economy, that would be correct, but in America we are no longer manufacturers so the money we borrow from China goes back to China and other Asian countries to produce things or to service industries who will in turn spend it on more service industries or more things from outside the US. When this happens the debt is not invested in anything, so a lot of won't be paid back.
We had the gold standard for a few years of the depression, but ti wasn't effective because FDR and Hoover did bank holidays and effectively canceled it out before FDR killed the gold standard and just banned owning gold at all outright in 1934.
The War did not get us out of the depression, it was the end of the war and the end of government spending that got us out of the depression in 1946.
And as for Schiff's investment record, he cannot reveal it because he was not an investment adviser until this year, but from what I've read most of his clients fell less than the stock market did last year the guy who showed Mish his portfolio invested like a week before the peak and sold out his whole portfolio like two weeks after the trough.
In his book Schiff said that the foreign markets would likely fall with the US until they decoupled, and he advised holding a lot of cash until then, so to imply he was totally wrong with his investment advise because he had a bad 6 months, which he predicted would happen, and got a chance to average into his investment is not very logical, especially for a value investor.
Also, Schiff is effectively a value investor, a few weeks back on his podcast one of his researchers at his firm was interviewed, and they do fundamental analysis on each stock they recommend, forecasting its cash flows and only buying those with low multiples and high dividends.
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More to come later, I will be 'live blogging' Tom Woods' new book Meltdown.
, By Tom Woods (my favorite author by the way) for a few relatives at three different book stores, well all of them were sold out and the last even mentioned the publisher is completely sold out.
