In December of 2007, as Apple was approaching $200 a share, you couldn’t say a word about it for fear of backlash from the Apple investment community that insisted it was going to $600 a share. Today, Nouriel Roubini and Peter Schiff are considered gods for predicting the economic turmoil, and anyone discrediting their teachings should be burned at the stake. Well, get the gas and matches, because I have to say that Peter is full of Schiff in his latest article.
A broken clock is still right twice a day. The problem is this: If you look at that clock at that exact “right” moment in time, you should not automatically assume that the clock is always right. Warren Buffett came out recently and said how “dumb” he was in 2008. Should we then assume that Buffett is doomed to be eternally wrong in the future?
The “Credit” Economy
In this March 2nd article on SeekingAlpha, Schiff posits that the government’s plan to restore the flow of credit is somehow a plan to entice people to leverage themselves further to the hilt.
Government efforts to simply make credit available, without rebuilding productive capacity or increasing savings, are doomed to destroy what’s left of our economy.
True. But then he goes on to explain how a “real economy” works in simple terms:
Suppose there is a very small barter-based economy consisting of only three individuals: a butcher, a baker, and a candlestick maker. If the candlestick maker wants bread or steak, he makes candlesticks and trades. The candlestick maker always wants food, but his demand can only be satisfied if he makes candlesticks, without which he goes hungry. The mere fact that he desires bread and steak is meaningless.
He continues, explaining what would happen if the candlestick maker began borrowing steaks and bread, issuing IOUs, yada yada, until there was a natural disaster that destroyed all the equipment and nobody could produce anything any more. The takeaway lesson: If everyone maxes out their credit cards and a meteor hits Earth and destroys every business and piece of equipment, our economy might have some problems.
(I’ve got news for you Mr. Schiff: Not everyone is leveraged to the gills.)
Growth in the “Real” World
Let me propose a different scenario to Schiff’s doom and gloom economic outlook. We have the same three players above, but we also have a city down the street with ten unemployed, starving citizens. The butcher employs one of these citizens so that he can work a little less. That citizen, now enjoying a paycheck, buys a candle. With increased demand, the candlestick maker hires a citizen, who in turn starts buying bread.
And so on and so forth until all ten citizens are employed.
Credit in the “Real” World
Everything is hunky dory and the three empires – bread, meat, and wax – are expanding into neighboring cities. Demand is through the roof, and the businesses rapidly expand. To fuel this expansion, the three companies put themselves on “credit” – borrowing from each other in the short-term to finance growth. (Example: The candlestick maker needs the fat from the cows to make candles. He’ll pay for that fat when he sells the candles.)
Short of a Peter Schiff natural disaster that wipes out the machines needed to make the materials, this system works just fine.
Debt in the “Real” World
The citizens, enjoying their newfound wealth, start spending like crazy – some beyond their means. A few citizens start banks; some start clothing shops. A small portion of them – say, 10% or 20% – borrow too much from the banks to buy from the clothing shops.
It’s fine while the system is working; but, along comes a draught. Grains dry up, which puts the baker in a bind. With grass in short supply, cows aren’t as fat; so, meat is scarce. Less meat means less material for candle wax.
Not able to produce as much, the “Big Three” employers lay off workers. Some (though not all) of those workers are overextended on their debt; so, they blow off the bank. The bank begins to lose money; so, they stop lending to everyone else.
Unable to borrow money to purchase threads to make 1,000 shirts, the clothing maker now has to make just 400 shirts.
The economy now hits a critical point, at which a decision must be made. Do we let it “work itself out,” knowing that we will have real pain and shrinkage at all levels until we find balance, at which point we will have flushed the bad debt out of the system? Or, do we help free up credit so that the rest of the system isn’t poisoned by the draught hurting the Big Three?
Finding a Balance
Where Schiff and Roubini have it wrong is in the end result. According to them, everything in the economy is going to zero. We have to reboot the system, which means that we’ll all move out of our homes and into the woods to start picking berries and making stone tools until a new butcher, baker, and candlestick maker come along.
During the Great Depression, we couldn’t possibly lubricate the system because our currency was tied to the gold that the country had in its coffers. It took a World War and the export of 20%+ of our male “consumers” to bring the butcher, baker, and candlestick maker back.
Today, we can manipulate monetary policy to grease the wheels. Admittedly, we won’t see Dow 14,000 for quite some time. Still, without plowing money into the system, the “Greater Depression” would have already been upon us.
People might buy fewer shirts; but, unless you think we’re all going to run around naked, the strongest tailors will survive. If they don’t, another citizen will step up to seize the opportunity and become tomorrow’s employer.
Until we have 100% employment around the world, this is how “real” economies work. We don’t live in a limited citizen, fully-employed, this-for-that economy that is being destroyed by an abundance of credit and a series of natural disasters. The problem lies in the non-productive “assets” – an overabundance of “investments” that were believed by many to be assets, but ended up being liabilities.
Pain Today or Pain Tomorrow?
To correct the situation, we have to grease the wheels. I hate it as much as anyone else, but that doesn’t change the fact that it needs to be done. Few people believe that we can “sit in the tub” while President Obama takes care of things, as Mr. Schiff suggests.
People will need to make sacrifices – greater than they are now. We need to save more – that goes without saying. For example, the few thousand people that read this article will likely do so on a computer, over somewhat expensive high speed internet, with all the lights on in the room. I’d be willing to bet the TV is on in the background while the cell phone sits quietly, racking up those rollover minutes they pay for but never use.
Before you load up on ammunition and bottled water, realize that today’s actions will certainly lead to tomorrow’s stagflation or inflation, but the game isn’t over. Once panic and fear pushes the pendulum beyond the point of equilibrium, things will start to improve.
Now, the race is on. Who will win? Schiff and Roubini, whom have so convinced people that the end is near that nobody will make changes? (Why should I cancel cable or pay off my debt if everything is going to hell?) Or, the desire for a better tomorrow, at the expense of today’s instant gratification? (A vision that a lot of people lost a long time ago.)
Is there more pain ahead? Yes, and probably for a number of years when factoring in the stagflation or inflation that is on the way. Nobody is denying that. Still, to promote a full reboot and going back to a “cash only” society is ridiculous. The problems we face are not due solely to the use of credit; they are due to a massive mispricing of risk at many levels, leveraged by the irresponsible use of credit.
If you want to burn me at the stake, go right ahead. But before you do, consider this: At what point will Roubini and Schiff become bullish on America…on businesses? At what point will they declare that stocks are cheap? If they have their way, you might want to save that match – you’ll need it when the power companies shut down and you’re foraging the Earth for sustenance.
(For the naysayers that want to immediately jump down my throat without reading this article, keep in mind that Roubini and Schiff were not the only ones to see the writing on the walls – they just have great press agents. While they were booking media appearances and kissing babies, some of us were moving clients largely to cash and/or bonds in 2007 and 2008.)
Filed under: Economics & History
As far as I can tell, Schiff and Roubini haven’t made a dime, and even LOST tons of money. Some gurus.
Ask Schiff how his short dollar, long New Zealand, long commodity play has “protected” his clients from all of this. Ask him where the “decoupling” is. He’ll tell you, “It takes time.” Hey Schiff-9 years IS the long-term! Schiff isn’t a guru…he’s just another vocal bear shining in this bear market.
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I agree with much here. Just a couple pieces to add.
The big problem with credit is what it is used for. If we borrow even more of tomorrow’s wages to buy our tenth pair of shoes, or to add a water feature to our patio, then that process cannot go on forever. But there are productive endeavors, with reasonable returns on capital, for which it makes good sense to use tomorrow’s wages. In my view, it makes good sense to buy a house you can afford with a substantial down payment; that is a good loan for households, banks, and communities. And some of the mortgages being written today, in California of all places, are for houses whose prices have fallen to 2000 levels and whose buyers have put down a substantial downpayment. These are arguably the best mortgage loans that have been written in California in a decade; that is definitely worth pondering.
Second, US debt is priced in dollars and bears the good fortune of not having the same currency risks related to debt that many countries currently have–risks that will materialize in real suffering for their people in the year ahead. The United States, for all its failings, is still perceived by high net worth individuals (excepting Jim Rogers) as the most stable economy in which to hold savings. In my lights, the U.S. economy has less economic overcapacity than most of its trading partners around the world; hence their economies will suffer more from this slowdown than the USA–see, e.g., Japan, China, Germany, Eastern Europe, Dubai, Russia.
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Not everyone will have to move to the woods and start picking berries, but it will be more than 10-20% as the number of irresponsible people is far greater than that. For years now I have cringed every time I have read the phrase “the consumer makes for 2/3 of the economy” and I was in a near state of panic the first time I read that the U.S. savings rate had actually gone negative. Very alarming as well, was the fact that financial engineering was the most lucrative industry in America by far. For years now I’ve considered our most respected banks as no better than those pawn shops and check advance joints that used to be confined to the seedy part of town. Money Tree?, Bank of America? No difference. Is the word “usury” still in the dictionary?
I never heard of this Schiff guy and his little essay is unreadable, but if I understand Roubini, I think he’s right, if not in his prescription, at least in his prediction. Europe is a basket case, Eastern Europe worse, most other parts of the world not far behind. I don’t see any way out of this until assets are repriced and I don’t see that happening without a lot of institutions going under and a lot of people losing their homes and investments.
So the question is how to best manage those massive loses. Here is were I probably side with you rather than Roubini. Ten year Japanese style stagnation actually looks better to me than the instant Depression you correctly forecast if we take the drastic prescriptions of those who would let a dozen big financial institutions all fail at once. We all hate the bailouts. We all hate that the same people who ruined their institutions get to keep running them and collecting their nice paychecks. However, we need to be careful not to cut off our nose to spite our face.
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I should add that I don’t think that a “lost decade” is the only possible outcome if we don’t follow the Roubini plan. If we are to avoid either outcome, we need to invest in industry, specially new and innovative industry like alternative or “green” energy, electric and biodiesel cars, etc. In my opinion the only road to growth goes through Silicon Valley. Tesla, not GM, AMAT and First Solar, not Exxon Mobil, some yet to be started virtual bank with only ATM machines and a web site, not Bank of America. We may indeed need to burn the village in order to save it, but hell, America has always done that, just not all at once.
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The U.S. economy is run by corporate spending and corporations are run by the consumer. Even people with stable jobs, nice nest egg of savings, and relatively low debt are scared shitless to make any big purchases and thus this is where the problem lies. Corporate and Consumer confidence is very very low and it will not change until the consumer feels that their financial well being is secure.
How about these ideas to help remedy the situation:
1) The banking system can help by re-doing the ARM’s to fixed ones without any additional fees or penalties and any interest paid by homeowner in ARM can count towards their new 20% down payment.
2) Corporate taxes are very high so tax credits could be given to corporations who hire new employees here in the U.S and not overseas.
3) All CDS’s should be halted and the value should be written down to the value of the premium received plus 10% interest for the number of years held. These contracts should be executed in one quick swoop on a particular day. The investors who hold these contracts would not lose any money and make a decent gain on their investment and the writers will have to take a loss. Government cannot tax the gains on these investments.
These items are just a start to get the consumer and banking sector confidence in the positive direction. It is going to be a while before the banks start lending out substantial amounts of capital to make a meaningful impact. The country needs more employment and Obama is on the right track by creating work through re-build of infrastructure and green energy. In the end, this country will do just fine since this crisis has been impacted globally. I feel sorrow for the many fine individuals who lost their jobs due to the greediness of a few white collar individuals.
My advice to the investors who are sitting with their balls stuck between their legs: Read Security Analysis and Intelligent Investor and it may not seem so scary after all.
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Peter Schiff is a nut job. His father is the notorious tax cheat/protester, Irwin Schiff, who is currently doing time for tax fraud. Peter actually co-wrote a book with his father on how taxes are unconstitutional and that you shouldn’t pay them.
He’s also a horrible investment advisor. He was also advocating heavily that the US and emerging markets had decoupled and that the US was going to crash without the rest of the world. He was long Shanghai, short dollar, etc. He’s probably the only bear in a bear market that lost money last year.
Why CNBC constantly puts the nut job on TV is beyond me, but hey they gave Cramer his own show.
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“they are due to a massive mispricing of risk at many levels, leveraged by the irresponsible use of credit.”
You have stated ONE of the problems that is currently there in the U.S economy succinctly enough. The question is how to solve it? Through government helped funding, which will create artificial stimulus and thus not allow the “mispricing” to correct itself to a non-stimulated value. Or to allow the agents which are the best at determining prices – the free market? What Peter Schiff is not so simplistic as a reboot, but he favours the latter. You have talked of how his primitive example does not make sense, but the alternative of govt doing what it is currently doing has been tried before after the Dot-com crash and has been tried in Japan. And Schiff’s point is simply that it would not work now when it has not worked in the past. Can you please point out your reasons for proposing how it will be different this time round?
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On Rene’s comment,
“Ten year Japanese style stagnation actually looks better to me than the instant Depression you correctly forecast if we take the drastic prescriptions of those who would let a dozen big financial institutions all fail at once. ”
Rene, the presumption behind argument such as this is the fear of the unknown. As Buffett has very often pointed out, the United States has survived the failure of several institutions in the past ( I agree with you Patel, Intelligent Investor also points to many examples). Look for example what happened to Lehman Brothers. Within a short time various parts of it were broken up and sold to various parties. What exact route must be taken is not an easy question to answer, but before we move on to finding the answer the ineffectiveness of the current route must be agreed upon by all. That is all the Peter Schiff tries to highlight – that the stimulus route will not work. I have never heard him talk about how exactly should we let the failing business fail. That is probably not his expertise either. But what he is good at is understanding the macroeconomic condition of the country in this crisis and what will not work.
Am I trying to defend Schiff here? Hell no. What I am defending are his arguments, which are very sound. Which is not something I find in the article above which contains too many over-simplifications of Schiff’s arguments (e.g everything is going to zero).
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Nikhil,
I’m surprised you use Lehman as your example. It’s not the unknown I fear, it’s the known. Namely, that if you now let all these big banks fail all at once, everything will seize up again, even to a greater degree. It seems to me that Lehman’s aftermath is exactly what we need to avoid. I do agree that the assets have to be repriced and I said so above. This means that the huge loses have to be taken either by the institutions, the tax payers or both. The only question is how fast to do it and to what the ratio of private capital/tax payer loses are. Of course Buffett is right and we will come out on the other end. The question is how we will fare in the interim. The Japanese stagnation lasted ten years, but the Great Depression was even longer and far more severe.
I do not agree that Obama’s program is ineffective, unless by ineffective you mean that it will not bring back growth and prosperity by next Thursday at noon. This country has failed to invest in infrastructure, modernization, research, education, etc. for far, far too long and we are being surpassed almost everywhere by countries that should not even be in the same league with us. I really don’t understand the failure to distinguish between tax and spend and investment by the critics. I do worry that the plan might be flawed, that it’s execution might be botched, that it will turn into Porksville, that it will become a cesspool of fraud and corruption, but in principle I think it’s great. I constantly look for legitimate criticisms of it and communicate my concerns to my elected representatives, but so far all the conservative arguments against it ring hollow and nonsensical to me.
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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.
Sorry, this is disorganized and the investment stuff is addressed to a commenter, but I have to go to work.
Mike
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Mark my words, these banks will go under just like Japan eventually had to liquidate their zombies as well. Propping them up is prolonging the agony. I’m reluctant to use Japan as a comparison to our current situation , however, or even the Great Depression era U.S. In both those past situations the afflicted countries (1930’s U.S. and 1990’s Japan) were strong creditor and net export nations. Today, we are net debtors (treasuries are among our biggest exports) and importers with no savings to help recapitalize. If anything, we’re more like Juan Peron’s Argentina during the 1940’s. They were a net debtor, net importer country that started nationalizing businesses and generally growing the size of it’s government and social programs. A key difference for us is our reserve currency status but that can only delay the inevitable. Once our bond market starts to revolt (it’s already starting to show signs of buckling) the Fed will monetize debt (print money), the dollar will plummet and we will be well on the Argentine path to economic ruin.
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Joe, love the blog but I have to disagree here on your post. In your scenario, the grain dried up. In the real world, it would be a blessing if that is what really happened. What really happened was that people made stupid decisions that others have already posted so I won’t reiterate, and then they started getting rewarded for it. If the grain merely dried up, you would wait til next year and hope for a better harvest. In the real world there are derivatives and bubbles and horrible loans that will affect the economy for years. It’s not as easy as ‘greasing the wheels’. We all know that TINSTAAFL and if you start printing money out of thin air things will spin out of control. I actually have my own little village story of what happened and I posted this below on Facebook and it’s very tongue in cheek. It was also only written in like 7 minutes. But below is the summary of what happened and what could happen if the gov’t doesn’t get it’s act together.
THE FABLE OF UNCLE SAM
There was once a family – a Mom, a Dad, and two sons. One of the sons was a Black Sheep, he didn’t do anything right. He ran his life into the ground. Let’s call him “Wally Street” for simplicity’s sake. Mom and Dad were terribly sad for their son, Wally Street. They wished that he would behave himself. He was so greedy and got into so much trouble that his greed and incompetence started to affect the whole family. He ran out of money! So, Mom and Dad, came up with a plan: “Let’s call Uncle Sam. He’ll take care of everything!” Now, Uncle Sam was a rich uncle of Wally Street’s. He made his money by charging rent to his family.
Wally Street’s brother, Main Street, worked hard for his money and helped out around the community where he could. He was a good man and lived a simple life. Every year, Main Street would take part of his OWN money and pay Uncle Sam for rent and to do other good things: help out around the community and also to appoint politicians and other elected officials. Although he was not perfect, Uncle Sam pretty much held the fort together, as long as Main Street paid him.
When the parents called Uncle Sam for help, Uncle Sam gladly came to the rescue. Uncle Sam took the money he was paid by Main Street to bail out his brother, Wally. Wally gladly took the money from Uncle Sam and paid for an even more extravagant lifestyle, going to parties, buying private jets, giving huge bonuses to all his friends and making bad investments all in hopes for riches. Wally eventually burned through the cash that was given to him and went back to Uncle Sam wanting more. Uncle Sam said, “Well, we can’t have this. Wally must be bailed out again. The whole family would be devastated if Wally Street went bankrupt!”
So, Uncle Sam took money yet again from Main Street to bail out Wally. Meanwhile, Main Street got tired of all his money going to Uncle Sam, only to bail out his foolish brother. So, Main Street said to himself, “Man, I wish I could get bailed out for living a frivolous lifestyle. Why am I being punished for succeeding?” So Main Street went out and spent huge amounts of money to get wasted and live a luxurious lifestyle.
One day Wally Street went back again to Uncle Sam to ask for more money. Uncle Sam turned to Wally and said, “I’m sorry Wally. I tried to collect rent from your brother, Main Street, and he told me that he didn’t have any money either, and that he had spent all his money on ‘living the good life’, just like you, Wally. So I had to bail him out, too. I gave him the last few pennies I had. Now all the money is gone, and nobody wants to work anymore, since they think they will just get bailed out. Well, there are no more bail-outs. I used to be a wealthy man, Wally. That was because people like your brother worked hard and paid their rent to me like they were supposed to. But due to my stupidity, they looked at you and became jealous because you were getting rewarded for bad behavior. Now, you and I, and even Main Street must pay the price.”
The End
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Totally agree.
People may panic and continue to sell. We might see a DJIA of 3000. But after the frenzied selling, little by little, people will get into their cars and drive to the stores after eating at McDonalds.
And they’ll think to themselves “wow, the world hasn’t ended. I should find a better job. I should get a better car. and I should definately start planning for my retirement. I’m gonna go buy that Joe Ponzio book.”
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Joe:
I encourage you and the other folks on here reading your article and these comments to read again this fine paragraph from “Mike” up above (see below):
QUOTE: “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.”
And after you get done doing that, should spend a few seconds thinking about Warren Buffett’s “The Superinvestors of Graham – and – Doddsville” article.
And notice how Mike’s comment is entirely consistent with Buffett’s article. (Mike’s comment is also true, by the way, just like Buffett’s “Superinvestors” article.)
The Austrians and Peter Schiff are not just lucky coin flippers on the topics of economics and how central banks and monetary policy affect economies. No more so than Buffett is just a really, really lucky coin flipper on the topics of stock picking and business.
Both Schiff and the Austrians, on the one hand, and Buffett, on the other hand, are right because they’re practicing “truth” in their discipline.
You should’ve put this topic in the “too hard” pile, Joe.
By the way, this debate is far from just intellectual.
Inflation and bailouts have normous real-world implications.
The broader point I hear from Peter Schiff and Ron Paul is the huge and tragic HUMAN cost of monetary. It’s the people who can least afford it who suffer the most from monetary inflation: savers and other folks on fixed incomes and so on. The politicians and their favored constituents (bankers, etc.) will not suffer to anything like the same degree.
Thanks.
Garrett
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I could easily agree with you.
Not to sound like a lemon but I tend to find “re-confirmations” of my own analysis in W.B’s statement that higher inflation than the past decade are ahead.
IMO, its intellectual enough… not everyone in society concerns themselves with Financial theories in practice; rather, they are busy in their own vocations but I understand what your saying.
Thanks for the suggestions too, appreciate it Garrette!
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This is what I love – intelligent discussion. I’m not suggesting that this is anything like the minor recessions we’ve had in the past. Instead, we have to step back and look at the “then what” of the scenario. To paraphrase Buffett: In economics, you don’t just do something and its over. For every action the goverment takes (or fails to take), there is a consequence – the then what.
In the late 1920s, the government did nothing, and the then what was a massive contraction, a myriad of business failures, and one-in-four unemployment. It’s easy today to say, “Let them all fail.” I can promise you this: In 1931, everyone was saying, “Why the hell didn’t we do more to avoid this?”
Today’s actions will result in tomorrow’s then whats – inflation and higher taxes among them. Don’t get me wrong – I’m not 100% behind everything that is being done to stem the problem. Personally, I think that AIG, for example, should have been given the initial bailout money and been immediately broken up.
As investors, we shouldn’t be sucking our thumbs and whining about the past. We need to be asking: “How do we profit from the then what?”
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It is not Peter who is full of Schiff, it is you Joe, who is full of Ponzio!
The point Peter is always trying to make, is that in order to buy something from others, you need to sell something first of equal value to others. Yes, your article makes sense in your context. And your context is that Butcher Baker and Candlestick maker are all borrowing from each other and from banks inside their city. The real situation is that all three of them stopped producing meat, bread and candlestick a long time ago. What they do in reality, they borrow money from other cities, to buy meat, bread and candlesticks from those other cities. How long do you think those other cities are going to tolerate it?
It doesn’t matter how much credit your are going to free up by printing more money, if no one will want to trade you anything for it. Peter is right! people need to start producing again in this country. Only when you produce your own meat, bread and candlesticks you create real capital the banks can loan to people.
I have a question for you Joe. Why do you think that if printing money and giving it to banks, so they can lend it to everybody, is the correct way to stimulate economy, common citizens are not allowed to do it? Why can’t you buy a printing press and pay for it by the money you print with it. This should stimulate the printing press production industry will it not? We can all be printing money and lending it to each other and all be millionaires.
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Anonymous,
I never said that printing money and handing it out creates wealth. But the thesis that producing tangible goods is the only path to prosperity is the sales script of a commodities salesman, not the cornerstone of an economic policy.
As best as I can tell, Warren Buffett has never physically crafting anything in his life. He turned hundreds into millions (for himself and his investors) from the late 1950s to the early 1970s without producing a thing of tangible value.
Advertising firms, graphic design companies, and accountants produce nothing of tangible value. Musicians and Google produce nothing of tangible value. Banks and Wal-Mart produce nothing of tangible value. Do they all really exist so that our fine citizens can smelt lead and grow corn?
We let credit get out of hand, but the real problem happened in September when the global economy froze and nearly collapsed. Clearly there is still a lot of misinformation out there about this; so, I guess I have another post to write!
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Joe,
While I agree entirely with you about your investment techniques, I have to say that you are WAY off on this article.
As a value investor, I would expect you to understand the role that man’s mind plays in the production of goods and services. Try to invest without using reason. Try to make any sort of product without using your brain. It’s impossible. And yet, here you are in full support of government intervention into the economy. Force negates man’s ability to reason and government intervention IS force. Force does not “grease the wheels,” freedom does.
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I do think people tend to extrapolate near term events/scenarios into the foreseeable future. As your example with Apple, so were predictions with oil Google, etc. Given a broader view of current events, the probabilities of stagflation, inflation are more likely than not. I’m not sure if anyone can assert specific predictions in sectors or the markets should likely be taken with more than a grain of salt.
Correct me if I’m wrong, I have been hearing Roubini’s call for the S&P to reach 600-650 for over a year. For someone to give specifics like this is ballsy. I also don’t think he is a perma-bear, but then again what do I know. I just read a handful of blogs a day… and this is a good one.
Buffet was not spot on, but he was generally correct. Seems like a good model to follow vs morphing in to the latest Nostradamus.
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