Listeners' Questions, Peter's Answers

2013-05-13T18:33:00Z

Monte in Plano, TX
I noticed in a recent article that the value of payments using the Yuan increased 171% from 2012 to 2013 according to a press release by SWIFT. In light of the Fed's dollar debasing, would the rise in Yuan exchange presage the decoupling of the Chinese and other economies from the US economy?

Carlos in San Antonio, PR
I'm concerned about a rental property I have. It has paid for itself for the last 12 years, but after discovering your videos, I'm wondering if I should continue to hang on to it. I calculate that I can make $50,000 if I sell it now. Would you keep renting it out or sell it and put that money in gold/foreign stock, etc. I'm afraid things will get bad enough where I will not be able to rent it or pay for it and lose it to the bank after all these years.

Billy in Glendora, CA
I am on disability and I'm going to retire soon with 100K saved up in my retirement fund. I have a large position on metals already. How else can I secure my wealth as I retire into this frightening economy.

Robert in Charlotte, NC
I'm trying to understand currency devaluation by central banks. If weakening one's currency encourages exports, why aren't we exporting more? Obviously we are weakening the dollar, but we aren't exporting more. Isn't this why countries devalue?

Chino in Miami, FL
Right now I have a private banking account in Santander Bank, but unfortunately in the short term I can't change it to Euro Pacific Bank so I've been asking my financial advisor to add Euro Pacific Bank Funds to my portfolio and it's been great. What is your opinion of buying gold through Central Fund of Canada (CEF)? Also, how can I buy Euro Pacific Precious Metals bullion gold and silver through my Santander Account?

Symptoms Don't Lie

2013-05-10T18:41:00Z

A good doctor will not simply make a diagnosis based on measurements. The symptoms and complaints expressed by the patient are at least as important in making a determination as the data provided by diagnostic tools. When the data says one thing and the symptoms continuously say another, it makes sense to question the reliability of the instruments. This would be particularly true if the instruments are furnished by a party with a stake in a favorable diagnosis, say an insurance company on the hook for treatment costs. The same holds true for the U.S. economy. Although our government-supplied data suggests we are experiencing low inflation and modest economic growth, the economy shows symptoms of low growth, rising prices, and diminishing purchasing power.

In my latest commentary I discussed how the Big Mac Index (The Economist Magazine's 30 year data set on Big Mac prices) provided strong anecdotal evidence that inflation in the United States is higher than official figures. More information has come in since then that tells me the same thing: that Americans are downsizing their lives as their incomes fail to keep pace with rising prices. These symptoms are at odds with the widespread belief in an accelerating recovery that has resulted in braggadocio in Washington and euphoria on Wall Street.

Earlier this week Tyson Foods, one of the nation's largest providers of packaged meat products, announced that although their top line sales revenue increased by almost 2% (roughly in line with U.S. GDP growth), operating margins collapsed by almost 50%, leading to a 43% decline in profit. Consumer shifts away from relatively higher priced/higher margin beef and pork products to lower cost/lower margin chicken products were to blame. Tyson also noted that cost conscious consumers shifted away from higher margin packaged chicken products to fresh meat cuts, thereby sacrificing convenience for cost.

According to government statisticians, the Tyson announcement would reveal modest growth and low inflation. After all, revenue at the company grew and spending on their products had increased modestly. But rising prices were obscured by consumers purchasing lower quality products. Not only are consumers avoiding the beef and pork that they otherwise may have preferred, but they are opting out of the convenience of prepared foods. This behavior is symptomatic of diminished consumer purchasing power. This is known as getting poorer.

The trend corresponds with the steady increase in the share of income that Americans devote to food and energy. According to the Bureau of Economic Analysis data, in 2002 Americans spent about 17.8% of income on food and energy. In the first quarter of 2013 the share had risen by a factor of 20% to 21.3% of income. Increased share of spending on necessities like food and energy is consistent with falling living standards. In the poorest countries almost all of income is devoted to such things.

This week we also learned the seemingly positive news that the March trade deficit narrowed to $38.8 billion. But the reduction didn't come from increased exports (which actually declined), but by the sharpest drop in imports since February 2009. Oil imports declined to a seventeen-year low, in part due to rising domestic production, but also due to a record low in 13 years in gasoline consumption. While some may argue that is a function of greater energy efficiency, I believe it's more likely that usage is down because of high prices and high unemployment. Even more significant is that our trade deficit with China in March dropped by a whopping 23.6%, hitting a three-year low. On a year over year basis, the decline in our deficit with China was 90% attributable to the decline in imports.

In contrast to the declining import figures, the government reported that personal spending rose by .2% in March. If we are buying less stuff from abroad, where are Americans spending the extra money? If the prices are stable, and imports are way down, consumer spending should also be down and savings should be up. But the savings rate in March held steady at a meager 2.7%. The sad truth is that Americans are buying fewer Chinese products because they are spending more money on food, rent, utilities, healthcare, insurance, and other necessities that can't be imported. Again, this is consistent with a falling standard of living, as inflation forces consumers to forgo the things they want in order to buy the things that they need.

It was also announced this week that the big three airlines (United, Delta, and American) will be raising their "change fees" for booked tickets by 33%, from $150 to $200. However, it's unlikely that such a hike will make much of an impact on CPI. According to the CPI, airline fares in the United States increased only .3% from 2011 to 2012. This mild increase came at a time when airlines were rolling out more new fees than most air travelers could have possibly imagined.

But even if the government fully factored in the increase in fees, they would likely ignore the change in behavior that the increase would elicit. With the cost of changing a ticket so dramatically higher than it has been in the past, it is likely that far fewer Americans would be willing to change their travel plans once their tickets have been purchased. So even while the spending increase may be relatively small, the lost convenience is not factored into the equation. A ticket with low price (or no price) change option is a much better product than a ticket with high penalties.

CPI reports that from 2007 to 2012 air travel increased on average 4% per year. But that's only half the story. A new study released by MIT reports that during those five years, U.S. airlines cut the number of domestic flights by 14%,with the cuts falling most heavily on mid-sized regional airports. By 2012, the industry also closed more than 20 smaller airports, began using a higher percentage of larger airplanes, and reported record crowding on remaining flights. In other words, air travel not only became more expensive but less convenient and more crowded.

How much loss in value does this inconvenience and lack of flexibility create? It's hard to say, but we all have experienced it with varying degrees of frustration. But what is sure is that the government isn't interested in such trivialities.

The combination of these symptoms suggests that the extent to which people are being impoverished by accelerating inflation is not reflected in official government measurements. This explains why unemployment remains high even as GDP appears to rise. It is my belief that the unprecedented expansion of the money supply under the current Fed leadership is pushing up prices for stocks, bonds, real estate, and consumer goods. Market indices neatly capture the price increases for all of these categories except for the latter, which has been concealed by an overly adjusted CPI.

If consumer inflation data were reported more accurately, it would be revealed that much of the apparent growth is an illusion. The patient is getting sicker, but the doctors are too distracted to notice.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

The Playlist for May 10, 2013

2013-05-10T18:38:00Z

Klint - Diamond
Theodore Shapiro - Two Dragons
The Roots - The Fire (feat. John Legend)
Galactic - Think Back
The Souljazz Orchestra - Insurrection
The Wild Magnolias - (Somebody Got) Soul Soul Soul
Thievery Corporation - The Richest Man In Babylon
Travis McCoy - Billionaire

The Playlist for May 09, 2013

2013-05-09T17:01:00Z

Maceo Parker - Pass the Peas
Cradle - Rise Up
Chris Joss - Re-Volt
Blur - Brothers and Sisters
Thievery Corporation - Lebanese Blonde
Samurai Showdown - Schiff Rza
Sharon Jones & The Dap-Kings - Stranded In Your Love
Shawn Lee - River Man

The Playlist for May 08, 2013

2013-05-08T16:49:00Z

Red Hot Chili Peppers - Falling Into Grace
Me&You - How Can I Hold You
artist unknown - Stand Up
Nomo - Hand and Mouth
Orgone - Come Around
Quantic - En Focus
The Bamboos - On The Sly

The Playlist for May 07, 2013

2013-05-07T16:50:00Z

Hexstatic - Chase Me
First Rate - I Wonder
Galactic - All Behind You Now
Arcade Fire - The Suburbs
Aloe Blacc - Hey Brother
Steve Miller Band - Take The Money And Run
artist unknown - Jorge
Tommy Hools - Barcelone

The Playlist for May 06, 2013

2013-05-06T17:45:00Z

Blondie - The Hardest Part
Bob Andy - Life
Bobby Hutcherson - Montara (Madlib Remix)
Bonobo - Kong
Candido - Serenate to a Savage
Cibelle - Train
Dan the Automator & Kalyanji Anandji - Fear of a Brown Planet
Alice Russell - Hurry On Now

Changing the Conversation

2013-04-26T19:49:00Z

Don Draper, Mad Men's master advertiser likes to say "when you don't like what they are saying, change the conversation." When it comes to the current economic weakness, which was confirmed again today by the release of lower than expected GDP data, Washington would love do just that. Fortunately for them, they consistently outdo the master minds of Madison Avenue when it comes to misdirection. If the government doesn't like what people are saying, they don't bother just to change the conversation, they change the meaning of the words.

The latest example of this was revealed earlier this week when the Bureau of Economic Analysis (BEA) announced new methods of calculating Gross Domestic Product (GDP) that will immediately make the economy "bigger' than it used to be. The changes focus heavily on how money spent on research and development (R&D) and the production of "intangible" assets like movies, music, and television programs will be accounted for. Declaring such expenditures to be "investments" will immediately increase U.S. GDP by about three percent. Such an upgrade would immediately increase the theoretic size of the U.S economy and may well lead to the perception of faster growth. In reality these smoke and mirror alterations are no different from changes made to the inflation and unemployment yardsticks that for years have convinced Americans that the economy is better than it actually is.

Today's data release confirms that the economic "recovery" is weaker than expected and remains heavily dependent on Federal support. Personal spending was indeed up 3.2%, the biggest jump in two years, but real earnings were down by 5.3%, the biggest fall since 2009. Not surprisingly the buying was made possible by a drop in the savings rate, which came in at just 2.6%, the lowest since the 4th quarter of 2007. No doubt, rising home prices and falling mortgage rates (made possible by Fed stimulus) allowed Americans to refinance their homes and to borrow and spend the money that they did not earn. With GDP continuing to disappoint, a statistical make-over couldn't come at a more convenient time.

In the simplest terms, GDP is calculated by combining a nation's private spending, government spending, and investments (while adding trade surplus or subtracting trade deficits). Business spending on R&D, a portion of which comes in the form of salaries, has traditionally been considered an expense that does not explicitly add to GDP. But now, the United States will lead the rest of the world in redefining GDP. Washington has now declared that the $400 billion spent annually by U.S. businesses on R&D will count towards GDP. This equates to about 2.7% of our nearly $16 Trillion GDP. The argument goes that, for example, the GDP generated by iPhones has far exceeded the cost spent by Apple to develop the product. Therefore, Apple's R&D is not an expense but an investment.

The BEA also argues that the cost of producing television shows, movies, and music should count as investments that add to GDP. Supporters of the change often hold up the blockbuster television comedy Seinfeld as an example. Given that the show's billions in earnings far exceeded its initial costs, they argue that the production expenses should be considered "investments" (like R&D) and be added into GDP.

Economists who have staked their reputations on the efficacy of Keynesian growth strategies have argued that such changes will more accurately reflect the realities of our 21st century information economy. But their analysis ignores the failures so often associated with R&D and artistic productions. For every breakthrough iPhone there are dozens of ill-conceived gizmos that never get off the drawing board. For every Seinfeld, there are countless failures and bombs that leave nothing but losses.

In essence, the new methodology is an exercise in double accounting. For instance, suppose a company employs an accountant who works in the sales department, who is then transferred to the R&D department at the same salary. He still counts beans but now his salary will be billed to the R&D budget rather than sales. In the old methodology, the accountant's impact on GDP would come only from the personal consumption that his salary allows. Going forward, he will add to GDP in two ways: from his personal consumption and his salary's addition to his company's R&D budget. The same formula would apply to a trucker who switches from a freight company to a movie production company (for the same salary). If he moves refrigerators, he only adds to GDP through his personal spending, but if he hauls movie lights, his contribution to GDP is doubled. It makes no difference if the movie bombs.

These double shots are different from traditional investments, which inject savings (or idle cash) back into the marketplace. Until money from personal or corporate savings is invested, it is not adding to GDP.

Another change that will artificially boost GDP concerns how government salaries will be counted. Unlike most private sector compensation, wages, salaries, and pension contributions paid to government workers are added directly to GDP. This distinction makes sense and eliminates potentially double accounting. Profits generated by private companies add to GDP when they are ultimately spent or invested by the company. Wages reduce profits, and therefore reduce GDP. But that reduction is cancelled out by the consumption of the employee receiving the wages. Governments do not generate profits, so salaries are the only way that public spending adds back to GDP.

The new system magnifies the GDP impact of government pensions, which are a principal component of public sector compensation. Going forward, the pensions will be calculated not from actual contributions, but from what governments have promised. Under the old system, if a state had a $10,000 pension obligation but only contributed $1,000, only the $1,000 would be added to GDP. Under the new system the entire $10,000 would be counted. So now governments can magically grow the economy simply by making promises they can't keep.

The bottom line is that now certain private sector salaries (in R&D and entertainment) will be counted twice and public pension contributions will be counted even if they aren't made. The economy will not actually be any larger or grow any faster, but the statistics will claim otherwise. With the stroke of a pen, our debt to GDP ratio will come down. Will this soothe the fears of our creditors? Will critics of big government take comfort that spending as a share of GDP may be lower? My guess is that the government is confident that its trick will work, and that distracting attention with a statistical illusion is the sole motivation for the change.

A similar type of hocus pocus has been successfully used to make inflation appear much smaller. A few months ago I produced a video showing how changes in methods used to calculate the Consumer Price Index (CPI) have resulted in a widening gap between increases in real prices and the CPI. The changes, that incorporate such concepts as hedonic adjustments and substation bias, were made to make the CPI more "accurate," but have instead produced consistently lower results. Although I used a basket of 20 goods for that experiment, I gave particular attention to such things as newspaper and magazine prices and health insurance costs. But just recently I came across another data set that leads to the same conclusion.

Since the late 1980's, The Economist Magazine has compiled something called the "Big Mac Index,"(BMI) a global survey of the cost of McDonald's signature hamburger. Although the index is primarily used as a means to compare purchasing power parity around the globe, it also can be used to track the prices of Big Macs in the U.S. over many years.From 1986 to 2003 the U.S. BMI rose roughly in line with the CPI. Although the burger occasionally rose faster or slower, over that 17 year period both indexes increased by about 68% (or about 4% per year). But from April 2003 to January 2013 the CPI Index is up just 25% percent (from 183.8 to 230.28 or about 2.5% per year) while the BMI is up 61% (from $2.71 to $4.37 or about 6.1% per year), or more than twice the rate of inflation.

What could possibly account for the difference? Has the Big Mac gotten bigger, better, tastier, or healthier? As an iconic product, McDonald's has been reluctant to change a proven formula. If the Big Mac hasn't changed, is it possible that our inflation yardstick has?

It has been estimated that if the government used the same methodology to measure inflation that it used during the 1980's, we would be currently dealing with official inflation that would be many times higher than today's official 1.5% rate. The Big Mac appears to confirm this.

But now the government appears ready to distort the figures even further. With little resistance from the media or the public, the Obama Administration and Congressional Republicans seem ready to switch the inflation measurements used for Social Security away from the CPI in favor of the even more attenuated "Chain Weighted CPI." This index, which is consistently lower than the CPI, looks to incorporate changes in spending patterns when consumers switch to more affordable products (in other words, it measures the cost of survival, not the cost of living). And while many admit that this is a manipulation, no one really seems to care.

Similarly clumsy tricks have been used to make our unemployment problem appear less severe. Over the years new methods have been introduced to factor out those who have "dropped out" of the labor force or to count part-time or temporary workers as employed.

All this takes us right back to Don Draper. If you can't change the conversation, change the words. If that doesn't work, just change the dictionaries.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

The Playlist for April 26, 2013

2013-04-26T19:40:00Z

Bob Marley - Lively Up Yourself
Cymande - Brothers on the Slide
Jeymes Samuel & Canibus - Who Writes the Songs
Manu Dibango - Weya
Lyrics Born - I Changed My Mind (Stereo Mc's Rattlesnake Mix)
Koushik - None In Mind
First Rate (feat. Project Redemption) - I Wonder
Curumin - Compacto

The Playlist for April 25, 2013

2013-04-25T19:42:00Z

Mike Gordon - Another Door
Buddy Guy - Crazy Love
Count Five - Psychotic Reaction
Stark Reality - Comrades & Dreams (Wolf's Stones Throw 101 Mix)
Toubab Krewe - Hang Tan
Yamasuki - Yama Yama
Tom Petty & The Heartbreakers - Should've Known
Amy Winehouse - Back to Black

The Playlist for April 24, 2013

2013-04-24T19:44:00Z

Earth Wind & Fire - Shining Star
Citizen Cope - 200,000 (In Counterfeit 50 Dollar Bills)
Deerhunter - Revival
Devandra Banhart - White Reggae Troll
Claude Bolling - Pop Mod
Junior Reid - Big Boss Man
Lalo Schifrin - The Cat

The Playlist for April 23, 2013

2013-04-23T19:47:00Z

Kafka - Baboon Slap
Bonobo - We Could Forever
Baby Charles - The Sphinx
Chuck Berry - Woodpecker
Ray Charles - Lonely Avenue
Blues Traveler - But Anyway
artist unknown - Os Mutantes
Beck - E-Pro

The Playlist for April 19, 2013

2013-04-19T20:45:00Z

Ravonettes - Love in a Trashcan
Mike Gordon - Another Door
Lalo Schifrin - The Cat
Junior Reid - Big Boss Man
Claude Bolling - Pop Mod
Brothers Johnson - Strawberry Letter 23
G Love & Special Sauce - Rainbow (feat. Jack Johnson)
The Coconutz - These Boots Are Made For Walkin

Japan Steps into the Void

2013-04-19T20:36:00Z

In the years following the global financial crisis, economists and investors have gotten very comfortable with very high, and seemingly persistent, government debt. The nonchalance may be underpinned by the assumption that globally significant countries that can print their own currencies can't get trapped in a sovereign debt crisis. However, it now appears that Japan is preparing to put this confidence to the ultimate stress test.

For the better part of 20 years, successive Japanese governments and central bankers have been trying, unsuccessfully, to use quantitative easing strategies to pump up a deflated asset bubble. The economy has by and large not responded. The sustained and impressive growth that Japan delivered during the 45 years following the Second World War (which had made the country one of the most successful economic stories in world history), has never returned. For the last 20 years Japan has offered a "zombie" economy characterized by low growth, stagnation, and exploding government debt. The Japanese government now owes approximately $12 trillion, a figure representing more than 200% of GDP. The IMF expects that this figure will reach 245% by the end of this year. This gives Japan the unenviable title of having the world's highest government debt-to-GDP ratio. But Shinzo Abe, the newly elected Prime Minister of Japan, and Haruhiko Kuroda, his newly-appointed Governor of the Bank of Japan, feel much, much more debt needs to be issued to turn the economy around.

The hope that Abe would be a new kind of prime minister with a bold economic formula helped revive the long dead Japanese stock market. Between May and November of 2012, the Nikkei traded within a range of 8200-9400. As Abe's victory began to be expected, the Nikkei started moving up, reaching 10,000 by the time he was sworn in on December 26 of last year. The euphoria continued throughout the spring and by April 2 the Nikkei stood at 12,003 points. Then on April 4, BOJ Governor Kuroda made good on Abe's dovish rhetoric and announced a plan to end years of mildly declining prices by doing whatever necessary to create 2% inflation (in reality these price declines have been one of the few consolations to Japanese consumers). To achieve its goals, the government is prepared to double the amount of Yen in circulation. Stocks immediately rallied, and in less than a week the Nikkei had breached 13,000 points, taking the index to a 4 1/2-year high. It is rare that any major stock market can achieve a 50% rally in less than a year. But the rally will be costly.

The Japanese government already spends 25% of tax revenue to service outstanding debt (compared to 6% in the US). These costs become even more astonishing when one considers the extremely low rates Japan pays. Ten-year Japanese government bonds now pay less than 0.6%, and five-year yields are now a little more than 0.20%. How much will debt service costs increase if Abe succeeds in pushing inflation to 2.0%? Two percent rates would triple long term borrowing costs. Given the size of its debts, increases of such magnitude could hit Japan with the force of 10 Godzillas.

Japan has an aging demographic and as more time goes by, the pool of potential bond buyers continues to shrink. Unlike the United States, where individual savers are mostly irrelevant in the sovereign debt market, Japanese investors have largely set the market in their own country. There is evidence to suggest that Japanese savers are increasingly considering overseas sources of yield for protection from the inflation that Abe is so determined to create.

As the Nikkei has moved upward, the Japanese Yen has taken the opposite trajectory, falling more than 20% against the U.S. Dollar since the beginning of 2012, and nearly 12% since the beginning of this year (the decline has been even greater in terms of several other currencies). This steep drop, which has taken a huge bite out of the nominal gains in Japanese stocks is unusual in the foreign exchange markets, and has threatened to destabilize an already weak global financial system.

Earlier this year the falling yen issue sparked a full-fledged headline war. On February 16th, participating members of the G20 issued a statement, clearly aimed at Japan, warning against competitive devaluations and currency wars. A day later, Japan's Finance Minister stated flatly that Japan was not attempting to manipulate its currency. After some hesitation, the G20 seemed to accept this statement. For now it seems the international powers have fallen in behind Japan. Both IMF Chief Christine Lagarde and Ben Bernanke have praised Abe's policies. The prevailing opinion seems to be that weakening a currency should not be considered manipulation as long as it's done to revive a domestic economy, not specifically to harm competitors. Such an opinion qualifies as a great moment in rhetorical shamelessness.

In addition to his plans for inflationary monetary policy, Abe is also attempting to wage war from the fiscal side as well. His Liberal Democratic Party has called for over $2.4 trillion USD worth of public works stimulus over the next 10 years. This spending represents approximately 40% of Japan's current GDP and, adjusted for population, would be the equivalent of nearly $600 billion USD annually in the United States.

It should be obvious to anyone with even half a brain that Japan's prior experiments with ever larger doses of quantitative easing have failed. Leaders in both Japan and the United States, however, are following this path with reckless abandon. According to Abe, the entirety of Japan's economic problems can be blamed on the fact that consumer prices have been declining by one tenth of one percent per year. If only Japanese consumers were forced to pay two percent more per year for the things they need or desire, all would be well.

Abe's wish may already be coming true. McDonald's announced this morning that, for the first time in 5 years, the price of hamburgers and cheeseburgers in Japan will be rising by 20% and 25% respectively. No doubt the Japanese will be so excited by this development that they'll rush to the stores to consume all the burgers they were planning on eating in 2014 before prices go up again. Of course there is no official concern that low-income Japanese will now have to pay more for low cost food.

The idea that informs Abe's plan, that rising prices entice consumers to buy before the prices go up, is clearly suspect as economic law dictates that demand increases when prices fall. Any store owner will tell you that cutting prices is the best way to move merchandise. Apart from this problem, how does Abe expect consumers to buy more when their currency is losing purchasing power and more of their incomes will be needed to pay interest on the national debt?

The boldness of Abe's plans should provide the rest of the world with a crash course in the ability of debt accumulation to jumpstart an economy. The good news is that the effects should not take too long to be seen. I believe that we will be treated with a stark lesson on the limitations of inflation as an economic panacea.

Hopefully, failure of this latest Japanese experiment will help convince leaders in the U.S. and Japan that the only true path to prosperity is free market capitalism. Rather than trying to reflate busted bubbles and micro-manage Keynesian style recoveries, politicians and central bankers should recognize their respective roles in creating the problems and get out of the way.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

The Playlist for April 18, 2013

2013-04-19T04:40:00Z

JJ Grey & Mofro - The Devil You Know
My Morning Jacket - One Big Holiday
Kutiman - No Reason For You
Phish - The Moma Dance
Talking Heads - Memories Can't Wait
David Bowie - Heroes
Charles Bradley & Menahan Street Band - The World (Is Going Up In Flames)
Body Language - Social Studies

The Playlist for April 17, 2013

2013-04-18T04:47:00Z

Mary Jane Hooper - I've Got Reasons
Travis McCoy - Billionaire
Thievery Corporation - The Richest Man In Babylon
Blues Traveler - But Anyway
Beck - Mixed Business
Jens Lekman - Your Arms Around Me
James Brown - Down and Out in New York City
Kylie Auldist - Made of Stone

The Playlist for April 16, 2013

2013-04-17T04:43:00Z

The Chamber Brothers - Funky
Koushik - Battle Rhymes for Battle Times
Maze - Color Blind
Yeasayer - 2080
Kutiman - Music Is Ruling My World
Tower of Power - Get Yo Feed Back On The Ground
Rufus Thomas - Funkiest Man Alive
Vince Guaraldi Trio - Linus and Lucy

Gold in the Crosshairs

2013-04-15T21:04:00Z

In the opening years of the last decade, most mainstream investors sat on the sidelines while "tin hat" goldbugs rode the bull market from below $300 to just over $1,000 per ounce. But following the 2008 financial crisis, when gold held up better than stocks during the decline and made new record highs long before the Dow Jones fully recovered, Wall Street finally sat up and took notice. The new devotees helped to push gold to nearly $1,900 by September of 2011. For the next year and a half it held relatively steady, trading mostly between $1,500 and $1,800 as more mainstream investors caught the fever. But now it appears that the brief love affair is at an end. It was really only a flirtation as the two were never a good match in the first place. Gold's new suitors never understood the fundamental case for gold and now they are turning their affection back to their true love: U.S. equities.

This is creating a brutal season for gold investors. The metal is in the midst of its largest pull back in nearly five years, and as the selling has gathered momentum powerful Wall Street voices as diverse as Goldman Sachs and George Soros have declared the end of its nearly fifteen year run of dominance.

The story line put out by most of these analysts is that gold shined as a safe haven during the Great Recession, but its allure has evaporated with the recent "improvements" in the global economy, particularly in the United States. Ironically, this ignores the fact that gold actually performed better in the years leading up to the 2008 financial crisis than it did during or following the crisis. That may be because the inflationary monetary policy that fueled the housing bubble also powered gold. Deflation fears led to gold's 35% decline in 2008, but once the Fed reopened the monetary spigots gold rallied to new highs. But in 2008 gold fell in concert with nearly every other asset class. This time, it's falling while other assets are rising. The negative spotlight makes the current decline potentially more meaningful.

Neither the new round of Keynesian expansion in Japan nor the recent fallout from the Cypriot solvency crisis produced gold rallies. Bears cite these failures as the signs that the bull is dead. The latest warning bell came late last week when the Bank of Cyprus announced that it would be selling its gold reserves in order to raise the cash to pay its debts. Concerns quickly spread that other heavily indebted Mediterranean countries with large gold reserves like Greece, Portugal, Italy and Spain would follow suit. The tidal wave of selling would be expected to be the coup de grace for gold's glory years. While this neat narrative may be sufficient to convince the financial media that an historic shift is underway, wiser minds will see more nuance.

While the vast majority of economists see gold as the "barbarous relic" described by Keynes, the sentiment has not stopped many central bankers from holding huge quantities as currency reserves. It is a curious phenomenon that the countries with the most daunting debt problems have the highest percentage of gold in their foreign exchange reserves. Many of these countries were formerly prosperous, and at various points in their histories had gold-backed currencies that required large reserves. These legacy assets now account for the bulk of their reserve wealth.

The United Stated leads the pack with both the largest amount of gold in reserve (8,133 tons) and one of the highest percentages (76%). Other heavily indebted developed countries are not far behind: Italy has 2,450 tons and 72% of reserves, France has 2,435 tons and 71% reserves, Portugal has 382 tons and 90% reserves, and Greece has 112 tons and 82% reserves. Tiny Cyprus, whose travails are creating global ripples, has just 14 tons (58% of reserves).

In contrast, the quickly developing emerging market economies are conspicuous for very small gold reserves, particularly in comparison to their much larger reserves of foreign currencies. Many of these countries have generated large amounts of U.S. dollar reserves as a result of ongoing trade surpluses. While China has more than 1,000 tons of gold, the cache only represents 2% of their enormous foreign exchange coffers. Even gold loving India has just 10%. Neither Russia, Taiwan, Thailand, Singapore, Mexico, South Korea, Indonesia, Malaysia, Saudi Arabia, nor Brazil has more than 10% (with most having far less than 5%). Bankers and political leaders in all of these countries, particularly India and China, have lamented publicly about the very high percentage of U.S. dollars in their reserves, and have even spoken fondly about the reliability and importance of gold.

The heavy debtors in the Eurozone have few pleasant options to deal with their insolvency. As illustrated by Cyprus, the choices may come down to painful austerity or raiding supposedly sacred bank deposits. The sale of gold reserves may provide a much more palatable option for politicians. After all, do voters really care how much gold sits in national vaults? For now at least, international central bank gold agreements limit the amount of gold that they can sell in a given year. But as these sovereign debt crises deepen for countries like Italy and Portugal, many justly question how long these paper agreements will keep the selling pressure at bay.

While I believe that they may indeed succumb to the temptation, such moves may not be disruptive, or even negative for gold. Large divestitures by some countries may lead to corresponding accumulations cash rich, but gold poor, creditor nations like India, China, Russia, and Indonesia. Such transactions would likely take place through private, direct, and tightly communicated sales. As a result, they would be far less disruptive than would be the case were they to occur in relatively thinly traded public markets as many now fear.

Such a transfer in gold holdings would be the logical result of the drift of the global economy over the past half century. Despite its current disfavor, gold is real wealth. Governments and bankers know this. As the emerging economies gain wealth, and the developed countries dissipate wealth through welfare-state debt accumulation, it is inevitable that the gold follows. It's not a question of if, but when.

While nations buying gold will pay for their purchases with dollars, the sellers will not re-invest the proceeds into Treasuries. Dollars raised through gold sales will be converted to local currency and used to repay debt. This will put downward pressure on both the U.S. dollar and Treasuries. In addition, emerging market central bankers will be more likely to hold onto gold for the long-term, thereby providing a bullish impact on the market. In essence, such a shift would flush out the weak hands who don't have the resources to protect their wealth in favor of stronger hands that do.

Creditor nations that buy gold cheap from bankrupt nations forced to sell at distressed prices will see the value of their reserves swell, thereby gaining the independence and confidence they need to finally break their reliance on the U.S. dollar as their principal reserve asset. When the reign of "king dollar" finally comes to a belated end, let's hope all the gold we allegedly have stored in Fort Knox is actually there. We're going to need every ounce of it.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

The Playlist for April 12, 2013

2013-04-12T22:01:00Z

Winston McAnuff - Unchained
Shuggie Otis - Me And My Woman
Shuggie Otis - Ice Cold Daydream
RJD2 - Ghostwriter Remix
Maceo Parker - Shake Everything You've Got
The Souljazz Orchestra - Insurrection
The Wild Magnolias - (Somebody Go) Soul Soul Soul
Madlib - Slim's Return

The Playlist for April 11, 2013

2013-04-11T22:03:00Z

The Roots - The Fire
Galactic - Think Back
Kid Loco - She's My Lover
Weezer - Beverly Hills
Quantic - When You Are Through
Unforscene - Alright
Kutiman - I Am New
Lonnie Smith - Move Your Hand

The Playlist for April 10, 2013

2013-04-10T22:05:00Z

Tony Allen - Road Close
Marcos Valle - Freio Aerodinamico
Shawn Lee's Ping Pong Orchestra - Brighton Rock
The Limp Twins - Moving Closer to the Sofa
Thievery Corporation - Radio Retaliation
Ray Charles - Busted
Willie Bobo - Fried Neckbones and Some Home Fries
Mark Ronson - Outversion

The Playlist for April 09, 2013

2013-04-09T22:05:00Z

The Quantic Soul Orchestra - Panama City
Sharon Jones and the Dap Kings - Money
The Budos Band - TIBWF
Wanda Jackson - Funnel of Love
Mark Ronson - Stop Me
Theodore Shapiro - Two Dragons
Thunderball - The Road to Benares
TM Juke - Get It Together

The Playlist for April 05, 2013

2013-04-05T21:14:00Z

DJ Krush - Kemuri
Dr. John - Loop Garoo
Duffy - Mercy
Five Alarm Funk - Brother Egypt
Five Alarm Funk - Uncle Meatball
Galactic - Never Called You Crazy
Klint - Snatch
Medeski Martin & Wood - End Of The World Party

The Playlist for April 04, 2013

2013-04-04T21:34:00Z

Deep Banana Blackout - Pure Gravity
Dan the Automator - Fear of a Brown Planet
Cibelle - Train
Candido - Serenade To A Savage
Bonobo - Kong
Bobby Hutcherson - Montara
Bob & Marcia - Life
Blondie - The Hardest Part

The Stockman Backlash

2013-04-04T18:24:00Z

This week, while economists should have been closely considering the implications of the actual bankruptcy of Stockton, California, they instead heaped scorn on the perceived ideological bankruptcy of David Stockman. In other words, Stockman trumped Stockton.

Ronald Reagan's former Budget Director contributed "Sundown in America" a multi-page opinion piece to the Sunday New York Times which loudly and eloquently described the illusions of our current economic system. While I don't agree with everything Stockman believes, I think he is showing great wisdom and courage in making dire predictions and calling for extreme changes in our policy and politics.

What was perhaps more surprising than the Times' uncharacteristic decision to run the piece in the first place was the vitriolic and largely ad hominem backlash against Stockman that quickly emerged from across the political spectrum. The attacks have focused primarily on his history and personality, and not on his arguments. One would be hard pressed to find any journalistic reaction that did not use the words "screed" "rant" or "unhinged." I believe these responses reveal an acute sensitivity from mainstream economists that arises from defending contorted Keynesian logic.

It can't be easy to take the position that debt doesn't matter and that spending creates economic growth. To do so with any hope of success requires team unity, and Stockman has never really been a team player. His reputation as an apostate and a naysayer has made him an easy target.

Famously, Stockman left the Reagan White House in protest over the Gipper's half-finished mandate. Yes, Reagan had cut taxes, but he never really cut spending. Stockman never bought into the easy idea, championed by Jack Kemp and Dick Cheney, that deficits don't matter and that tax cuts pay for themselves. And although the Reagan revolution did clear the way for a return to better growth in the 80's and 90's, Stockman knew that the piper would call someday to collect the debt. Despite his foresight on that topic, his criticism of the Reagan legacy has earned him the derision of the Republican establishment for whom that particular hero worship is sacred.

This may have informed the attack issued by neo-conservative apologist and Iraq war cheerleader, David Frum, who offered a solely psychological assessment: "Stockman provides an insight into the gloomy mindset that overtakes us in older age, it's a valuable warning to those of still middle-aged that once we lose our faith in the future, it's time to stop talking about politics in public." So much for respecting our elders.

Bloomberg's Jeff Kearns, whose support of Fed policy has earned him regular taps at Ben Bernanke's televised press conferences, provided the most common mainstream dismissal of Stockman: "His warning that the Federal Reserve's quantitative easing is steering the world's largest economy toward a crash is at odds with nine quarters of job growth, record stock prices and unprecedented corporate earnings." This "he must be wrong because things look good now" position supposes that economics can't be understood or predicted, only observed. I received very similar treatment back in 2006 and 2007 when I tried to tell the mainstream that the real estate market was a house of cards. How could it be bad, they said, if it goes up every year?

Despite his misalignment with the Republican hierarchy, the Left has an even greater revulsion for Stockman. Since the crisis, he has become perhaps the most respected figure (with the possible exception of Alan Meltzer) to take the position that a system based on fiat currency is doomed. Those who most visibly argue these points, like Ron and Rand Paul, and myself, come from the libertarian movement. As a result, we can be easily dismissed as cranks. However, Stockman was once a card-carrying member of the power elite. His embrace of these principles is taken more seriously and is thus ripe for instant attack from liberal economists.

While the usual suspects of Jared Bernstein and Joe Wiesenthal weighed in with heaps of invective, the loudest heckles have come from, whom else, Paul Krugman. He began his multi-post campaign by questioning the "mystery" of why the New York Times would sully Krugman's own gravitas by forcing him to share column inches with someone as "non serious" as Stockman. He then offers the back of his hand:

"I thought Stockman would offer some kind of real argument, some presentation, however tendentious, of evidence. Instead it's just a series of gee-whiz, context- and model-free numbers embedded in a rant - and not even an interesting rant. It's cranky old man stuff." For the record, Stockman is only 66.

In actuality, Stockman's NYT piece offers a litany of objectively dismal facts and cogent explanations of how we got here. While most are celebrating the nominal high of U.S. stocks (see my recent analysis of the current rally), he points out that in the five and half years it has taken for the S&P 500 to set a new high, "Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the 'bottom' 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled to 59 million, about one in five Americans." But Krugman fails to find the currency of his stock and trade, the macro-economic statistical models that attempt to describe how an economy works. In truth, those academic ordeals only matter in getting tenure and impressing the global elite. The real economy is much easier to understand.

Case in point: Stockton, California, which on Monday became the largest U.S. city to file for bankruptcy protection. Stockton, a city of 300,000 and two hours from San Francisco, is following the path blazed by many smaller California municipalities that have been unable to support lavish spending, salary and pension guarantees. And although Stockton has tightened its belt over the last few years (unlike similarly bankrupt San Bernadino, which is not even trying), it lacks the capacity to close the gap. Despite its enormous advantages in geography, infrastructure and location, the city is too bloated with government and clogged with taxes and regulation to allow for robust growth. As a result, Stockton is looking to pin the losses on its creditors.

As Stockman makes clear, the United States has been plagued by the same problems that doomed Stockton. His critics argue that the Federal Reserve's printing press provides a foolproof immunity to such pedestrian problems. But in the end, these paper protections will only exist on paper. We're all Stocktonians now.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

The Playlist for April 03, 2013

2013-04-03T21:38:00Z

Greyboy - Got To Be A Love
artist unknown - Stand Up
Nomo - Hand and Mouth
Orgone - Come Around
Quantic - En Focus Feat
The Bamboos - On The Sly
Alice Russell - Hurry On Now
Aretha Franklin - Rock Steady

The Playlist for April 02, 2013

2013-04-02T21:40:00Z

Shawn Lee - River Man
Sharon Jones & The Dap-Kings - Stranded In Love
Samurai Showdown - Schiff Rza
Me&You - How Can I Hold You
MGMT - Kids
Handsome Boy Modeling School - The World's Gone Mad
Bob Marley - Sun Is Shining
Greyboy - Got To Be A Love

Flying High on Borrowed Wings

2013-04-01T19:50:00Z

After selling off an astounding 56% between October of 2007 and March 2009, the S&P 500 has staged a rally for the ages, surging 120% and recovering all of its lost ground too. This stunning turnaround certainly qualifies as one of the more memorable, and unusual, stock market rallies in history. The problem is that the rally has been underwritten by the Federal Reserve's unconventional monetary policies But for some reason, this belief has not weakened the celebration.

Although the Fed has been tinkering with interest rates and liquidity for a century, nothing in its history could prepare the markets for its activities over the last four years. (See 'The Stimulus Trap' article in my latest newsletter). And while most market analysts give credit to Ben Bernanke for saving the economy and sparking the rally, they have not fully grasped that market performance is now almost completely correlated to Fed activism. A detailed look at stock market movements over the past four years reveals a clear pattern: upward movements are directly tied to the delivery of fresh stimulants from the Fed. Downward movements occur when markets perceive that the deliveries will stop. In other words, the rally is really just a bender. The rest is commentary.

Since 2008, the Fed has injected fresh cash into the economy with four distinct shots of quantitative easing and has added two kickers of Operation Twist. In recent months, the Fed has dispensed with the pretense of designing, announcing, and serving new rounds of stimulus and is now continuously monetizing over $85 billion per month of Treasury and mortgage-backed debt. The new cash needs a place to go, and stocks, which now often provide higher yields than long term Treasury bonds, and which offer much better protections against inflation, provide the best outlet.

But the four year rally has been punctuated by several sharp and brief drops. It is no coincidence that these episodes occurred during periods in which the delivery of fresh stimulus was in doubt. If the Fed were ever to follow through on its promise to exit the bond market, we believe the current rally would come to an immediate halt. This provides yet another reason to believe that stimulus is now permanent.

A close look at the performance of the S&P 500 over the past four years tells the story.

Source: Yahoo! Finance, Euro Pacific Capital. Past performance is no guarantee of future results. (Click here to enlarge)

In May 2007, with the "Goldilocks" economy of 2005 and 2006 still in control, the S&P finally eclipsed the March 2000 high of the dotcom era. It ultimately hit an all-time high of 1565 in October 2007. But later in the year, things began to unravel when bankruptcies of premier subprime lenders signaled real trouble. A blood bath, though, did not materialize. As late as August 2008, the S&P was trading at nearly 1300, down a less-than-tragic 16% from its high. But when Lehman Brothers, Fannie Mae and Freddie Mac, and AIG imploded almost simultaneously in September 2008, the markets panicked. Hundreds of billions of dollars of potentially worthless debt now sat on the books of the nation's financial system. No one knew where the next bomb would explode. A stampede thus ensued. (A minor replay of this dynamic just occurred in Cyprus. See my recent commentary for more on this).

Less than a month later the index fell below 900, a fall of more than 30%. By November 21, the S&P had lost another 100 points. Four days later, the Fed introduced the first round of what would come to be commonly known as "quantitative easing". This consisted of purchasing $600 billion of government-sponsored enterprises debt and mortgage-backed securities. By the day of the announcement (even though nothing had yet been done), the S&P rallied almost 50 points to 851. Still encouraged by the Fed, the S&P was at 931 on January 6, 2009, significantly higher than in late November.

Despite the first round of asset purchases, the market was still in chaos and had not yet stabilized. By early March, the S&P had lost an additional 25%, bringing total "peak-to-trough" losses at more than 50%. On March 18, 2009, the Fed announced that it was going to expand the size of its stimulus program. This time it really got the stock market's attention. The new guidelines called for a total purchase of $1.25 trillion of MBS and $300 billion of Treasury debt. On the day of the announcement, the S&P opened at 776 and by the time the asset purchases were complete a year later, in March 2010, the S&P was trading at 1171, an increase of 50%.

When the spigots of quantitative easing shut down in the second quarter of 2010 the S&P turned south, declining to a low of 1022 in July (a 13% decline from March). In late August, just before Bernanke delivered his 2010 Jackson Hole speech, in which he would hint at the next round of stimulus (to be later dubbed "QE2"), the S&P was still hovering a full 10% below its post QE1 high. But the expectation of another shot was enough to ignite a rally. When the formal announcement of QE2 came in November, the index had already advanced to 1193. When the program expired at the end of the 2nd quarter of 2011, the S&P stood at 1307, a 25% increase from before Bernanke jawboned the markets at Jackson Hole.

The market response to QE2 was in many ways similar, if less spectacular, than its prior response to QE1. And like the first go-round, the rally ended with the withdrawal of stimulus. In addition, after the cessation of QE2, the markets had to contend with the farce of the U.S. debt ceiling drama. As a result, the S&P declined from a high of 1343 on July 22 to 1123 by August 19, a drop of 16%. This is also the same time period when the U.S. received its downgrade by Standard and Poor's. Ironically, the U.S. eventually got a temporary reprieve from the spotlight when its problems became overshadowed by funding tensions in Greece and Southern Europe, causing the market to once again flock to the so-called "safe haven" of U.S. assets.

The cover from Europe could only go so far. Pressure soon began to build on the Fed to deliver once again. It acted in September 2011 with its "Operation Twist", a program that consisted of buying longer-term treasuries while selling an equal amount of shorter dated paper. Although Twist was advertised as being balance sheet neutral, the short-term sales the Fed made were somewhat offset by the extension of credit lines to Europe and an extended commitment to the 0% interest rate policy that at the time called for an end date of mid-2013. The day the Fed announced Operation Twist, the S&P opened at 1203. By the following April it had reached 1400, a return of 16%.

But once again the stimulus began to fade. In the second quarter of 2012, a sell off took hold, and by June 5, the S&P traded as low as 1277, a decline of 9% since April. Cue the Fed! On June 20, the Fed announced the extension of Operation Twist, sparking a new rally which has continued into 2013. This buoyancy has been maintained, in part, by the announcement of QE3 on September 13, 2012, which also included another extension of the zero interest rate policy until at least mid-2015. By October, Fed governors were already mentioning inflation targets and when QE4 was launched on December 12, they clarified that zero interest rate policies would be in place until unemployment fell below 6.5%. The current leg of the rally has been somewhat non-linear as the election, the Fiscal Cliff, and the endless empty headlines out of Europe have continued to put pressure on the markets. Despite these obstacles, the S&P has rallied past 1500 and on March 5, 2013, it closed at 1538, within shouting distance of its all-time high of 1576 on October 11, 2007.

When the Fed made the first round of asset purchases in November of 2008, the market was still in a state of flux. However, since the system stabilized in mid 2009, there has been a reliable correlation between the timing of the programs and the performance of the markets. This intention was stated explicitly in Ben Bernanke's November 4,2010, Washington Times Op-ed in which he provided the rationale for QE2:

"This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending."

With the Fed on pace to expand its balance sheet by over $1 trillion in 2013, there can be little doubt that much of that money is headed straight into the stock market. Treasury bonds are still offering negative real yields and so there is less incentive than ever to own government paper.

Recently, the New York Post's Jonathan Trugman pointed out that Citigroup could be considered the poster child of the dubious rally. Since the crisis began, he reports that the Bank has received $45 billion in TARP funding, an additional $45 billion line of credit from the Treasury, and a government guarantee of $300 billion for its own troubled assets. At the same time, its cost of capital (the money it borrows from the Fed) is near zero, while it earns 3% to 5% on mortgages and 12% to 18% on credit cards. But from an operational standpoint, those gifts have failed to create a flourishing, self-sustaining, business. The company had shed almost 100,000 employees from its period of peak employment a few years ago (down to 260,000 employees) and it announced three months ago that an additional 11,000 cuts are to come. But Citi's share price has risen more than 85 percent since June of 2012, despite scant evidence that the company has turned itself around.

But look what all the Fed intervention has wrought. Each time they have intervened the resulting rally has diminished in intensity, and a sell-off has always ensued when the drug wore off. Through the years, the cycle of stimulus administration has quickened pace and has now arrived at a stage where it is continuous. Currently, the Fed is talking about a potential exit strategy, but as we have argued in the past, and as the chart above surely indicates, any withdrawal of stimulus could likely have dire implications for stocks which will not be tolerated by Washington.

Japan has been unsuccessfully trying to inflate its way out of these problems for the past 20 years(see 'Japan's Dangerous Game' in my latest newsletter). Now many of the indebted nations of the developed world seem intent to follow that example. But the monetary experiment of unending stimulus has, up to now, never been tried on a global scale. No one knows when or how it will end, but I believe it will end badly.

Investing in stocks is supposed to be a way to harness real economic growth, not a way to front run stimulus. Our advice for stock investors is to recognize that and to get as far away from artificially induced highs as possible. More fundamentally sound markets exist. We just have to find them.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

The Playlist for March 29, 2013

2013-03-29T19:50:00Z

Reuben Wilson - Bambu
Mark Ronson - Oh My God
The Coasters - Down In Mexico
Tommy Hools - Barcelone
unknown artist - Jorge
Nostalgia 77 - 7 Nation Army
Red Hot Chili Peppers - Falling Into Grace
Thievery Corporation - Lebanese Blonde

The Stimulus Trap

2013-03-29T05:01:00Z

For years we have been warned by Keynesian economists to fear the so-called "liquidity trap," an economic cul-de-sac that can suck down an economy like a tar pit swallowing a mastodon. They argue that economies grow because banks lend and consumers spend. But a "liquidity trap," they argue, convinces consumers not to consume and businesses not to borrow. The resulting combination of slack demand and falling prices creates a pernicious cycle that cannot be overcome by the ordinary forces that create growth, like savings or investment. They say that a liquidity trap can even resist the extraordinary force of monetary stimulus by rendering cash injections into useless "string pushing." Some of these economists suggest that its power can only be countered by a world war or other fortunately timed event that leads to otherwise politically unattainable levels of government spending.

Putting aside the dubious proposition that the human desire to strive and succeed can be permanently short-circuited by an economic contraction, and that modest expected price declines can quell our desire to consume, the Keynesians have overlooked a much more dangerous and demonstrable pitfall of their own creation: something that I call "The Stimulus Trap." This condition occurs when an economy becomes addicted to the monetary stimulus provided by a central bank, and as a result fails to restructure itself in a manner that will allow for robust, and sustainable, growth. The trap redirects capital into non-productive sectors and starves those areas of the economy that could lead an economic rebirth. The condition is characterized by anemic growth and deteriorating underlying economic fundamentals which is often masked by inflation or asset price bubbles (I look at how stimulus has impacted the U.S. stock market in the March edition of my newsletter).

Japan has been caught in such a stimulus trap for more than a decade. Following a stock and housing market boom of unsustainable proportions in the 1980s, the Japanese economy spectacularly imploded in 1991. The crash initiated a "lost decade" of de-leveraging and contraction. But beginning in 2001, the Bank of Japan unveiled a series of unconventional policies that it describes as "quantitative easing," which involved pushing interest rates to zero, flooding commercial banks with excess liquidity, and buying unprecedented quantities of government bonds, asset-backed securities, and corporate debt. Although Japan has been technically in recovery ever since, its performance is but a shadow of the roaring growth that typified the 40 years prior to 1991. Recently, conditions in Japan have deteriorated further and the underlying imbalances have gotten progressively worse. Yet despite this, the new government is set to double down on the failed policies of the last decade.

I believe that the United States is now following Japan into the mire. After the crash of 2008, we implemented nearly the same set of policies as did Japan in 2001. In the past two years, despite the surging stock market and apparently declining unemployment rate, the size and scope of these efforts have increased. But as is the case in Japan, we can clearly witness how the stimulus has perpetuated stagnation. (See my analysis of the new plans of the Japanese government).

In 2008, one of the country's biggest problems was that we had over-leveraged too many non-productive sectors of the economy. For instance, we irresponsibly lent far too much money to people to buy over-priced real estate. Since then, the problem has gotten worse. Currently the process of writing, securitizing, and buying home mortgages has been essentially nationalized. Fannie Mae and Freddie Mac (which are now officially government agencies) write and package the vast majority of new home mortgages, which are then guaranteed (almost exclusively) through the Federal Housing Administration, and then sold to the Federal Reserve. According to a tally by ProPublica, these government entities bought or insured more than nine out of 10 home mortgages originated last year, a $1.3 trillion business. Compare this to 2006, when the government share was only three in 10. As a result of this, our lending is far more irresponsible than it has ever been.

In the fourth quarter of 2012, 44% of all FHA borrowers either had no credit score or a score of 679 or lower. In addition, the overwhelming majority of FHA guaranteed loans are being made at 95% or greater loan-to-value. This means down payments are an afterthought. Under the FHA's Home Affordable Refinance Program (HARP), loans are now even extended to underwater borrowers whose mortgages may be worth far more than their homes. As a result, the FHA could be exposed to enormous losses in the event of future housing market downturns. Such an outcome would be likely if mortgage interest rates were ever to rise even modestly from their current low levels.

In fact, losses on low-quality mortgages have already left the FHA with $16 billion in losses. To close the gap, it has had to raise the insurance premiums it charges to borrowers. With those premiums expected to rise again next month, many fear that marginal borrowers could be priced out of the market. But rather than learning from its mistakes, the government just announced that Fannie Mae would pick up the slack, lowering its lending standards to match the ones that had led to losses at the FHA. In other words, we haven't solved the problem of bad lending - we have simply made it bigger and nationalized it.

The overall financial sector is equally addicted to cheap money. Banks have seen strong earnings and rising share prices in recent years. But their businesses have largely focused on the simple process of capturing the spread between the zero percent cost of Fed capital and the 3% yield of long term Treasury debt and government insured mortgage backed securities. As a result, banks are not making productive private sector loans to businesses. Instead, the capital is being used to pump up the already bloated housing and government sectors.

Corporate profits are indeed high at the moment, but much of that success comes from the extremely low borrowing costs and extremely high leverage. Investors chasing any kind of yield they can find are pouring money into companies with dubious prospects. This January, yields on junk rated debt fell below 6% for the first time. Currently they are approaching 5.5%. Consumers are using cheap money to buy on credit. Savings rates are now hitting post-recession lows.

Lastly (but certainly not least), the Federal government is now totally dependent on the Fed's largess. Without the Fed buying the bulk of Treasury debt, interest rates would likely rise, thereby increasing the cost of servicing the massive national debt. While Congress and the media have focused on the $85 billion in annual cuts earmarked in the "Sequester," an increase of Treasury yields to 5% (3% higher than current levels) on the $16 trillion in outstanding government debt would translate to $480 billion per year of increased interest payments. Such an increase would force a tough choice between raising taxes, cutting domestic spending or reducing interest payments sent abroad for debt service. If foreign creditors begin to doubt that America has the resolve to make the hard choices, they may refuse to roll-over maturing obligations, forcing the government to actually repay principal. With trillions maturing each year, actual repayment is mathematically impossible.

But for now most people feel that the transition is underway to a healthy economy. The prevailing debate is when and how the Fed will let the economy fly on its own. Many of the top market analysts have great faith that Ben Bernanke can pull the monetary tablecloth off the table without disturbing the dishes. Those who hold this view fail to understand that the United States is caught in a stimulus trap from which there is no easy exit. How can the Fed wean the economy from stimulus when stimulus IS the economy? In truth, the trick Bernanke must actually perform is to pull the table out from beneath the cloth, leaving both the cloth and the dishes suspended in air. (Read how Iceland confronted its own crisis while avoiding the stimulus trap).

What would happen to the Treasury market if the Federal Reserve, by far the biggest buyer and largest holder of Treasury bonds, became a net seller? Who will be there to keep the sell off from becoming an interest rate spiking rout? It may sound absurd to those of us who remember the economy before the crash, but our new economy can't tolerate "sky high" rates of four or five percent. What would happen to the housing market and the stock market if interest rates were to return to those traditional levels? The red ink would flow in rivers. With yields rising and asset prices falling, how long would it take before the Fed reverses course and serves up another round of stimulus? Not long at all.

That means any talk of an exit strategy is just that, talk. Not only can the Fed not exit, but it will have to delve further into the stimulus abyss. While doing so, the Fed will continuously insist that the exit lies just behind an ever moving horizon. It will repeat this mantra until a currency crisis finally forces a painful exit.

Unfortunately, the longer the Fed waits to exit, the more painful the exit will be. But trading long-term pain for short-term gain is the Fed's specialty. In the meantime, Wall Street watches in uncomprehending stupor as the economy settles deeper and deeper into the stimulus trap.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

The Playlist for March 27, 2013

2013-03-27T20:32:00Z

Gorillaz - Plastic Beach
Galactic - All Behind You Now
Arcade Fire - The Suburbs
Aloe Blacc - Hey Brother
The Steve Miller Band - Take the Money and Run
artist unknown - Jorge
Tommy Hools - Barcelone
The Coasters - Down In Mexico

Cyprus Lifts the Curtain

2013-03-22T18:14:00Z

This week financial analysts, economists, politicians, and bank depositors from around the world were outraged that European leaders, more specifically the Germans, currently calling many of the shots in Brussels and Frankfurt, could be so politically reckless, economically ignorant, and emotionally callous as to violate the sanctity of bank deposits in order to fund a bailout of Cyprus. The chorus of condemnation may have been the deciding factor in giving the Cypriot parliament the confidence to unanimously vote down the measures in hopes that Berlin will cave or Russia will swoop in with a bailout.

The decision to inflict pain on both large and small depositors was almost universally described as a historic blunder. But the mistake was to do so in a manner that was not camouflaged by financial smoke and mirrors. In truth, rank and file depositors have been paying, and will continue to pay, for all manner of bailouts and stimulus. (Read about the Stimulus Trap in my just released newsletter).Whether it's through lower interest payments on deposits, inflation, higher taxes, higher borrowing costs, or the accumulation of unsustainable sovereign debt, Cypriots will bear the burden of past profligacy. But the new plan for Cyprus was far too transparent, simple, and direct to survive in a world dependent on deceit and obfuscation. It was dead on arrival.

All over the world, most notably in the United States, Britain and Japan, central bankers are actively pursuing inflation targets of two to three percent. But isn't inflation, which allows governments to pay off debt through the creation of new money that transfers purchasing power from savers to borrowers, just a deposit tax in disguise? (Read more about Japan's plan to do just that). British citizens of all means have been living with such a three percent stealth tax for the past three years, and it is expected to stay that high for at least two more years. Yet a one-time tax of 6.75% in Cyprus is seen as the ultimate act of betrayal?

Many are lamenting that Cyprus' membership in the EU prevents it from devaluing its own currency to get out of the jam. How would such a course be morally superior? Taking actual losses on deposits is no different than taking losses through devaluation and inflation. Both result in the loss of purchasing power. Asking for a depositor haircut at least deals with the problem honestly and immediately. Although it's not quite as honest, devaluation can also be effective.

The same dynamic holds true with bailout funds. Suppose the EU were to come through with more funds? All that means is that Cypriots will have to pay more in future debt and interest repayments. In so doing they would saddle future generations with a burden that they had no hand in creating. How is that fair?

And it's not as if depositors at Cypriot banks, many of whom are reported to be Russian citizens seeking tax havens, were not complicit in the risk taking. Bloomberg reports that over the past five years euro deposits at Cyprus banks returned more than 24 percent cumulatively, almost double the returns on comparable German accounts. The banks were able to offer such returns because they were exposed to riskier assets (i.e. Greek government bonds). What's so wrong with asking those who took greater risks to earn higher returns to give something back when their decisions go bad?

Cypriot citizens, as members of the EU, had the choice to put their deposits in any EU bank. Even after paying the taxes that had been proposed in the bailout, long-term depositors would have made more money by keeping their savings in the high yielding Cypriot banks than low yielding German banks. So what kind of sadistic Rubicon are we crossing?

The predominating fear internationally was not that mom and pop Cypriots would have trouble making ends meet, or that Russian mobsters would have lost any of their questionable fortunes, but that a run on banks in Cyprus would lead to similar panics in Greece, Spain, and then the world at large. As a result, the troubles of an insignificant economy are seen to threaten the entire global financial edifice. This is just the latest sign that our current system rests upon nothing but confidence...which in the end can be ephemeral.

Despite the surmounting mathematical challenges faced by the overly indebted countries, investors have confidence that central banks will be able to engineer a return to sustainable economic growth without creating runaway inflation or triggering a renewed recession through premature tightening. This would be a tall order in even the best of circumstances. But if a small issue like Cyprus can shake that confidence...how strong can it be? Read how this confidence in central bank support has been the driving force in stock market rally.

Interestingly, the troubles in Cyprus have encouraged many to boast about the comparative health of American banking institutions and the superior sanctity of our own depositor protections. Both of these strengths are illusory, and as a result, what happens in Cyprus will not necessarily stay in Cyprus.

This month the Federal Reserve released the results of "stress tests" that it conducted on the major U.S. banks. While the media heralded the overwhelming success, in which 14 of 16 institutions received gold stars, they did not mention how the tests failed to test how the banks would perform if interest rates were to return to their historic norms.

Currently, the ultra-low rates provided by the Federal Reserve, which provide a low cost of capital and sustain profits on highly leveraged bond and mortgage portfolios, are a key element keeping banks in the black. All of that would be threatened in a rising rate environment. And while the tests did assume that rates would rise from the current 1.9% on the 10 year Treasury, there were no considerations for yields surpassing 4%. They assume that interest rates will stay near historic lows, no matter how bad (or good) the economy gets, how high inflation rises, or how much money the government borrows.

The Fed saw yields rising to 4% (by the end of 2015) only under their most optimistic forecast. In the scenarios involving economic deterioration, they predicted yields would come down dramatically from current levels. At no point did researchers ask the most fundamental questions: What if all the money that has been created over the past few years leads to an increase in inflation that forces interest rates past 4% even if the economy remains weak -- do they not remember the stagflation of the 1970s? Or what if the continued fiscal cowardice in Washington leads to a diminishment of bond investors' enthusiasm?

Given our past experience with bursting bubbles, would it not have been wise for the Fed to consider whether banks could withstand the bursting of the Treasury bond bubble, which many suggest is the biggest bubble of them all? But since the Fed did not recognize the smaller bubbles until after they burst, it is not surprising that they are equally blind to this one? The Fed, after all, does not have a history of learning from its mistakes. However, I believe the oversight is no accident. The Fed knows that major banks would fail if the bond market crashed, but it does not want to shake the confidence that is essential to the current economy.

This episode also puts into starker focus the inadequacy of deposit insurance. By offering the illusion of systemic safety in bank deposits, government guarantees encourage recklessness by banks and depositors. They provide the same incentives that federal flood insurance does in convincing homeowners to build on flood zones. Consumer choice and risk aversion are powerful forces that could bring needed discipline to banking. The FDIC in the U.S. is in the same situation as insurance giant AIG before the crash of 2008.

While the FDIC currently has about $25 billion available to bail out failing banks in the event of isolated events (mainly held in U.S. treasuries that would need to be sold), it insures more than $10 trillion in deposits. Clearly it lacks the resources to cover major losses in a systemic failure. A failure of just one of the nation's forty largest banks could swamp the resources of the FDIC. I believe that a significant spike in Treasury yields, to say 6%, would result in the failure of several major banks. Bank of America and Citibank for example each have over $1 trillion in deposits. Where would the FDIC get the money to make the depositors whole in such a situation? The government would be unlikely to pass a major tax increase to fund an FDIC bailout. More likely the Fed would print the money. In that event, depositors may not lose their money, but their money will lose much of its purchasing power. In the end, honest losses could prove to be much smaller.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

The Playlist for March 19, 2013

2013-03-20T03:52:00Z

Count Five - Psychotic Reaction
G. Love - Rainbow
Lefties Soul Connection - V2
Jeymes Samuel & Canibus - Who Writes the Songs
Earth Wind and Fire - Shining Star
Beck - Mixed Bizness
Jens Lekman - Your Arms Around Me
Manu Dibango - Weya

The Playlist for March 14, 2013

2013-03-14T18:17:00Z

Bonobo - We Could Forever
Kafka - Baboon Slap
The Coconutz - These Boots Are Made For Walkin'
The Stark Reality - Comrades
Toubab Krewe - Hang Tan
Yamasuki - Yama Yama
Tom Petty - I Should Have Known It
Amy Winehouse - Back To Black <br>

The Playlist for March 13, 2013

2013-03-13T18:20:00Z

Yeasayer - 2080
Winston McAnuff - Unchained
Thievery Corporation - Radio Retaliation
Lonnie Smith - Move Your Hand
Blues Traveler - But Anyway
Ray Charles - Lonely Avenue
Chuck Berry - Woodpecker
Baby Charles - The Sphinx

The Playlist for March 08, 2013

2013-03-08T19:23:00Z

Shuggie Otis - Ice Cold Daydream
Kutiman - I Am New
Tower of Power - Get Yo Feet Back On The Ground
Maze - Color Blind
Shuggie Otis - Me and My Woman
Ray Charles - Busted
Kutiman - Music Is Ruling My World
Mark Ronson - Stop Me

The Playlist for March 07, 2013

2013-03-07T19:27:00Z

Unforscene - Alright
Vince Guaraldi Trio - Linus and Lucy
Wanda Jackson - Funnel of Love
Shawn Lee - Brighton Rock
RJD2 - Ghostwriter Remix
Rufus Thomas - Funkiest Man Alive
Koushik - Battle Rhymes for Battle Times
The Limp Twins - Moving Closer to the Sofa

Thankful College Student

2013-03-05T01:13:00Z

Hello Mr. Schiff,

I'd like to simply express my utmost appreciation for the profound knowledge and insight that you continue to share with your audience. As a 20-year-old student formerly studying physical therapy, I was newly introduced to you through your Occupy Wall Street video that was posted by a member on Bodybuilding.com's forums. I was intrigued and inspired by your ability to present rational views completely unadjacent with the mainstream, yet infinitely more sensible. Since discovery of your video, I've strictly spent the last year studying finance and economics with your principles as my main incorporation in my coursework, with a new-found passion for the field. With near-term goals of completing business school and transitioning into the professional sector, I aspire to provide to others the knowledge and value that you've mastered in presenting to me. Last year, I knew much about physiology and next to nothing about economics. Fast-forward one year, and I'm consistently adding to my stack of 1,000 oz of silver and 20 oz of gold, while having daily discussions with my economics professor on how the Fed has checked into the Roach Motel of monetary policy. I am truly grateful for the unparalleled positive influence you've had on me over the past year and look forward to your continued success in life.

Cordially,
Alex
Pasadena, CA

The Fed's Tightening Pipe Dream

2013-03-01T21:46:00Z

Testifying before the US Senate this past Tuesday, Fed Chairman Ben Bernanke made an extraordinary claim about its bloated balance sheet: "We could exit without ever selling by letting it run off." What Bernanke means here is that the Fed could simply hold its Treasuries and agency bonds until they mature, at which point the government would then be forced to pay the Fed back the principal amount. Through this process, the Fed's unprecedented and inflationary position will be gradually and placidly unwound.

Growing rumors last month of a potential "tightening" of monetary policy - seemingly confirmed by the Fed minutes released on Feb. 20th - have spooked the precious metals markets, leading to a 5.8% correction in gold and 10.2% in silver.

However, these fears are preposterous on two counts.

First, the Fed just spent the past year and a half extending the maturities of its entire portfolio. That was the entire purpose of Operation Twist. The average maturity of the entire portfolio is now over 10 years. That means any wind-down using the strategy Bernanke outlined would play out over the course of decades - not months or years.

Fortunately for hard asset investors, it is unlikely to play out at all.

The second reason these fears are unfounded is that there is no exit strategy. Listening to Bernanke's testimony, it was clear that here was a man simply speculating about when an exit might be undertaken - or perhaps ifit would ever be taken. Senator Corker from Tennessee accused Bernanke during the hearing of being "the biggest dove since World War II." "I think it's something you're rather proud of," the Senator continued. The Chairman's response to the charge of recklessly endangering the nation's currency? "In some respects, I am."

The Fed Chairman has been talking about tightening for some time. In 2010, he said, "As the expansion matures, the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures."

Back then, the same mainstream analysts were predicting recovery and a reversal of quantitative easing (QE). Instead, we have subsequently seen QE2, Operation Twist, and now QE3 to eternity.

While these mainstream commentators are at best guessing as to why or when the Fed might reverse course, I understand that it is extremely unlikely to do so for the foreseeable future. In fact, I've bet my net worth on it.

There is no exit strategy because the results of the Fed withdrawing its artificial support would be disastrous for the US Treasury and in the short-term, the US economy.

The Fed is expected to buy nearly 90% of new Treasury bonds in 2013, according to Bloomberg. This is a tremendous subsidy that has kept 10-year Treasury yields below 1.95% on average this year so far. Last year, with 10-year yields averaging 1.8%, the Treasury spent $360 billion on interest payments alone. That represented nearly 10% of all expenditures.

Let's assume a Fed tightening causes these rates to triple - not unreasonable for a government facing over 100% debt-to-GDP. If these rates triple by 2015, and another $2 trillion or so is added to the debt, then interest would make up over 30% of annual federal expenditures. Just interest. Then, there are principal repayments, Medicare/Medicaid, Social Security, the Armed Forces, and all the other entitlements for which the Treasury is responsible. Is Washington going to default on our creditors, our seniors, or our men and women in uniform?

I believe these assumptions are still rosy compared to what might actually happen if the Fed were to withdraw support. As I outlined in my January Gold Letter, the US sovereign debt market is a house of cards in which the Fed, foreign creditors, and domestic investors each play a part. If the Fed were to signal that creditors might face haircuts, then the reaction could be swift to the downside. If rates went above 10%, as they have in Greece, then over half of the federal budget would be committed to interest payments alone.

But that's not all. Higher interest rates would cause the shaky housing market to take another nosedive. Few Americans are in a position to buy a $300K house at 10+% interest. Rather, prices would have to decline to levels affordable for cash buyers and those willing and able to take out high-interest mortgages. That might mean another 50% decline or more, in real terms.

With housing taking a second bath, we can expect the banks not to be far behind. That sector remains bloated and dependent on various subsidies from the Fed. With loan rates higher than their customers can afford, banks would fail at a rate higher than 2007-8. This would trigger another round of bailouts from the Treasury; but without Fed assistance, where will the funds come from?

If there isn't a bailout, the major money-center banks would collapse, crippling Wall Street's reputation as the global financial center. The US dollar's reserve status might then be abandoned once and for all.

Quickly, one can see how the Fed's money-printing is the mask holding this charade together.

To see in real time what happens when the mask is pulled off, look to the Mediterranean. Greece has seen the Golden Dawn neo-nazi party win 7% of seats in the last two elections. Italy, meanwhile, just saw a comedian with no political background grab 25% of its parliament in a satirical candidacy. Street protests, unemployment, and other signs of instability are rampant. The protestors are not learning a tough lesson about the consequences of profligate spending; instead, they're simply angry that the money has stopped flowing.

No one in Washington - not least Ben Bernanke - has any intention of setting off a similar episode in the US. Yet, that's exactly what a tightening of monetary policy would do. So, at least as long as the CPI numbers can be fudged to make inflation appear "contained," the Fed is going to keep filling the punch bowl.

Returning to the latest Fed minutes that have hard asset investors so upset, it is telling that while there was some discussion of the dangers of money-printing, only one of twelve governors actually voted against continuing current policies. With no concrete actions being taken and an overwhelming majority still in favor of current policies, it seems gold bears are making much ado about nothing.

As investors realize this, they will once again put their pedals to the precious metals.

Peter Schiff is CEO ofEuro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices.

Click here for a free subscription to Peter Schiff's Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts.

And now, investors can stay up-to-the-minute on precious metals news and Peter's latest thoughts by visiting Peter Schiff's Official Gold Blog.

Listeners' Questions, Peter's Answers

2013-03-01T20:28:00Z

David from Billings, MT
Do you think another downgrade is coming for the U.S.?

Derek from Mercer Island, WA
Is buying into international ETFs or mutual funds enough to protect that money from a falling dollar or do you need to somehow get your money out of the US and buy foreign stocks and funds?

Gonzalo in Mexicali, Baja California
Peter would you please give me a scholarship for my university?

Enrique from San Francisco, CA
The rent is very high here in San Francisco. If I have no cash flow, should I rent a home or should I try to buy a property?

Steven from Northland, New Zealand
We currently have a manufacturing sector which is struggling because of the high dollar. Our government is currently following free market principles, but has indicated that it will give our Federal Reserve Bank greater powers to intervene in order to reduce the value of the dollar. How can a vibrant and productive manufacturing sector co-exist with a high and constantly rising dollar?

I never once allowed myself to compromise our thoughts on the economy

2013-03-01T13:00:00Z

Dear Mr Schiff,

My name is Graham S. -- I hold a degree in economics 2010 grad. I am 24 years old.

I have been a listener of your thoughts for years. I listened to what you said, followed up with my own research and when it came to attending class to be confronted by a 'lecturer' -- I was laughed at when I brought up the inevitable crash coming this was in 2007.

I wrote my dissertation on "hyperinflation and the end of the US dollar" -- my professor refused to accept it at first, but by then I knew the worthlessness of the degree I told him I couldn't care less whether he agreed or not, or even if I graduated. Why? Because by 2010 I knew that I was smarter and further ahead of the game than they were, all thanks to you.

When I attempted to get a job on a trading desk in the city of London I was repeatedly turned down. The reason being, because I wasn't backward in coming forward with my thoughts and facts on the impending crash at a time when people were anticipating a recovery.

Throughout every interview, I never once allowed myself to compromise my our thoughts on the economy, which means I can hold my head high and my integrity remains intact.

It's 2013 now and I am paying back a worthless degree, my girlfriend studying her doctorate and I cannot get a mortgage as banks want a silly high deposit.

However, I decided that I would put my money where my mouth is and back the knowledge that I have gained from your youtube videos/ radio show and books.
I am now trading my own portfolio predominantly futures and forex and making strides toward financial freedom.

I owe everything to you. No amount of student loans will ever outweigh the debt I will forever be in to you.

Maybe one day I will buy you a few drinks don't worry I have enough gold to pay the tab off.

Thanks again.

Your friend,
Graham S.

A fan of your work & books

2013-02-25T23:59:00Z

Hi Peter,

I'm a fan of your work & books. I've got an MBA & I researched for Wall Street institutional investment funds for years before I got a real job developing fast-payback energy saving systems for businesses. You've taught me more about economics than all the misinformation I've learned over the years combined.

I LOVE your new radio show, because the interactive format with your guests is the best possible way to thoroughly understand the issues. Keep up the good work.

Andy K.

Looking for Advice

2013-02-25T23:59:00Z

Dear Peter, my name is Ethan I am 19 and live in a small town in Vermont called Marshfield. I currently go to the Community College of Vermont part time taking two classes a week. I also work part time with my dad and my older brother logging to be able to pay for the classes which I attend. My dad is the third generation of the Ducharme logging business making my brother who wants to take over the fourth. I on the other hand want nothing to do with logging and actually hate it. I see my dad come home every afternoon worn out tired beat up form the days worth of work then get up at 4 the next morning to start all over again.

When I am not taking classes I'm out there with them doing the same boring stuff they are doing; I'm not exactly sure what I want to do with the rest of my life but I no what I do not want to do and that's logging. I want to go to college full time like everyone else I no but I don't want to get into all kinds of debt and take out all kinds of student loans. I feel like it is impossible to go to college without getting into debt and If I keep having to work to pay for the classes that I am taking it will take me the rest of my life to complete school. I think I want to go to school to be a nurse because I like working and interacting with people and you make decent money and don?t have to work yourself to death. My brother whose name is Erik and is 22 is also our neighbor, he comes over all the time and tries to give me advice on what I should do for work and this and that and what he wishes he did when he was my age instead of going into the marines.

From what I have gathered in my 19 years of life I came to realize that its pretty hard to make it out in the world and become successful and financially stable which is exactly what I want to become. I started looking into investing and buying a few shares and Googleing what?s good to buy or bad and somewhere along the line your name popped up. I looked you up online and read a little bit about you and saw that you looked like you new your shit; good with money, good with politics, investing and being able to tell what is potentially good or bad to invest in. I listened to part of your first radio show but it only would let me play three minutes so I couldn?t listen to the rest. I have 2 ounces of gold that my grandfather gave to me before he died and I am not sure what to do with them. I want to build a house in a few years but feel like its impossible to get anything started or up and going I feel like I could make some money by selling my gold, or maybe by investing a little but I only have about 500 dollars that I could potentially invest. If you could give me some maybe good safe ideas what I could invest in or just some advice in general about where to go or how to make it out there it would be a tremendous help. I'm not asking for a handout by any means just some advice and you seem like the person I have been looking for. You probably get a million emails a day but I sure hope you see mine. Thank you so much.

Ethan D.

Keep it coming!

2013-02-25T23:58:00Z

I love you man! You are one of the last great thinkers worth listening to in what's becoming an insane-asylum nation! I anticipate hearing your daily blog and enjoy your radio program. Keep it coming!

Thanks!

Scott

Fan club in Germany not Army

2013-02-25T23:57:00Z

Hi Peter,

You have a growing fan club in Germany not Army! I've been watching your videos since about 2 years ago and you have converted me to the Austrian School. I also recently felt the need to do something political, to spread the word. There is a new, rapidly growing libertarian political party here in Germay which I recently joined. I have been asked, being a native English speaker, I was born and grew up in Toronto, Canada to ask you if you would be so kind as to record a short interview or just a message for us that we could post on our website www.parteidervernunft.de . I noticed that you recently did one for Hartgeld.com in Austria.

I bought a copy of your 'Fish Reserve Notes' book. My son, 14, loved it, he read it twice. I liked it a lot too, and really think it should be made required reading at the high school level. If all students had to read this, it would fundamentally change the way society works within 20 years IMHO. The Left has dominated education for decades, it's time freedom loving people started to exert an influence on education, to swing the pendulum back, so to speak. Will this book get translated into German? Have you tried to introduce your book into the school curriculum anywhere?

Keep up the good work, and best regards from Berlin

Steven M.

From Australia

2013-02-25T23:53:00Z

Hey Peter

What a good show I've have put on and I truly like it. Its great that there are international listeners like me from Australia is tuning in for what your opinions on economics.

The one thing that you've mentioned about the Australian housing bubble. I think there is a bubble in property prices and particulary when back in 2005 to 2009. Both Howard and Rudd-Gillard government have continued to support the real estate market by offering the so called 'first homes owners grant' of $10,000 to $25,000.

Since these grants been to recent home buyers. Since the R.B.A rises interest rates to 7% during 2006-7. Mortuage stress was an all time high as home owners who wasn't able to service their loans particlularly when more than 30% of thier income is being used to pay off their mortage repayments and interest. Since Kevin Rudd was elected in 2008, he made the grants bigger and since the RBA raise rates again to 4% in 2010, still a similar percentage of home owners are in mortague stress again and so as home reprocessions.

So far I believe both the past and present governments have made the real estate market more vulnerable and more expensive for younger people to own a home.

By the way, Prime Minister Julia Gillard believes in communism since she was a student at Melbourne University and rejects the free market. she wanted like she'd said in a press conference days after since she overthrown Kevin Rudd that she believes in a command and control economy.

Khoa from Melbourne, CA

Help with Economics and Investment

2013-02-25T23:52:00Z

Hey Peter, I just wanted to let you know that I enjoy listening to your new show when I can. I have been following you for quite some time now, and hearing what you have to say has helped to shape my perspective on economics and investment.

I wish you the best of luck and hope that it turns out to be a great success. I also sincerely hope that you make another political run at some point in the future.

Charlie

Greeting from Fujisawa, Japan!

2013-02-25T23:51:00Z

Dear Peter-san:

Greeting from Fujisawa, Japan!

I greatly appreciate your wisdom, courage and professionalism that you exhibit in running your business, your Senate campaign and media appearances.

I recently saw a You Tube CNN interview when you were debating a clueless nitwit. This jerk asked you the last time the government didn't intervene in a major recession.

You didn't reply to this simpleton--you had moved on to another topic--however, the answer to this jerk's question is the Forgotten Depression of 1919/1920.

Coolidge and his Treasury. Sec. Mellon CUT the government size/spending 50% eliminating/combining 100's of agencies, CUT upper tax rate from 76% to 24%, reduced regulations, and the FED didn't intervene.

After these initiatives were implemented, within 2 years, the unemployment rate fell from 20% to 4%, GDP growth soon hit 7%, standards of living exploded, industrial production rapidly expanded, exports increased, and led to the roaring 20's--one of the fastest periods of economic growth in U.S. history.

They did keep interest rates too long and had insufficient margin limits 10% I think--confirm this point, which contributed to the stock market crash of 1929 primarily caused by the Smooth-Hawley Tariff Act however, it still shows what is possible when you governments stop trying to "fix" things.

Anyway Peter, you are incredible and would contribute to your campaign if when? you run again for Senate.

If you ever ran for President, I would contribute to your campaign and send in my absentee ballot with your name checked off!

Keep up your outstanding work!

Sincerely,
Steve D.

A Positive Influence

2013-02-25T23:51:00Z

Peter,
   I simply wanted to thank you for the continued education and overall positive influence that you have had on my life. I am a restaurant owner in California, as you can tell from my background the last couple of years have been a difficult time for me. Your guidance through these difficult times has really helped me to financially position my fiancée and I to do well when many of our peers and friends have not been able to do so.

   In addition, your sharing of ideas has helped me understand what is truly going on in the world. I used to be a person that was living my life and managing my business day to day, with no real understanding of where our economy was going and feeling as though it was not in my power to control my own financial destiny. I know feel a sense of empowerment and understanding that has developed largely from the influence of following your work.

   My dad first turned me on to your book crash proof back in 2008. I had heard my dad speak of many of the concepts you explained so well, but it wasn?t until I read your book that I truly had that ?ah ha? moment. From then on I have read all of your other books as well as many of the authors on your reading list. I continue to read your blogs and watch your video blogs every time you post. Now that you have the weekly radio show I try to listen as much as possible. On a personal level, your work has enabled me to develop a really wonderful side to my relationship with my dad that previously did not exist. We are able to connect and discuss topics and conversations that are generated from the content you provide on your website. Many of our phone conversations now begin with ?did you see what Peter said today??.

   I know you are a busy man so I wont continue to ramble, I really just wanted to say keep up the good work and all that you do is appreciated and has a very positive and profound effect on many. If nothing else, I thought it only fair for me to say thank you. Back to work for me.

Best,
John M.

The voice of reason

2013-02-25T23:50:00Z

Mr. Schiff-

Thank-you for being the voice of reason. I'm sure that with all the ridicule you have endured so graciously over the years, you must feel sometimes that few are hearing you, but rest assured -- we are. You have completely changed - or shall I say corrected my mistaken understanding of economics that I learned in my MBA program in the US. Because of how much clarity you have brought to the current economy, I have begun relearning economics through the writings of von Mises, Rothbard etc. and have been really enjoying it. Instead of watching junk TV in free time after work these days, I listen your show or read about economic theory.

I am am US citizen working abroad in Japan as a fashion executive and thanks to you I have a better understanding of the macro economic climate in which my business operates as well.

Keep pushing forward -- so many are hearing you, and whenever some mocks or laughs at you on a TV show or in a debate, you just might be able to hear all of us out hear laughing at them.

You're a real inspiration. Keep it up.

Richard G.
Yokohama, Japan

Free Market Principles

2013-02-25T23:49:00Z

Greetings Peter -

I probably don't have enough money to ever cross paths with you in person, so I wanted to see if I could get an email thru to you past the screeners.

I just wanted to say thank you for your video blogs, articles, books why economies ... and your new radio show. You have a great way of communicating free market principles, which has helped me greatly to understand our current economic environment.

I am a new customer of both EuroPac Metals and EuroPac Capital.

In a world where 'sharks' are circling and consuming people running in fear or better put - consuming their money, you and the europac combination have provided a way for people like me and my wife, to be educated, and to have professional investment alternatives.

You are always welcome here in Huntsville, AL.

All the best for your continuing success.

Sincerely,

Curt C.
Huntsville, AL

P.S. If you see Anthony Bevilaqua at E.P. metals, ask him about our new "business idea" :

A Legend

2013-02-25T23:47:00Z

Peter, you are a LEGEND, keep up the great work.
Regards, Con - Australia.

When you owe the bank five thousand dollars

2013-02-25T23:47:00Z

Peter,

I once read, "When you owe the bank five thousand dollars, you have a problem, when you owe the bank five million dollars, the bank has a problem. This is maybe why Geithner can talk down to China and other U.S. creditors. This argument was discredited in some articles I had read early in the crisis. Why, I don't understand, especially since China is relatively poor in gold but rich in US treasuries. Maybe the Chinese aren't as smart as everyone seems to think since they waited so long to consider and accumulate gold. Surely it was understood by all countries how the system was arranged for the US to be the consuming engine of the world, and it wouldn't have been much of stretch even twenty years ago to have projected where we are today. But then, Keynesianism is a shortsighted economic model. The only reason it probably was effective for so long is because the vast majority of human beings are also shortsighted, even the Chinese.

Unfortunately, I think psychopaths have taken over most if not all Governments in the world and cooperate on that basis in order to dominate and control "socialized" individuals. When Gordon Brown would say "together we can do such and such" as he often did, he wasn't addressing "socialized" personalities. The main character traits of psychopaths are they lack conscience, remorse, shame, guilt, are glib, grandiose, and have pathological egos. Socialized individuals could not, and would not preside over the death of hundreds of millions of innocent people that fill the pages of human history. Only anti-social individuals who lack conscience could. Thanks to Hervey Cleckley's seminal work on psychopaths "The Mask of Sanity" written in the 1940's and books like "Without Conscience" by Robert D. Hare, and "The Sociopath Next Door" by Martha Stout, we now understand the psychological landscape of the Psychopath. Cleckley's book in my opinion is the greatest work ever presented to humanity by any author. By "humanity" I mean those of us who cooperate to coexist and live in peace. History suggests that the vast majority of those who have governed were not 'socialized' individuals. Going forward, the human race can only progress though a widespread awareness and knowledge that psychopaths often called inter species predators are among us, that they can mimic human emotions without having these underlying emotions. I recall a line out of one of the Peter Sellers Pink Panther movies where Inspector Clouseau said, "I suspect everyone, and I suspect no one." That is my position today. I have little doubt that information on the subject of psychopathy was suppressed as much as possible for many years by powerful psychopaths. Now, I think the cat is out of the bag and humanity as a whole is on the verge of recognizing and understanding the true origin of senselessness and chaos on the planet. Carl G. Jung believed that the human race was characterized by a progression toward higher consciousness. If he is correct, then I do not think the regressive lower consciousness of psychopaths will dominate a higher consciousness in humanity.

Chuck

Thanks for all you are doing

2013-02-25T23:46:00Z

Hey Mr. Schiff,

My name is Taylor Gay and I am a 23 year old Finance/Economics student at Florida State University. I just wanted to send you a little message about me and say thanks for all you are doing.

If I may, let me start with myself. Back in the summer of 08', I was a typical American youth. I was a sophomore in college who's only concern was getting laid and how pimped my ride was. My father owns a cabinet factory one of the few manufactorers left in the U.S. back in Jacksonville that makes cabinets for schools, hospitals, and airports throughout Florida and my mother is the editor of a local newspaper. We considered ourselves upper middle class.

We were the definition of a housing bubble family. My dad's business exploded in 2002-2006, doing millions of dollars worth of business a year and my mother's business did equally as well. We were literally millionaires. We sold our house we purchased in 1999 for a $200,000 profit and built a $700,000 house in 2005 dollars. My father took out multiple home equity loans to put in a pool and even to put in solar panels on our roof to heat the pool! My life was filled with cruises, European vacations, and new cars.

In was in the summer of 08' that I noticed my father and mother talking about business alot more and seeming somewhat distressed. I began to hear murmurs of "sub prime housing" and "lehman bros" but was still pretty much apathetic. Presidential canidate Barack Obama was what everybody was talking about at the time. My dad's manufactoring business began to bleed money as building in Florida ceased to exist, leaving my mom to support the family. The days of new cars and cruises were gone as my family began to seriously struggle. Our home value began to fall precipitiously and life went from carefree to very difficult.

It was around this time when I came across Ron Paul and the R3volution campaign. I stumbled across him when I heard he was the only congressman who would legalize marijuana. This was my first involvement in the freedom movement. I began to do my financial and political research at about the same time the financial crisis was unfolding. I then came across the "Peter Schiff Was Right" video and I was shocked.

How could one person have known this was coming - I thought? What made him see what my dad, a great business man and entrepreneur, couldn't? Well I began to delve into what made you and Ron Paul so accurate in your financial predictions.

I began to study the Austrian School of Economics and my questions were answered. I read Crashproof 2.0 by you, The Theory of Money and Credit by Von Mises, The Road to Serfdom by Hayek, Atlas Shrugged by Ayn Rand, and Ron Paul's End the Fed. I was now hooked on Austrian economic theory.

Since then I have followed your advice whole-heartedly. We sold our $700,000 house for $600,000. We needed help from my grandparents to cover the difference. We moved into a much smaller, more rural house that cost less than half of what our old house cost. I had my parents remove $50,000 from their cd and put $40,000 in gold Canadian Maple Leafs at $997 an ounce and $10,000 in silver Kennedy Silver Dollars at $13.80 per ounce. This was the best investment my family ever made. Gold is now at $1350 while silver is at a whopping $24! We have made thousands upon thousands of dollars off your advice and will continue to purchase physical precious metals in the near future. The purchases will be from your EuroPac precious metals company.

I have also begun to prepare for what I see as inevitable hyperinflation. I don't care how many Tea Party members are elected, they can't go back in time and not print 1.7 trillion dollars in a few months. I have stocked piled canned food and water, purchased and trained with a couple of firearms, and have begun to fortify my house. If this is going to be anything like Argentina's collapse, I am going to need all of that and more. More importantly, I have begun to ready myself and my family mentally for the world we are about to enter.

Now, whenever I am in one of my finance or economic classes, I use you as inspiration to stand up for the Austrian school and stand against Keynesianism. Keynesianism is really the only school of thought taught at FSU and it is somewhat of an uphill battle against the teaching staff. But I remember all the people who yelled and laughed at you Art Lauffer during the bubble years and I use that as inspiration. At the beginning of class every semester I send out an email to the teachers and students with "Peter Schiff is Right" as an attachment and warn people of whats coming. I will only get maybe one or two responses but I feel that if one person listens and I can turn one person, then I've done a good thing.

I just want to say I am one of your biggest fans. I listen to all of your blogs and even have the Peter Schiff App on my iPhone! I just want to say thank you and to keep up the good work Pete. Thanks for opening my eyes to the truth, even though it is sort of tough being enlightened in a world full of people "asleep".

If I'm ever in Conneticut I wanna come by EuroPac and say hey. I'd love to meet ya.

P.S. Linda McMahon sucks. What kind of people do you live with up there that would actually vote for that bitch?

Your Friend,
Taylor G.

This radio show is such a treat

2013-02-25T23:44:00Z

Peter,

I've listened to nearly every television and radio interview, video blog, and Wall Street Unspun you have done for over a year now. This radio show is such a treat, as this 20 year old Schiff-addict can now get his dose every day of the week. You've poured gasoline on that small fire of interest I already had in Austrian free market economics and politics. I will be forever grateful for your clear, simple, and profound explanations of the economy.

It's so rejuvenating to hear your voice of reason and principled stands, even in the face of republicans as you did with Dan Debicella. Your promise to hold him accountable is exactly what this country needs to hear and mimic. Congratulations on the new show, it has great potential to positively affect this nation, as you tried to do with your Senate run. It does feel like we are winning- one small battle at a time. I look forward to the day when your show will hit central Florida's airwaves, and will do my part to lobby radio stations to carry it.

Best Regards,
Matthew M.

Three Political Things

2013-02-25T23:43:00Z

To Peter:

I am a Euro-Pac client from the Los Angeles, CA area. I have Perth Mint gold and silver accounts, and your Newport Beach people have invested some of my money in one of your mutual funds as well as a few energy and food stocks.

I have been following you on You Tube including Schiff Report and Schiff For Senate campaign. I have finished reading "How An Economy Grows..." and I am halfway into "Little Book..."

What I want to tell you at this time are three political things:

1 California voters want global warming laws. They're going to vote down Proposition 23, which would delay Arnold Schw's Global Warming Solutions until unemployment falls to 5.5%. I am going nuts because my career is in aerospace mechanical parts! I have told liberal friends that if Al Gore were 100% correct, Cap And Trade would still be an abomination because it doesn't really limit carbon dioxide emissions, it just licenses it. Some of these friends think that they are getting tough with "greedy" corporations, but a few corporations are 10 steps ahead of them, having gamed the system to become carbon credit vendors. The corporations pushing Prop 23 are ones that failed to get on the gravy train. Global Warming Laws will not lessen carbon dioxide, much less regular air pollution, but it may create some monopolies! Of course, I don't actually think Al Gore is right! Carbon dioxide is not a pollutant, it is what comes out of our noses. It is only 0.03% of air, so the idea that it dominants the radiative properties of air is absurd, yet no scientist ever discusses this fact.

2 When a government agency suffers budget cutting, the agency always maximizes the loss of benefits so that the public outcry is the loudest. The politician who pushed for the budget cut is then vilified on TV news by an angry mob led by his opponent.

3 Price cutting by the universities in the event of government subsidy termination is not so easy to accomplish. The excess money from the presently high tuitions is in the pockets of highly paid administrators, people who don't teach anybody anything. In some cases, these people are protected by unions. If you fire the administrator, you would be legally obligated to keep paying him/her. The universities thus cannot reduce their costs.

I don't think the crash that you predict is avoidable because too many people believe in Keynesianism; too many people receive gov't benefits; too many Republicans are more like George W. Bush than they are like Ron Paul. One liberal acquaintance says he'd give Austrian Economics the benefit of doubt if we could name just one country that has ever used it successfully.

My vision of a Schiff/Paul type of currency crisis is one where Ben Bernanke resigns and forces that lady who is his understudy to be the one who tightens the money supply. She'll say to Obama, "I'm sorry, Mr. President. I cannot monetize your debt any longer." I don't think gasoline and milk need to cost $100/gal. I think $10/gal and rising will tell Bernanke that his ideas aren't going to make it. Next, an emergency tax surcharge on corporations and rich people fails to produce anywhere near the needed revenue. Businesses don't have time to flee. The owners just throw up their hands and plead hardship, but most of them don't pay up. China, instead of agreeing to a massive purchase of Treasuries, starts buying up crude oil and raw materials. They buy up anything expensive in the world that can be bought with U.S. dollars - hotels, factories, maybe even sports stadiums! Meanwhile, the federal government cannot be fully funded, so civil servants are sent home.

At this point, the biggest danger is that many Americans will want full socialism to fix the problem. However, anti-communism is still very strong in the U.S. These are the people with privately owned high-powered rifles. An all out push for socialism will cause civil war.

I think that it would take a crash in 2011 or 2012 to put Ron Paul in the White House. He is already so old that he could only serve one term. It will be truly tragic if Ron dies without ever being allowed to save the United States. Ron has a lot of details figured out already, such as the ramping down of Medicare and the use of competing currencies of gold and silver. The crisis needs to hit by mid-2012, though.

---Regards, Albert W.

I had no clue as to how economics worked

2013-02-25T23:41:00Z

Since I can't call in to the show do to working at the time it is on live, I wanted to send you this message.

First up until 6 months ago I had no clue as to how economics worked. I have studied Austrian economics for the past 6 months.

I totally agree with everything you say, I have rearrainged my entire view and basically rearrained my entire financial life according to your investment stategies.
I have opened an account at your firm and have begun to at least buy silver. I can't really afford gold even at these prices.

I just don't know how you don't keep from going nuts. I have talked alot on the monetery policies of the country to my friends and they all disagree.

People in this country really don't have a clue. No matter want you say or how much solid evidence I present it does not seem to matter.

People here just want to keep living in the U.S. bubble pretending nothing is wrong.

It is scary though, I feel sorry for people when I see them financing everything. When I hear them talking about how much the market has been going up.They just continue on like everything is the same.
I am the idiot.

Anyway, keep up the good work and know that you do change some peoples minds.
I am proof that what you say does have a impact on some, although not enough.

Take care
Tim K.

A Big Hit

2013-02-25T23:39:00Z

Now that I see that you do accept emails from Canada I will now start.

I have to say your blogs and now your radio show have been a big hit with me. I have been listening to your blogs and youtube videos for about two months. Let me give you some background on me. I have always been very liberal socially but very conservative fiscally. The two sides of me don't really fit into any politcal party so I rarely get too excited about who get elected up here or down in the states.

I find your style of presentation to be not only entertaining but palitable. There are many so called right wing comentators out there that I cannot stand. Not because of what they are saying but because of the way they present themselves. My biggest beef is that they have to put down or denigrate liberals and sociallist etc. Many of these people are our neibours and friends and we have to get along with them. But even though you may be libertarian you do not have that hatefull side to your personallity. I hope that you do not get bad advice from the radio people and try to project an image that goes over the top with insults and put downs. You are perfect just the way you are. Think about it. If your real goal is to change those in Washington, then you need all the help you can get. And if you can convince and old liberal like me to see the libertarian viewpoint then you can reach alot more like me by keeping your presentation just the way it is.

Don't change. You are already getting your message across and it is working.

Maurice in Mississauga

just west of Toronto.

The Playlist for February 22, 2013

2013-02-22T19:50:00Z

Thievery Corporation - The Richest Man In Babylon
Klint - Diamond
The Wild Magnolias - (Somebody Got) Soul Soul Soul
Theodore Shapiro - Two Dragons
The Souljazz Orchestra - Insurrection
The Roots - The Fire
Galactic - Think Back
Travie McCoy - Billionaire (feat. Bruno Mars)

The Playlist for February 21, 2013

2013-02-22T19:24:00Z

First Rate - I Wonder (feat. Project Redemption)
Hexstatic - Chase Me (feat. Juice Aleem)
Gorillaz - Latin Simone
Deep Banana Blackout - Pure Gravy
Gorillaz - Plastic Beach
Aretha Franklin - Rock Steady
Kinnny - Back Street Lust
Belleruche - Northern Girls

Tom Puts Me to ZZZZzz...

2013-02-20T19:14:00Z

Please email & let me know when Peter is back & Tom is gone..Tom sucks quite frankly..nothing against him personally but....he just isn't talk show host material..sorry but Tom puts me to ZZZZZZZ & if Peter continues letting Tom host the show..well LOL staying on the air....the guy from the LA office much better host or let alex jones fill in?..still looking for my "free" t-shirts with the name "Irwin" on them..??? where are they? i ordered 20 a month ago & not see them anywhere..Peter should have done the t-shirt thing when Irwin was 50..waiting 35 years to try to get him outof jail shows Peter could give a rats S about his dad,..he's concerned about the money he'll make selling the T-shirts obviously..he a good Talmadic joo thru & thru...talmadic jooish list of prioritys:
#1 money
#2 money
#3 money

Gary H. from Groveport, OH

The Playlist for February 19, 2013

2013-02-20T03:03:00Z

Quantic - En Focus
Chris Joss - Re-Volt
Shawn Lee - River Man (Nick Drake)
Galactic - Never Called You Crazy
Deniece Williams - Free
Cibelle - Train
Arcade Fire - The Suburbs
The Bamboos - On The Sly

The Pound Gets Pounded

2013-02-20T02:47:00Z

As the global currency war intensifies, the majority of attention has been paid to the 17% fall of the Japanese yen against the U.S. dollar over the past few months. The implosion has given cover to the sad performance of another once mighty currency: the British pound sterling. But in many ways the travails of the pound is far more instructive to those pondering the fate of the U.S. currency.

Japan has a unique economic and demographic profile which makes it a poor stalking horse. Newly elected Prime Minister Shinzo Abe and the Bank of Japan have clearly and forcefully committed Japan to a policy of inflation at any cost. Even in a world of serial money printers their plans stand out as exceptional. Britain, on the other hand, is charting a more conventional course to the same destination.

The UK government, under conservative Prime Minister David Cameron and Chancellor of the Exchequer George Osborne, has succeeded in bringing marginal discipline to their budgetary imbalances. From 2009 to 2012, British government expenditures rose a total of just 1.6%, which was far below the official pace of inflation. (In contrast, U.S. federal spending grew by 7.9% over that time period). Since 2009 the British have kept their debt-to-GDP ratio lower than America's and have cut into that metric at a faster rate. But while the British are conservative when compared to their American cousins, they are hardly austere when compared to Germany (which continues to have a nearly balanced budget and extremely low debt to GDP). Paul Krugman blames Britain's lackluster economic performance on their misguided experiment with austerity.

The monetary side of the equation also puts the UK within the spectrum of its peers. Ever since the Great Recession began in 2008 the Bank of England, led by outgoing Governor Mervyn King, has been far more stimulative than the European Central Bankers in Frankfurt (but not quite as much as the Federal Reserve or the Bank of Japan). In contrast to the permanent and ongoing bond-buying quantitative easing programs underway in the U.S. and Japan, the Bank of England has engaged in such measures only selectively.

Given the relatively moderate approach pursued by the British, the poor performance of their currency may be hard to fathom. The deciding factor may be that the Pound Sterling is not nearly as vital to investors, or as integrated into the global economy, as the U.S. dollar or the euro. The greenback, being the world's reserve currency, has always benefited from demand that is independent of its economic fundamentals. The euro benefits from the size of the euro zone and the legacy of German banking discipline. The pound enjoys no such privileges and as a result foreign central banks do not feel as pressured to prop it up. As a result, over the past few years the pound has been... pounded. Since July 2010, the currency is down 26.7% against the U.S. dollar, and in recent months it has started falling faster than all other developed currencies except for the Abe-pummeled yen. Since October 1, 2012 the pound has fallen by 4% against the dollar and 8% against the euro.

The pound's health is made more suspect by the extreme challenges faced by the Bank of England as it tries to stimulate the most admittedly inflation prone economy among the major Western nations. Unlike the Federal Reserve, which is tasked by statute to combat both inflation and unemployment, the BofE has only a single mandate: to keep inflation contained. On that score it has been failing habitually. Inflation in the UK has been north of its 2% target for the past five years (the current official rate is 2.7%). In its most recent inflation projections, Mr. King admitted that it will stay that way for years to come, and that it may exceed 3% this year and next. With its currency weakening and inflation accelerating, the mandate of the BofE would clearly indicate that the time has come for monetary tightening.

However, like all central bankers, Mr. King, and his successor, the Canadian Mark Carney, will not be bound by such triflings as statutory mandates and past promises. In his press conference last week, Mr. King spoke of "looking past" current inflation figures to a time when he expects inflation will moderate. When the choice is between inflation and the political pain of economic contraction, bankers (at least those who don't speak German) will choose inflation every time.

While the American media has poked fun at the Bank of England's backtracking, they somehow do not understand that the Federal Reserve would be doing the same if not for the advantages given to us by the dollar's reserve status. Our ability to monetize the vast majority of the annual government deficit while exporting our inflation through half trillion dollar trade deficits and the overseas sale of hundreds of billions of Treasury bonds annually means that we do not yet face the pressures bearing down on the Bank of England.

For now at least Cameron is sticking to his guns and making the politically difficult case to voters that today's hard choices will yield benefits down the road. This puts all the pressure on the Bank of England to satisfy the calls for stimulus. The Federal Reserve is fortunate in that the Obama Administration shares none of Cameron's fiscal determination.

But already the Fed has done plenty of backing off from its prior promises. Just a few months ago Ben Bernanke announced specific inflation and unemployment triggers that would apparently put monetary policy on automatic pilot. But just last week, Fed Vice Chairman Janet Yellen announced that those goalposts (6.5% unemployment and 2.5% inflation) should not be considered "triggers" but as thresholds past which the Fed "may consider" tightening. When U.S. prices start to rise in earnest, look for the denials and rationalizations to come in torrents. The Fed will never acknowledge high inflation no matter what the data, nor will it ever take any steps to combat it. The simple reason is that it will be unable to do so without bringing on the economic contraction that is so terrifying to the British.

However, as British inflation accelerates, the pressure on the Bank of England to change course will intensify. As monetary stimulus continues to take its toll on the pound, price pressures will mount, even as the economy continues to stagnate. In other words, it is charting a course to stagflation. Perversely, this will put even more pressure on the BofE to ease. However, more cheap money will not stimulate the economy but merely cripple it further by fueling the inflationary fire.

At some point the British will have to admit that stimulus doesn't work. To break the inflationary spiral and rescue the ailing pound, the BofE will be forced to aggressively raise rates, at which point the British government will have no choice but to slash spending more deeply than would have been the case had they taken their medicine sooner. However, if the BofE refuses to tighten even in the face of much higher official inflation, the pound may deteriorate further and the UK might be left with the embarrassing choice of adopting the euro.

As far as the United States is concerned, the U.K. is the canary in the coal mine. What they are going through now, and what they may be about to go through, we will surely experience in the years ahead. The only difference is that the leeway afforded to us by our special status simply gives us more rope to hang ourselves. When the noose finally tightens, the fall will be that much more painful.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

Another American with No Brain

2013-02-19T19:13:00Z

You, sir, are just another American who did not get in line when brains were handed out. Happy my job sent me to this country.

Bob L. from Lethbridge, AB

A Complete Nut in Most Cases

2013-02-18T19:12:00Z

I watched some of your videos on youtube Mr. Schiff and you sound like a complete nut in most cases. you will not come to terms that keynes was right and you intellectually lazy austrians are wrong. hopefully one day, by the grace of God, that you, Ron Paul, Woods, et al will cross the riversticks and come to the side were you guys belong. please peter come out from the dark side, and come into the light. keynes should be your guru, not von mises or ayn rand.

p.s excuse my grammar and spelling, chowzers

Ryan from The Bronx, NY

The Same Old Tea Party Talking Points

2013-02-15T19:10:00Z

Peter,

Saw you on CNN-GPS. God, the same old Tea Party talking points we heard from Michele Bachman, Sarah Palin, and the rest of the right-wing crazies. What ever happened to the Republican Party? Who do you think is listening to you as you ride around in an expensive car, wear $500 suits, have styled hair, and cry about taxes and regulation? Somebody has to run the country. Will it be big government elected by the people, or rich assholes like yourself?

Richard B. from Keene, NH

The Playlist for February 15, 2013

2013-02-15T18:36:00Z

Five Alarm Funk - Uncle Meatball
Bonobo - Kong
Steve Miller Band - Take the Money and Run
Bacano - Come Around
Blur - Brothers And Sisters
Sharon Jones & The Dap-Kings - Stranded In Your Love
Candido - Serenade To A Savage
Aloe Blaac - Hey Brother

The Playlist for February 14, 2013

2013-02-14T22:55:00Z

Five Alarm Funk - Brother Egypt
The Beatles - Taxman
Bobby Hutcherson - Montara
artist unknown - Jorge
Nomo - Hand and Mouth
Thievery Corporation - Lebanese Blonde
The RZA - Samurai Showdown

The Playlist for February 13, 2013

2013-02-13T22:58:00Z

MGMT - Kids
Duffy - Mercy
Baby Huey - Hard Times
Bob Andy - Life
Tommy Hools - Barcelone
Kid Loco - AnotherLateNight
Red Hot Chili Peppers - Falling Into Grace
Me&You - How Can I Hold You

Listeners' Questions, Peter's Answers

2013-02-13T19:05:00Z

Suhas from Pune, India
You keep saying "When the interests go up...".
What event will trigger the rise? Who controls the interest rates? If it's the Fed, then why couldn't they keep it low forever?

Tim from Tampa, FL
I've been reading "The Real Crash", and I agree with the likelihood of tough economic times ahead in the United States. Do you think there are companies such as life insurance companies that might actually benefit from an economic crash?

Brian from San Diego, CA
Besides gold would you recommend owning any other commodity, such as corn, gasoline, natural gas, etc.?

Eric from Hoboken, NJ
Why can't we get some type of move in miners? Even on some days when gold advances, miners are still under pressure.

Doug from Winter Springs, FL
In a recent Schiff Report video blog, Debt Ceiling & the Fiscal Cliff , you said, "Get out of any debt denominated in dollars." I intended on letting inflation ease my low interest debt while making better investment choices with the money I have. However, your comment in the video makes me think I am misunderstanding something.

The Playlist for February 12, 2013

2013-02-12T23:00:00Z

Mark Ronson - Oh My God
Handsome Boy Modeling School - The World's Gone Mad
Dr. John - Loop Garoo
The Black Keys - Thickfreakness
Blondie - The Hardest Part
The Coasters - Down In Mexico
Greyboy - Got To Be Love (Paul Nice Mix)
Nostalgia 77 - 7 Nation Army

Messing With The Bull

2013-02-08T19:45:00Z

With the announcement this week of its massive $5 billion lawsuit against ratings agency Standard & Poor's, the Federal Government took a bold step to squelch any remaining independence of thought or action in the financial services industry. Given the circumstances and timing of the suit, can there be any doubt that S&P is paying the price for the August 2011 removal of its AAA rating on U.S. Treasury debt? In retaliation for the unpardonable sin of questioning the U.S. Treasury's credit worthiness, the Obama Administration is sending a loud and clear message to Wall Street: mess with the bull and get the horns. Shockingly, the blatant selectivity of the prosecution, however, has failed to ignite a backlash. But as the move violates both the spirit of the Constitution and the letter of the law in so many ways, I can't help but look at it as a sea change in the nature of our governance. Call it Lincoln with a heavy dose of Putin.

Given the nature of the U.S. economy during the housing mania of the last decade, charging S&P with fraud is like handing out a speeding ticket at the Indy 500. Like nearly every other mainstream financial firm in the world at the time, S&P believed that the U.S. economy rested on a solid foundation of accumulated housing wealth. By 2006, the housing market was closing out one of its best decades in memory. Developers, speculators, financiers, real estate agents, bankers and even ordinary Americans had become charmed by the easy wealth of serial home purchases. The party had been orchestrated by a cadre of politicians and regulators who wanted to keep the party going and take credit for the good times.

To a degree that few Americans understand even to this day, it was not irresponsible lending, bad ratings, or excess greed that finally doomed the mortgage market, it was the simple fact that national home prices started falling. As long as prices stayed high, refinancing would have been open to borrowers, and defaults would have been manageable. Among the hordes of analysts, academics, and reporters who covered the market there were few if any standing who believed that national home prices could fall of a cliff. I know this to be true because I spent many years trying, unsuccessfully, to warn them.

From 2005 to 2008, I made scores of appearances on national television and at investment conferences around the country in which I stated that national home prices were set to decline by at least 30% and that the resulting mortgage defaults would devastate the financial sector and bring down the economy. I may have just as well been arguing that pink unicorns were about to resurrect the Soviet Union. At the 2006 Western Regional Mortgage Bankers conference I told attendees that many highly rated mortgage-backed securities, including some rated AAA, would become worthless. My debate opponent claimed that such predictions only come to pass if "an atomic bomb landed on either Los Angeles, Chicago, or New York!"

The idea that home prices could decline at all, let alone by 30% was considered beyond serious consideration. The models used by the banks, investors, government agencies, academics, and rating agencies predicted that national home prices would continue to rise, or at least stay stable. They were ALL wrong. Calls for even a 5% decline would have put S&P in the extreme minority. I know because I WAS that extreme minority and would have noticed any company joining me. Absent such opinions, the analyses put out by S&P, Moody's, and Fitch were justifiable. So why pick on S&P? Perhaps because the other two agencies never downgraded U.S. government debt.

As proof of S&P's institutional culpability, the Justice Department provided a few e-mails sent by S&P analysts during the final stages of the housing bubble. The messages contain cynical awareness that the mortgage market was built on a house of cards. So what? To avoid guilt would S&P have to prove 100% agreement among all employees? The company readily admits that it reached its opinions through a consensus and that feelings within the firm varied. Opinions are, by definition, nuanced and varied. During the years before the crash I received emails from many people who agreed with me but who said that their friends and co-workers believed that they "were nuts" for harboring such fears. I lost count of how many people told me that I was nuts. Many of these e-mails could have come from S&P analysts.

At most, S&P was guilty of a culture of complacency and group think. Ironically that spirit was engendered by the bizarre regulatory environment created for ratings agencies by the government itself. In 1973, in order to "protect" investors from unregulated markets, the SEC designated certain ratings firms as "Nationally Recognized Statistical Ratings Organizations." Thereafter, only bonds rated by sanctioned firms could be purchased by pension funds and federally insured banks. Before that time the ratings agencies were paid for their advice by bond investors. As the rule change limited the abilities of investors to choose who to ask, the ratings firms began charging bond issuers instead. This arrangement meant that interests of investors would be subordinated. In any event, the law may have mandated who could perform ratings, but it did not require anyone to take them seriously. Any decent portfolio manager recognized this conflict of interest and performed their own due diligence.

The problem was when it came to housing mortgage bond buyers who were just as clueless as the ratings agencies. In fact, even those few buyers who knew the party would end badly, decided for themselves to keep dancing until the music stopped. It's completely hypocritical to sue the band after-the fact. Given that the SEC required investors to use these ratings agencies, should not the Justice Department be suing them instead?

The 2011 downgrade came as the government passed a weak and inconclusive patch to the debt ceiling crisis. Now, a year and a half later, we see that they have slithered out of that poorly constructed straight jacket. With the new debt piling up faster than ever, and the government showing itself to be blatantly incapable of making hard choices, it should be clear to anyone with a half semester of accounting that the Treasury debt should be downgraded. Yes the government has a printing press, but that only means that the value of the bonds will disappear through inflation rather than default. S&P was far too lenient.

Smaller ratings agency Egan Jones (which never had the official sanction of S&P) issued harsher reports about government debt, and they have also been duly punished for their candor. In 2011 the other major ratings agency, Moody's, argued that the fiscal cliff deal agreed to by Congress and the President improved the country's fiscal position and forestalled any need to downgrade Treasury debt. However, since we never actually went over that conveniently erected fiscal cliff, why has Moody's not responded with a downgrade? Perhaps they want to stay out of court?

Let's hope that it is still possible to get a fair hearing in a U.S. court of law, even when squaring off against the biggest and most powerful opponent the world has ever known. But even if S&P wins, we have all already lost. If it survives it will only do so after incurring huge legal bills and seeing its share price slashed. It's a foregone conclusion that no more downgrades will be coming.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

The Playlist for February 08, 2013

2013-02-08T19:33:00Z

Blues Traveler - But Anyway
James Brown - Down And Out In New York City
Jens Lekman - Your Arms Around Me
Beck - Mixed Bizness
Jack Ashford - Las Vegas Strut
DJ Krush - Kemuri
Reuben Wilson - Bambu
Bob Marley - Sun Is Shining

The Playlist for February 07, 2013

2013-02-07T19:36:00Z

Manu Dibango - Weya
Jeymes Samuel & Canibus - Who Writes The Songs
JJ Grey & Mofro - The Devil You Know
Citizen Cope - 200,000 (in counterfeit 50 dollar bills)
artist unknown - OS Mutantes
Beck - E-Pro
Earth Wind & Fire - Shining Star
Kylie Auldist - Made Of Stone

The Playlist for February 06 2013

2013-02-06T19:24:00Z

Devandra Banhart - White Reggae Troll
Amy Winehouse - Back To Black
Lyrics Born - Changed My Mind (Stereo MCs Rattlesnake Mix)
The Beatles - I Am The Walrus
Lefties Soul Connection - V2
My Morning Jacket - One Big Holiday
Ray Charles - Lonely Avenue
Deerhunter - Revival

Listeners' Questions, Peter's Answers

2013-02-06T15:33:00Z

Joshua from Harrisonburg, VA
As you are someone who has enjoyed success in political commentary, I'm wondering how one is able to break into the field. I've been actively promoting my political principles through a blog, but would like to transition to something full-time that can reach a much greater audience. Are there any suggestions you can offer?

JoÃ£o from Braga, Portugal
It seems, the Euro is becoming a stable currency. Should Europeans buy gold or stay in the Euro?

Jacques from Bucharest, Romania
Do you think Bernanke is losing it or has lost it mentally? I can't help but think of 1920's Germany. In "Lords of Finance" they mention how the finance ministers in Germany suffered mentally from all the inflation, because the numbers got so out of control, the actual magnitude of the economic events were mind-numbing and ultimately mentally debilitating for policymakers to perform their duties in a practical manner. I wonder if Bernanke is suffering similarly.

George from Mt. Prospect, IL
Over the past few years, instead of overpaying my mortgage, I have been buying physical silver. I have just refinanced to a 30 fixed mortgage at 3.5%. I need to pay this mortgage off in 15 years. Should I continue to play the silver game or just overpay the mortgage?

Patrick from Pasadena, CA
For those of us who have student loan debt, but are able to make the monthly payments and have some savings, should we try to pay more to the loans to get out of debt, or should we pay the minimum and use the savings to purchase silver?

The Playlist for February 05, 2013

2013-02-05T18:23:00Z

I Wonder (feat. Project Redemption)
The Black Keys - Tighten Up
Phish - The Moma Dance
Chuck Berry - Woodpecker
Broken Bells - The High Road
Koushik - None In Mind
Peggy Lee - Spinning Wheel

The Bernanke Shock

2013-02-04T16:25:00Z

The financial world was shocked this month by a demand from Germany's Bundesbank to repatriate a large portion of its gold reserves held abroad. By 2020, Germany wants 50% of its total gold reserves back in Frankfurt - including 300 tons from the Federal Reserve. The Bundesbank's announcement comes just three months after the Fed refused to submit to an audit of its holdings on Germany's behalf. One cannot help but wonder if the refusal triggered the demand.

Either way, Germany appears to be waking up to a reality for which central banks around the world have been preparing: the dollar is no longer the world's safe-haven asset and the US government is no longer a trustworthy banker for foreign nations. It looks like their fears are well-grounded, given the Fed's seeming inability to return what is legally Germany's gold in a timely manner. Germany is a developed and powerful nation with the second largest gold reserves in the world. If they can't rely on Washington to keep its promises, who can?

Where is Germany's Gold?

The impact of Germany's repatriation on the dollar revolves around an unanswered question: why will it take seven years to complete the transfer?

The popular explanation is that the Fed has already rehypothecated all of its gold holdings in the name of other countries. That is, the same mound of bullion is earmarked as collateral for a host of different lenders. Since the Fed depends on a fractional-reserve banking system for its very existence, it would not come as a surprise that it has become a fractional-reserve bank itself. If so, then perhaps Germany politely asked for a seven-year timeline in order to allow the Fed to save face, and to prevent other depositors from clamoring for their own gold back - a 'run' on the Fed.

Now, the Fed can always print more dollars and buy gold on the open market to make up for any shortfall, but such a move could substantially increase the price of gold. The last thing the Fed needs is another gold price spike reminding the world of the dollar's decline.

Speculation Aside

None of these theories are substantiated, but no matter how you slice it, Germany's request for its gold does not bode well for the future of the dollar. In fact, the Bundesbank's official statements are all you need to confirm the Germans' waning faith in the US.

Last October, after the Bundesbank had requested an audit of its Fed holdings, Executive Board Member Carl-Ludwig Thiele was asked in an interview why the bank kept so much of Germany's gold overseas. His response emphasized the importance of the dollar as the world's reserve currency:

"Gold stored in your home safe is not immediately available as collateral in case you need foreign currency. Take, for instance, the key role that the US dollar plays as a reserve currency in the global financial system. The gold held with the New York Fed can, in a crisis, be pledged with the Federal Reserve Bank as collateral against US dollar-denominated liquidity."

Thiele's statement can lead us to only one conclusion: by keeping fewer reserves in the US, Germany foresees less future need for "US dollar-denominated liquidity."

History Repeats

The whole situation mirrors the late 1960s, during a period that led up to the "Nixon Shock." Back then, the world was on the Bretton Woods System - an attempt on the part of Western central bankers to pin the dollar to gold at a fixed rate, while still allowing the metal to trade privately as a commodity. This led to a gap between the market price of gold as a commodity and the official price available from the Treasury.

As the true value of gold separated further and further from its official rate, the world began to realize the system was unsustainable, and many suspected the US was not serious about maintaining a strong dollar. West Germany moved first on these fears by redeeming its dollar reserves for gold, followed by France, Switzerland, and others. This eventually culminated in Nixon "closing the gold window" in 1971 by ending any link between the dollar and gold. This "Nixon Shock" spurred chronic inflation throughout the '70s and a concurrent rally in gold.

Perhaps the entire international community is thinking back to the '60s, because Germany isn't the only country maneuvering away from the dollar today. The Netherlands and Azerbaijan are also discussing repatriating their foreign gold holdings. And every month, we hear about central banks increasing gold reserves. The latest are Russia and Kazakhstan, but in the last year, countries from Brazil to Turkey have been adding to their gold holdings in order to diversify away from fiat currency reserves.

And don't forget China. Once the biggest purchaser of US bonds, it is now a net seller of Treasuries, while simultaneously gobbling up gold. Some sources even claim that China has unofficially surpassed Germany as the second largest holder of gold in the world.

Unlike the '60s, today there is no official gold window to close. There will be no reported "shock" indicator of a dollar flight. This demand by Germany may be the closest indicator we're going to get. Placing blame where it's due, let's call it the "Bernanke Shock."

It Takes One to Know One

In last month's Gold Letter, I wrote about the three pillars supporting the US Treasury's persistently low interest rates: the Fed, domestic investors, and foreign central banks - led by Japan. I examined how Japan's plans to radically devalue the yen may undermine that country's ability to continue buying Treasuries, which could cause the other pillars to become unstable as well.

While private investors and even the Fed might be deluding themselves into believing US bonds are still a viable investment, Germany's repatriation news makes it clear that foreign governments are no longer buying the propaganda. And why should they? If anyone should appreciate the real constraints the US government is facing, it is other governments.

Our sovereign creditors know that Ben Bernanke and Barack Obama are just regular men in fancy suits. They know the Fed isn't harboring some ingenious plan for raising interest rates while successfully selling back its worthless mortgage and government securities. Instead, the Fed is like a drug addict making any excuse to get its next fix. [See Bernanke's tell-all interview with Oprah where he confesses to economic doping!]

US investors should be as shocked as the Bundesbank about the Fed's deception. While we cannot redeem our dollars for gold with the Fed, we can still buy gold with them in the open market. As more investors and governments choose to save in precious metals, the dollar's value will go into steeper and steeper decline - thereby driving more investors into metals. That's when the virtuous circle upon which the dollar has coasted for a generation will quickly turn vicious.

Peter Schiff is CEO ofEuro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices.

And now, investors can stay up-to-the-minute on precious metals news and Peter's latest thoughts by visiting Peter Schiff's Official Gold Blog.

The Biggest Loser

2013-02-01T20:34:00Z

In Switzerland, it's not just the clocks that are cuckoo. Over the past four years Swiss politicians and central bankers have gone on an unprecedented buying spree of foreign exchange reserves. In 2012, their cache swelled to as much as $420 billion worth of various currencies, primarily the euro. This figure is a seven-fold increase since 2008 and equates to 70% of the country's annual GDP. The sum translates to $200,000 per family of four, enough to keep the Swiss in clocks, chocolates, and fondue for many years to come. The Swiss leadership will claim the money has been "invested" with an eye to the future, but what they've done is impoverished themselves in the present. Although such a decision seems perverse, it makes perfect sense when seen through the lens of today's presiding economic thinking.

For the past few generations Switzerland has enjoyed some of the strongest economic fundamentals in the world. The country boasts a high savings rate, low taxes, strong exports, low debt-to-GDP, balanced government budgets, and prior to a few years ago one of the most responsible monetary policies in the world. These attributes made the Swiss franc one of the world's "safe haven" currencies. But in today's global economy, no good deed goes unpunished.

Central bankers around the world, particularly in Washington, Frankfurt and Tokyo, have been engaged in a massive and coordinated campaign of currency debasement to combat the recession. But for years the Swiss refused to join in the printing parade. As a result, investors around the world wisely decided to park their savings in the reliable Swiss franc. From December of 2008 to August 2011 the franc appreciated an astounding 59% against the U.S. dollar and approximately 30% against the Japanese yen. More importantly, the franc gained 42% against the euro. As the Eurozone completely surrounds Switzerland, its trade with those countries represents the vast majority of its international transactions.

During this massive run up in its currency, the Swiss economy continued to prosper. Wages and purchasing power increased and GDP grew consistently faster than other countries in Western Europe. Despite generally positive export statistics, some Swiss exporters noticed that at times the strong franc put them at a disadvantage against foreign competitors. In addition, the strengthening currency helped keep a lid on consumer prices, giving Switzerland a consistently low inflation rate with occasional bouts of actual deflation. Despite the fact that Switzerland was an island of economic health amidst a sea of problems, the reigning economic orthodoxy convinced Swiss leaders that their strong currency was a burden rather than a blessing. More pointedly, the rise in the franc was seen as a repudiation of the expansionary policies occurring in other countries. And so the Swiss government decided to join the currency killing party.

In early August 2011, the Swiss National Bank took a series of steps to reverse the fortunes of the franc. In the simplest terms, they sold francs and bought foreign currencies, most notably the euro. The announcement included a promise to buy unlimited quantities of foreign exchange to maintain a floor of 1.20 francs per euro. In so doing, the Swiss essentially outsourced their monetary policy to the Eurozone. Any moves taken by the European Central Bank would need to be matched by the Swiss. Ironically, it was fear of this outcome that kept the Swiss from adopting the euro in the first place. Despite the former bias toward independence, the Swiss have de facto adopted the euro anyway. Since that time, the franc has fallen 16% against the dollar, Swiss foreign exchange reserves have skyrocketed, and investors who bought francs as a means to escape debasement have been betrayed.

Productive nations generate excess goods and services that can be sold abroad and their growth and stability attract investment funds from abroad. These conditions will tend to increase demand for the nation's currency, thereby pushing up its price. A strong currency keeps capital and raw materials costs low, enabling more productive workers to earn higher real wages. But according to most economists, a strong currency will bring down an economy because it destroys international competitiveness and can even lead to lower prices (deflation) which they see as economic quicksand. These fears have ignited a "global currency war" in which countries are expending huge amounts of national savings in order to ensure that their currencies stay cheap. In today's economic logic we must fail in order to succeed.

But it is very easy to have a weak currency. All that is needed is an unlimited willingness to print. A strong currency requires real fiscal discipline and actual production. Yet, like the weight loss TV show, economists believe that the winner of a currency war is the biggest loser. You win not by killing your competitors, but by killing yourself! It's like a student convincing his parents that an "F" is a better grade than an "A." And if a straight "F" report card results in parental accolades rather than anger, the students will lack any incentive to improve performance. Similarly, as nations like Switzerland strive to reduce their own grades, the failing nations have a reduced incentive to change their study habits. Without outside support, nations with collapsing currencies would see huge increases in consumer prices. The resulting fall in living stands would force productive reform.

I take the minority position that just as it is better to be rich than poor, a strong currency is better than a weak one. Although much more credentialed economists may try to muddle the arguments, the truth may be seen when a particular position is taken to its logical extreme. If a weaker currency is preferable to a stronger one, then logic would dictate that a currency of no value will be preferable to one with an infinite value. But how would economies with these drastically different currencies operate?

It is true that the country with the zero value currency will tend to see full employment and strong exports. The relative low cost of labor will mean that the locals could be easily employed in even the most marginal activity. But since holders of other currencies will be able to outbid the domestic population for all of their production, everything produced will be exported. Imports will be zero as the local population would be unable to afford anything produced in countries with more valuable currencies. As a result, actual consumption would be extremely low. In essence this economy would be analogous to impoverished, subsistence level economies such as Bolivia, Zimbabwe, and Haiti.

In contrast, a country with an infinitely valuable currency would see the best of all possible worlds. Even the smallest amount of money would allow citizens to buy huge amounts of goods from abroad. An evening's babysitting money would deliver more purchasing power than months of hard labor in poorer countries. The strong currency would mean that consumption would soar even while hours worked fell. Savings would increase in value, and people would have more ability to travel and pursue leisure activities. In essence, we are describing a rich economy.

Placed in such a context, it's easy to see the preferred option. Those who believe in the benefits of weak currencies do not specify when a falling currency becomes a bad thing. Clearly there must be a tipping point where lost purchasing power overcomes supposed gains in growth. Yet they are silent on that point. My position is that a rising currency is always good. No magic tipping point needs to be identified.

The problem is that economists now believe that the goal of an economy is to provide employment, not goods and services. They see a job as an end in and of itself, rather than as a means for people to get the things they really want. But if we can get all that we want without having to work, who needs to bother? A strong currency takes us closer to this goal. It is a testament to how far the "science" of economics has fallen that this goal has been utterly forgotten.

But this junk science is killing real growth. As long as this "black is white" ideology remains in place, the biggest printers will continue to be the biggest actual losers.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

The Playlist for January 31, 2013

2013-02-01T01:01:00Z

Charles Bradley & Menahan Street Band - The World (Is Going Up In Flames)
Bonobo - We Could Forever
Mike Gordon - Another Door
Stark Reality - Comrades
Buddy Guy - Crazy Love
Count Five - Psychotic Reaction
David Bowie - Heroes

The Playlist for January 30, 2013

2013-01-31T01:10:00Z

Kutiman - Music Is Ruling My World
Travie McCoy - Billionaire (feat. Bruno Mars)
Tower of Power - Get Yo' Feet Back On The Ground
Rufus Thomas - Funkiest Man Alive
Body Language - Social Studies
Kafka - Baboon Slap
The Raveonettes - Love In A Trashcan
The Coconutz - These Boots Are Made For Walkin'

The Playlist for January 29, 2013

2013-01-30T01:13:00Z

Shuggie Otis - Ice Cold Daydream
RJD2 - Ghostwriter Remix
Maceo Parker - Shake Everything You've Got
The Wild Magnolias - (Somebody Got) Soul Soul Soul
Madlib - Slim's Return
Koushik - Battle Rhymes for Battle Times
The Chamber Brothers - Funky
Thievery Corporation - The Richest Man In Babylon

The Playlist for January 25, 2013

2013-01-25T20:47:00Z

Lonnie Smith - Move Your Hand
Kid Loco - She's my lover
Kutiman - I Am New
Weezer - Beverly Hills
Unforscene - Alright
The Souljazz Orchestra - Insurrection
Winstone McAnuff - Unchained (with trinity)
Shuggie Otis - Me And My Woman

The Playlist for January 24, 2013

2013-01-24T17:20:00Z

Tony Allen - Road Close (dance Dub)
Shawn Lee's Ping Pong Orchestra - Brighton Rock
Marcos Valle - Freio Aerodynamico
The Roots - The Fire
Thievery Corporation - Radio Retaliation
Mark Ronson - Outversion
Ray Charles - Busted
Willie Bobo - Fried Neck Bones And Some Home Fries (Dan The Automator Remix)

The Playlist for January 23, 2013

2013-01-23T17:24:00Z

Mark Ronson - Stop Me (feat. Daniel Merriweather)
Medeski Martin & Wood - End Of The World Party
The Quantic Soul Orchestra - Panama City (Soul Descarga)
Sharon Jones and the Dap Kings - Money
Theodore Shapiro - Two Dragons
Thunderball - Starsky & Hutch
TM Juke - Get It Together (feat. Bread & Water)
The Limp Twins - Moving Closer To The Sofa

The Playlist for January 22, 2013

2013-01-22T17:37:00Z

Bobby Hutcherson - Montara (Madlib Remix)
Bonobo - Kong
DJ Krush - Kemuri
Dr. John - Loop Garoo
Galactic - Never Called You Crazy
Five Alarm Funk - Brother Egypt
Five Alarm Funk - Uncle Meatball
Klint - Diamond

The Playlist for January 18, 2013

2013-01-18T17:42:00Z

Quantic - En Focus Feat
Oregone - Come Around
Blondie - The Hardest Part
Deep Banana Blackout - Pure Gravy
Bob Andy - Life
Dan The Automator & Kalyanji Anandji - Fear Of A Brown Planet
Bobby Hutcherson - Montara (Madlib Remix)
Cibelle - Train

The Playlist for January 17, 2013

2013-01-17T18:03:00Z

Samurai Showdown - Rza
Shawn Lee - River Man
Sharon Jones & The Dap Kings - Stranded In Your Love
Bob Marley - Sun Is Shining
Greyboy - Got To Be Love (Paul Nice Mix)
Alice Russell - Hurry On Now
Lee Fields and Sugarman & Co. - Stand Up
The Bamboos - On The Sly

The Trillion Dollar Trick

2013-01-16T04:19:00Z

The birth, and the apparent death, of the trillion dollar platinum coin idea may one day be recalled as a mere footnote in the current debt crisis drama. The ultimate rejection of the idea (which was to use a loophole in commemorative coinage law to mint a platinum coin of any denomination) by both the the President and the Federal Reserve seems to offer some relief that our economic policy is not being run by out-of-touch academics and irresponsible congressmen. In reality, our government has been creating more than one trillion dollars out of thin air every year for the past five. The only difference is that the blatant dishonesty of a trillion-dollar platinum coin is so easy to understand that the public simply couldn't be expected to swallow it. The American people are more than willing to be fooled, but they won't tolerate so simple a ruse.

People have a long and intimate history with coins. Some of us collected them as kids, and we all touch and see them every day. Unlike currency bills, we know intuitively that a coin's value is supposed to come from its metal content. That's why quarters are bigger than dimes. As a result, most people have viscerally rejected the platinum coin idea. To assign an arbitrary, sky high, valuation to a small piece of metal strikes most people as a deceitful, desperate act. They are right.

However, the same people have no problem with images of thousands of crisp paper notes flying off the printing presses. The acceptance is not impacted by how many zeroes the bills contain. People simply believe that paper money derives value from the numbers, not the paper. This was not always so. Paper money originally entered the public awareness as promissory notes to pay different amounts of gold. Once people got used to the paper, few really cared when the gold backing was finally removed. As a result, the public would likely have been much more accepting of the Fed printing a trillion dollar bill than the government minting a trillion dollar coin. But there was no legal pathway for the Fed to simply give that money to the government.

The government, not the Fed, mints coins, so they did not have to rely on the Fed to create value out of thin air. That is why the platinum coin idea was so seductive, if ultimately unsellable.

But the Fed does the exact same thing all the time using sophisticated accounting and state of the art computing. The Fed "expands its balance sheet" by buying government bonds from private banks. In exchange for these securities, the Fed credits the banks with funds it creates out of thin air. The banks then pass the funds to the general public through loans. But it's important to realize that the Fed does not have any money to actually buy the bonds in the first place. The funds are "created" by a Fed computer. The process is easier (and equally duplicitous) than minting a trillion dollar coin (which at least requires the production of something other than computer code). The only difference is the lack of window dressing. It's a shame that the platinum coin episode did not result in a wider recognition of this brutal truth.

A similarly silly and meaningless distinction is being made with respect to raising the debt ceiling. In his press conference yesterday, President Obama said the Republican reluctance to raise the debt limit was the equivalent of a diner who had ordered and enjoyed a meal who then decides to leave the restaurant without paying the bill. The President is actually arguing that if the diner had no cash on hand, it would be much more responsible to simply use a credit card. In taking this moral high ground, the President ignores the fact that the diner (who has indebted himself through habitual restaurant meals) intends to pay his credit card bill with another card, and then repeat the process until he runs out of cards. So in the end, it's not the restaurateur who gets stiffed, but the issuer of the last card the diner is able to acquire. As with the platinum coin, this is a distinction without a difference.

Currently the Federal Government counts more than $16 trillion in funded obligations. Over the next 10 years we are expected to add another $10 trillion or more. At no point in the foreseeable future are we expected to approach balance in our annual budget. All of our future bills are expected to be paid by future borrowing on a massive scale. Anyone with an ounce of integrity would have to plan for the possibility that an ever increasing debt rollover is a limited prospect. Such an understanding will mean that eventually someone will get stuck with the bill. How is this any more responsible than dining and ditching?

In truth, a failure to raise the debt ceiling is not a commitment to renege on obligations. It is simply a decision to stop borrowing. The government could still meet obligations by cutting spending, raising taxes, or making reforms to entitlements. But it chooses not to take this difficult step.

More important than that is the message America is sending its creditors. By informing them that the United States will not use its taxing power to repay its debts, but will only rely on its ability to borrow more (ironically from the same creditors), it effectively admits to running the world's largest Ponzi scheme. It's a shame that more people can't seem to grasp these very simple truths.

To order your copy of Peter Schiff's latest book, The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country, click here.

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The Playlist for January 14, 2013

2013-01-14T21:31:00Z

The Black Keys - Thickfreakness
The Staples Singers - Respect Yourself
Baby Huey - Hard Times
Deniece Williams - Free
Reuben Wilson - Bambu
Gorillaz - Plastic Beach
The Coasters - Down In Mexico
Galactic - All Behind You Now

The Playlist for January 11, 2013

2013-01-11T21:49:00Z

JJ Grey & Mofro - The Devil You Know
Charles Bradley & Menahan Street Band - The World (Is Going Up In Flames)
My Morning Jacket - One Big Holiday
David Bowie - Heroes
Talking Heads - Memories Can't Wait
Phish - The Moma Dance
Jack Ashford - Las Vegas Strut
Gorillaz - Latin Simone

The Playlist for January 10, 2013

2013-01-10T21:47:00Z

The Raveonettes - Love In A Trashcan
Citizen Cope - 200,000 (in counterfeit 50 dollar bills)
Mike Gordon - Another Door
Deerhunter - Revival
Lalo Schifrin - The Cat
Junior Reid - Big Boss Man
Claude Bolling - Pop Mod
Kylie Auldist - Made Of Stone

Inflation Propaganda Exposed

2013-01-09T20:57:00Z

Economists who hold the popular view that expanding the money supply will provide the best medicine for our ailing economy dismiss the inflationary concerns of monetary hawks, like me, by pointing to the supposedly low inflation that has occurred during the current period of rampant Fed activism. In a recent blog post aimed specifically at me, Paul Krugman noted that the sub 2.5% increases in the Consumer Price Index (CPI) over the past few years are all that is needed to prove me wrong. In fact, Krugman and others have even suggested that the CPI itself overstates inflation and that the Fed would be better able to help the economy if less strict methodologies were used. However, there is plenty of evidence to suggest that the CPI is essentially meaningless as it woefully under reports rising prices.

Magazines and newspapers provide a good case in point. The truth has not been exposed through the economic reporting that these outlets provide, but in the prices that are permanently fixed to their covers. For instance, from 1999 to 2002 the Bureau of Labor Statistic's (BLS) "Newspaper and Magazine Index" (a component of the CPI) increased by 37.1%. But a perusal of the cover prices of the 10 most popular newspapers and magazines (WSJ, Washington Post, Time, Sports Illustrated, U.S. News & World Report, Newsweek, People, NY Times, USA Today, and the LA Times) over the same time frame showed an average cover price increase of 131.5% (3.5 times faster than the BLS' stats). This is not even in the same ballpark.

Some defenders of the BLS may conclude that prices were held down by the availability of free online news content or the convenience of digital delivery. But that is beside the point. Prior to the digital age, the BLS could have claimed that newspaper costs were held down by public libraries that provided free access. It's also true that online publications deliver less value on some fronts. Not only do many people enjoy the tactile process of reading physical newspapers or magazines, but they offer the secondary value in helping to kindle fires, housebreak puppies, pack dishes, and line birdcages.

Another stunning example is found in health insurance costs, which is a major line item for most families. According to the BLS we can all breathe easy on that front because their "Health Insurance Index" increased a mere 4.3% (total) in the four years between 2008 and 2012. Interestingly, over the same time, the Kaiser Survey of Employer Sponsored Health Insurance showed that the cost of family health insurance rose 24.2% (5.5 times faster). But even if the BLS had reported higher costs, it wouldn't have made much of a difference in the CPI itself. Believe it or not, health insurance costs are assigned a weighting of less than one percent of the overall CPI. In contrast, the Kaiser Survey revealed that in 2012 the average total cost for family health insurance coverage was $15,745, or almost one third of the median family income.

If the BLS could be so blatantly wrong in reporting the prices of newspapers and health insurance, should we believe that they are more accurate on all other sectors? If the inaccuracy of these two components were consistent with the rest of the CPI's components, inflation could now be reported in double-digits!

Even more egregious than the manner in which prices are currently reported is the way that CPI methods have been changed over the years to insure that most increases are factored out. Since the 1970's, the CPI formula has changed so thoroughly that it bears scant resemblance to the one used during the "malaise days" of the Carter years. Main stream economists dismiss criticism of the changes as tin hat conspiracy theories. But given the huge stakes involved, it's hard to believe that institutional bias plays no role. Government statisticians are responsible for coming up with the formulas, and their bosses catch huge breaks if the inflation numbers come in low. Human behavior is always influenced by such incentives.

The newer CPI methodologies are designed to report not just on price movements, but on spending patterns, consumer choices, substitution bias, and product changes. In other words, the metrics have been altered to track not so much the cost of things, but the cost of living (or more accurately, the cost of surviving). But if you simply focus on price, especially on those staple commodity goods and services that haven't radically changed in quality over the years, the under reporting of inflation becomes more apparent.

As reported in our Global Investor Newsletter, we selected BLS price changes for twenty everyday goods and services over two separate ten-year periods, and then compared those changes to the reported changes in the Consumer Price Index (CPI) over the same period. (The twenty items we selected are: eggs, new cars, milk, gasoline, bread, rent of primary residence, coffee, dental services, potatoes, electricity, sugar, airline tickets, butter, store bought beer, apples, public transportation, cereal, tires, beef, and prescription drugs.)

We know that people do not spend equal amounts on the above items, and we know their share of income devoted to them has changed over the decades. But as we are only interested in how these prices have changed relative to the CPI, those issues don't really matter. We chose to look at the period between 1970 and 1980 and then again between 2002 and 2012, because these time frames both had big deficits and loose monetary policy, and they straddle the time in which the most significant changes to the CPI methodology took effect. And while the CPI rose much faster in the 1970's, the degree to which the prices of our 20 items outpaced the CPI was much higher more recently.

Between 1970 and 1980 the officially reported CPI rose a whopping 112%, and prices of our basket of goods and services rose by 117%, just 5% faster. In contrast between 2002 and 2012 the CPI rose just 27.5%, but our basket increased by 44.3%, a rate that was 61% faster. And remember, this is using the BLS' own price data, which we have already shown can grossly under-estimate the true rate of increase. The difference can be explained by how CPI is weighted and mixed. The formula used in the 1970's effectively captured the price movements of our twenty everyday products. But in the last ten years it has been quite a different story.

If these price changes in our experiments had been fully captured, CPI could currently be high enough to severely restrict Fed action to stimulate the economy. Instead, the Fed is operating as if inflation is extremely low. As a result, they are making a huge policy mistake that will come back to haunt us. During the last decade the Fed spent many years denying the existence of a housing bubble, even as a mountain of evidence piled up to the contrary. That error caused the Fed to hold interest rates too low for too long, blowing more air into the bubble and imposing enormous negative consequences on the economy. The Fed, now similarly blind to the inflation threat, is repeating its mistake, only this time the negative consequences will be even more dire.

Apart from the statistical problems that hide inflation, there are also macroeconomic factors that have helped keep prices down despite the quantitative easing. Massive U.S. trade deficits and foreign central bank dollar accumulation mean that much of the printed money winds up in foreign bank vaults, not U.S. shopping centers. As foreign consumer goods flow in, and dollars flow out, a lid is kept on domestic prices. In effect, our inflation is exported as foreign central banks monetize our deficits and recycle their surpluses into U.S. Treasuries. The demand has pushed down bond yields which has allowed the U.S. government to borrow inexpensively. Of course, when the flows reverse, bond prices will fall, yields will climb, and a tidal wave of dollars will wash up on American shores, drowning consumers in a sea of inflation.

Unlike Krugman and the Keynesians, I would argue that it is impossible to create something from nothing. I believe that printing a dollar diminishes the value of all existing dollars by an aggregate amount equal to the purchasing power of the new dollar. The other side takes the position that the new money creates tangible economic growth and that real economic value can therefore be created by putting zeroes onto a piece of paper. I think that those making such absurd claims should bear the burden of proof. For more on the interesting topic of hidden inflation, see my video that I just posted.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

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The Playlist for January 9, 2013

2013-01-09T19:41:00Z

Brothers Johnson - Strawberry Letter 23
Manu Dibango - Weya
Buddy Guy - Crazy Love
Lyrics Born - I Changed My Mind (Stereo MCs Rattlesnake Mix)
Curumin - Compacto
Koushik - None In Mind
First Rate - I Wonder (feat. Project Redemption)
James Brown - Down And Out In New York City

The Playlist for January 8, 2013

2013-01-08T19:49:00Z

The Black Keys - Tighten Up
Patsy Cline - Crazy
Earth Wind & Fire - Shining Star
Jeymes Samuel & Cabibus - Who Writes the Songs
Lefties Soul Connection - Lefties Soul Connection
Jens Lekman - Your Arms Around Me
Ted Nugent - Cat Scratch Fever
Ted Nugent - Stranglehold

The Playlist for January 4, 2013

2013-01-04T21:13:00Z

Tom Petty - I Should Have Known It
Toubab Krewe - Hang Tan
Yamasuki - Yama Yama
Beck - E-Pro
Cymande - Brothers On The Slide
The Beatles - I Am The Walrus
Shawn Lee - Christopher Walken On Sunshine (feat. Princess Superstar)
Broken Bells - The High Road

The Playlist for January 3, 2013

2013-01-03T21:09:00Z

Bonobo - We Could Forever
Ray Charles - Lonely Avenue
Baby Charles - The Sphinx
Chuck Berry - Woodpecker
artist unknown - OS Mutantes
The Coconutz - These Boots Are Made For Walkin'
Bob Marley - Lively Up Yourself
Stark Reality - Comrades

Treasury's Last Pillar Crumbles

2013-01-03T15:20:00Z

With the return of Shinzo Abe and his Liberal Democratic Party to power in Japan, the market for US Treasuries may be losing its last external pillar of support. Re-elected on September 26th, Abe has quickly set a course for limitless inflation, saying Japan must "free itself from deflation and the strong yen." This is significant to the global economy as Japan is the largest foreign power left with a strong appetite for US Treasuries. If this demand falters, the Fed may be the only remaining buyer of new Treasury issuance.

Abe's Plan

This election marks Abe's second turn in the premier's seat. He first held the position from 2006 to 2007, when he abruptly resigned as the first of a string of unpopular one-year premierships. Notably, in the intervening time, the LDP lost its lower house majority to an opposition party for the first time since its formation in 1955. The victors, the Democratic Party of Japan, had been formed in 1998 on a platform of reducing corruption and making Japan more progressive.

Unfortunately, as we know from our past century of experience in America, progressivism is not the cure for an ailing economy. The DPJ was predictably unsuccessful at reining in the bureaucracy, but did manage to push through a damaging doubling of the national sales tax and additional entitlement spending.

Similarly to President Obama's 2008 election, the Japanese people were sold a lot of rhetoric about hope and change and, lacking any sincere alternatives, decided to give the new guys a shot. The results were equally disappointing on both sides of the Pacific.

While American voters decided to throw good votes after bad in 2012, the Japanese preferred to return to the devil they know. The only problem is, he's still a devil.

Abe has essentially promised to return to the failed but feel-good policies of LDP government for the last 3 decades; namely, he will prop up failing industrial giants and attempt to print his way out of an economic slump.

Saving Grace or Pain in the $%&?

The yen hit a post-war high against the US dollar in 2011 and has remained strong. For sound-money enthusiasts, this has been cause for celebration. But for Keynesian demand-siders, it's a crisis.

Rather than attribute decades of sluggish growth to an interventionist industrial policy, Abe and his cadres are blaming the strong yen. In response, Abe has called for the Bank of Japan to target at least 3% inflation.

For some time, the only saving grace for Japanese citizens who are unable to find jobs or secure financing has been that prices have been stable or falling. Abe intends to rob them of that salve while doing nothing to address the underlying infection.

While some Americans may feel a self-interested sense of relief that one of the major dollar-alternatives is being undermined from within, they are misunderstanding the knock-on consequences of this move.

The Last Major Pillar

For the Treasury to continuing having successful auctions at current rock-bottom interest rates, someone has to be purchasing. A lot.

Before 2008, most of the demand came from foreign central banks - especially China. Since the financial crisis began, China and many emerging market banks have dramatically reduced their purchases and even become net sellers.

The deficit has been made up by the Federal Reserve, domestic personal and institutional investors, and a few foreign holdouts led by Japan. In fact, Japan is about to overtake China as the largest foreign holder of US government debt.

This is significant in that the other two sources of funding - Fed and US domestic - are essentially intertwined. The more Treasuries the Fed purchases, the higher inflation becomes, which harms the US economy even further, which leaves domestic funds less wealth to invest in Treasuries. In my view, the foreign influx of capital has been the key third pillar that has kept this vicious domestic cycle from playing out in full.

How It Crumbles

Prime Minister Abe's plan to devalue the yen could thus be disastrous for both US and Japanese government finances. As the yen devalues, Japanese domestic investors - who make up the bulk of owners of Japanese Government Bonds (JGBs) - will be under intense pressure to sell out and find higher yields elsewhere.

This flight of capital will threaten Tokyo with default, so the likelihood is that the Bank of Japan will begin directly buying JGBs on an even larger scale (as our Fed has done since the financial crisis) instead of buying US Treasuries. They may even become net sellers of Treasuries in order to finance their bailout of Tokyo while controlling inflation.

This will, in turn, put tremendous pressure on US Treasury investors. As the outflows mount, the Fed will no doubt announce another program to buy Treasuries under the guise of promoting economic stability. If the Fed becomes the permanent crutch of the Treasury, we can expect inflation to get higher and higher - driving more and more investors out of Treasuries.

Decoupling Continues

It is clear that Washington and Tokyo are but two sides of the same coin. Japan's debt-to-GDP is about 212%, while the US has just crossed 100%. Both are highly dependent on domestic investor interest in government debt to keep the charade going, and neither have prospects of paying their debts without real write-downs for investors.

Unfortunately, neither government is using the time before this real crash strikes to even attempt to shore up their positions. The platform of Shinzo Abe seems poised to undermine Japan's ability to continue subsidizing US government debt. Left without any significant external supports, Treasuries will be in an extremely weak position when attention shifts from the EU sovereign debt crisis to the our own tattered finances.

Fortunately, there are ways for investors to escape Abe and Obama's tandem cliff-dive. Recent data shows that China continues to build a viable alternative. The South Korean won and Taiwan dollar are now significantly more correlated to the movements of the yuan than the yen or the US dollar. These booming economies will sustain demand for commodities as they build real wealth. With the old statesmen of sovereign debt compromised, I expect the up-and-comers to continue to turn to gold and silver in droves.

Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices.

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The Playlist for December 21, 2012

2012-12-21T20:56:00Z

LateNightTales - Yama Yama
Beck - E-Pro
G Love & Special Sauce - Rainbow
Lemonade - Lemonade
The Beatles - I Am The Walrus
Shawn Lee - Christopher Walken On Sunshine (feat. Princess Superstar)
Broken Bells - The High Road
The Black Keys - Tighten Up

The Playlist for December 20, 2012

2012-12-20T18:30:00Z

Chuck Berry - Woodpecker
Baby Charles - The Sphinx
artist unknown - Os Mutantes
The Coconutz - These Boots Are Made For Walkin'
Bobby Helms - I Saw Mommy Kissing Santa Claus
Stark Reality - Comrades
Amy Winehouse - Back To Black
Toubab Krewe - Hang Tan