4/11/2013

Peter Schiff is Wrong About Everything


“The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.” 
― Stephen Hawking

A libertarian friend of mine who — like most libertarians — subscribes to the Austrian school of economics sent me a video, convinced that I would no longer think about inflation the same way after watching it. The video is of well-known libertarian pundit, investor, and self-proclaimed Austrian economist, Peter Schiff.

In the video, Peter Schiff responds to his critics who attacked him for a prediction he made at the end of 2009 about hyperinflation:
You know, look, I know inflation is going to get worse in 2010. Whether it’s going to run out of control or it’s going to take until 2011 or 2012, but I know we’re going to have a major currency crisis coming soon. It’s going to dwarf the financial crisis and it’s going to send consumer prices absolutely ballistic, as well as interest rates and unemployment.
According to Schiff, the reason we haven't seen hyperinflation yet is because the CPI is flawed, "deliberately designed" by the government to hide the true rate of inflation.

The video was so bad, it compelled me to write this post. First, watch the video above. Then read about what Schiff gets wrong:

1) "I never said the money printing would cause inflation. I said the money printing is inflation."

Any student who has taken macroecon 101 knows this is an overly-simplistic view of inflation. It's hard to believe that an "economist" holds this view.

Schiff's view doesn't take into account inflationary expectations, the rate of money exchange, or where said money ends up in the economy (e.g. M1, M2, M3, etc). If the treasury printed $1T and buried it in a hole the money would not exert the same inflationary pressure as it would if the printed $1T were distributed to the nation's poor and middle class. The former would have a much smaller inflationary effect than the later. Schiff, at least, ought to acknowledge the fact that while the Fed has expanded the monetary base from $0.87 to $2.92 trillion, it is holding on to $1.62 trillion of excess private bank reserves. That's $1.62 trillion sitting in a hole, not being circulated, exerting no inflationary effect. This money parked at the Fed is not inflationary.

This is not a difficult concept to grasp, but Schiff fails to grasp it nonetheless.

2) "But Krugman would say that Peter Schiff is wrong because prices haven't risen. But, again, the proof that he offers, and that other Keynesians offer, are government-created statistics that purport to measure inflation like the CPI."

For someone like me that has been following this narrative closely, it's plain to see that Schiff is misrepresenting Krugman's critique. I'll explain.

First, Krugman has criticized Schiff's predictions of hyperinflation, not normal levels of inflation (i.e. "rising prices"). According to Schiff's predictions in 2009, we should have sky-rocketing prices by now, but we don't. And this is exactly why people like Krugman say Schiff's predictions haven't panned out.

Furthermore, in Krugman's most recent post about Schiff, he doesn't offer the CPI as proof that inflation is under control because he knows that Austrians don't care for "government-created statistics". Instead, Krugman offers MIT's Billion Prices Project as a third-party estimate of inflation. This project monitors the daily prices of over 5 million online transactions in over 70 countries. Guess what? This metric only varies slightly from the CPI and it tells the exact same story — namely, that inflation is not a problem.

According to my calculations, from the end of 2009 when Schiff made his prediction, until the beginning of 2012 when this video was made, inflation has increased by the following:

CPI less food and energy ~5.1%
PCEPI ~5.5%
CPI ~6.4%
MIT's BPP ~7.1%
Monetary Base ("money printing is inflation")  ~32.9%
Gold ~51.2%

The first three metrics are "government-created statistics", the 4th is a third-party estimate of inflation, and the 5th and 6th are the Austrian metrics of inflation. Ask yourself: Which of these measures of inflation is inconsistent with reality? Has your cost of living gone up 30-50% since late 2009 or has it increased somewhere on the order of 5-7%?

3) "The CPI does a lousy job of measuring inflation. And I think it deliberately does so by design."

By design? Evidence?

4) "In fact, I'm not the only one that's convinced that inflation is a lot higher than the government admits."

Schiff's support for this claim? No, not a third party mathematically driven model like MIT's or some other equivalent   a FOX News poll. The poll referenced, however, does not support Schiff's claim that the CPI underestimates inflation. All the report states is that 41% of people polled felt that rising prices were their primary concern.

5) "Well, if the government is correct, if the CPI is accurate, then why are so many people worried about inflation that doesn't exist?"

First, nobody said inflation doesn't exist (see point #2).

Second, this poll does not support the notion that the CPI is inaccurate. Inflation is real and people who are out of a job or underemployed ought to be concerned about rising prices. As a student, I am concerned about rising prices, but this does not mean that I believe the CPI is inaccurate. Nor does my concern mean that I think there is ongoing hyperinflation.

6) "Afterall, what makes more sense? That the government can print all this money, and prices not rise? Or that prices are rising and the government is just not being honest?"

Arguments of incredulity are not only weak, but they often-time reveal a lack of knowledge or understanding in the person that uses them. Also, once again, nobody is saying that prices aren't rising (i.e. see point #2).

Schiff doesn't understand that printing money against the zero-lower bound — the point at which the federal funds rate is zero — does not have the same inflationary effects that it would in times of economic prosperity. I'll outsource the explanation as to why this happens but, in a nutshell, "if interest rates are near [or at] zero, money printed now just gets hoarded, and monetary policy has no traction on the real economy."

Given Schiff's definition of inflation, I don't blame him for not grasping this concept.

7) "The items that I selected for my basket were eggs, cars, milk, gasoline, bread, rent for a primary residency, coffee, dental services, potatoes, electricity, sugar, airline tickets, butter, store-purchased beer, apples, public transportation, cereal, tires, beef, and prescription drugs."

According to Schiff, the CPI's basket of goods is deliberately misleading, but his own basket of (20) goods is stable, unbiased, and more accurately represents price levels than the CPI? Does anybody buy this? I don't.

First, Schiff's basket is food and fuel-dominant, relying heavily on two factors that are commonly removed from measures of core inflation because of their inherent volatility.

Second, even if we accept Schiff's high-ball basket of goods as being accurate, we are still left with a decade with only 44.3% of inflation. This is odd because it contains the recent post-recession period of hyperinflation (or high inflation) that many Austrians are angry about, yet inflation in this past decade is still well bellow the 117% increase during the 70s. So according to Schiff's calculations, we've still only seen a fraction of the inflation that plagued us during the 70s.

Did Schiff intentionally show that inflation during this past decade was actually much lower than it was during the 70s, or did he do this by accident?

8) "But it actually gets worse because the government numbers are wrong. And I'll prove it..."

Schiff continues by pointing out, what he claims to be, specific "inaccuracies" in the CPI. These warranted a fact-check on my part.

I checked Schiff's claim about healthcare premiums only increasing 4.3% from 2008-2012 according to the CPI. According to the CPI — the CPI that I just looked up  health insurance premiums have increased by almost 20% over this period. The Kaiser report that he references, which by the way only refers to employer provided insurance, shows an increase of 24.2%. This doesn't seem like a contradiction, but it makes me wonder where Schiff is getting his CPI numbers.

It appears that the CPI is actually referring to a 4.3% increase in the healthcare premium costs per year, but Schiff is — either misleadingly or accidentally — implying that according to the CPI, premiums have increased by a total of 4.3% over the entire five year period of 2008-2012, which, of course, is not true.

9) "So if the government is wrong about newspapers and magazines, if they're wrong about health insurance, how should we believe that they are right about anything?"

Wait, how did Schiff prove that the government is wrong?

--

Krugman's description of the Austrian viewpoint sums it up best:
Substance aside — not that substance isn’t important — Austrian economics very much has the psychology of a cult. Its devotees believe that they have access to a truth that generations of mainstream economists have somehow failed to discern; they go wild at any suggestion that maybe they’re the ones who have an intellectual blind spot.
Schiff is wrong, but he's sticking to his guns. And, in the process, he's revealing just how little he knows about economics, policy, and pretty much everything else. Why do people still listen to this guy?

41 comments:

Anonymous said...

The fact that the CPI says prices have not gone up is proof enough. When polling was done before the election the number one issue was higher prices. However this should not be occurring since we are not in a booming economy. Anyone who has taken Macro like myself knows that in slow economic time higher prices do not occur in fact deflation is most. Even Hedge fund managers know this, they usually use government data as a way to promote another side while hedging.

Anonymous said...

So basically Peter schiff is Right.

Anonymous said...

You say the FED has 1.6ish trillion "in a whole" and therefore is not inflationary. http://www.federalreserve.gov/releases/h41/current/h41.htm
Here is the reported reserves of the federal reserve, you can see that they group notes and bonds in the same category.
http://research.stlouisfed.org/fred2/series/FDHBFRBN

Here is a link that shows how much debt (bonds) is owned by the federal reserve. From these two links, we can come to the conclusion that the federal reserve does not hold dollars, it holds IOUs. The Federal reserve exchanged dollars for those IOUs and those dollars are currently in circulation by the government. You see, keynesian economics is a politicians economics. People who are educated under this school are very good at making numbers mean something they don't. If you would like, I could continue on any one of your points but I feel that you aren't likely to respond. Respond and we can have a respectful debate!

Nate Heckmann said...

Thank you for your thoughtful reply. I have to admit, I'm not sure what you are getting at.

I'm well-aware of the data you linked to, but my link above was a graph of "excess reserves of depository institutions" which represents moneys owned by private institutions that are currently being held by the Fed.

Your comment, "The Federal reserve exchanged dollars for those IOUs and those dollars are currently in circulation by the government" is essentially describing the quantitative easing that the Fed has undertaking, except for the fact that the "circulation by the government" that you write about isn't be circulated at all. Rather, this debt (i.e. IOU) is being held by the Fed itself as evidenced by your second link. How does this change anything? Yes, the Fed holds debt (i.e. IOUs), but how is this relevant to my argument about inflation?

How do you then conclude that "keynesian economics is a politicians economics, people who are educated under this school are very good at making numbers mean something they don't"? Care to expand?

4_The_Remnant said...

The fact that you cite Krugman immediately revokes any credibility you might have. Just go look at an aspirin bottle, magazine cover, gas price, grocery price, beer price...etc. Would also highly encourage you to read this: http://www.shadowstats.com/article/no-438-public-comment-on-inflation-measurement

It is sad that are kids are growing up to study the economics you are claiming to be real. Peter Schiff thank you

Nate Heckmann said...

Re: 4 The Remnant,

1) "The fact that you cite Krugman immediately revokes any credibility you might have."

I could say the same thing about your credibility since you thank Schiff, but I try to avoid ad hominem attacks because, well, they are not constructive, they are unpersuasive, and they dodge substantive arguments. So, if you'd really like to deem my entire post incredulous, not based on the substance of it, but because I cite Krugman, by all means, go ahead. But just know that this is neither persuasive, nor constructive.

2) "Just go look at an aspirin bottle, magazine cover, gas price, grocery price, beer price...etc."

I'm curious. Did you read my entire post before commenting? Nobody is denying the fact that prices are rising (please read point #2). Rather, I'm arguing against Schiff's notion that hyperinflation is being masked by a deliberately-flawed CPI. I offered the personal consumption expenditure price index and a third-party estimate from MIT that looks at the average of roughly 5 million online transactions as support. What's your support?

Your support is the same as Schiff's: hand-selected items — items that are often excluded from core measurements because of their intrinsic volatility — at the exclusion of other all-encompassing metrics of inflation. Do you have any large-scale, aggregate measure to support your claims that the CPI is grossly understated?

Since Obama took office in 2009, have you seen costs go up somewhere on the order of 10% (http://research.stlouisfed.org/fred2/graph/?g=iay) or 100% (http://research.stlouisfed.org/fred2/graph/?g=iaz)?

3) "Would also highly encourage you to read this..."

Thank you for sharing this link, though this is hardly anything new. I've read similar critiques of the CPI, and find it amusing that the critics of the CPI never bother to mention other measures of inflation such as the PCEPI or MITT's BPP.

4) "It is sad that are kids are growing up to study the economics you are claiming to be real. Peter Schiff thank you"

It's sad that people like Schiff are thanked for spreading misinformation, presenting sloppy analyses, and perpetuating the same counterfactual claims over and over again.

Noah Kubbs said...

Your money in a hole argument falls apart once those $1.6 trillion which belong to individual banks get returned to the economy. Unless the fed does some insane bond sales it is going to have to find another way to shrink the money supply. The fed doesn't have enough bond value to complete the required sales because all of the mortgage backed securities it bought have less than face value.
The CPI data next to the gold price is a perfect example of the problem money printing is having. Gold went up 51% because all of this money which was printed ended up in the hands of people itching to invest it, and they put it into commodities like gold and such. All this does is make another bull market which gives advantage to people who have more money earlier, and when the jacked up commodity prices affect other parts of the economy badly enough it will fall apart again.

Nate Heckmann said...

Re: Noah Kubbs

"Your money in a hole argument falls apart once those $1.6 trillion which belong to individual banks get returned to the economy."

I wasn't making an argument about future inflation, though I will address that point in a minute. I was, however, directly replying to Peter Schiff's statement: "I never said the money printing would cause inflation. I said the money printing is inflation."

In saying this, Schiff is arguing that the act of money printing (i.e. expanding the monetary base through QE) is itself inflationary. He then goes a step further, stating that the only reason we can't see this current inflation is because of a "deliberately-flawed CPI." To address your point about this idle money entering the economy and potentially causing future inflation, I'd say that I agree with you. But this is not the point that Schiff is making.

Plus, we can follow the M2 money supply (i.e. the relevant portion of the money supply in circulation) as an indicator for future inflation, rather than following changes in the entire monetary base the way Schiff keeps alluding to it. Look at what's happened to the M2 money supply over the last 20 years.

I graphed M2 on a log scale to capture rate of growth:
http://research.stlouisfed.org/fred2/graph/?g=ieq

I graphed M2 in nominal values:
http://research.stlouisfed.org/fred2/graph/?g=ier

Notice anything?

Noah Kubbs said...

This graph is evidence against your theory stating "we can follow the M2 money supply (i.e. the relevant portion of the money supply in circulation) as an indicator for future inflation,". If one had been using M2 to predict inflation in the fall of 2008 they would have seen the increase greater than historical precedent, and would predict, like Peter Schiff, that there will be inflation in the future. Coupled with the "money in a hole" theory; which would be in addition to this M2 bump when entered into the economy, it seems that Peter Schiff is making quite reasonable predictions about inflation.

Anonymous said...

Obviously all Austrian economists are wrong. Gold is a worthless shiny metal (sarcasm). Remember the last time that gold was worth 0$? me neither. If we aren't seeing inflation, how come the dow (at all time highs) is only worth 10 oz of gold, when back in 2000 it was closer to 40 oz of gold?

Luckily, I don't take economics personally. I only study it to make money. Compare someone like Schiff to Krugman- one makes a shitload of money based on his economic theory and the other hides behind a prize and writes snarky blogs attacking everyone that disagrees with him.

Nate Heckmann said...

Re: Anonymous --

"Obviously all Austrian economists are wrong. Gold is a worthless shiny metal (sarcasm). Remember the last time that gold was worth 0$? me neither."

Nobody is saying this. Strawman, anyone?

"If we aren't seeing inflation, how come the dow (at all time highs) is only worth 10 oz of gold, when back in 2000 it was closer to 40 oz of gold?"

Once again, if you read my post and my comments, you would know that nobody is making an argument for no inflation. Rather, I am making an argument against hyperinflation. Please appreciate this distinction.

Also, if you use the Dow-to-gold ratio as a measure of inflation, then, using this definition, we must have experienced enormous amounts deflation during the 90s when this ratio started to climb dramatically? Also, I'd like to make two more observations about this Austrian metric: (1) today, the Dow-to-gold ratio is back to where it was in 1995 (i.e. pre dot-com bubble) and (2) the Dow-to-gold ratio is exactly where it was in 2009 — it was 10 in 2009 and it is 10 today, despite the fact that almost all of the "money printing" by the Fed has occurred after 2009.

So, this Dow-to-gold ratio you speak of dropped from 40 to 10 between 2000 and 2009. If you, as an Austrian, consider this change to be inflationary, what's your explanation for this inflation during this time period?

"Luckily, I don't take economics personally. I only study it to make money."

I think you need to keep studying.

http://research.stlouisfed.org/fred2/graph/?g=ijU

Anonymous said...

“The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.”
― Daniel Boorstin (NOT Stephen Hawking! Stephen Hawking was quoting Boorstin)

Danilson said...

Let me first state this. I think that few people have the intelligence (including me) that can, with a specific certainty, can tell if theories about economics are true or false. We can make guesses, or we have a gut feeling about things. Don't get me wrong. I have an IQ of about 130 and I have a pretty good ability to analyze and grasp things, but a real understanding is only for the few.

I think you don't understand Peter Schiff fully, so you're not in a position to debunk his theory.

There is a theory withing the Austrian School about business cycles. This theory states that even if price levels remain steady, capital is not distributed in the most optimal way due to interest rates that are too low. That's happening right now and will cause a further weakening of the economy that will put a greater strain to the national debt. When interest rates are too low, new bubbles are created that will move the economy away from equilibrium. Finally the market pressures to return to equilibrium will become too great and the bubble bursts.

Furthermore, the most accepted definition in Austrian School of Economics is the growth of the money supply. This inflation will cause a rise in the price levels (which isn't normally called inflation. Remember, these are just definitions.

I agree that the timing of Peter Schiff isn't right. The rise of price levels hasn't gone through the roof (yet), although inflation (rising of price levels) is already pretty high (and stated lower by the government, this is fact as for instance the government has given out statements that the improvement of products will lower the CPI). I assume the extra money created by the FED is offset by deflationary pressures because of the deleveraging that's going on. We would have had much lower prices, if it wasn't for the FED printing all this money. Now we have to face the problem of high unemployment AND high prices. If it wasn't for the FED we only would have to face the problem of temporarily high unemployment (during the fase the the economy has to rebalance to a free market equilibrium).

Also you need to see the remark made by Peter Schiff about hyperinflation in a larger context. You need to take in account the national debt of the US and the whole US economy that can't repay it's debt. This contains a risk that parties will dump their dollar holding which will flood the US economy, bidding prices up. When this will happen is very difficult to predict, because this is influenced by politics and the view on the US economy of the masses which is still positive, too positive in the eyes of the Austrian economer. If you further take into account the view of Austrian Economics that the stimulating of the economy that's going on will take the economy further from equilibrium and causing a future collapse of this bubble, either in high bond prices or hyperinflation you can understand his view.

Anonymous said...

@Nate. Just a simple question. In your opinion, what happens when the printed money IS circulated?

Nate Heckmann said...

"Just a simple question. In your opinion, what happens when the printed money IS circulated?"

Thank you for the comment.

To make a long answer short, when the newly printed money eventually is circulated, it will exert an inflationary effect on the dollar. But the amount of inflation depends not as much on the absolute magnitude of said influx but rather on the rate at which the newly printed dollars enter circulation (i.e. the M2 money supply).

This can be understood best if you understand the mathematical framework of many salt water economists, who correctly based most of their inflationary predictions on an IS-LM model. They predicted, using this mathematical framework, that at the lower zero bound — where monetary policy has inadequate traction to reduce unemployment — that inflation would remain low, despite a large expansion of the monetary base. This framework also does a good job of explaining what happened in Japan during the 90s, when Japan almost doubled their monetary base between 1991 and 1995, yet experienced crippling deflation.

Bernanke and Krugman, two of the most prominent academics who studied Japan during the "lost decade" understood all to well, this concept. Once again, Krugman (circa 2011):

"That’s why in early 2009, when the WSJ, the Austrians, and the other usual suspects were screaming about soaring rates and runaway inflation, those who understood IS-LM were predicting that interest rates would stay low and that even a tripling of the monetary base would not be inflationary. Events since then have, as I see it, been a huge vindication for the IS-LM types – despite some headline inflation driven by commodity prices – and a huge failure for the soaring-rates-and-inflation crowd."

In summary, printing money in today's economic landscape won't produce inflation, but it does carry the risk of producing inflation down the road — though the FED has measures to stave off future inflation as well (i.e. by raising interest rates, etc.). This is in contrast with Schiff's definition which purports that printing money is analogous to inflation, and that this inflation is being deliberately masked by a government-manipulated CPI.

One theory relies on a mathematical model, the other relies on a conspiracy.

Anonymous said...

Thank you Nate.

Danilson said...

Nate, your last comment is such a simplification and it shows you lack an understanding of the point that Austrian Economers are trying to make.

Sure, Austrian Economers (Peter Schiff at least) understand there are deflationary pressures going on, but this is short term. Peter Schiff is not a short term speculator. He looks at the foundation of the economy and bases his investments on that. The dollar is VERY weak if you look at the following facts:

- The USA governenment has a very large deficit year after year
- The USA has a trade deficit year after year
- Other countries are openly hinting at wanting to drop the dollar as the world reserve currency.
- All over the world there are countries with dollar holdings, totalling trillions of dollars that one day countries would like to change for goods, services or resources.
- When these countries are looking for American goods and services they find an economy that has a large trade deficit and can't live up to the debt they have in the books.
- The willingness of countries all over the world to borrow dollars has diminished greatly and the Federal Reserve has to buy their own debt. (How can you not see this is VERY bearish on the dollar).

One day countries, pension funds and investors will find out the US has abused their status as world reserve currency and all the dollars will flood back to the US economy causing massive hyperinflation.

And yes, the current deflationary pressures make this only MORE likely, bacause deflation makes it harder to pay back debts. And who is the world largest debtor? Yes, the USA. When the dollar became the world reserve currency the USA was the world's largest CREDITOR nation.

Nate, how can your overlook the abismal fiscal state the USA is in?

Art Novice said...

Hi all, I'm not too familiar with the vagaries of economic theory, but I was wondering if I could ask some open questions on the subject in the interest of discussion.

What is the consensus on the relationship between credit and debt?

To what extent is the global economic network entangled? How would, for example, the global market respond to the collapse of a major currency?

In your opinion, has outsourcing and the circumvention of regional regulations established NGOs as pirate enterprises (operating outside the restrictions of law) and if so, how does that lend support to the notion of the attenuated authority of the sovereign nation-state? If national identity becomes superannuated, what affect will that have on a world economy?

I'm also interested in determining how much the difference between competing economic schools is due to prescriptive factors, and how much is due to simple linguistic preference. e.g., can the differences be explained by false equivalencies in the definitions for common terms, or are they better understood as reducible to ideological priority?

Thanks for your responses.

Nate Heckmann said...

@Danilson,

You said: "Sure, Austrian Economers (Peter Schiff at least) understand there are deflationary pressures going on, but this is short term. Peter Schiff is not a short term speculator. "

Schiff's whole argument in the video in this post is an argument about short term speculation: i.e. that inflation already exists, and current price levels today are being masked by a government manipulated CPI. He's making a case for inflation (or price levels) today, not inflation (or price levels) tomorrow.

Also, here are a number of other short term predictions (i.e. speculations) that Schiff has made:

1) Dec 2006: Peter Schiff on Fox News said inflation and interest rates would go up in 2007, 2008, and 2009. This didn't happen.
2) Jan 2009: Peter Schiff said in US News that the dollar would lose 40-50% of its value by the end 2010. This didn't happen.
3) Jan 2009: Peter Schiff said on a now-deleted radio podcast that we would have Zimbabwe hyperinflation by 2009-2010 if the Fed continued quantitative easing. The Fed continued QE yet we are still not Zimbabwe long after 2010.
4) Jan 2009: Peter Schiff said on Bloomberg that stocks would fall in 2009, 2010, and 2011. The exact opposite happened.
5) Sep 2009: Peter Schiff said in Daily Finance that the dollar will drop to zero, and gold will soar to $5,000 in the "next couple of years." Gold has been losing value over the past two years, and was never close to $5,000
6) Dec 2009 (the quote in this post): Peter Schiff said on Fox News "You know, look, I know inflation is going to get worse in 2010." This didn't happen.
7) Dec 2010: Peter Schiff said on CNBC that the dollar will collapse in 2011 and cause another economic disaster. According to the US dollar index, the value of the dollar in Dec 2011 was almost identical to the value of the dollar in Dec 2010.

Maybe you think I'm being overly simplistic, but this sure looks like short term speculation to me. And, no, by pointing out Schiff's incorrect short term predictions, I am not ignoring his long term economic theory, nor does it show that I "lack an understanding of the point that Austrian Economers are trying to make."

You said: "The dollar is VERY weak if you look at the following facts: The USA governenment has a very large deficit year after year"

You're right in that a deficit can drive down the value of a currency, but if all (or most) major currencies are driving up equal or commensurate deficits relative to the US, the value of the dollar will not be affected as much as it would be if our deficit was created in isolation.

If you look at data over the last decade, this notion becomes perfectly obvious. According to the dollar index based on all major currencies, over the past decade the dollar lost most it's value prior to 2008, and has remained relatively stable over the past 5 years. We didn't start recording large deficits until 2008 and beyond. So, no, our recent deficits have not been driving down the value of the dollar.

http://research.stlouisfed.org/fredgraph.png?g=iUW

You said: "The dollar is VERY weak if you look at the following facts: The USA has a trade deficit year after year"

You're right in that a trade surplus may increase the value of a country’s currency. But a trade deficit does not necessitate the devaluation of a currency — in fact, it can be a symptom of a strong domestic currency relative to weakening currency's abroad. The devil is in the detail, my friend.

If you look at the trade-weighted US dollar index (i.e. the US dollar index weighted towards the currencies of all our major trading partners), the value of the dollar has actually modestly increased since 2008 due in part to our post-recession trade deficits, which are smaller than the trade deficits we recorded immediately prior to the recession.

http://research.stlouisfed.org/fredgraph.png?g=iVZ

Nate Heckmann said...

@Danilson (continued),

You said: "The willingness of countries all over the world to borrow dollars has diminished greatly..."

This is simply not true. Does this really look "VERY bearish" to you?

http://research.stlouisfed.org/fredgraph.png?g=iUX

You said: "…deflation makes it harder to pay back debts. And who is the world largest debtor? Yes, the USA."

Yes, of course. Why do you think many economists today are advocating for higher (not lower) inflation? Well, to devalue our debt and make it easier to pay off.

The advocates for tighter money are essentially arguing for the exact opposite. And this would assuredly make our debt more difficult to pay back. If we heed Schiff's advice and raised interest rates and stopped QE, would deflationary pressures increase or decrease? The answer is simple: deflationary pressures would increase.

You said: "Nate, how can your overlook the abismal fiscal state the USA is in?"

Why do you think — in my calling out the incorrectness of Schiff's short term predictions — that I am ignoring the fiscal state of the USA? You are assuming too much.

Nate Heckmann said...

@Noah,

Thanks for the comment.

You said: "What is the consensus on the relationship between credit and debt?"

I don't think there's much of a debate on this issue. Generally, easy credit tends to mean more debt. Though, this hasn't happened to private debt since the onset of the recession. On the contrary, despite record-low borrowing rates for individuals, total household debt has actually decreased since the beginning of the recession.

You said: "To what extent is the global economic network entangled? How would, for example, the global market respond to the collapse of a major currency?"

An area of continual economic research, but to make a long answer short, I'd say the global economic network is very entangled, and if one major currency collapsed, it would wreck havoc on the global economy.

You said: "In your opinion, has outsourcing and the circumvention of regional regulations established NGOs as pirate enterprises (operating outside the restrictions of law) and if so, how does that lend support to the notion of the attenuated authority of the sovereign nation-state? If national identity becomes superannuated, what affect will that have on a world economy?"

I honestly don't know enough about this topic to opine.

You said: "I'm also interested in determining how much the difference between competing economic schools is due to prescriptive factors, and how much is due to simple linguistic preference. e.g., can the differences be explained by false equivalencies in the definitions for common terms, or are they better understood as reducible to ideological priority?"

This is an important distinction to make in any ideological debate, and I'm glad you brought this up. Most of the differences in economic schools of thought are attributable to prescriptive (and descriptive) factors, not simple linguistics.

Most conservative (e.g. Mankiw, Reinhart, Rogoff, etc) and liberal (e.g. Krugman, Summers, DeLong, etc) economists agree on linguistic terms like inflation and deflation, and share similar mathematical frameworks, despite differences in their prescriptive conclusions. Many of these differences stem from nuances in the assumptions (i.e. descriptive differences) made in their various mathematical models.

The debate in this post is not a debate about the aforementioned types of nuances. Rather it's a debate about drawing conclusions from demonstrably false claims (e.g. inflation is really much higher than the CPI purports, foreigners are no longer buying American debt, etc.), and misleading audiences with false data or sloppy analyses.

Danilson said...

@nate
Thanks for the response. But as you would expect, I don’t agree with most things.

About deflation:

On the one side, Austrian Economists understand that deflationary pressures are there. In other words, the free market pressures are looking for a less leveraged economy. Austrian Economists believe that the government should let this happen. This will be painful short term, but will be a gift from heaven for the long term. This will be the end for the phony debt driven economy. The economy can restructure this way and show real future growth. This also means a restructuring of the government debt and telling other nations the US government can’t possibly pay them back.
The current dominant view is that the current stimulating of the economy by the FED is temporary. As soon as the economy gets momentum, the FED can cut back and the economy will continue on its own, but this is simply not true. The moment the FED steps back interest rates will skyrocket and the economy will implode. The economy has been built on a low interest rate environment. As soon as they rise it cannot persist. A restructuring with short term pain is inevitable. This also makes the Austrian Economic thought more credible in my view, because they don’t promise fairy tales. They’ll tell you we’re screwed and we need to go through some short term pain. Keynesians will just tell you that the FED can use their magic wand. Just give them enough power and everything will be ok. This is quite the opposite. The FED will tell you everything will be ok, but it’s only short term, until the bubble pops. In my view, the FED can stimulate the economy in the short term, but by only making it worse in the long term. Because in the debt induced boom all the wrong decisions are made. It feels nice to buy a big house on cheap credit, but one day you’ll find the reality is quite different. All these bad decisions add up on a macro scale. This effect of wrong decisions also happens in business and especially long term big investments. (Source: http://mises.org/tradcycl/econdepr.asp).

About government and inflation

The US government doesn’t like deflation. That’s where the government steps in. The effect of the policy of the government is inflationary. This is where a lot of people get confused and where the arguments about deflation/inflation are coming from. The market forces are deflationary but the government fights the deflationary market forces.

Danilson said...

@nate (continued)

Manipulation of the inflation rates

Well, there are two sides. I feel it’s naive to think governments won’t use statistics to patch things up. I think propaganda still exists. There are numerous websites that keep track of real inflation rates. The most famous website that does this is: http://www.shadowstats.com/alternate_data/inflation-charts.
Furthermore, the US government has stated openly about how they influence/manipulate the inflation rate. They do this for instance by taking into account the improvement of products. When computers become faster they’ll assume that the inflation rate is lower than it really is.

Peter Schiff short term predictions

Well, Peter Schiff has made a lot of short term predictions that haven’t come true yet. But it’s not fair to state that Peter Schiff is wrong about everything just because his timing is a few years off (assuming that his predictions will come true). Since Peter Schiff became famous he has at least been right about the direction the economy is moving in. It’s not fair to shoot him down because he’s off with short term predictions and details. In my opinion it doesn’t say anything about his ability to analyze and predict the economic situation. His analysis is very logical, very easy to follow, very convincing and very accurate (except from the short term movements of markets).
And then again, all is depending on the government. If the government decides to stop QE and to let the interest rates rise there will be massive deflation. Peter Schiff knows this, but they’ll tell him he was oh so wrong. When the FED keeps stimulating the economy until it recovers we WILL get hyperinflation, because the economy will not recover until it can restructure and be built on a solid foundation on fair free market interest rates.
The US is mostly not a free economy. Just like Soviet Russia there is economic central planning happening. The FED manipulates the interest rates. The interest rates should be a result of free market forces. When the Russians set the price of a loaf of bread this only resulted in shortages and black markets. The same is happening with money and credit. In 2008, in a wave, a massive shortage in liquidity arose. This was the credit crunch. And thereby there aren’t necessarily black markets for money, but people are still looking for alternatives. The gold price has risen from around $250 per ounce in 2000 to about $1385,- currently. A gain of about 450%(!). Bitcoins are also still popular and US citizens are looking more than ever for investments opportunities abroad.

Current strength (or better to say: lack of weakness) of the dollar

Yes, the dollar has been surprisingly strong the last years. But, I in my opinion that means the herd still have faith in the dollar. When you look at the fundamentals of the US economy I can only come to the conclusion that even the herd will find out that the dollar isn’t worth what it has been selling for. Isn’t that what wise investing is about? Analyzing events better and before the herd and mainstream catches up? There is a lot of hubris going on within the US. I myself, I’m from Western Europe, the Netherlands. We shake our heads when we see what’s going on in your country. Massive unemployment, people living in villages only made of tents, moneyprinting. Your country is going down as the world’s super power. It’s a big mental shift. People all over the world that are living now grew up with the United States of America being the supreme dominant factor in the world. The truth is, this economic and politic power is crumbling and it’s shifting to the creditor nations, especially China. It’s hard for the herd to make this mental shift, I’d say look at the facts and make the shift before them. It will save you a lot of money.

Finally, I want to comment only on this graph: http://research.stlouisfed.org/fredgraph.png?g=iUX. Could you find a graph with the debt held by foreign and international investors in relation to the total debt issued, so in relation to the FED that bought federal debt?

Nate Heckmann said...

@Danilson,

Thank you for the reply and the civil debate. Unfortunately, due to time constraints, I will not be continuing our conversation after this comment. However, feel free to comment further.

In regards to you final paragraph (i.e. "Could you find a graph with the debt held by foreign and international investors in relation to the total debt issued, so in relation to the FED that bought federal debt?"), I have posted a graph below to address your question.

The blue line indicates the total number of dollars owned by foreign investors, the red line indicates this value as a percent of GDP, the green line indicates foreign owned debt as a percent of all public debt, and the orange line indicates foreign owned debt as a ratio to debt owned by the federal reserve. None of theses measures look particularly bearish.

http://research.stlouisfed.org/fredgraph.png?g=j7U

Emilio Salinas said...

items in the basket, used in the calculation on the cpi, that experience high inflation are taken out of the basket and replaced with an item that experiences lower inflation. thats one of the differences between the cpi in the 70s and the current cpi. so money continues to "print' or credit is extended digitally, a crash is bound to occur sometime in the near future, im just not sure if it'll be inflationary, or perhaps deflationary, which is possible with defaults. weather its hyperinflation, which can happen if volatility of the dollar picks up, or deflationary, money supply created through loans being defaulted on in effect evaporating that money created through loans, shrinking the money supply causing deflation, is the hard part of determining the near future.

Anonymous said...

Why does the CPI basket exclude food and fuel? The explanation that these two crucial elements are too volatile for consideration seems fishy since food and fuel and their volatility have a major impact on all US households. An accurate and useful CPI is needed.

D. Day said...

I've read with interest all of the comments and feel the "expert" writers are very knowledgeable about the specific disciplines of economic systems. I too studied the economic theories when in college but it still seems to me that you cannot export your technology, manufacturing, and jobs while your government borrows huge sums of money and incurs increasingly high debt to float social problems. This has worked in the short term, but we are now reaching the long term and our government continues to increase the debt while reaching a point where they can no longer pay the interest on the debt. No one would lend money to a debtor with this scenario. I think we are now at the point where the U.S. Government can print all the money they want to and it will not be acceptable to our creditors. It is also my understanding that only two countries will accept the role of U.S. Government creditors. China and Japan. What happens when the U.S. Government can no longer borrow the funds it needs to support these programs the general populace has come to expect(demand?)
I think we are very close to this situation and the U.S. will see inflation and a loss of living standards like we've never imagined in our worst nightmares.

Eric Nordling said...

Was Greenspan correct in his description of gold's role in a free society? "Gold and Economic Freedom"

Anonymous said...

Just wanted to say, Nate, you do an amazing job in the comments of not being derailed and reiterating the key points of your article. It takes superhuman patience. You're a doll.

Anonymous said...

The simple fact is that Schiff publically called the housing bubble spot on while all the Keynesian wannabe's were shouting him down and calling him crazy. You single out quotes and try to pick them apart. He correctly asserts the govt constantly redefines its definitions to intentionally mislead the low information crowd and now has somehow magically frozen the debt LOL! The Keynsians can't distinguish spending from investing. Schiff is simply pointing out the obvious: the Emporer has no clothes! Soon we will default as sure as the aun sets in the west, and the dollar will fall and will take many with it. The numbers don't lie. Stop rearranging the Titanic's deck chairs; Schiff has looked overboard and is rightly stating the obvious: the ship is sinking. The fools quibble about the exact time.

Anonymous said...

Words are just symbols that we use to try to communicate. We must consider the meaning that someone attributes to their words. It is a mistake to take a couple short quotes and assume that we understand the meaning someone puts to those words. I do not believe that anyone who has studied Peter Schiff's views in depth would agree with the points this article tries to make about him. What I like about Peter Schiff is that he is not an economist. There are plenty of economists, and most people don't have a clue what they are talking about. When Mr.Schiff talks to the public, he tries to explain things in a way that most people can understand. He is trying to help people understand what the major problems are that we will face. He believes that we will have to face these problems sooner or later. He believes that we can't keep hiding the problems. I don't know if he is right about everything, but my instincts tell me that he is on the right track about our economy and that we are only making things worse for us later.

Anonymous said...

You keep refering to him as Austrian economist. Last I checked, Austrian/German economist/ economy where doing a lot better than the rest of the world.

Jerry Wolfgang said...

Of course if the published CPI was showing 10% annual rate of inflation, Schiff would be all over it. What's great about this post is that it ages like fine wine. In 2015, Schiff will look like a bigger fool as his predictions do not come true.

Kevin VanderWulp said...

A video any SchiffBot can understand explaining how money works. The US is not running out of money. It cannot run out of money. Taxes and bonds do not fund the government. The government is the currency issuer.

Stephen Reis said...

The CPI doesn't also included the rate of debt payment (i.e the cost of debt). Once you factor that in you see we are in a massive debt deflationary spiral.

Stephen Reis said...

The absolute best measure of inflation is to simple go ahead and count the bodies in the unemployment line. Those are folks who aren't spending that much if any into the economy and don't contribute to the rate of turnover of money. Now you can have high unemployment and high inflation but that's a distinction to be made largely from supply side issues (i.e Oil Shocks). This is lost on most deluded Austrian clowns who can only see inflation as a result of money "printing" and nothing else. The price of oil could reach 1000 dollars a barrel tmmrw, you could lose your job and be starving in the streets and your kids could go stupid and undecuated for the rest of their lives but you really really really give a fuck that inflation didn't grow by 2% this year...

Pablo Pena said...

I find his arguments against P. Schiff to almost be painfully immature and misguided. I'm no believer in Doom and gloom but Nate's points show really poor logic skills. let's look at this gem : "if interest rates are near [or at] zero, money printed now just gets hoarded, and monetary policy has no traction on the real economy.". Hello?? So it's gone from "No there's no bomb in the basement" to "Well there's a bomb but at least it's a year before it goes off". As the economy improves (we are hoping for that aren't we?) then consumer spending will sky rocket and all of that "hoarded money" will start to thaw and we could well see out of control inflation.

Anonymous said...

It amazes how a charlatan like Schiff can get all the media attention he does. For those believers in Austrian voodoo and other cargo cultists convinced that the cpi seriously has understated inflation for years and years, educate yourself about the effects of compounding, and then play a little with the math for a sense of how preposterous these claims are really. If you worship at the alter of the likes of "shadowstats" then my first new car, the cheapest, crappiest Datsun I foolishly put $4400 into in 1977 would go for what today? 40k? Stick, no a.c., no power anything, and rusting and going to hell in 3 years. Check what you can get today for 17k (roughly the cpi) in a new Nissan versa, nicely equipped, still a simple cheapie, but vastly superior. My wife and I, concerned we were wasting too much money, found a way to go on a simple, comfortable budget in 1979. Yep, we're coots now, but that budget has served us well for 3-plus decades, and guess what? The simple chunk we allocate for "general spending" (groceries, wine, sundries, entertainment, meals out, gas etc) has gone nicely DOWN adjusted for official cpi over time (bls has an easy to use Web calculator for same), tho we live a similar comfortable lifestyle, drink better coffee and wine, she spends more on some things like hairdresser and, to a modest degree, more professional clothes. Shadowstats, Schiff, and all manner of similar crackpots would have this budget at multiples of what we're even capable of spending. I guess we could just give the wizardly Schiff the extra cash and marvel as he makes it vanish. I advise all true believers to do this: let this buffoon invest for you. You deserve what you'll get.

Cary Clan said...

Peter Schiff is selling books and runs a business that helps people invest overseas. So, to make a buck, he promotes gloom and doom to entice non-US investment and sell books. Shiff has been singing the hyperinflation tune for 6 or 7 years, he was only 1/2 right about the collapse in 2007, as he completely missed the Credit Default Swap as the culprit.

If all one talks about is failure then every down turn in the business cycle they can say "see I'm right." The crash of 2008 was accurately predicted by lots of people, including Donald Trump.

As a real estate investor, I'm seeing a come back in a housing market that is much harder to get into, in several cities. Thats what I call an economic foundation, since it's basically demand driven not money driven, as in Wall Street buying toxic loan packages. I'm more optimistic than I was 12 months ago even though unemployment is high.

I would not put money into Shiff's "the sky is falling" scenarios. He's just trying to make a buck.

Anonymous said...

I am no economist, but if you justify removing oil and housing from CPI due to "volatility" could you provide a graph over time of the inflation there?

My rent went from 1685/mo to 2400/mo over the course of three years. This is more significant to me than if a loaf of bread went from 1.00 to 1.05.

Secondly, again not an economist, but how is inflation good for me? If you agree the "real" inflation is closer to 5%, and I earn .25% (!) in a savings account, I lose money over time. I can't get my head around how inflation is good for everyday people.

Could you please explain, I'm not being facetious. Thank you!

Nate Heckmann said...

This seems particularly relevant to the discussion taking place:

"...if you believe that prices should move in proportion to the monetary base, there’s simply no way to rationalize triple-digit money growth associated with 2 percent or less inflation."

"Why haven’t the kind of people who listened to Peter Hyperinflation-by-2010 Schiff switched to, say, Warren Mosler?"

"It has to be in some sense political; the canon appeals to certain kinds of prejudices, in particular the prejudices of angry old white men with money to invest. But it remains amazing how little those prejudices have been dented by their failure to meet the most decisive real-world test you could imagine."

– Krugman

http://krugman.blogs.nytimes.com/2014/03/16/charge-of-the-right-brigade/

Post a Comment

All comments are screened. Spam and expletive comments will not be posted. Please be polite.