Video: Peter Schiff predictions

[Bishopknight]

An excellent 11 minute interview with Economist, Peter Schiff. If you haven't heard about him before, he was one of the few pundits to come out and predict the housing bubble, on TV. This recent video gives insight into what he sees in the years ahead.

http://uk.youtube.com/watch?v=9h2x7R8pxUs

[muldoon]

I have been reading Schiff for years now.  I think he only sees half the problem.  While he loves to beat his drum about how he saw the housing bubble and credit crash coming, he also has been calling for the destruction of the dollar for years now as well.  He is a gold to 5000 an ounce guy, and has invested heavily in the euro and pound. 

On Friday, Jan 9 - he did publish a paper that I agree with many parts of and have been talking and thinking about for some time.
http://news.goldseek.com/EuroCapital/1231524773.php

Essentially, treasury bonds are in a bubble.  All parobolic charts lead the same place, violent reversal.  It doesnt matter if its yahoo at 900 or oil at 147 or 2 bedroom bungalos at 900k, or 30 year long bonds at 2% yield- it's the wave after wave of speculators that pile in and generate the volatility to create unhealthy conditions. 

He says as a matter of course, "However, since the only way the Fed can buy bonds is by printing money, the more bonds they buy the more inflation they will create."  And that is a fallacy.  He is quite certain that any creation of dollars will result in inflation while I am not so sure it is warrented. 

If you consider the money base as a combination of monetary base and credit (because they spend as the same) and then you consider that credit has been decimated you will see that effective base has been smashed.  As credit is reversed, the velocity of money falls (the amount of times a dollar will recirculate).  Consider this -- Federal Reserve statistic on the M1 MULT.
http://research.stlouisfed.org/fred2/series/MULT



On 12/31/08 it was 0.945.  humm, under 1? 
1 dollar times multiplier = dollars going into circulation? 

I "print" one hundred dollars and the net affect is that 5 dollars and 50 cents comes out of circulation?  Wow - thats a clear sign that there will be no inflation.  There will be no hyperinflation.  Money is being destroyed by deleveraging faster than can be created.

The reason being that no matter how much they print it can never be enough - you cant borrow money with a penalty of interest and pay it back without creating the money to pay back the interest.  No amount of printing can make up the hole because the math is broken.  Only when you get to numbers as astronomical as this does the problem with exponential function really become obvious. 

Again, I have nothing but respect for Peter Schiff.  I understand he intends to run for congress in 2010 http://www.schiff2010.com/ - I would vote for him in a second.  I simply think he is jumping to conclusions on his thesis about inflation.  Much like he jumped to conclusions last year regarding the euro and pound last year. 

Thats just my opinion. 

[Bishopknight]

How can money be destroyed faster than its created?

I've having trouble understanding that.

[muldoon]

Maybe I shouldn't have said destroyed.  left circulation may be easier to understand.

You buy a house for 100k, you ut down 20k or 20%.  Your leverage is 20:1 For every 20 dollars your borrowing you put up 1.  Lets say you stop paying and the bank comes to get your house.  But your house is now worth 50k while you owe 70k.  That 20k difference is destroyed, or removed from circulation. 

Heres another example using a typeical hedge fund.


Now take a look at this chart


This is the net effect of the above chart in the first post - as more money is printed the velocity of money falls.  Therefore the net affect of printing actually does not meet the goal of getting more money into the system because velocity has now fallen below 1. 

As printing (encouraging more fraud that created this mess) the velocity of money falls to the point where every dollar printed effectively removes money from circulation through the leverage unwind process. 

Hope that makes sense, if not I'll try to answer whatever your curious about.