Peter Schiff’s New Book: (3) What You Need to Know About Invisible Inflation and The Stimulus Scandal

Well so far, I’m just about halfway through reading Schiff’s Little Book of Bull Moves in Bear Markets.  I have to say (as I mentioned the other day to someone on Twitter) that I’m pleasantly surprised that not all of it is stuff that I’ve heard Schiff talk about before.  I was a bit concerned that I would have already heard it all.  Not true.  For example, I didn’t know that Schiff’s father Irwin Schiff was an insurance banker who wrote The Biggest Con: How the Government Is Fleecing You (Freedom Books, 1977).

In my second post on this book, I introduced the basic framework and thesis of Peter Schiff’s analysis. So next I’m going to share some of the interesting points that I’ve learned from reading another 70 pages or so.  But like I said, I won’t tell you everything in case you’re planning to get the book for yourself – or heck – buy it as a great gift for someone else you know, maybe older parents who aren’t on the internet but need to know these things.

Here are some take-home points in a nutshell.  Remember, Schiff was writing this in May-June 2008:

• the current slowdown is being painted “as the sort of cyclical decline that the American economy has shrugged off numerous times over the past generation and a half.”  We won’t be that lucky this time.
• true economic growth/wealth comes from PRODUCTION not from SPENDING
• hence, the U.S. cannot spend its way out of this decline – it needs to PRODUCE real things

“True economic growth causes prices to fall.  It’s the growth in money supply that causes them to rise.” (pg. 35)

• U.S. Treasury in 1944 (at height of its economic power) held more than 60% of world’s foreign currency reserves, and now holds only 1% – less than Libya, Poland and Turkey!
• the subprime sector accounted for a whopping 20% of mortgages in 2006.  Think about that.  That’s how much junk has to be written off balance sheets worldwide at a minimum.  And that’s only the subprime stuff (people with no income or who lied about it).  There’s still all the other adjustable-rate (”teaser rate”) mortgages to clean up from actually hardworking people who weren’t subprime.
• “In my view, there is a real possibility that a new administration in Washington will confront its economic challenges with New-Deal-type programs that will only exacerbate the damage and turn the current recession into a repeat of the Great Depression, only with consumer prices rising instead of falling.  As I write this in mid-2008, the government still claims the U.S. economy is not in recession.”
• predicts the current economic crisis will last well into the next decade
• inflation is now an international problem caused by America, which “exports” its inflation
• CPI and PPI are bogus statistics that severely understate price increases
• GDP is a bogus statistic because it includes the money that foreigners spend when in the U.S. and because it only measures spending (i.e., the circulation of paper dollars), not manufacturing or production of goods.

Still not convinced that inflation is the main current problem (remember, it has nothing to do with prices – the money supply is still being inflated right now)?  The U.S. government creates “inflation invisibly by expanding the money supply.  Here are the main reasons:

Inflation is used for political reasons to stimulate the economy and counteract down-cycles that are perfectly normal and corrective of excesses but are unpopular with voters

Government debt and other obligations such as social security become more manageable when payable with cheaper dollars

Inflated incomes increase government revenues by forcing people into higher tax brackets

Inflation helps finance entitlement programs that would otherwise cause tax hikes.”

I think #2 there is key, because this is basically how the U.S. thinks it’s going to get out of debt (if it’s still going to try to be honest and do that at all), but the sad thing is that inflation is just a different way of robbing people – over time rather than all at once.  Moreover, “an indication of how secret the Fed wants its money-printing activities to be was revealed in 2006… the government announced that the category containing [the amount of inflation being created], called M-3, would no longer be made public.”

So what can you do?  Here are Schiff’s basic suggestions:

• get out of U.S. dollar-denominated investments like cash and bonds (including “TIPS”)
• move into commodities, resources, energy stocks
• buy foreign stocks likely to keep on growing
• buy precious metals which hold their value no matter what
• buy gold stocks, because these can’t be confiscated from you
• reinvest excess cash you don’t need “in a nondollar money market fund or foreign equity portfolio”
• don’t invest in stocks that don’t pay dividends: you need these in order to prove that the growth is real
• don’t invest in hedge funds (they’re not transparent, too leveraged, too risky, not accountable)
• replace your domestic portfolio holdings for at least the next 3-5 years with foreign stocks

So basically Schiff is recommending a portfolio of foreign dividend-paying stocks based on real assets.  He also includes certain U.S. multinationals that derive a majority of their income from outside the U.S.

About the only point on which Schiff has been “wrong” so far (”wrong” only because it hasn’t happened yet) is the collapse of the U.S. dollar.  Since Lehman Brothers, there has been a rally in the greenback.  We all know the story by now.  But Schiff sees this as a temporary trend because of the shock around the world. Moreover, Schiff is not the only one pointing out what is inevitable for the US dollar.  Just google or youtube any of these analysts’ names and you’ll see how much they converge on at least this one point: Jim Rogers, Gerald Celeste, Nouriel Roubini (NYU), Ron Paul, Marc Faber, Niall Ferguson (Harvard), Peter Morici (Maryland).

These are all independent analysts, more or less working for themselves.  They don’t have to be spreading the word about this – I think they’re really trying to help people get out from under the woolly fleece blanket that the media has over all of us.

The other thing I want to suggest is that people shouldn’t conflate some of these economic findings with the conservative/Republican political environments in which they are so often brought up and discussed.  Like Glenn Beck’s talk shows.  Or Jeff Rense.  As Peter Schiff says,

“Austrian” economics makes about as much sense as “Chinese” physics.  It’s a science, and its laws function the same way no matter where they operate or who attempts to apply them.”

The point being that these economic problems have nothing to do with political caricatures and stereotypes, but basic misunderstandings of fundamental economic building blocks. Take Gerald Celente, for example, who considers himself a “political athiest.”  He’s still reached the same conclusions.

I’ll be back with more in the next post…

• State of the Economic Union: How Will Obama Get Massive U.S. Budget Deficits To Budge?
• The End of Influence: What Happens When Other Countries Have the Money
• A New Trick For Stemming Inflation? The Fed Now Pays Banks Interest For Masses of Excess Reserves
• How To Get Ready For Double-Digit Inflation
• What is a DRIP?

• If I Promise to Spend it, Will Obama Send Me Stimulus Money?
• Why Inflation Is Bad
• Gold breaks $1,100: Does It Matter?
• Emotional Attachment: Why Do We Treat Money Differently Based On Its Source?
• Review of the Millionaire Mind

Tagged as: books, Peter Schiff, strategy