p. 122: “…collusion between originators and appraisers resulting in faulty documentations, phony appraisals, and lax credit screening practices….” Here we are with another conspiracy theory. One, I might add, which has been accepted by every liberal, every anti-capitalist, every anti-freedom person in the U.S. I am sure that some people out there were not honest. I am sure that there are crooks. But, most weren’t. Most mortgage brokers are businessmen who want to remain in business. They aren’t short-term thinkers. Most did not go to Ivy League schools. But, I will tell this, the people who set the standards of credit in the mortgage industry are Freddie Mac and Fannie Mae. They look over that paperwork. They check it out. The loan coordinator at your local mortgage broker and the bank keep in touch with the people they have to satisfy.
What is little known I found out from a syndicated columnist, Robert J. Samuelson, whom I mentioned above, a year or so ago (I’m looking for the article!). In the early years of this decade, Congress, in its wisdom, changed the law regarding loans taken by their two creations. Congress told Freddie Mac and Fannie Mae that they had to increase the percentage of loans they gave to “low and middle income” families from the low thirties to 42%, close to a third more! (I am not sure if this was an increase in the number of mortgages or in the total value. The later would have been even worse.) You can bet that Fred and Fan weren’t leaving many of these mortgages on the table before this piece of wisdom from Congress. Now what were they going to do?
If there were few additional mortgages available from the lower income segment of the population, Fred and Fan were left with two bad choices: One, reduce the amount of mortgages they accepted until the lower income range made up 42%, which didn’t seem to be what Congress intended at all; or Two, reduce the standards to bring the percentage up. Guess!
Why isn’t this better known? Well, Congress isn’t going to tell, nor are its minions. Finding that fact isn’t easy, so do not count on the media. Schiff? Notice that Schiff basically admits he doesn’t know why this mess began, and the trots out another conspiracy theory. Notice a trend? I do admit that I was just lucky in finding that piece of information. But, I knew that most business people are honest folks, and that the government in the form of Fred and Fan were telling them what was needed, and they tried to accommodate. I am sure that many had misgivings, but, I am sure that they have misgivings about much of what they are told to do by the government, and realize they are given little choice. That is the problem with big government, sensible people are given little choice, little opportunity to follow their own better judgment. Where is Schiff on this issue? MIA.
I will give Schiff’s the recognition that the other important segment of the residential real estate bubble was inflation. The availability of massive amounts of money for loans also had a negative effect on credit worthiness tests. This created money drove up house prices massively, just like the stock market in the late 90’s.
p. 133: Again speculation is at the heart of our problems. Those dirty speculators.
p. 135: “So as real estate continues to decline and the U.S. economy goes further into recession, the dollar really will come under increasing pressure as foreigners, recognizing the relative weakness of our economy, begin bailing out of U.S. assets.” And then: “It’s a spiral that will feed on itself and ultimately cause the American economy to implode.” (emphasis in book)
Well, of course, that did not happen. I think that it didn’t for two main reasons, which I have mentioned before. One, the U.S. economy is not a hollow shell. It has lots of productive strength, in spite of inflation and the rest of the government. Two, which has two parts, the world economy is very connected, so that the U.S. recession had echoes all over, and, foreigner’s reasons for accepting and keeping dollars is only slightly negatively affected by our monetary craziness.
As of the date of this review, housing has dropped in value significantly, but the residential real estate market is stabilizing; the stock market dropped more that 50%, in great part because of the mania on the part of the press and government, but the stock market has rebounded over 40% from its low in only a few months, and is currently about 30% off its high; the dollar’s low was 16 months ago, trade is holding up, and foreigners are still buying U.S. debt.
Since Schiff never defines “crash”, we can look at it any way we want. I would not argue that the stock market “crashed”, the housing market burst, maybe even “crashed”. But I would not consider the value of the dollar to have done much, considering. I am wondering if Schiff feels vindicated or frustrated.
p. 143-162: This section is a real mish mash. I am not at all sure that the money we have stashed away in our savings accounts adds much to the national capital. On the other hand, having a lot borrowed for consumption, especially at higher interest rates, is not of benefit.
I do not like Schiff’s continued requirement that what an individual does with their personal finances should be to “society’s advantage”.
Schiff’s requirement is savings, not savings and investment. I do not understand why owning a productive asset does not correspond to savings? If I put my money into a savings account and earn interest, does that mean my savings has increased or not? If I buy a stock, sell it when it has appreciated and put the money in a savings account, does that mean I have not increased my savings? He seems to have some idea that there is savings, consumption, and some, middle, mystical ground. I do not understand.
What is the difference between savings and wealth? Does cash in the bank a higher status to Schiff than owning a productive asset? How about having your own business, does that constitute savings, wealth? Does any investment in a productive asset produce something? Aren’t retained profits a form of savings? Isn’t reinvesting profits a form of savings? Doesn’t paying dividends out of profits to a stockholder who uses the income to pay for his retirement constitute consumption?
Debt for consumption means that you have committed to using some future production to pay your loans. As a day-to-day practice, this is a bad idea, I agree. Using debt for the purchase of a house, may make sense, as long as you buy within your real income level. Borrowing for a new TV, or even furniture, and especially wine, for example, is a bad idea. Even more, spending all you make is not good for you. I think Schiff and I agree. He just has some confusions regarding what “savings” is.
p. 163-171: This section is mostly correct, but unexceptional. Nothing new here.
One thing, here, finally, does Schiff recognize the burden of regulations in the U.S. Yet, I do not think that he recognizes how influenced the governments of the East are by the “American” model. Japan’s government, for one, has a greater role in their economy than the U.S. government. But the other point is well founded, i.e., lower costs. I wonder about the capital costs. The efficiency of the American capital markets are unparalleled. I also wonder about their taxes. However, in this case, I’ll not contest Schiff’s contention. He should exclude Japan, however, because it has a European style cradle to grave welfare system, and with the population shrinking and much older than any other industrialize nation, it is headed towards bankruptcy quickly.
Hindsight is easy, I know. After looking at Schiff’s stock portfolio recommendations, I looked at several pure international mutual funds. They didn’t do any better particularly than the U.S. funds. It’s a world economy, really. If Schiff was correct about the currency risk involved with the U.S., then the funds should have done better. At least, Schiff’s recommendations didn’t hurt him any worse than staying in the U.S. What I saw that I found interesting was that a good international fund was able to keep the appreciation that it had in the preceding few years. It crashed just like the others did, but from a higher level.
International stocks have a very mixed history over the last 40 years. From around 1990 to the early part of this decade, they were definitely well behind U.S. companies, even taking into account the burst bubble centered on tech stocks. Most of the benefit of foreign stocks starting say in 2002 was from the U.S. currency problem, not in the greater profitability of foreign companies, which is what Schiff is referring to. Yet, I agree with Schiff’s attitude toward the dollar. The dollar will continue to fall, due to all of that exported inflation, again, consistently with Schiff’s position. I do not think that we will see a “crash”, however, primarily due to the reasons why foreigners accepted and kept dollars in the first place. Schiff’s explanation is that foreigners did it unthinkingly and because the U.S. pulled the wool over their eyes. Why we would want to put our money with people who have such poor judgment, I do not know.
There is nothing basically wrong with Schiff’s recommendations as to how to select stocks. Mostly, these are the things to which any stock picker should pay attention. Problem is that amateurs are not good stock pickers. It is not a lack of intelligence or interest in the results. It is a lack of interest in the process and access to the information. For example, I have the formal and informal education and a lot of the experience to be a stock picker. But it would be a bad idea, because the process and the company reports, etc., bores me to tears. The division of labor applies as much here as any other form of human activity. I do agree with a lot of what Schiff has to say about mutual funds. There are drawbacks. What I think makes a big difference is that these funds tend to have analysts in the countries in which they invest. They tend to have much better information and understanding of the market. You just want to look for a fund that is doing what you want, has been doing it long enough to show it can consistently make you money, and that the people who did it are there now. There are enough funds that one will come close to what you want.
Regarding costs in mutual funds, as in all other forms of services, you tend to get what you pay for. No one has proven that cheap is really better than paying for talent. There is such a thing as talent, remember?
As I write, gold has far exceeded the price when Schiff was writing, but then dropped back about 20%. If anyone is ware of any of Schiff’s anticipated demand for a sound currency, please let me know. I would like Schiff’s expectations to occur. I am not really a pessimist, or cynic. I am not negative, really. I just think that it takes more than some economic turmoil to make people doubt their governments, especially after a century of more of accepting more and more government. To a great extent, especially in the U.S., there was little outcry against the government and media claims that it was the free market that caused the problems. A sound currency does not seem to be in anyone’s mind.
I will say that GLD has done well since it was created in 2005 until early in 2008. In a well thought out portfolio and with a good understand of more than Schiff offers, GLD could provide some important protection. It would work right up to the time that you would want to own the gold physically. But that is getting way ahead of where we are now. As far as the present is concerned, gold is still a very complex, worldwide market. I know that the moves that Obama has made and wants to make will be bad for the economy. The Fed doesn’t have a clue as to what would be a good thing to do. Nevertheless, I would want to see where we are after the dust clears a little to determine a strategy. The U.S. stock market has shown some strength, the dollar has been flat for 16 months, gold has been as well, the banks aren’t lending, Congress is balking a little, and public opinion is turning some.
p. 229: Commodities. Again, the ugly head of the speculator appears. Actually, there are three participants of a futures market, the producer, the user, and the speculator. The Speculator makes the market possible, because the other two groups aren’t large enough to make a market. The reason the producer and the user are there is to protect themselves against adverse price changes. They want to be sure that they get either the price they need to make money or that their costs do not exceed a certain level. Being in the futures market by either buying the contract or the option on the contract gives them the protection they need. Both consider the expense of being in the futures market a business expense. In other words, if the contract period ends and the price did not make them money, and they lost what they had in the market it is okay, since they will be getting the price on the item they had planned on all along.
So, what is it you are trying to do? If you attempting to protect yourself form the fall of the dollar, and not make money on speculation, even an option is good. This approach works if you are using gold futures/options or Euro or Yen futures/options. This approach could also work for someone who expects the price of oil to rise again.
p. 237: “The monetary and economic implosion I have been predicting throughout these pages could happen tomorrow or could take a few years. It could be cataclysmic, as would be the case if the United States suddenly lost reserve currency status or there were a run on the dollar, or it could be gradual and so well disguised that the purchasing power of the dollar would simply be gone before we knew it and had time to protect ourselves.”
So much for the “crash”. Silly alternatives. Give us a break.
p. 238: “Americans…put dollars into high-yielding investments in foreign currencies or invest in gold may see temporary pullbacks, but will be will positioned for the longer run.”
Okay, I may be picky, but “high-yielding” and conserve don’t seem to be the same thing.
Yes, a little picky. I didn’t really think Schiff didn’t mean that people who followed his instructions wouldn’t profit. But, he did not say so there, elsewhere he says other stuff.
We have exported a lot of inflation, yes, even though foreigners have a reason for keeping a lot of our dollars, we have already experienced a significant drop in the value of the dollar. Additional drops in the value of the dollar are to be expected, especially since we are continuing to export inflation. The drop in the value of the dollar will lower our standard of living both because imports will take a larger number of our dollars, and more dollars will be bidding on our own goods, which will increase prices. The only way the Fed can combat the fall of the dollar would be to reduce or reverse its expansion of our currency, which would be contrary to the needs of supporting the federal government by providing for our budget deficits. Which of these conflicting goals would they support?
Well, back to p. 237, if the situation is “gradual” (the rest of that sentence does not really add up) then we can take care of ourselves in a well controlled manner.
One thing that Schiff did not follow through on is his promise that he would show us how the Fed increased the money supply in several different ways. Actually, I know of only one way the Fed has, which is to increase the supply of credit. If the banking system is not increasing the supply of credit, the Fed in not expanding the money supply. As of this writing, the banks have stopped lending for months. So for months there has not been an expansion of the money supply, and no inflation and no new pressure on prices. There is still a lot of money in the economy that could flush out and have an impact, especially on the current account, i.e., we could still be exporting inflation from previous years.
From what I understand now, the money that the Fed has used for the “bail-out” has not been placed as “money supply” (I am going to take a closer look.). The money given the banks has been used for reserves and capital. Banks need reserves and capital for operations and loan losses. The major banks lost a considerable portion of their loan loss reserves and capital due to mortgage defaults. These reserves and capital were not considered part of the money supply before, and doing so now would give you the wrong idea as to what is happening.
Little of what has been done as part of the bailout is something that is going directly into the money supply. Certainly, the bailout is partially keeping the recession from wiping out the previous inflation. But that does not mean that it is creating new inflation. It is also expected that over the next few months that the Fed is going to work to withdraw much of the money it has created.
I do not mean to say that inflation has stopped. We shall see inflation soon enough. The budget deficit will require the Fed to do a lot to finance the borrowing that the Treasury will need to do. We cannot expect that foreigners will be willing or able to meet Obama’s need. Interest rates will go up, which the Fed will fight. We shall see inflation. We shall see price inflation. How fast? Who knows? You just have to pay attention.
As for Schiff’s realignment to Asia, I think it could happen, but certainly not to the extent that Schiff proposes. Why? The U.S. is not as bad and the Asian’s not as innocent as he suggests. Their central banks produce inflation significant for their economy. The U.S. does produce and has strengths. China still has a Communist Central Committee who thinks that it is in charge, and there will be a conflict.
p. 240: Merk Hard Currency Fund
Up until the 3rd quarter of 2008, this fund underperformed a good international mutual fund, then it didn’t dive as much. Can’t say that I am impressed. It parroted the Euro. I think that it might do well for a hedge. A professional might compare that with currency future options.
For an overview and conclusion about the book, see the review.
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