Notes and Commentary On "Crash Proof 2.0" Part 2

Chapter 5, p. 148: 2009 UPDATE

This chapter is about the stock market and the Dow Jones Industrial Average, which was at its recent low under 7000 when Schiff was writing. It is now in the 9600 range. Probably, Schiff would call this a bear rally.

p. 150: He expects to Dow to go to 4000 to 5000 and last for 5 to 10 years. ???? Unexplained.

p. 151: He refers to GE, which hit $5.72 in March, 2009 is now at $16.08 at a P/E of 12. He considers the Price/Earnings Ratio to be important. 12 is way below the traditional average.

p. 152: “Therefore, much of the big profits earned by such companies through their financial activities from the 1990’s on…were phony.” Here we are again. Jump. Phony because the financing was supported and the interest rates kept low by the Fed’s massive money creation. But how that makes the finance arm’s profits more phony than any other part of the company I do not know. It is true that those activities cannot be sustained because the Fed’s inflationary policies cannot be sustained. But dollars from one sector spend just as well (or poorly) as dollars from another sector.

Chapter 6, p. 186: 2009 UPDATE

For this chapter I have nothing to add or criticize. Not bad

Chapter 7, p. 227: 2009 UPDATE

p. 228: “As I noted in the chapter [of the first edition], the Social Security Trust Fund is a pure case in point [of a Ponzi scam].” Okay, this is not a big point, as far as the book is concerned. It is as far as he goes, however. He did not explain the Social Security Trust Fund in the chapter. He mentioned it. He did explain Social Security. He did not explain that Social Security is a very big problem looming just around the corner.

Nor did he explain that Medicare, which is already bursting out of its direct tax revenue and eating into the General Account, i.e., income taxes, etc., is an even bigger problem than Social Security, and it is starting now. The correct description is that Medicare is selling its special Treasury Bonds in its Trust Fund back to the Treasury. It is a fraud.

Perhaps, and this is just a perhaps, Schiff is so much of a finance guy that no other issues are big to him.

p. 231: “Out of this pseudo economy emerged the now-dominant service sector….” Here we are back to the service sector. Now, at least, it is only “dominant” in stead of providing services as the only thing we do rather than manufacturing.

I do not want to attribute this to Schiff without some evidence, but maybe the reason why he places the service sector here is because he cannot find another culprit for the deficit. I don’t know. But harping on the service sector only undermines what is often decent material. What he sees as the service sector is also very narrow. But, ultimately, he just doesn’t look at our economy as part of the world economy. It is. So is our service sector. Services, as long as your not restricting the definition narrowly to menial tasks done locally, are actually easier to transport and provide than physical goods. Looking at the U.S. as part of the world, offering services makes us very flexible in a rapidly changing technological world.

p. 234: “China funds about 50 percent of our borrowing,….” The numbers do not add up. Let’s say that our trade deficit is $800 B and that our federal deficit is $1 T. So, Schiff is saying that China receives three fourths of our trade deficit, and the put all of it into our Treasuries. Our total imports, which went down this year, were only $2.4 T, which means that China would have to be on the selling end of more than half of our imports. No, they weren’t. If he is going to throw numbers out, I wish he would give us some idea where they came from. I do not want to accuse him of making them up, really.

What numbers that I can find shows that out of the total U.S. federal debt of over $10 T, 25% is foreign owned. It could be that foreigners are buying 50% of new debt, expanded debt. I would still like to see his source.

p. 235: “In effect we imported foreign goods and exported inflation.” My very words. Where do services stand in this statement?

“…foreigners get to keep their goods….” This is part of his “decoupling” thesis, often mentioned but not explained in this book in either edition. I think I know what he is trying to say. The problem derives as to why the Chinese exports are so attractive, to focus on the country that Schiff refers to most often. They do not want many of the things that they build for us. The goods they do want they buy in as large a quantities that they can afford. I don’t see that the production capacity that they use for export is of much value within their country. Their general population is, after all, low income.

I will say that I generally agree with his analysis of the federal bond market. The current low rates cannot continue, the market will not buy a continuous stream that shows no end, ultimately, the buying of bonds by the Fed, with or without the trick of expanding bank credit, will reach consumer prices, with the help of dollars held overseas coming home. Price inflation will rise, and tend to rise at an increasing rate.

A general note, which applies since the last chapters are about investment advise. Schiff has not discussed the Fed’s major tactic of expanding the credit supply via the use of member bank’s deposits. It may not be relevant, or desirable in this book, but I often wonder if he knows.

Chapter 8, p. 273: 2009 UPDATE

p. 275: Schiff apparently has many other writings on the internet in which he explains much of his thinking. He left a lot out of the earlier edition of this book. Now, in the revision/add on, he sort of writes as if the reader had read the other stuff as well. Here, finally, he recounts some of his broader views that make some sense of the first edition.

p. 280: Another problem I have here is that he states several events as facts. They vary well might be, but I would like to see myself. Schiff does not give me a way to find out. There are no references. Okay, finding out is not as difficult as it once was. Go internet.

“The world is rapidly waking up to reality.” This time some evidence would really be worthwhile. I do not see this happening. I think that the central bankers around the world are still the same central bankers. They have not all of a sudden had a brain transplant. Private actors, currency traders, businessmen, investors, etc., may be, but again, having some reference to substantiate this would be helpful. Schiff acts as if anything he says is to be totally accepted. Please.

“I’m talking prosperity and growth unlike anything we could imagine when those nations had their wings freighted with the United States’ excessive debt and trade imbalances.” Does Schiff realize that all of these countries are less free than the U.S. was prior to the 60’s? Further, I do not understand how their internal economies, or even several countries, or the entire rest of the world, is going to absorb the production that the U.S. has received, or even a significant portion of it, without experiencing drastic reductions in the prices of everything. It isn’t as if there is all kinds of ready money, real or otherwise, sitting around to buy what the U.S. can no longer buy. How does Schiff expect that to work. The central banks in the other countries look at their economies not that differently from the Fed. If they see prices begin to drop they may just as well act as the Fed would and pump money into their economies, and bang, have the same problems we have. Schiff needs to explain how this works. I don’t see it.

“We are already seeing signs of decoupling….” Meaning that foreigners are tending to buy fewer U.S. Treasury Bonds, sell dollars, and not expect to sell goods to the U.S.. So, where does he see this?

p. 281: As the world’s producers begin making more for themselves and less for us, they will demand even more basic commodities, while recent capacity reductions will further limit supply.” But also, we will be demanding less, and therefore some supply will be opened up. But, as I said before, it is less obvious how the other countries are going to be able to take advantage of “making less for us” without prices dropping, which means that they will have less ability to pay higher commodity prices.


Chapter 9, p. 309: 2009 UPDATE

p. 311: “I do not believe there will be an official decree to replace the dollar as the world’s reserve. It will simply lose that status due to independent market forces. My guess is that central banks will began [sic] to hold more of their reserves in other currencies, such as the euro, yen, or Chinese renminbi, and significantly higher percentages in gold.”

Let’s consider what the situation would be if the U.S. had not been exporting inflation, i.e., made up dollars. Let’s say that the $10 T that is currently being held by foreign central banks and the $1 T held by foreign private interests were part of a stable currency. Of course, that could not have happened, because about 30 years ago our total liquid money supply was about $1 T. What would have happened is that as we sent dollars overseas to buy goods, they would have held on to them, pretty much as they held on to the made up money. Dollars would have disappeared from circulation in the U.S., and prices would have had to go down, simply because there were fewer dollars around to spend on things. Wages would have gone down, too, but not as much. This scenario would be just like the last few decades of the 19C. Internationally, the dollar would be bid up consistently, year by year, making foreign goods even cheaper and more attractive. Our standard of living would improve, especially as we became more productive and allowed our creative people to create. What a world.

The point of going through that scenario is to point out what would happen in countries whose currencies would be chosen to be reserves. Every yen taken out of circulation in Japan is one less yen being used for prices in that country. There isn’t much of a yen bond market. The situation would be similar for the euro.

As I mentioned in an earlier note in this commentary, the central banks in those countries do not view falling prices as a good, and would tend to make more money to replace money that was effectively exported, and the cycle would begin, as it did here.

I do not think that gold would be the general response because it is too restrictive. Central banks could not do what they consider their responsible activities of controlling the business activity within their countries.

Schiff has this unrealistic view of what other countries are like. They have an even lower attitude toward the free market than our “leaders” do, and less experience. (I am willing to consider exceptions, but those would not be major economies, I expect.) I would not expect milk and honey in China, Japan, Korea, and certainly not in Europe.

On the other hand, I think that Schiff’s expectation that gold will continue to rise in the long run, or even intermediate, is accurate. What’s to stop it?

“…the fact is that the world does not need a reserve currency. Rather than replacing the dollar with some other flawed fiat alternative, the world could simply return to the traditional gold standard that existed prior to Brentton Woods.”
Well, yes, that is what it should do. But, to do so, it would have to recognize why. The Chinese do not. And I see no reason to think that anyone in the governments of the other major players understand either. The fact is that governments that exist today prefer fiat currencies, and really have no problem with a fiat currency as a reserve. If they have a problem with the dollar it is because the U.S. has gone overboard, in their opinion.

p. 313: “…but I’m also surprised at the extent to which the European Central Bank (ECB) and other foreign central banks have adapted inflationary policies.”
Mr. Schiff, U.S. central bank policies were patterned upon foreign central banks. We did not invent the central bank, the Europeans did.

The balance of this section is, in my opinion, sound.


Chapter 10, p. 335: 2009 UPDATE

In this section Schiff sort of ping-pongs around, accurately demonstrating the problem with suggesting the thing to do in our current situation. What to do?

If his expected economic disasters come to pass, it is very unclear when they will. This leaves the asset holder in a difficult quandary. If his second collapse is as drastic as he expects, then holding the right things will wipe them out just as much as holding the wrong things. The most important assets to hold may be gold, food, and weapons. That is the worst-case scenerio. Frankly, if you expect the worst case, you should be moving to a small town in an agricultural area, get to know your neighbors, help on farms, buy some gold coins and bullion, and hunker down. Holding foreign stocks might not be helpful.

If, on the other hand, you expect things to be hard fought, that the efforts by yourself and other Objectivists and people who want freedom are going to have enough of an effect to keep things running well and then turn around, owning foreign stocks, gold indirectly, and a selection of solid U.S. companies would make sense. I do not think that someone who felt that reason has a good chance of prevailing today would give up entirely on U.S. companies.
Not a good set of choices, sorry.

Notes and Commentary on "Crash Proof 2.0" Part 1

p. vii: “More importantly, while most believe that the economic collapse is over, the reality is that it has only just begun. What we have witnessed thus far are merely the events that have set the collapse in motion. It will take some time for all the dominoes to fall. But fall they will, perhaps even more spectacularly now than how I initially envisioned back in 2005.”

p. viii: “…you to see that our problems today are the consequences of pernicious fundamental trends that I have recognized and warned about for years.”

Maybe. They were not really in the book. He did warn about the residential real estate mess. Credit to Schiff. Lots of credit to Schiff. I think that he has shown some ability there.

Yet, the thesis of the book, the collapse of the dollar, has not occurred. We’ll see what he has to say.

Chapter 1, p. 24: 2009 UPDATE

p. 27: “…and provide the capital investment that entrepreneurs need to create jobs and finance the production of exportable goods.” ???? Where did this emphasis on exportable goods come from? Why does he get so excited about exportable goods? Why does “exportable” matter? Why not just goods, goods for everyone?

I need to say that the sections that I am not commenting about are at least decent, and often good.

p. 29: “But buying stuff we couldn’t afford with money we didn’t have was what got us into this fix.” While this is true, it is superficial. I fear that as long as he focuses on consumer oriented thinking, he will be letting our opponents off. What he needs to focus on, which he has elsewhere, is the inflation that underlies the consumer spending. Much of this behavior is driven by the cheap money policy and the mistaken notion that the key factor in an economy is consumer demand. With an emphasis on production and the manipulation of the money supply stopped, people would not benefit from over spending and the practice would be less prevalent.

“Rather than encouraging American borrowers to once again tap the savings of foreigners….” We weren’t getting the savings of foreigners, we were getting our own previously made inflation dollars back. This is one of his worst statements in that, one, he is claiming something that sounds so vile and, two, he says it with no support, in this case, with not even a supporting explanation. I expect that he is referring to the U.S. federal debt that is purchased by foreign central banks with dollars they hold in their reserves. These dollars come into the local economy as exports are sold to the U.S. The exporter then trades his dollars to the central bank in exchange for local currency. As long as the local currency is not being inflated for this exchange, then the process to then is neutral. The problem comes when the central bank just holds the currency instead of allowing it to continue ciruclarating in international commerce. This is a drain on the local economy. But these are still dollars created by inflation. When the central bank then buys U.S. federal debt, it is putting our inflated dollars back into our economy, which is then spent as “real dollars” here, and will tend toward pushing up prices. It is still difficult to see how we are tapping into the savings of foreigners.

At the end of the page he actually said, “worst-case scenario” regarding the “crash” he has been predicting with each book. That means that the outcome that he has been using to frighten his readers is now regarded as a worst case.

p. 31: “I have always said, however, that it wouldn’t happen overnight.” Ahhh. Please show me where in the first book that was said. In this book he seems to be encompassing all of what he has said anywhere as opposed to just Crash Proof. What is a crash but an overnight event.

p. 32: “It’s absolutely unarguable that they [foreign economies], not we, are the engine of economic growth.” This very arguable statement is an assumption that undermines his entire argument. If he recognized that there is a strong foundation still in the U.S., he would be a better analyst and predictor. He is good in some respects. He could be better. Schiff is an intelligent man. I do not understand why he would make this statement and provides no support. As I say, I have not looked at everything he has written or said, but in what I have seen, including his most public presentation, Crash Proof, he offers little evidence to support his conclusions.


Chapter 2, p. 53: 2009 UPDATE

“Clearly recent events have proven my point: Wall Street, the U.S. government, and the mass media have been using manipulated data to foster a falsely optimistic view of a ….” I don’t see where he gets this. It isn’t the data that confuses those people. It didn’t confuse Schiff. What confuses most people are their ideas, their philosophy. Schiff’s confusion on this point is a reason why I am not impressed with the claims by his supporters that Schiff is a defender of reason or a follower of Ayn Rand. He just doesn’t demonstrate a recognition of the importance of ideas. His point here is that if these people looked at good data they would act differently. No, they wouldn’t.

He does end the paragraph with the accurate point: “Even more distressing, to my mind, is that the experts did not actually understand the problems threatening our economy.” That is correct. I wish he would show that he, Schiff, knows why those experts did not understand.

p. 58: “Note, too, that a 1 percent fed funds rate provided the stimulus that sparked the housing bubble and made teaser rates so enticingly low.” While this is technically true, it is not really helpful. I mean, how does the Fed keep the rate at 1 percent and how does that “provide the stimulus”? Without that information I think many people, including many who reasonably agree with him, are left with a floating abstraction. It needs to be explained.

p. 61: “…our economy is fundamentally broken.”

“But we spent an excessive amount of money on consumer goods with the result that we don’t have the manufacturing bases….” Still don’t see how spending on consumer goods, excessive or otherwise, or importing a lot of it destroys our manufacturing base.

His basic point in this section is correct. We have not learned from our previous mistakes.

“When the problems predictably worsen, let’s hope Washington finally learns the proper lesson.” He is right about the lesson to be learned. But he doesn’t understand that Washington as it is now constituted (and the last administration as well) is incapable of learning.

Chapter 3, p. 83: 2009 UPDATE

p. 84: “…where I had predicted earlier that the Dollar Index would likely bottom out at around 40, I now see a bottom closer to 20 or maybe even lower.” It was around 70 in March, 2008. He does say when or how fast. The timeline would be the difference between a crash and a decline. I do not disagree with a decline, a continuing decline. I wouldn’t begin to suggest a number. A crash won’t happen. Strategies for retaining value in your assets would differ between a crash and a decline. A slower decline would offer some chances to do something about it, if we had the opportunity. A swift decline or a crash would bring us to a desperate situation.

p. 85: “As our trading partners see it, they were watching their best customer go down the tubes, and their first reaction was to come to its rescue.” Yes. And the fact that they have $10 T in dollars and bonds. They are not going to want to see that go down the tubes either. Which has been my point.

This section is an excellent description of the interrelatedness of our world economy. The U.S. is a very significant part of it. Schiff’s decoupling would shrink the world economy drastically, and the consequences he relates in this section would happen again. His tag line that they should stop manufacturing for us and do it for themselves is so screwy.

p. 88: “The problem is that too many people lack the sophistication to understand why [foreigners supporting the U.S. dollar and selling goods to the U.S. is harmful].” Again, he shows that he does not understand the importance of ideas. The currency and bond traders of the world, the manufacturers and exporters of the world, and businessmen, wealthy people, and so on, are not unsophisticated. To the extent that they are making bad decisions as envisioned by Schiff, they are miss-trained. They have bad philosophies. But, to some extent, they are making some reasonable decisions, since Schiff is incorrect in claiming that the U.S. is an economy without foundation.

p. 89: The last sections are reasonably good. The bond market is going to see higher interest rates, even if the Fed tries to support low interest rates. There will just be too many bonds. The Fed will have to flood the market with credit. Schiff does not mention this but things will be rockier as Obama’s plans play out. After that we will get the huge increases in Social Security and Medicare spending, and we will have taxes that will take up every bit of capital and discretionary spending.

“When this rally ends, the bottom is going to fall out of the dollar.” So we are back to the collapse. Well, I think that the post-panic government actions, plus Obama’s programs could do it. Interestingly, Schiff has not mentioned Obama’s programs directly. He is focused only on the bailout. He hasn’t mentioned Social Security and Medicare.


Chapter 4, p. 118: 2009 UPDATE

p. 122: “If we were still on a gold standard, as was the case during the 1930’s….” While technically we were on the gold standard in the 30’s, it was not a real one. FDR famously sat down with one of his “economics” advisors every morning and decided what the gold price should be. There was also lots more gold than there were gold certificates, meaning the Fed could make as much money as it wanted, and did.

Schiff constantly refers to inflation in terms of “printing presses”. I think that this is so misleading to people. It is so simplistic. I understand that using accurate terms is more cumbersome, but accuracy and precision of language is important.

p. 123: “…and now that we are in a downturn, we have even more inflation because the money supply is growing even faster.” Is it? I know it will. But it isn’t now. Credit is still dead; no lending is going on. This is why his using the term “printing press” is a problem. He is not using in his descriptions what he does know, that inflation in the U.S. is caused by bank credit expansion, and the lowering of the dollar because of the size of the foreigner dollar holdings the exist because of credit expansion in the past. So he knows that, although the Fed is certainly trying to get banks to lend, they aren’t. Thus, there is no inflation now. That will reverse, and with the amount of new government debt, the idea of stimulus, and the goal of low interest rates, bank lending will pick up, grow and grow and grow. Inflation. It will burst out somewhere.

“Many argue that all this money printing is not inflationary as it merely replaces the money lost due to debt defaults. However, this naïve view fails to account for the loss of output represented by defaulted loans.” ????? The loans were mortgage-backed securities based on loans to people who couldn’t make their payments. Where is the loss of output? My problem is that I do not see the connection between these two sentences. He does not deny that the bail-out money is replacing reserves and capital, and is not particularly inflationary (it is not good for us). And a recession has a loss of output. Is he saying that since there was a loss of output that there should be less money in the system? Is this loss of output permanent? I am not seeing these connections.

p. 125-6: “Why Inflationary Pressures Will Prevail” This is a very curious section. He talks quickly about a vast array of economic actors, including commodities, consumer goods, credit, farms and mines, retailers, etc. But nowhere does he talk about the Fed and its money machine? When someone tries to declare what is going to happen at this level of detail, they are always wrong, because the number of actors and factors is too large. He needs to stay on the broader level on which he usually works.

p. 126: “The Real Game Changer” This analysis of the value of the dollar in international trade is correct, but I wonder at the size of the impact. I think the bigger impact within the country will be the Federal budget, the higher interest rates, and most important, the Fed’s actions. The fall of the dollar will have its impact, but will not be as big as Schiff thinks. He seems to go back and forth as to what is most important. But he always returns to the value of the dollar in international trade. I wonder why? The reason that I say that it will not be as big a deal as he thinks is that international trade is not a large segment of our economy. We have already seen a nearly 50% drop in the value of the dollar against the Euro and the Yen, even the Canadian Dollar is much stronger against our currency, but we have seen little effect within the country. Perhaps he is expecting the U.S. government debt to have fewer buyers. This idea ignores the trillions of dollars that will still be out there and the very few places that it can be placed.
The one way in which his analysis could be correct is if some major holder dumps their dollars. The major players include England, the Euro Block, Japan, China, probably Canada, and maybe one or two of the oil producing countries. One of them would have to decide to start selling their large holdings of dollars. One of the first events would be the other countries buying to protect their vast holdings of dollars.

Crash Proof, 2.0; Review

Peter Schiff’s newly published book has an unusual organization. It is the original Crash Proof, exactly as originally published, with updates written in 2009 at the end of every chapter. He has changed none of his positions. At least some of his positions and predictions came to pass. He crows about this repeatedly. I don’t hold this against him, mind you. In fact, in his business, where often even if the market goes the way you predicted, you are wrong about why, so everyone is wrong. Being right significantly is worth crowing about.

Since the whole original book is intact, all of my original problems remain. I will not repeat them (see the original review on this blog).

The “Updates” generally extend the ideas in the original text, including the ones with which I disagreed. In some cases, he makes clearer what those ideas are, and why his original ideas are not quite right.

I thought that the following quotation demonstrates what may be his biggest confusion: “…but I’m also surprised at the extent to which the European Central Bank (ECB) and other foreign central banks have adapted inflationary policies.” (p. 313) He has consistently treated the U.S. as a country that acts differently than every other country. Yet the concept of the central bank and how it should function is a European invention. The fiscal policy that our country follows was created by our old friend Keynes, an Englishman. All of the central bankers in the world went to the same schools, read the same texts and authors, and talk and communicate all the time. Why does he think that they wouldn’t all act the same?

Even worse is the following: “I’m talking prosperity and growth unlike anything we could imagine when those nations had their wings freighted with the United States' excessive debt and trade imbalances.” Does Schiff realize that all of these countries are less free than the U.S. was prior to the 60’s? Why is just not selling to the U.S. going to bring on the days of milk and honey?

Also wrong about that quotation is that the trade imbalance is the result of foreigners holding on to our dollars. If they had not held on to the dollars, the foreign central banks would not be faced with the problem with where to put the money, and they would not be funding our debt. If other nations, especiall China in recent years, had spent the money, the dollar would be much lower, we would have had to finance our own debt and interest rates would have had to be higher and there would have been more restraint. I'm not saying that our problems are the fault of other nations. They are responsible for the number of dollars they hold on to.

A criticism concerning understanding the book comes from the fact that Schiff has written and talked (audio and video posts) a great deal on the web. His stronger supporters are familiar with this material. I have read one or two things, seen two or three short videos, and heard one audio piece that went on for about an hour. In the online material somewhere, Schiff has developed some ideas that did not appear in the first book, but he mentions briefly in the 2.0. Most importantly among them is the idea of “decoupling”. This is very important in Schiff’s thinking, but it is not explained in his book. I do not think that I can adequately present the idea with its supporting argument. Generally what decouples is the Asian economies from U.S. purchases and government debt. As a result they have “prosperity and growth unlike anything we could imagine”.

I disagree. To have that growth in mature economies, they would have to have freedom. The reason they got there was the support of the country that was, and hopefully will be again, the freest in the world, the U.S. If the U.S. hadn’t existed, they would not have cleared the 19C.

The last three chapters contain advise as to how an investor can protect himself and perhaps even profit while the U.S. economy suffers. There is some interesting advise there. Schiff does recognize the major issues, e.g., timing and changes in the laws. As with my above comments, I don’t think that he realizes that what happens in the U.S. is going to have significant adverse effects elsewhere. (In my notes that I will publish after this review I discuss what would have to happen in the “decoupling”). Without considering what could happen in other countries, I think that Schiff’s discussion lacks completeness. It is still worth reading, if you keep both the shortcomings in mind.

I also think that his comments on Treasury Bonds and the actions by the Fed are decent.

Actually, if it weren’t for his shortcomings regarding the rest of the world, he would be good. Certainly much better than most of what you can find these days.

Schiff, "Crash Proof", Chapter 6 to End

Chapter 6

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.


Chapter 7

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.


Chapter 8

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?


Chapter 9

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.


Chapter 10

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.

Commentary, "Crash Proof", Chapters 4 & 5

Chapter 4

Initially, this chapter is fairly good. Not real clear, a little misleading (maybe he will clear a few things up later), but overall, it is helpful. He does leave many of his earlier statements that include references to inflation as being just sloppy.

p. 72: Then, he is back to his conspiracy theory. What he says about the benefits of inflation to government is true, but to make it intentional, to suggest that many, if any, members of the government or bureaucracy planned it this way or even know anything about this, is really reaching. Especially since it goes across parties, ideologies, professions, and just people who do not like each other. Maybe he is like someone who is confused about the world and is comforted by the feeling that some supreme being is really in charge. Schiff isn’t willing to accept that these people have just fallen into this mess because of lack of education, clarity, foresight, a common, poor education, and their own desire for power. Really, in the present circumstance, Obama has no idea what inflation is.

p. 73: Well, what a surprise. “Much depends on how the new money enters the system and where it is spent first.” This is the key. Schiff offers it causally, without any fanfare. I think that it is central. But at least he offered it. It does raise the level of the book immensely. You just have to wade through a lot of gunk to get to it. Let’s see where he goes with it. [Nowhere]

p. 76: Oil Prices. I do not like this section. Oil, like any other product in an economy is subject to the effects of inflation. It is also one of the biggest political footballs, a major source of wealth, a target of the environmentalists, and one of the most controlled products in the world. Schiff acts as if the environmentalism does not exist. Nowhere, so far, has he mentioned governmental regulation in any regard. The guy has a singular focus.

The international price of oil is controlled more by politics and governments than by inflation. Politics and environmentalism have forced a restriction on the drilling and refining of oil. (Schiff’s comments about low prices leading to underinvestment applies to a couple decades ago, not since gas prices rose above $2 a gallon.) If the demand raises only slightly, the price will skyrocket. That demand could be from inflation, but there are actually other very apparent sources of demand, i.e., real people slowly moving to a more productive economic level, and they need more energy. Inflation would cause oil prices to raise as slowly as the other commodity prices, not sky rocket like it did just a couple years ago, not as it will again shortly.

I particularly do not like his statement that “purchasing power shifts form the United States to Asia”. This sounds as if “purchasing power” is a zero sum game and that in order for someone else to increase theirs the U.S. has to lose it. If he is talking about inflation adjusted value of the dollar to other currencies, he might be accurate, but the statement is not at all clear. My first reading made me think or real economic production, not currency.

p. 78: “Bogus Deflation Threat” Not bad. Incidentally, the Civil War was not the only time that saw an expansion of the money supply significant enough to cause widespread price raises. The gold rushes, especially the California gold rush (the 49’ers) had the same effect.

One factor that Schiff has argued constantly so far is that price inflation is much higher than the indexes the government publishes. In a way, as far as our futures are concerned, who cares. Even 2% price inflation has significant impact. As far as economic impact, high inflation is very bad, but more important is the rate of increase, since fast raising prices make it much more difficult to adjust and make plans. Actually, I think that the best indicator of the impact of inflation is corporate profits. Business can adjust and make at least some headway against lower levels of price inflation that is not growing very rapidly. However, the seventies showed that faster movement, or higher levels on price inflation wreck havoc with business success, and especially depreciation.

I also think that people are attuned to the effects upon their purchasing decisions of price changes, especially, continued increases. As prices raise, I think that people will tend to make their dismay known, regardless of the official indexes.

I think that Schiff feels he needs a number of “enemies” or “villains” in his book for effect. It may also be that he has long harbored negative feelings about government figures (not a completely irrational feeling). Whatever. I just do not think that ranting about the indexes is helping. We saw in the seventies that the indexes looked bad enough when price inflation took off.

p. 83: “How Government-Created Inflation Became Policy”

I think much of his discussion here is close to the truth, except for three points. First, (well, besides the point that there cannot be any non-government-created inflation) control of the money supply, and thus inflation, was the purpose of the Fed from the beginning. And it did its work, thus the inflation in the 20’s, leading up to the choke hold the Fed took around 1929, and that aftermath. The Fed might have been less active at times, but the “gold standard” never really had much impact, because the country had more than enough gold to allow more money to be created. A real gold standard means that all of the monetary gold (as opposed to gold used for jewelry or industry) is the currency. It would mean that every oz. of gold we had would be represented by a gold backed note. It would be a one for one relationship. The Fed never adopted this policy. From the very beginning, the Fed had all of the leeway it wanted to manipulate the money supply.

The reason the U.S. went off the gold standard, was because the money supply had increased to the point that the Fed’s activities had to be curtailed.

Second, there was no conspiracy. It was just government as is thought to be okay in the US, a result of our poor educations and the current philosophy.

Third, there are other factors operating in our world, not just inflation. Inflation is very important, certainly, but other wrong actions by our government also can be important. Other governments, too, can do bad things, and the oil mess was one example.

p. 85: “How the Federal Reserve Defied the Constitution” Actually, it was the Congress. I suspect that he is correct in his discussion. Certainly, the Founding Fathers knew about debasing of the currency and would have not wanted a government to have that power. It would be nice if Schiff had some reference to support his contention.

p. 94: “As the U.S. economy contracts, the federal budget deficit will grow and the perceived appeal of U.S. financial assets will be lost.” Didn’t quite happen that way. Everybody contracted. In considering the U.S. to be a hollow shell, he forgets about the interconnectedness of the world economy.


Chapter 5

This chapter is about the wisdom of owning American companies. First and foremost, Schiff’s arguments depend upon his claim that there is no productive capacity in the American economy. That the American private enterprise is worthless, or at least, worth very little. I have already made arguments that he cannot justify that claim.

Further, I have several arguments with many of his comments about investing, especially, over the long-term. For example, “Some stocks will gain, of course, but only at the expense of other companies, whose earnings shrink. If the market is trading at a given multiple, there have to be stocks whose earnings go up and stocks whose earnings go down. They all can’t be winners.” Some people call this a zero-sum game. It isn’t. Let’s leave aside the point that some companies are going to be poorly run, make bad decisions, have the wrong product at the wrong time, and so on. We aren’t talking about failure. Nothing Schiff said indicates that he is talking about failure. No. Schiff’s view is that, in normal circumstances, if one stock goes up, another has to go down. Mr. Schiff, what is wealth creation? If there is such a thing as wealth creation, it occurs over time, and then, as a whole, the value of the ownership of American companies would grow and be worth more. The value of a company on a free market will be determined by its profits, and anticipated future profits, this in spite of Schiff’s requirement of dividends.

Maybe what is happening here is that Schiff has the myopia that you see in Wall Street of so often these days, that can only deal with the next 90 days, or 30 days, or until the closing bell. Sorry. Humans live a lifetime. That is our time-frame. 90 days is besides the point. [Schiff seems to provide evidence that he does not have this myopia elsewhere, which makes the discussion here less clear.]

p. 106: “The only acceptable reward for taking the risk of ownership is dividend yield. A cash dividend policy is the only insurance an investor has that a business will be operated for the benefit of shareholders. Non-dividend-paying growth stocks can be attractive but should be viewed as speculation rather than investing.”

This statement is very curious, I don’t mean the point about shareholder interest, but the last part. What is the significance between investing and speculation? Certainly, most speculation is done in the short-term. If you buy a stock that pays no dividend and hold it for 10 years, then yes, you are doing so because for some reason, hopefully a good one, you expect the price of the stock to rise in real terms. You expect it to create wealth through its profitability. Would you buy a dividend paying stock and not expect its price to raise over time? One of the differences between a bond’s interest and a stock’s dividend, is that the interest remains flat during the bond’s lifetime. You do expect the stock’s dividend to increase in stride with the company’s growth over time as it remains profitable and creates wealth.

Actually, I have always considered speculation to be a category of investing, just as selling short, buying or selling options or futures. It is not gambling, but that seems to be Schiff’s implication.

It is also the case that you will only get dividend paying stocks from mature, established companies. New, smaller companies need to put their profits back into the company in order to grow. If you want to start your own company, you will be told that. You will be told that you cannot draw out money until the company has enough revenue, etc. Even then, most business owners are drawing salary or wages, not dividends. Their businesses are not sufficiently successful to generate a return on their capital in cash. Maybe they could in capital gains when they sell the company, if they can. [I am not clear how his dividend requirement relates to his latter instruction to buy smaller companies outside the U.S.]

I think that Schiff is drawing a false differentiation. He is also looking at speculation as something less than investing, as if it was slightly dirty.

As for the point about shareholder interest, I think that the motives and purposes of a company’s management become clear over time. It is part of doing your research to determine if a particular company fits in with your investment goals. And, you do have to continue to watch.

I think Schiff sees conspiracies and malfeasance everywhere. Certainly, there is some, more malfeasance than conspiracies. I don’t think that it is really healthy or helpful to approach things as if most people are unworthy of trust. It is actually more helpful, I think, to realize that the government and business leaders all went to the same schools, read the same texts, heard the same lectures, and they were exposed to a lot of ideas that have no connection to reality. Consequently, they are acting the way they were taught and bad stuff is happening. That approach is much clearer, understandable, and true.

p. 110: “Adjusting for inflation, if you bought the Dow Jones Industrial Average in 1966, you would have waited until 1995, nearly 30 years, to get your money back.”

Did you ever see a salesman who picked exactly the figures that made him look good, and ignored the one that wouldn’t? Schiff has cherry picked these dates. 1966 is the year that begins the problems with price inflation. Remember, I mentioned earlier that companies’ profits decline during higher periods of inflation. They did. From 1966 to 1982, profits and thus stock market performance stayed pretty flat. Interestingly, considering Schiff’s views, this performance is vastly understated because the Dow is made up of mature, fairly successful companies, almost all of whom pay dividends. When dividends are factored in, the Dow did somewhat better, but, that is besides the point. Then, however, if you factor in inflation, even that thought sours, since the Dow stayed fairly flat, in real terms, those companies lost well over half their real value. [Schiff makes this point later.]

However, since 1982, the market was robust, and a significant reason was that price inflation had subsided.

Between 1966 and 1982, stocks, bonds, and cash were bad places for money, until the last part of that period, when interest rates began to fall, and then you should have bought bonds, and then held them until interest rates stabilized or were low, relatively speaking. To show you why I’ll use a made up example. Let’s say you bought a bond paying 16% and five years later it was paying 4% and you sold. You would have sold for almost 4 times what you paid for it. In a price inflation environment, that is the only way to make money in bonds.
An annoying part of this statement on p. 110 is his comment about “adjusting for inflation”. Is he talking about his view of what prices have done during that period or the CPI? He doesn’t say. It makes a difference. If he is using his view, then we would need an idea of what that rate is. If he is using the CPI, why?

Commentary, Crash Proof, Chapters 2 & 3

CHAPTER 2

Actually, the first few pages are not too bad. But, then he gets to his assertions.

p. 27: “Our trade deficit…threatens to ruin us.”

This is a recurring refrain. But, it is an assertion. He claims that we cannot pay, as if we produce nothing of value to the world, are completely worthless, and once the bubble is burst, we will completely default. Nonsense. This is an insult to Americans. We are productive and competent.

We would suffer for the years of inflation that has driven up our trade deficits. But, BUT!!, many of the reasons why foreigners have bought our debt and kept our dollars still hold. Even if other countries begin to solve their own problems and no longer need or want our dollars, it will take years, and the dollars will come back to us over time. We will see price inflation for that, but a collapse is not imperative.

There is no explanation, really, of why or how we became a “service” economy. How did the decisions leading to that result go wrong, Mr. Schiff?

A methodological error or maybe an intellectual policy decision that Schiff makes is to tell us repeatedly what the deficit is, but not what the total trade figures are. Well, here are some numbers for 2008.

With the release of December 2008 U.S. International Trade in Goods and Services report by the Department of Commerce’s U.S. Census Bureau and the Bureau of Economic Analysis, U.S. exports of goods and services grew by 12.0% in 2008 to $1.84 trillion, while imports increased 7.4% to $2.52 trillion.

Exports comprised 13.1% of U.S. GDP in 2008. To put in historical terms, exports were 9.5% of U.S. GDP five years earlier (2003), and 5.3% 40 years ago (1968).

Capital goods represent the largest goods export category (end-use) for the U.S. with $469.5 billion worth of exports in 2008. The U.S. trade surplus in capital goods rose $12.8 billion to reach $15.7 billion in 2008, up from a surplus of $2.9 billion in 2007.

Services were just less than a third of our total exports.

I do not regard a trade deficit of $700B as insignificant. It is huge! We will suffer at some time for this gap. But to keep Schiff’s discussion of the situation in mind, realize that the US is still exporting a tremendous of goods. Something around 80% of the total of exports is goods, imports more like 90%. Therefore, we are still a significant exporter of manufactured good. (There are some foodstuffs there, too.)

The deficit really represents three things, first, our continued exportation of our inflation, and, two, other countries unwillingness to let the dollar slide to a position of market equilibrium, and, three, foreigners willingness to hold dollars instead of their own currencies (there are actually three small countries who dollars as their currency).

Schiff is correct only insofar as our inflation is concerned. The other portions of the trade gap is the result of the decisions of foreign central bankers and individual businessmen and individuals.

p. 29: “Inflation:….” Here, Schiff does not actually discuss inflation. He makes some statements, talks about the CPI and PPI, goes back to talking about dept, again. He says that he talks about inflation in Chapter 4.

p. 31: “The Housing Bubble” This is already past history. At the point that Schiff is writing the mess was beginning. He says that he will discuss it in Chapter 6.

p. 32: More on inflation. (Why is he talking about it here for several paragraphs when he says that he will talk about it in a later chapter?) What bothers me about this section is that he seems to be equating inflation with increasing prices. Then, sometimes he connects inflation with the housing balloon. Then he equates inflation solely with prices. I hope he clarifies his points later. Then (p. 62) “highly inflationary monetary policy of extremely low interest rates”? I know what he means. I am not certain if most people have a clue. Schiff often does not explain himself. Did he have an editor?

And on he goes about the measuring of prices, what is core, what effects certain parts of the CPI, and on and on. Anyone who worries about this is missing the point. Really!

Yes, he is attempting to say that the stated CPI numbers attempt to hide the “real” rate of inflation and make people feel safe. This is Schiff’s brand of a conspiracy theory. The federal beaucrats are not particularly competent. I am very hesitant to think that 10s of thousands of them, along with the entire last four administrations are involved in a conspiracy. Schiff has a few pet peeves we get to experience. Thanks, dude.

p. 36: Two points. First, oil. He sort of implies that oil prices will continue to be high. Now, he did not foresee that oil prices would fall during the recession that began after he wrote his book. That’s okay. I did not see any of that either (I only mean that foresight is almost impossible). I think that to a certain extend of what he says about high oil prices is still valid. I do expect oil prices to go back up, way up.

Second, he is wrong to discuss oil as being inflation. Inflation is not some particular price going up. Nor is price inflation some particular price going up. Claiming so just adds to the confusion. Inflation is the expansion of the money supply. Price inflation is a general increase of prices as a result of the expansion of the money supply, of inflation. Oil prices are going up because of a world wide enforced restriction of the supply of oil. Supply and demand, restrict the supply, and prices will go up. Nor is this just a case of inflation impinging upon the supply restriction. No, this is mostly the increase of demand because some major parts of the world population, India and China, for example, are starting to become a little more productive. If the populations of India and China increase their demand only slightly, the pressure on the oil market will be enormous! Inflation will make it worse.

p. 37: “The Deflation Ruse” Now here, finally, is a section that I agree with. This discussion is pretty much correct. Well, except that he reveals his confusion and limitations in his understanding of inflation. He says that “inflation results from an expansion of the supply of money and credit”. No, inflation is that expansion. Not realizing that, he is confused about our trade deficits, the bubbles in stocks and real estate we have experienced, and prices generally.

But you can forget about deflation fears. We should be so lucky!

If you accept that deflation means falling prices, deflation is actually good. During the last half of the 19C, when the US experienced the greatest increase in standard of living and had the greatest freedom that the world has ever seen, deflation was a constant, both prices and wages constantly fell. Wow, were we well off! If deflation means a contraction of the money supply, especially in a sharpe, sudden manner, then you can look at 1929 and the following few years. Slow, moderate contraction of the money supply probably would not be so bad, but it would be unfair to borrowers. Level is good. Actually, since the amount of gold is not a constant, but changes depending upon consumption and mining, the amount of money connected to gold tended to raise, especially as new mining techniques and technology evolved.

p. 38: “The Productivity Myth” Well that was short lived. Schiff has this tendency in his arguments to state that there is a shortcoming in a certain way and then declare that the thing does not exist. My statement is poorly put, so an example, a portion, not a small portion, but only a portion, our balance of trade is a deficit, therefore, Americans are a sham (see pp. 14-17 or pp. 21-23, both insults). So he does the same here, the way improvements in computing production is measured is screwy and computers have not added to the productivity in other industries has been overstated, so any increase in productivity in American industry is a myth. This is just poor thinking.

p. 41 to the end of this chapter: GDP. Consumer Confidence. Not worth discussing.

The thought that pops into my mind, thinking about the underlying theme of this chapter, is: profits. Why didn’t he talk about profits. In a capitalist economy, the surest sign of health is profits. All of the rest of that is merely government prattle. The Treasury reports, the Commerce Department, all of them, their stuff is prattle. Is Schiff saying the same for the thousands of companies in the US that are reporting profits? That is where productivity shows up. If price inflation was as significant as Schiff says it is, we would see a decline in profits. Does Schiff know that the bubbles he has talked about in stocks and residential real estate wipe out a good part of the inflation previously created?


Chapter 3

p. 64: “The declining dollar is the result of an American economy characterized by declining production, inadequate savings, reckless consumption, soaring household debt, ballooning federal budget deficits, and an overly accommodating Fed.” (Italics in text). Ahh. No. Schiff has not actually presented proof about the declining production. As I have mentioned, he does not show a very consistent reasoning pattern. The US economy does have problems with consumption, consumer debt, the Federal Budget, and some others, like enormous regulatory apparatus. Where is Schiff on that? But, the declining dollar is a consequence of inflation. No inflation, no huge export of dollars, no problem. Inflation is the creation of money by the Fed. Soaring household debt and reckless consumption are symptoms of the same thing. This is hard of Schiff to recognize in part because of his confused ideas about inflation and money creation. They do not seem to be straight in his head.

p. 65: the end game. “dollars that are on deposit in China and Japan and elsewhere are going to come flooding back”. Why? I mean, he has built a case for people to trust dollars less. But, why flooding? I mentioned it before, but he doesn’t really have an explanation as to why foreigners, including a lot of private banks, businesses, and individuals, have kept dollars in the first place, and continue to do so. Without an answer to that, we really do not know what would change their mind, and if, even then, they are willing to go through the mess that would result if they were to flood the US. Schiff just does not have, or I should say, he has not presented an argument as to why they would flood the US. I think that he may think that he has shown at least a basis, but, I hope you see, his thinking is badly flawed, and the international community knows better. I mean, they understand that it is not in their interest to flood the US with the dollars they hold. Instead, they will continue to let the dollar slide. If the slide becomes too steep, they will tend to pull it back a little. The consequence for us will not be good, either way. Schiff is right that these deficits are bad for us. The consequences will come.

Why will central banks stop lending to us? Look, for the central banker, the issue isn’t, “Should I invest in the US or not?” The question for him is, “I have money sitting here, where should I put it?” Now he has certain requirements as a central banker. The investment must have very limited probability of default, it must be “safe”. It must provide an income (the central banker does not have to worry about taxes) that is relatively competitive. It must have a market large enough that his investment will not affect it. When you run through the options, you have got to realize that there is only one market that meets these requirements. The US Government bond market. No other bond market in the world is as large or is considered as safe. The Central Banker may put some of his money in another market, maybe Germany, or England, but he has to be careful. No other countries debt has a market as well supplied with securities and as organized as the US market. The central banker’s major choice is then, the US government bonds, or cash, i.e., dollars. People proposing Euros or Yen, or a basket of currencies come into the same problem as the bond suggestions. There aren’t enough. To transit from a dollar denominated international reserve to anything else is going to require time planning and some means to move without destroying all of those assets. Wild dumping of dollars makes no sense to anyone, except, apparently, Schiff. The central banker may not be rational, in that he doesn’t understand economics, he thinks the world is putty in certain respects, but he really is not crazy. Even the Chinese central bankers aren’t crazy. Now, the Chinese Communist leaders are crazy, there is a crack in the money dyke.
Here is a good overview of some of the issues surrounding the trade issues. Robert J. Samuelson is good on certain, narrowly limited economic matters. For example, here he completely misses the role of U.S. inflation. But the rest is not bad. http://www.washingtonpost.com/wp-dyn/content/article/2009/04/05/AR2009040501724.html

Commentary, "Crash Proof", Introduction & Chapter 1

COMENTARY

p. ix: “The continued demand for U.S. government investments among central bankers has its explanation, I think, in robotic bureaucratic momentum.”

The problem with our thinking about “central bankers” is that “robotic bureaucratic momentum” is an easy one to accept. In fact, to at least some extent, it may be true. But, it will be to our folly, as economic analysts, if we allow ourselves to stop our thinking at the easy and convenient. Many central bankers have gone to schools that have excellent reputations and good classes on bond portfolios. They know that their bosses want certain results from their activities, and they are aware of their opportunities. It is folly to accuse people of being stupid just to make your own point. It makes your point questionable.

Central bankers have a problem when considering as to where to place their money, which is to say their accumulated dollars. They have a lot of them. In one estimate I saw, non-U.S. central bankers have $10T sitting around. And there hoard is growing daily, several hundred billion dollars a year.

Since they have so many dollars they have to have markets large enough to place that money. Of course, they don’t have to do it all at once. They just have to be able to place the new money and the funds that they have received from interest payments and redemptions whey the bonds mature. They also must have a security that has a certain high degree of safety. Well, there is only one market. The U.S. government bonds. Other markets are too small or the security does not have the creditworthiness. The last time I saw the comparison, the bond market in the U.S. is eight (8!) time the size of the U.S. stock market, the largest in the world. The central banker could place some in other markets, and probably is. But the other markets are just not enough to make any significant difference. The central banker is stuck, whether he does suffer from any robotic tendencies or not. This is also the reason that the U.S. bond markets have underperformed. The demand for our securities drives the performance down. If we had to compete more for bond buyers, the interest rates would go up.

There is another problem for Schiff’s position. These central bankers do not want to have the U.S. dollar collapse. It would be bad for themselves and their citizens. A collapsed U.S. would be bad for the entire world. We are still the dominant economic engine. A world without a healthy U.S. would be a world in a deep economic depression. A crash is bad, and they are smart enough to know that, well, at least most of them most of the time. Frankly, the people most likely to screw up this mess is the U.S. Congress and the Chinese “leaders”.

None of this argument is in any way meant to imply that our Current Account deficits are a good thing. It is definitely the result of our inflation. It will come to bite us, yes. I don’t think that it will be a crash. See my comments elsewhere.

p. x: “In contrast, the economies of Japan or China are portrayed with images of billowing smokestacks, busy production lines, robots assembling, and people actually making things.”

Schiff has the opinion that the production of “things” is the only means to real wealth. Producing things does produce real wealth, but for the capitalist. The factory is the tool, used by capitalists. Somehow software, services, management know how, knowledge of how to use the international division of labor, etc. does not quite rate Schiff’s attention. He does not grasp how the process is going on, especially in China.

Nor does he understand how the trade deficit has occurred. Schiff does not compute the difference between our current system of currencies and the way a gold system would work, or even one in which governments weren’t in control. One real reason we have a trade deficit is that the relation between currencies is not allowed to resolve, especially, with the Chinese. The reason is that people and banks outside the U.S. tend to prefer to hold dollars to their own currencies, which tends to make sense. But, mostly, the reason we have a trade imbalance is that we export our inflation. If the Fed stopped making money, the deficit would dwindle, maybe not disappear, because the people and central banks overseas would have to act differently, but the deficit would be a less significant thing. If we did stop exporting our inflation, the value of the dollar would still need to fall because of past inflation, especially against those currencies that have not been allowed to devalue the dollar.

Thus, to rant about the deficit is to miss the point.

Schiff may get to that point, later, I hope.


p. 1: “The economy of the United States, long the world’s dominate creditor, now the world’s largest debtor, is fighting a losing battle against trade and financial imbalances that are growing daily and are caused by dislocations too fundamental to reverse.”

Too fundamental to reverse? Apparently, we are dead men walking. But, Mr. Schiff, why do you say that? Proof, please. So disappointing.

To be the world’s largest creditor is not good, I know. The debt is largely our federal debt, i.e., overspending by Congress. I do not like it, the debt. It is not going to be fun paying it off. I do think of the Clinton administration. Remember, we began having surpluses? Now, the Fed was busy printing money, and we did have a inflation caused stock market bubble, and Clinton significantly weakened our military, but, on the whole, really, the 90’s was a period of increases production and wealth creation, brought on by lower taxes and reduced regulation. Think what would happen if we began moving toward freedom and capitalism, for a change. Not only would the productive people we have increase output, but there would be hundreds of thousands who are not considered employed, but are in jobs that are actually burdens on the economy, who could be actually productive. Plus, there is an enormous amount of federally owned land and property that could be sold. I don’t worry much about the federal debt as much as I worry about moving further away from Capitalism. We can’t pay any debt when we are not allowed to be productive.

p. 2: “…nonexportable services” We export lots of services. His statement is merely an unsupported assertion. There are services that we cannot export, surely, but there is more than Schiff apparently knows about.

p. 3: “Because Americans are not saving and producing but are borrowing and consuming, we have become precariously dependent on foreign suppliers and lenders.”

p. 7: “The fatal flaw in the modern economy is that any attempt to save and under consume, which would bring about a badly needed recession, is resisted by government policy….”

The idea here is that personal savings, according to Schiff, is necessary for capital accumulation. But, that is not so. Capital is accumulated by capitalists, not by the man in the street. Schiff is actually very influenced by modern economists.

p. 7: “…selfish…” Not good when Schiff regards this idea as a pejorative.

P. 8: ref to Bretton Woods agreement.

Says that we are immune to consequences due to status as reserve currency, but disregards fall of the dollar for last several years.

p. 9: “Abroad, in contrast, there was a spirit of rebuilding, an awareness that natural resources were scarce and must be conserved, lower taxes and wages, and generally fewer government obstacles to economic development.”

Where exactly. This description corresponds to nowhere that I know of. It is just wrong. Further, the “awareness that natural resources were scarce” (which is basically wrong!) has caused more government controls, and lower potential economic development. The only thing correct about this statement is that in certain areas, first Japan, but mainly in the Far East, wages were lower. Taxes were not, particularly.

In the seventies and eighties, Japan was touted as the next big thing, being much better than the US, even at some of the Objectivist Conferences. However, American business took stock and remade itself, and left Japan in our dust. Since then, Japan has had little growth, has not reviewed its cumbersome government structure and controls, and is actually shrinking with its population.

p. 10: “The popular notion that in the post-industrial service economy money-valued services are an acceptable substitute for goods because both generate money ignores the distinction between money and wealth. Money is a medium of exchange. Wealth is what is received in that exchange.”

This is absolute nonsense. If you have $10,000,000 in net assets, all in financial assets of some kind, you have wealth. Wealth is the ownership of assets, not possession of goods. I have no idea of what he is trying to say. Probably, he is trying to make some kind of point about manufacturing is better than other kinds of businesses. What the U.S. has demonstrated more than anything is that business management is the most wealth-producting activity. As Objectivists, we know that the fountainhead of wealth is the man of the mind. One consequences of that is that the broader the view, the more integrated the understanding, the wider integration, the more effective, productive, creative the individual is. Such an individual would use the best, least cost, most productive business elements from around the world. In that environment, the software company who creates a program that improves productivity could easily be producing more wealth than a manufacturing plant.

Schiff has not demonstrated that an economy needs to be mostly manufacturing in order to produce wealth. His comments are merely assertions, including those about services. I recognize that I am not presenting a case for a service-based economy. I do not have the research to do so. It may need a real academic. But Schiff’s text does not provide justification that we are not a productive economy.

p. 11: “…but I don’t agree that we can ever replace manufacturing with information. There is simply an insufficient quantity of such products….”

Simply assertions.

“The resulting trade deficits prove that our so-called information/service economy is in reality a sham.”

Since there are other issues in our deficit, e.g., our inflation, the desire of foreigners to posses dollars, the unwillingness of certain governments to allow their currencies to move towards equilibrium, and the reserve status of the dollar, I think Schiff’s statement is without justification.

I think that we are more productive and competitive in a far broader extent than Schiff is willing to consider. Having said that, I recognize that I am merely making an assertion, stating an opinion, as is Schiff. My opinion, however, is certainly consistent of what I see about me. Schiff’s would require that my experience be an illusion.

p. 11: service jobs pay less than mfg jobs. Again an assertion. This assertion is even more an error when you consider two things, one, that mfg jobs in the U.S. have been over paid for decades, and, two, he has made a straw man in representing service jobs by the hamburger flipper. Bad form. Implies that he cannot support his position without the straw man. Additionally, service industry jobs are not low paying. U.S. incomes have not fallen precipitously.

p. 12: straw man lives

p. 13: Schiff gives us the alternative of Consumers vs. Savers
There are so many strange and questionable ideas put in this paragraph that it is hard to figure where to start.
- financial services org deregulated – making it sound as if regulation is good
- financial services org lowering their standards – generally, no, they didn’t
- foisting loans – the idea that advertising or salesmanship, etc., breads bad actions
- the value of stocks and houses wholly dependent upon inflation

p. 14: Schiff equates our “excess consumption” with all we do. While any loss of “excess consumption” would be a marginal loss to some, if we collapse, our complete loss or a very large reduction of our importing would be a significant loss to many. We are everyone’s largest trading-partner. The problem here is that Schiff forgets the part that foreigners buy from us. The trading numbers show us having a deficit, but the total amount of trade is very large. Loss of a significant percentage of that, on both sides, would be a major blow for everyone.

His castaway example is an insult. Today, yes, some of what we pay for is in the form of IOUs, i.e., dollars that are not returned. But it still is a fraction that was small and gotten larger.

Further, the idea that the Americans are the only ones who have the problem with inflation and IOUs is amazing. According to Schiff, Americans are the lone scavengers in the world. The Japanese are known for not inflating their economy as others have, the same is true of the Germans, and to a lesser extent, the English. But the rest of the countries of the world, and now especially the Chinese, are busy doing the same. The U.S. has the position it has among these countries because of its greater productivity and creativity because of its freedoms. Schiff does not know of any of this. Our real problem is the continued erosion of our freedoms, which do translate into a reduction of our productive ability.

p. 17: Schiff speaks so offhandedly about the “disruptions”.

p. 19: Confused at best. Who is doing what? People, especially in the U.S., are demanding that China allow their currency to obtain parity to other currencies. The Chinese have enourmous trade deficits with every industrialized country. It is Chinese government policy that has created much of this situation.

Further, how does Schiff suppose these Asian economies are going to stop producing for the U.S. The U.S. is not going in at gunpoint. The countries (except maybe China) are not forcing their people to sell to the U.S. Schiff ignores that all of this trade is essentially free. The only element of force is the U.S. inflation and the reserve currency agreement. He also fails to give foreigners any credit for recognizing that dollars are still often a better deal than their own currencies and their own government.

p.20: A whole lot less eating. Let’s see, our trade deficit is around $800B. Out total output is about $15T. So our deficit is something like 5.3% of our total economy. I’m sorry. I don’t get how this means that we are going to have to restructure our entire economy. If our international trade grew to be in balance and the dollar drifted down as foreigners sold off the dollars they didn’t want, we would see our goods and imports become more expensive and our standard of living fall. But, as in the past, given the opportunity, i.e., if Obama didn’t stand in the way, we would continue to improve our economy, making economic decisions upon costs and goals. Just as it should be. Schiff has made a major leap.

The balance of trade is not a minor issue. The cause is right here at the Fed. However, the Fed actions have had other, more significant adverse consequences than the trade deficit. It we handle the Fed, the trade issue will become less severe.

Frankly, this chapter is so far gone that I do not think that there is any redeeming feature. It is true that Schiff does realize that the major source of the trade deficit is our inflation, but he is so carried away about it that he loses his perspective. Nor has he addressed the downward movement of the dollar already experienced. This need not be a collapse. There is also the problem that he does not recognize the problems created by other governments and those effects on trade. It is the bad U.S. all of the time.

Review: "Crash Proof" by Peter D. Schiff

In the 1970’s there was a spate of “crash” books, many by Harry Brown, that are very similar to this book by Peter D. Schiff. These “crash” books presented a set of problems that the economy was suffering and promised that these problems would lead to a “crash”, and if you were well positioned, you could profit. I don’t remember any “crashes” during that time. There was horrible price inflation. There was a blip in 1987. But, we had modest recessions in the early 1990’s and in the early 2000’s, and then now. This is a mess, we had a panic, we have unemployment higher than we have had in decades, and the banks aren’t lending. But, is it a “crash”? And how does the current situation correspond to what Schiff is expecting. One of the biggest problems I have with this book is that Schiff does not tell us what a “crash” is.

Although Schiff did expect the housing market to do something close to what has happened, and the stock market has dropped to levels he thought were closer to the proper level in 2006, the central theme of his book has not been fulfilled. Schiff’s “crash” clearly centers around a significant drop in the value of the dollar. That event has not happened, at least at this writing, and there doesn’t seem to be any real movement either. Against the Euro, there has been no significant upward movement since early 2008.

Actually, since I had seen references to Crash Proof on sites that I wanted to like, I had high hopes for this book. Mostly, I was very disappointed. My disappointment centers mostly upon three main, closely related points.

To get to those points, let’s set up Schiff’s U.S. scenario. The U.S. has been exporting significant amounts of money since the about 1983, 26 years. This money was created by the Fed (The Federal Reserve System). It is inflation (Schiff doesn’t call it that, but he does recognize the connection. I will talk about inflation a lot in forthcoming blogs.). I agree with this completely.

So foreigners, foreign central banks, foreign businessmen, foreign citizens, are accepting U.S. money and keeping it. Here is the first point that Schiff and I part ways. I want to know why foreigners are doing that. Schiff’s explanation is two fold: foreign citizens and central bankers and are keeping and hoarding U.S. dollars because the U.S. has fooled them into thinking that U.S. dollars are worth something. U.S. dollars are in fact worthless, according to Schiff, because the U.S. produces nothing, i.e., we are no longer a manufacturing powerhouse, we are a service economy. We do produce dollars however, and that contributes to their worthlessness, which is true, as a natural result of inflation. So, in a manner that Schiff does not explain, foreigners believe that the dollar is worth something and accept it as a reserve currency. For clarity, I must say that Schiff’s explanation is meant to explain current behavior rather than the reason why foreigners began accepting money in the first place, which began after WWII.

I will leave it to an economist to examine the question of the strength and viability of a manufacturing vs. a “service” economy. Frankly, I found Schiff’s comments on this and the role of Americans to be short of the truth and often insulting, esp. p. 14ff. (See my commentary about the level of manufacturing in our exports.)

That leaves us with Schiff’s argument that we are purposely misleading foreigners. Schiff says that as soon as they realize that the dollar is worthless, they will begin off-loading dollars and the value of the dollar will crash. (Sometimes Schiff says that this process could take a long time, which I guess is a slow-motion crash.)

I think that the reasons why foreigners began accepting and keeping dollars has something to do with whey they might begin selling.

A long history lesson will not be appreciated by most readers, so let me just say quickly, that the two underlying reasons why people began and still do accept and keep dollars are, one, that they all agreed to do so. At the time of the agreement the U.S. was the major economy in the world and few countries had any gold. Two, the currency of their own country was not stable.

Point one is still true, although less so than after WWII. Foreigners do find a lot to buy from the U.S. Point two is also still true, only a few currencies in the world are stable. The dollar is not as stable as it was (more on that elsewhere). Also, over time, more and more places around the world are accepted dollars without question. It became the international currency. You walk into just about any bank anywhere and offer dollars and you get smiles. The same is true for many retail stores, even in parts of Europe. Try either of those efforts with Euros or the Yen, and you will not be as successful. So many businesses and investors find using the dollar to be convenient and probably less expensive (by saving on currency exchange costs, etc.).

For the international community to decide that the dollar is worthless, would be a crippling blow to international trade. That the dollar is not as desired or revered as it was, and has fallen in value to the Euro, the Pound, and Yen significantly, is not to say that foreigners have rejected it.

As correct as Schiff’s beginning scenario is, since he ignores the context in which the non-U.S. participants began this mess, he really cannot jump to the conclusion that they are going to dump dollars. It is a leap. I don’t think the “fooled them” explanation works at all. I think that he pulled that one out because he couldn’t figure out any other rational explanation for people to accept currency Schiff believes is worthless. Actually, point of fact, every currency is worthless, since they are all fiat currencies. In that sense, foolishness is widespread.

For clarity, my three closely related points are: one, neither the dollar or the U.S. economy is worthless; two, there is a better explanation as to why foreigners accept and keep the U.S. dollar; and three, there will be no “crash” of the dollar as it would be a crash of the world system (not just “dislocations”).

That doesn’t mean that we are out of the woods regarding the value of the dollar. A significant amount of that exported inflation is going to come back. Some of it is in the form of a lower dollar vs. other strong currencies. It is not a question of the strength of the different economies, but of the quantity of our exported dollars.

Now briefly, I will list a few of the other themes in the book I find to be very questionable:

1. The U.S. government has consciously and purposely engaged in fooling the world and its own citizens by manipulating all kinds of statistics, programs, etc., over generations, different administrations, various departments, and literally thousands of employees of various levels, talents, and loyalties.
2. Speculation is presented as bad, or at least ignoble.
3. Inflation is the cause of everything bad in our economy (this stand is lessened in the last chapter or two).
4. Schiff's one-note song is even worse when other disastrous policies are going to be bombarding us, e.g., social security and medicare. How will Schiff's investment ideas hold up to that, especially considering that those same problems are going to cripple Japan and several other countries?
4. Manufacturing is the root of all wealth.
5. He also has some strange, conflicted ideas as to what is savings and what to do with it.

I am not a big fan of the prescriptive chapters at the end of the book. Much of what he has to say is more conventional than I expected, especially given what he said by way of build up in the early part of the book. His recommendation to invest solely in foreign equities has not panned out well so far. His recommendation of GLD is a bright spot for him from mid ’05 to early ‘08. Since then GLD has moved with the other markets. That is not a record on which I would like to base a long-term strategy. Until the dust clears a little, I do not think that we have a reason to anticipate anything in particular (yes, with Obama in charge, it can’t be good).

In my notes on the book I didn’t discuss the last chapters with much enthusiasm or detail. I would respond to questions.

So, if you have read this book or are considering doing so, look at it closely. Watch for those many points in the book in which he makes unsupported assertions and be prepared for the leaps in his thinking.
In the following posts I will publish my notes from my reading in which I discuss many points in greater detail. It isn’t comprehensive, just a running commentary on the points I thought needed elaboration.