Peter Schiff: Dollar rout, CNBC, Fin Reg

Subject: Peter Schiff: Dollar rout, CNBC, Fin Reg Mon Jul 19, 2010 5:57 am

With the Dollar cratering this week, the last shoe in Peter Schiff’s Austrian-based prediction set from 2007 may finally be dropping.

In his latest video blog (July 15th), Peter Schiff comments upon the 9% drop in the Dollar Index this month, with the Dollar showing particular weakness against the Euro, the Yen, and the New Zealand Dollar.

Schiff thinks this Dollar Index drop may be the direct result of the recent G20 meeting, where a clear split opened up between the American stimulus-and-spend position and the European austerity-and-save position — dare we say the Krugman versus Schiff divide? — which has subsequently weakened the Dollar outlook versus the Euro outlook, despite the earlier problems with Greece et al.

Mr Schiff has faced much criticism in the past two years because of his 2007 conviction that a forthcoming crash, on the bursting of Greenspan’s bubble, would be accompanied by US government bailouts, bank failures, Fannie and Freddie bankruptcy, zero percent interest rates, massive government borrowing, quantitative easing, and record deficits. Under these predicted conditions, he saw it as highly unlikely that the Dollar would increase its strength relative to other currencies; yet this is exactly what happened.

The financial world turned in panic to the Dollar as a ’safe haven’, thereby pushing up the Dollar Index value, when virtually everything else crashed almost exactly in line with Schiff’s many other predictions, all based upon his long-term analysis of the Greenspan bubble and its necessary eventual bust, according to the tenets of the Austrian Business Cycle Theory (ABCT).

(For more on ABCT, the following concise PDFs are freely available: The Austrian Theory of the Trade Cycle [Mises, Haberler, Rothbard, Hayek] and The Austrian Theory of Money [Rothbard].)

Despite the avalanche of snickering criticism, Mr Schiff remained convinced that economic gravity would eventually grab the Dollar in the same way that cartoon gravity eventually grabs hold of Wile E. Coyote whenever he chases the Road Runner over a cliff — despite Wile E. Coyote’s fervent desire to remain up in the air.

The Dollar’s recent problems may thus mark economic gravity finally nailing the elusive Dollar, thinks Schiff; it was certainly difficult for gravity to remove all the subtle traces of a smile from Mr Schiff’s cherubic face as he opined upon the issue.

He then moves on to price inflation, with some commentators at CNBC saying that price inflation is almost invisible and is certainly nothing to worry about. On the contrary, claims Schiff; to him the price inflation train is highly visible because prices should be dropping in a time of US economic distress, but they are holding up due to all of the money inflation pumped into the US economy by the Federal Reserve.

(As in Britain, many US government-measured figures have been massaged down over the years, to create a better press for government. Ronald Reagan took housing-related costs out of the CPI, because they were going up too quickly, and there have been many other finaglings and finessings over the years, especially since 1980. To take a clearer look at US price inflation, it is often worth taking a looking at the Shadowstats web site, which is currently showing US price inflation at approximately 9%, using the US government’s 1980 price inflation methodology, rather than the approximate 1% figure reported currently using the US government’s 2010 price inflation methodology.)

Schiff predicts that when prices do start going up significantly, as the inflation train rushes towards us, it may be too late for anyone to do much about it, because the inflationary stimulus policies of the US government and its Federal Reserve have made the US economy so febrile that any punitive Volcker-style interest rate rises required to shut down rapid price inflation will cripple the US economy completely. The analogy Schiff uses is of a man who has got rid of his party hangover (the 2008 bust following the preceding boom) by taking another large cup from the punch bowl (the Keynesian stimulus policy). This may have made the pain go away temporarily (producing the infamous green shoots of recovery), but have left the man in an even worse state to cope with reality when the second hangover inevitably kicks in (which is starting about now).

The man would have been better off taking the painful hit of the first hangover and dealing with it, says Schiff, rather than hitting the punch bowl for a refill. One assumes that hitting the punch bowl for a third time, as Obama may do with another round of stimulus, will cause even less temporary relief and will cause even more eventual pain.

To wrap up, Schiff predicts that when the Dollar index starts going really low (sub-80) then the US bond market will start to move downwards in line with the US stock market. He also criticises the theatrics in Washington over the recent passage of the financial regulations bill. The too-big-to-fails will get bigger, Schiff claims, due to all of the extra regulation and easy access to government finance, while the smaller firms will either be more likely to fail or to merge into the larger entities, thereby decreasing competition and allowing yet more financial complacency, which can only be bad news for the long-term recovery.