The Party Is Over

[Errol]

The Party is Over

Peter Schiff

Oct 11, 2008

More than just a mere liquidity or credit crisis, the current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow and spend culture that has defined us for a generation. Our long ride on the global gravy train is finally coming to an end, and once it does nothing will be the same. The sooner we come to grips with this the better.

Despite the myriad of proposals that are coming from Washington and other world capitals, we must understand that this crisis cannot be cured by governments. In the United States, credit is gone because savings are gone. Our shallow pool of savings has been depleted through bad loans, and we can no longer entice foreigners to lend us their available savings. Given that we are already too loaded up on existing debt they we cannot realistically repay, who can blame them for not wanting to lend us more?

As a result, the free market is trying to put an end to our spending spree. Without savings or home equity to fall back on, Americans struggling with rising prices are finally being forced to cut back. This has terrified our leaders and is causing them to dismantle the remaining structure of our free enterprise-based economic system.

The intention of all these daily federal interventions is to keep the credit spigots open so Americans can go even deeper into debt to buy more stuff they can't actually afford. This should be clear enough to anyone who listens to what our leaders are actually saying. When speaking about the need for an even larger fiscal stimulus package, Barney Frank, chairman of the House Financial Services Committee, said, "We have to prop up consumption." He has it backwards. The government has been propping up consumption for far too long, and the best thing they can do now is remove the props so spending can be replaced by savings.

The sad reality is that we borrowed and spent our way into this crisis, and we are not going to borrow and spend our way out of it. Legitimate credit can only be supplied if there are genuine savings to finance it. Savings can't be magically concocted into existence by a printing press, but can only be created by consumers who spend less than they earn. Efforts to fool the market will not work and will ultimately lead to a monetary disaster and runaway inflation.

Were the government to allow market forces to work, Americans would now have to pay cash for their consumption. That would mean no instant credit for new cars, plasma TVs, appliances, consumer electronics, clothing, furniture, etc. Unless buyers actually had the cash in their checking accounts these purchases would have to be deferred. From an economic perspective this is precisely what the doctor ordered. But for an economy based 72 percent on consumer spending, the medicine will go down hard.

Ultimately, a serious reduction in consumer and mortgage credit, combined with an increase in personal savings, would again provide a pool of needed capital for businesses to produce products and provide employment opportunities. However, the danger is that this potential credit could be completely crowded out by massive borrowing by the Federal Government. In addition, prices for such things as houses and college tuition will fall sharply, as the credit artificially propping them up disappears. People would still be able to buy houses and send their kids to college only they would pay much lower prices when they do.

However, if the government keeps creating inflation to artificially sustain consumer borrowing and spending, there will be no savings left to fund anything and prices will be so high that despite massive consumer spending there will be few goods that Americans could actually afford to buy.

http://www.321gold.com/editorials/schiff/schiff101108.html

Edited October 11, 2008 by Errol

[kiwi]

yep your deposits are safe, they are ones and zeros on a disk pack somewhere......

[sign_of_the_times]

yep your deposits are safe, they are ones and zeros on a disk pack somewhere......

did they lose that one too ??

[council dweller]

The Party is Over

Peter Schiff

Oct 11, 2008

More than just a mere liquidity or credit crisis, the current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow and spend culture that has defined us for a generation. Our long ride on the global gravy train is finally coming to an end, and once it does nothing will be the same. The sooner we come to grips with this the better.

Despite the myriad of proposals that are coming from Washington and other world capitals, we must understand that this crisis cannot be cured by governments. In the United States, credit is gone because savings are gone. Our shallow pool of savings has been depleted through bad loans, and we can no longer entice foreigners to lend us their available savings. Given that we are already too loaded up on existing debt they we cannot realistically repay, who can blame them for not wanting to lend us more?

As a result, the free market is trying to put an end to our spending spree. Without savings or home equity to fall back on, Americans struggling with rising prices are finally being forced to cut back. This has terrified our leaders and is causing them to dismantle the remaining structure of our free enterprise-based economic system.

The intention of all these daily federal interventions is to keep the credit spigots open so Americans can go even deeper into debt to buy more stuff they can't actually afford. This should be clear enough to anyone who listens to what our leaders are actually saying. When speaking about the need for an even larger fiscal stimulus package, Barney Frank, chairman of the House Financial Services Committee, said, "We have to prop up consumption." He has it backwards. The government has been propping up consumption for far too long, and the best thing they can do now is remove the props so spending can be replaced by savings.

The sad reality is that we borrowed and spent our way into this crisis, and we are not going to borrow and spend our way out of it. Legitimate credit can only be supplied if there are genuine savings to finance it. Savings can't be magically concocted into existence by a printing press, but can only be created by consumers who spend less than they earn. Efforts to fool the market will not work and will ultimately lead to a monetary disaster and runaway inflation.

Were the government to allow market forces to work, Americans would now have to pay cash for their consumption. That would mean no instant credit for new cars, plasma TVs, appliances, consumer electronics, clothing, furniture, etc. Unless buyers actually had the cash in their checking accounts these purchases would have to be deferred. From an economic perspective this is precisely what the doctor ordered. But for an economy based 72 percent on consumer spending, the medicine will go down hard.

Ultimately, a serious reduction in consumer and mortgage credit, combined with an increase in personal savings, would again provide a pool of needed capital for businesses to produce products and provide employment opportunities. However, the danger is that this potential credit could be completely crowded out by massive borrowing by the Federal Government. In addition, prices for such things as houses and college tuition will fall sharply, as the credit artificially propping them up disappears. People would still be able to buy houses and send their kids to college only they would pay much lower prices when they do.

However, if the government keeps creating inflation to artificially sustain consumer borrowing and spending, there will be no savings left to fund anything and prices will be so high that despite massive consumer spending there will be few goods that Americans could actually afford to buy.

This is true but sadly our main political parties are all keen to keep the debt culture going. Debt is now like a religion and to challenge it is herecy.

[Converted Lurker]

got a link? Tia

[hairbearbunch]

If the debt party really is allowed to end, well - do you think the politicos will let that happen? The debt burden is so insanely enormous that if the availability of more debt goes completely the come down is mind boggling. From overconsumption to what will seem like almost rationing levels of subsistence. I don't want to sound all tin hat-esque about it. If the gravy train doesn't get going again the consequences will be historical. I can't see how it can be done without major social unrest in the US and UK/Europe. House prices will become irrelevant because very few will be able to buy even at knock down prices. Will the powerful allow their positions to be threatened? I think all I am trying to say is if politicians really will do anything to maintain their positions and power then they will do their worst to prevent the natural course of events from unfolding. Bailouts will be small fry compared to what will need to be done. A lot more social & financial intervention a la the USSR.

Edit to add - The question is how long can they keep shoring up the dam? Weeks? Months? Years? I can see it hobbling on for years.

Edited October 11, 2008 by hairbearbunch

[council dweller]

If the debt party really is allowed to end, well - do you think the politicos will let that happen? The debt burden is so insanely enormous that if the availability of more debt goes completely the come down is mind boggling. From overconsumption to what will seem like almost rationing levels of subsistence. I don't want to sound all tin hat-esque about it. If the gravy train doesn't get going again the consequences will be historical. I can't see how it can be done without major social unrest in the US and UK/Europe. House prices will become irrelevant because very few will be able to buy even at knock down prices. Will the powerful allow their positions to be threatened? I think all I am trying to say is if politicians really will do anything to maintain their positions and power then they will do their worst to prevent the natural course of events from unfolding. Bailouts will be small fry compared to what will need to be done. A lot more social & financial intervention a la the USSR.

Edit to add - The question is how long can they keep shoring up the dam? Weeks? Months? Years? I can see it hobbling on for years.

Passive resistance? The system only works because we feed it , if we stop 'buying' their lies it will collapse. Indeed it could go on for years.

[Wannabe]

got a link? Tia

Link

[hairbearbunch]

Passive resistance? The system only works because we feed it , if we stop 'buying' their lies it will collapse. Indeed it could go on for years.

The problem is that a lot of people (the majority?) don't want to stop feeding it because they've been allowed to indulge their avarice because of it. Also the system tends to get weighted in such a way that its easy to rack up debt in the course of every day stuff. Like parking ticket and clamping fees, Student loans, etc. The cost of living drives a lot of working people into overdrafts and credit card use for shopping. So easy to get into the spiral. Dunno - just feeling a bit pessimistic, been hoping the debt/greed culture would end for the best part of twenty years now. Don't want to get too hopeful it might actually be happening only to be disappointed when the political banking machine produces another make believe recovery out of the hat and kicks off another round of Loadsa money excess.

Edit for spelling

Edited October 11, 2008 by hairbearbunch

[council dweller]

The problem is that a lot of people (the majority?) don't want to stop feeding it because they've been allowed to indulge their avarice because of it. Also the system tends to get weighted in such a way that its easy to rack up debt in the course of every day stuff. Like parking ticket and clamping fees, Student loans, etc. The cost of living drives a lot of working people into overdrafts and credit card use for shopping. So easy to get into the spiral. Dunno - just feeling a bit pessimistic, been hoping the debt/greed culture would end for the best part of twenty years now. Don't want to get too hopeful it might actually be happening only to be disappointed when the political banking machine produces another make believe recovery out of the hat and kicks off another round of Loadsa money excess.

Edit for spelling

That's true but won't the burden on the majority become unbearable before long....surely a tipping point will come when the strain of continuing as we are will wake people up?

[Errol]

surely a tipping point will come

It already has.

[Uriah Heap]

Passive resistance? The system only works because we feed it , if we stop 'buying' their lies it will collapse. Indeed it could go on for years.

Passive resistance is the only option. Pay down your debts and stop playing the game.

[Elizabeth]

Which part? When? I must of missed it... thats right, I forgot to get 20 credit cards.

[council dweller]

It already has.

Really!? But the man in the canteen is waiting for the government to fix things still....how many people will cut back during that orgy of gluttony and waste known as Christmas? Very few I guess and not by choice.

[hairbearbunch]

Christmas could be a tipping point of sorts. Not an Earth-shattering, politician-lynching one but a sobering one. A paradigm shift as they say in academia. Like the end of the phony war in 1940 where people realized how serious things really were. If money (and credit) is tight its going to be a miserable Christmas for many which helps to shift people's thinking.

[Britney's Piers]

Well I never got on the gravy train so I'm not that bothered. Then again I have no debt either.

[hairbearbunch]

Well I never got on the gravy train so I'm not that bothered. Then again I have no debt either.

Ditto and I have secure housing, that doesn't mean we won't be affected by the implosion-explosion sequence that may be around the corner.

[BrickandMortar]

Debt culture has to stop. Governments though will not allow or let this to happen without a fight since it is mainly debt-fuelled spending which keeps the economy afloat. The years of economic growth experienced in the US and UK in particular were due to the explosion of all sort of credits available. Economic miracle?!

I keep hearing the politicians banging on about getting the credit system going - Implicitly, what they are saying is lets get the economy back up again through "forcing" banks to start lending as before. It is a vicious circle difficult to get out of.

[silver surfer]

[quote name='Errol' date='Oct 11 2008, 09:02 AM' post='1383435'

Peter Schiff

Oct 11, 2008

we can no longer entice foreigners to lend us their available savings. Given that we are already too loaded up on existing debt they we cannot realistically repay, who can blame them for not wanting to lend us more?

This sounds like a sensible statement. But where's the evidence that the flow of liquidity, from oil producing and emerging markets to the US and Europe, is actually slowing down?

Don't misunderstand me, it's not in their interest, it's not even in our long term interest, for that liquidity flow to continue. But where's the evidence that it's drying up?

The simple fact is that the oil producers and emerging economies invested in the west because they felt they could get a bigger, safer return here rather than in their own economies. I don't see any evidence that they've so far changed their minds. Oligarchs are actuallyaccelerating the flow of funds out of Russia, and the rising price of government securities in Europe and the US shows that, far from being turned off, the tap is actually being opened further!

I'll say again, I don't think this is necessarily good or desirable, but let's get the facts straight.

[mattyboy1973]

[quote name='Errol' date='Oct 11 2008, 09:02 AM' post='1383435'

Peter Schiff

Oct 11, 2008

we can no longer entice foreigners to lend us their available savings. Given that we are already too loaded up on existing debt they we cannot realistically repay, who can blame them for not wanting to lend us more?

This sounds like a sensible statement. But where's the evidence that the flow of liquidity, from oil producing and emerging markets to the US and Europe, is actually slowing down?

Don't misunderstand me, it's not in their interest, it's not even in our long term interest, for that liquidity flow to continue. But where's the evidence that it's drying up?

The simple fact is that the oil producers and emerging economies invested in the west because they felt they could get a bigger, safer return here rather than in their own economies. I don't see any evidence that they've so far changed their minds. Oligarchs are actuallyaccelerating the flow of funds out of Russia, and the rising price of government securities in Europe and the US shows that, far from being turned off, the tap is actually being opened further!

I'll say again, I don't think this is necessarily good or desirable, but let's get the facts straight.

it was a positive feedback loop thats just been cut. If the US isn't buying chinese products/oil whatever, then these countrie aren't getting USD, so they can' re-'invest' this USD in treasuries, for the yanks to borrow and spend again etc.

[silver surfer]

it was a positive feedback loop thats just been cut. If the US isn't buying chinese products/oil whatever, then these countrie aren't getting USD, so they can' re-'invest' this USD in treasuries, for the yanks to borrow and spend again etc.

Okay, I hear that. But again, look at the facts. Americans are buying what, 4%, 5% less Chinese tat than they bought a year ago? Not much of a reduction , at least so far. And as for oil, enough of it is still being bought so that the price is about three times higher than it was five years ago!

Like I said in my first post, right now cash is flowing into treasury bonds faster than its ever flown before, so where's the hard evidence that the liquidity flow, from oil producing and emerging markets into the west, is actually being turned off?

[lets get it right]

Christmas could be a tipping point of sorts. Not an Earth-shattering, politician-lynching one but a sobering one. A paradigm shift as they say in academia. Like the end of the phony war in 1940 where people realized how serious things really were. If money (and credit) is tight its going to be a miserable Christmas for many which helps to shift people's thinking.

Every cloud has a silver lining.

Someone in my family starts asking 'what are we going to do for Christmas this year?' - as soon as the summer holidays are over.

I finally plucked up the courage to tell her the other day 'To be honest, I don't give a flying ****. As long as the kids get some presents, who cares? I don't give a monkey's what we have for Christmas dinner because we're in the lucky position of eating well all year. We don't need a feast, we have a feast every day. I am not going to buy into this 'Christmas is magic, let's spend a fortune on it nonsense' - I'm sick of it. The only good thing about it is that for one measly day, people concentrate on something other than work and spending money. Although, of course, they've worked like dogs for months to get the money they spend to enjoy that one, wonderful, precious day.

I seem to have turned into Scrooge.

[tinker]

This crisis was always about debt.

1. personal debt = future income not yet earned spent today (risky, the future is an unknown)
   
2. government debt = future taxation, spent today (paid for by future generations and the problem of future governments, who may be tempted to perpetuate this debt cycle)
   
3. corporate debt = future profits not yet realised, spent today (risky, the future is an unknown and many companies appear to be poor at planning ahead lacking competence and detachment). A particular concern must be those companies who fell into the hands of the Private Equity pirates who loaded them up with debt and cut and run.
   

The elephant in the room was always DEBT. Politicians have fed off this as economies grew but were actually built on foundations held up by straw.

Schiff, like Denninger and Ron Paul, and HPC gurus and others have been ignored on this for years. The mess we are now in has been inevitable; watching the politicians and banking elite tying to save their skins (at the expense of 'hard working people') is a disgrace.

Credit Crunch is actually the wrong phraseology it needs to be Debt Something.

What is needed is nothing less than a reset and cultural/psychological change in attitude to money and debt. The clowns who have been in charge during this unsustainable boom are not the people to resolve this.

[council dweller]

This crisis was always about debt.

1. personal debt = future income not yet earned spent today (risky, the future is an unknown)

2. government debt = future taxation, spent today (paid for by future generations and the problem of future governments, who may be tempted to perpetuate this debt cycle)

3. corporate debt = future profits not yet realised, spent today (risky, the future is an unknown and many companies appear to be poor at planning ahead lacking competence and detachment). A particular concern must be those companies who fell into the hands of the Private Equity pirates who loaded them up with debt and cut and run.

The elephant in the room was always DEBT. Politicians have fed off this as economies grew but were actually built on foundations held up by straw.

Schiff, like Denninger and Ron Paul, and HPC gurus and others have been ignored on this for years. The mess we are now in has been inevitable; watching the politicians and banking elite tying to save their skins (at the expense of 'hard working people') is a disgrace.

Credit Crunch is actually the wrong phraseology it needs to be Debt Something.

What is needed is nothing less than a reset and cultural/psychological change in attitude to money and debt. The clowns who have been in charge during this unsustainable boom are not the people to resolve this.

Good post. Some things are just to big to see.

You're right, we don't have the 'phraseology' (or words!) to descibe this situation but I'm sure we soon will as wars and depressions always throw up new words by the thousand. I believe that credit crunch was coined in the 30's (?) If these viewpoints (anti debt culture) continue to be expressed, then I'm sure new terms will appear naturally and so help people to 'get a handle' on the ideas of Schiff, Paul and others.

[Britney's Piers]

I really hope Christmas gets downsized as a result of this crisis.

Each year it starts earlier and earlier, and it's at the point where we get solid Christmas marketing and advertising from November 6th through to December 25th. I find it really disgusting and insipid.