Category Archives: Peter’s Commentaries

Peter Schiff’s latest commentary looks at what happens when a country becomes addicted to easy money, and explains why the Fed will keep pumping money the US economy until a currency crisis forces it to stop.

“For years we have been warned by Keynesian economists to fear the so-called ‘liquidity trap,’ an economic cul-de-sac that can suck down an economy like a tar pit swallowing a mastodon. They argue that economies grow because banks lend and consumers spend. But a ‘liquidity trap’ convinces consumers not to consume and businesses not to borrow. The resulting combination of slack demand and falling prices creates a pernicious cycle that cannot be overcome by the ordinary forces that create growth, like savings or investment. They argue that a liquidity trap can even resist the extraordinary force of monetary stimulus by rendering cash injections into useless ‘string pushing.’ Some of these economists suggest that its power can only be countered by massive fiscal stimulus (in the form of a world war or other fortunately timed event) that leads to otherwise unattainable levels of government spending.

Putting aside the dubious proposition that the human desire to strive and succeed can be permanently short-circuited by an economic contraction, and that modest price declines can make penny pinchers of us all, the Keynesians have overlooked a much more dangerous and demonstrable pitfall of their own creation: something that I call ‘The Stimulus Trap.’ This condition occurs when an economy becomes addicted to the monetary stimulus provided by a central bank, and as a result fails to restructure itself in a manner that will allow for robust, and sustainable, growth. The trap redirects capital into non-productive sectors and starves those areas of the economy that could lead an economic rebirth. The condition is characterized by anemic growth (masked by the delivery of perpetual stimulus) and deteriorating underlying economic fundamentals.”

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In his latest commentary, Peter Schiff explains how the Cypriot banking crisis reveals the precariousness of the entire international banking system.

This week financial analysts, economists, politicians, and bank depositors from around the world were outraged that European leaders, more specifically the Germans, currently calling many of the shots in Brussels and Frankfurt, could be so politically reckless, economically ignorant, and emotionally callous as to violate the sanctity of bank deposits in order to fund a bailout of Cyprus. The chorus of condemnation may have been the deciding factor in giving the Cypriot parliament the confidence to unanimously vote down the measures in hopes that Berlin will cave or Russia will swoop in with a bailout.

The decision to inflict pain on both large and small depositors was almost universally described as a historic blunder. But the mistake was to do so in a manner that was not camouflaged by financial smoke and mirrors. In truth, rank and file depositors have been paying, and will continue to pay, for all manner of bailouts and stimulus. (Read about the Stimulus Trap in my just released newsletter). Whether it’s through lower interest payments on deposits, inflation, higher taxes, higher borrowing costs, or the accumulation of unsustainable sovereign debt, Cypriots will bear the burden of past profligacy. But the new plan for Cyprus was far too transparent, simple, and direct to survive in a world dependent on deceit and obfuscation. It was dead on arrival.

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This is Peter Schiff’s exclusive commentary on the jobs report released last Friday. If you enjoy Peter’s opinions and analysis, don’t forget to subscribe to his monthly Gold Letter!

As is typical, Wall Street and the media are celebrating a jobs report that is not nearly as positive as the headlines suggest. The continuing decline in the labor force participation rate was at least as important a factor as the new jobs created in bringing down the official unemployment rate to 7.7%.

The participation rate has now dropped to 63.5%, the lowest level since 1981 when the rate had plunged due to a terrible recession. It is important to realize that at that time women had not fully entered the labor force.

Prior to that, a single income was sufficient to support most families. When incomes fell, and living costs rose in the 1970s and 1980s, American women were able to enter the labor force and find employment. That is no longer an option. So the only factors that are now helping families make ends meet are low interest rates, debt accumulation, declining savings, rising home prices, and government transfer payments.

More importantly, the number of people who are no longer even counted in the labor force rose by nearly 300,000 from January to February. This is greater than the number of jobs created. Analysts simply can’t look past the headlines to see these disturbing trends.

In addition, the jobs that were created lean heavily towards the service sector and those industries that benefit most directly from Fed stimulus. The 48,000 jobs created in construction in February were underwritten by the Fed’s $40 billion monthly purchases of mortgage backed securities, which has stimulated home purchasing. An additional 32,000 jobs were added in healthcare, another sector that will do nothing to promote long term economic health. In comparison, manufacturing only added 14,000 jobs.

Many analysts have characterized the February numbers as a “Goldilocks” report that is good enough to signal growth but not so good that it will encourage the Fed to dial down its stimulus. This is optimism in the extreme. Whenever anyone mentions Goldilocks, it’s good to start looking for bears.

The majority of jobs being created now will disappear when either the stimulus ends or rising interest rates bring back recession. When the time comes to pay the piper for all this stimulus, the bill will be large, and the collapse much worse than the financial crisis of 2008.