Posted by: Dark Defender | January 25, 2009

Wait, the solution to the credit crisis isn’t more debt?

Do you know who Peter Schiff is? No, he isn’t a relative of pretend NY DA Adam Schiff.  He’s actually a economist who predicted the housing bubble and economic crash, he even published a book in 2007 called “Crash Proof: How to profit from the coming economic collapse”. Yes in 2007, actually in February 2007, which I would assume would mean he wrote it in 2006. 

I bring up his bio to distinguish him from the bevy of economists who seem to have no clue what they are doing and failed utterly in anticipating the current problems.

Schiff has an article out today in which he basically says what logic appears to dictate and noone in power dares to say:   taking on more debt is not going to solve our fundamental problems, it will only make things worse in the long run and it isn’t sustainable because it depends on its own bubble.

Read the whole thing but here’s a taste:

Barack Obama has spoken often of sacrifice. And as recently as a week ago, he said that to stave off the deepening recession Americans should be prepared to face “trillion dollar deficits for years to come.”

But apart from a stirring call for volunteerism in his inaugural address, the only specific sacrifices the president has outlined thus far include lower taxes, millions of federally funded jobs, expanded corporate bailouts, and direct stimulus checks to consumers. Could this be described as sacrificial?

What he might have said was that the nations funding the majority of America’s public debt — most notably the Chinese, Japanese and the Saudis — need to be prepared to sacrifice. They have to fund America’s annual trillion-dollar deficits for the foreseeable future. These creditor nations, who already own trillions of dollars of U.S. government debt, are the only entities capable of underwriting the spending that Mr. Obama envisions and that U.S. citizens demand.

These nations, in other words, must never use the money to buy other assets or fund domestic spending initiatives for their own people. When the old Treasury bills mature, they can do nothing with the money except buy new ones. To do otherwise would implode the market for U.S. Treasurys (sending U.S. interest rates much higher) and start a run on the dollar. (If foreign central banks become net sellers of Treasurys, the demand for dollars needed to buy them would plummet.)

In sum, our creditors must give up all hope of accessing the principal, and may be compensated only by the paltry 2%-3% yield our bonds currently deliver.

As absurd as this may appear on the surface, it seems inconceivable to President Obama, or any respected economist for that matter, that our creditors may decline to sign on. Their confidence is derived from the fact that the arrangement has gone on for some time, and that our creditors would be unwilling to face the economic turbulence that would result from an interruption of the status quo.

But just because the game has lasted thus far does not mean that they will continue playing it indefinitely. Thanks to projected huge deficits, the U.S. government is severely raising the stakes. At the same time, the global economic contraction will make larger Treasury purchases by foreign central banks both economically and politically more difficult.

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