Wednesday, August 05, 2009

Schiff: Recession is Over: Long Live Depression

Peter Schiff, the economist made famous for predicting the current economic downturn has called an end to the recession (as have I) and declared that we are now in a depression (as have I, here). Keep in mind I'm not predicting a return to the Great Depression, simply argueing that the US is in a small "d" depression and we have to make structural changes to get out of it.

Schiff comments:

In truth, because of the continued profligacy of the government and Federal Reserve, the imbalances that caused the current recession have actually worsened. We are now in an even deeper hole than when the crisis began. Rather than wrapping up a recession, we are actually sinking into a depression. If things look better now, it’s just because we are in the eye of the storm.

He goes on to say:

In order to lay the foundation for real and lasting recovery, market forces must be allowed to repair the damage. However, current policy is counterproductive to this end. Trillions in stimulus dollars have kept the party going, but now what? How does deficit spending by the government address the problems that brought about the crash? It doesn’t; it just delays and worsens the hangover – and we have to hope we don’t die of alcohol poisoning.

By interfering with the unpleasant forces of the recession, we simply trade short-term gain for long-term pain. By propping up inefficient companies that should fail, we deprive more effective companies of the capital they need to grow. By holding up over-valued asset prices, we prevent the prudent or less well-off from snatching them up and, in doing so, creating a new price equilibrium based upon reality. By maintaining artificially low interest rates, we discourage the very savings that are so critical to capital formation and future economic growth.

My favorite part of his post is in regards to Cash for Clunkers - a program which is anti-American and downright stupid:

The recently passed “cash for clunkers” program (currently on-hold, as it ran out of funding in one week) is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy.

The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?

Think about it this way. If your friend were in trouble because he had too much debt, would you encourage him to take on even more? Wouldn’t a real sign of progress be a reduction of debt, even if he had to cut back on his everyday expenses? What is true for an individual is also true for a collection of individuals, even if they call themselves a ‘government.’

Schiff may seem like another Dr. Doom, but read the article and tell me if what he says sounds ridiculous - how much longer can our nation continue to spend recklessly without paying a price.

Scott Dauenhauer CFP, MSFP, AIF