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What do you think of Peter Schiff's thesis?

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Peter Schiff is predicting that the US economy is in the early stages of a degression that will turn out to be far worse than the Great Depression of the 1930s. He says that we are likely have a massive contraction of GDP in conjunction with a collapse of the dollar, resulting in mass unemployment, homelessness, riots, rolling blackouts, martial law, etc. He's predicting that the dollar collapse will occur within the next few years and that it will be a cataclysmic event. Meanwhile, he says, emerging markets in foreign countries, especially those of east Asia, will have explosive growth and prosperity as they ae freed from the burden of supporting America's debt-fuled consumption and use their savings to consume the goods that they once shipped to the US. Not only that, but their stronger currencies will allow them to outbid Americans for goods produced in the US, resulting in little or nothing being left for Americans to buy. He reccommends that American investors protect their wealth by investing in precious metals and foreign stocks, or even moving out of the US altogether.

His argument seems to rest on the following premises:

-the imending collapse of the US dollar

-the ability of foreign currencies to withstand the dollar collapse

-America's dependence on foreign production

-the ability of other countries to consume what they currently export to America

I am admittedly not knowledgable enough to evalueate his claims, but his argument seems convicing. His track record of making accurate predictions based on Austrian economic theory indicates to me that he is very smart and knows what he's talking about, although that in itself is not evidence of his correctness.

What say the Objectivists?

Edited by BRG253
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I don't believe Schiff has claimed that foreigners moving away from trade with the US will *cause* all of these economic problems. He has always identified the true cause as government and Fed intervention into the economy. Their mistaken belief that taking money from the productive and giving it to the unproductive will lead to economic recovery is going to bring the economy down on its own, and that will force foreigners who were storing value in US dollars to switch to other, more stable currencies, and trade with other countries (or with their own citizens).

(Jake - no, I didn't vote your post down)

Edited by brian0918
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What say the Objectivists?
Schiff uses too much hyperbole for my liking. To the extent that he speaks about the need for freedom, he is right; but, then people like Milton Friedman also spoke about that. Indeed, there have been many economists that sound good in many things they say, but those are things that folks like Adam Smith said more than a century ago. So, Schiff is a mix. The biggest thing I do not understand about folks like him is how they think U.S. government spending is bad, but think that Chinese government spending --- which is huge
-- is relatively benign.
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His argument seems to rest on the following premises:

-the imending collapse of the US dollar

The impending collapse of the US (fiat)dollar was set in motion in 1913. At nearly a century old, the predictions of it's demise are treated similarly to the religionists claims that the end of the world is nigh.

-the ability of foreign currencies to withstand the dollar collapse

The collapse of the dollar

-America's dependence on foreign production

The division of labor renders being fully independant in providing the diversity of ones needs and desires highly improbable.

This would apply to a nation as well as the individual.

-the ability of other countries to consume what they currently export to America

How often has consuming what one produces been an issue. Usually the issue is not having something to consume (i.e.: it has not been produced, or it was given to some other for consumption.

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Schiff uses too much hyperbole for my liking. To the extent that he speaks about the need for freedom, he is right; but, then people like Milton Friedman also spoke about that. Indeed, there have been many economists that sound good in many things they say, but those are things that folks like Adam Smith said more than a century ago. So, Schiff is a mix. The biggest thing I do not understand about folks like him is how they think U.S. government spending is bad, but think that Chinese government spending --- which is huge

-- is relatively benign.

According to Schiff, when asked a question about the same thing, he didn't say that it was benign at all, but he said it was relatively less bad because they have the money to spend, they have the pool of savings. Yes, it's bad that they waste it on stimulus too, but at least they are not borrowing to do so. So his predilections for the East is based on his assertion that China (and Japan) saves (relatively compared) while the US borrows and spends. So their Keynesianism will get them "lost decades" and "empty cities" a la Japan/China, while ours will get us something more like Greece, and if not stopped, ultimately Zimbabwe-style crack-up.

I don't know if it's right or wrong, I don't know enough about the facts of the situation to apply the correct theory, but that was his answer anyway.

Edited by 2046
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as they ae freed from the burden of supporting America's debt-fuled consumption and use their savings to consume the goods that they once shipped to the US.

This is the weakest link. Developing Asia puts so much of their would-be savings in American debt because they lack critical financial infrastructure. And that's only the beginning of their problems.

A lot of growth in China for example is fueled by government policy (not optimal investment), including monetary manipulations. Plus, a lot of the excess savings come from selling to America.

America is far and away the high-tech powerhouse in the world. Fareed Zakaria, even, in his book called The Post-American World, concedes that the upper level higher technical education occurs overwhelmingly in America.

This isn't good news for the 25% poorest in America, but is bad news for the 75% poorest in China.

Peter Schiff makes the same mistakes as other economists by not looking far enough beyond the 'status quo'. In this case there's this assumption that Asia is some miracle. It's not. It has a high population, and is 'behind' the industrialized world. It's capitalizing, that's all. And it's capitilizing so that American can by consumer goods at a discount. In other words, we're paying for their miracle (and then they don't have anywhere to put the savings gained by lower-than-American-wages-workers except into our debt). All it has to do is capitalize up to the levels of the West, and its magic growth will freeze. And it won't be able to reach that point as Communist. I can't even imagine the level of malinvestment in China, let alone the ongoing cultural implications of a dependence society (no matter what number have the entrepreneurial spirit).

Of course, America only has until Gen X reaches levels of upper management (20-30 more years), until we've completely lost our edge. By then, I predict a good percentage of our skilled labor will be people comfortable moving back to native India, or Korea, etc.

If America drops the Wagner act and the minimum wage, fixes Social Security and Medicare to flow like a leaky faucet, abolishes the income tax (who cares what replaces it - so long as it isn't VAT), repeals all drilling and energy production bans, and goes back to the days before the Federal Reserve system, then in less than a decade I'd predict we'd storm FAR ahead of anybody else.

In terms of 'cultural infrastructure': we'd have to introduce school choice, as well as end federal grants - totally - in the education system. Art, science, medicine, only 'depend' on federal dollars because we've created them too. And that 'dependence' breeds a lot of art, science, and medicine that doesn't optimally benefit the economy.

And if the economy is bad enough, all that will happen. Short of being 'that bad', I can't see how anyone else would move ahead of the US - unless they too liberalized.

And that's where Objectivism comes in. America's 'edge' is built out of its government's history economic laissez-faire policies, and the frontier ethic of its people. This ethic means: a population forced to accept reality. If someone else can do that, then that's where the economy will thrive.

But who will do that? Japan - until recently the 2nd largest economy - succeeded because they worked really really hard, and that hard work was spent copying the lessons learned by the American 'cowboys'. China has many times over the population of Japan, so only a small portion of it needs to industrialize to overtake Japan. There's no recipe for success there, in the long run.

But the world was destroyed economically in the 1940's, and since then there are three economic stories: 1) Rebuilding (only lasts so long) 2) A little technology (computers, barcodes, shipping containers) 3) Billions of people living in collectivism, conquered by the West, forced to learn its legal institutions, liberated from Imperialism for a couple of decades (before the institutions are unlearned).

So what we need is a return to the 1820-1920 era of American economic policy. That's what 'made' the industrial revoultion.

But returning to that period means returning to a time when people didn't think about certain things. These economic/social concepts, of the 20th century, have to be rejected in order to have long-term global economic health:

- Economic Equality

-'We're all in it together' protectionism (there is no 'guardian' of the market, just a referee)

- The idea that nobody is ever supposed to suffer in society.

- The presumption that man has some God-like ability to know and impose a moral order of some kind on his fellow man.

**That's my opinion, and I don't count as an official Objectivist. Objectivism as a philosophy would offer the idea, I think, that knowledge, therefore morality and volition, are possessed ONLY on an individual level. So politically AND economically, the whole concept of 'social policy' is contradictory to man's nature. There's no good 'social order' he can establish over others, and there's no economic way for it to work. So you need to reject 'social policy'. Man can only destroy himself, or other men, if he tries something like that.

I think that the 1940's, imperialism before that, and the millenia of barbarians and warlords before that destroyed mankind's productive success much MORE than modern liberal democratic 'social policy', and so the latter appears to have been successful. But we're finding out that it isn't in the long run. We've never bothered to see if laissez-faire works, because we concluded that it wasn't fit due to its lack of a controllable 'social policy'.

Also, Objectivist epistemology has a lot to offer economic science. I happen to think that the poor do not, in fact, have their 'share' of wealth distributed to the rich. Instead, their 'share' is distributed to the future, where everyone is richer.

This future involves inventions that change the productivity of the economy in a way that is not expressed in the present-day total 'share'. Objectivism fundametally understands the open-ended nature of concepts, and can therefore 'handle' epistemologically the idea that a share of wealth today can corresponding to a greater share of wealth tommorrow - even when today's 'share' is 'distributed' to the 'rich'.

Austrian economics fails to 1)Reject the political idea of social policy and 2)Properly conceptualize wealth creation (through induction it arrives at the proper conclusion, but fails to provide an epistemological basis, hence the inability to reject social policy).

That's a Sunday night for you. Apologies for the disorganization. I can't really see how this fits together coherently. It's just a bunch of ideas relevant to the topic, listed one after the other. Use what is interesting or useful, and do not worry about the rest.

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ZSorenson, Great post.

I agree that countries like China will not overtake the U.S. in per-capita wealth unless their is a big enough change in the ideologies of both. While it is easy to see the U.S. drifting further toward statism, the most likely multi-decade process is a flow and ebb that makes this a slow process. Already, there is widespread public reaction against deficits, health-care and so on. It is almost impossible to see China not becoming more statist in areas where they currently have opened up completely. For instance, as standards of living improve, there are bound to be more calls for environmental laws, product safety laws, and all sorts of other regulation. People there look to the U.S. and Europe and see rich countries that have a plethora of regulations and yet are far richer than they are. Barring some surprise collapse and revolution, it is reasonable to expect China to become more open on things like press-freedom and even foreign-exchange control, while it also becomes more statist in the nitty-gritty of regulating production.

The only thing I disagree on is the idea that "if the economy is bad enough, all that will happen". I agree that if things get bad enough in the U.S. (e.g. Social-security problems even more looming than today, inflation more threatening, etc.) there will be more impetus for action. However, very often politicians can use a crisis to spiral the country into ever-worse policies. That is the story in countries like India that enacted a few statist policies after independence, and then continued with bad policies that made the situation ever worse, for more than one generation. The big issue is this: what intellectual argument will win out when the U.S. is finally faced with a situation far more serious than today?

Edited by softwareNerd
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  • 3 months later...

I agree that countries like China will not overtake the U.S. in per-capita wealth unless their is a big enough change in the ideologies of both.

True, but why does that matter to us? If China goes from producing 5 trillion to producing 15 trillion dollars worth of goods, and the US slowly sinks a trillion over a decade, we ought to be investing in companies in China and getting out of US investments.

Already, there is widespread public reaction against deficits, health-care and so on.
I hope, for the sake of the US and the world, that they do something about their deficits. Are you optimistic about the US producing balanced budgets and reducing the debt before Asia stops buying their T-bills? I am skeptical that even balanced federal budgets will be accomplished within the next two years. Maybe after the election of a new president. But the US still has to worry about bailing out socialist states and cities like those in California in the near-term.

It is almost impossible to see China not becoming more statist in areas where they currently have opened up completely. For instance, as standards of living improve, there are bound to be more calls for environmental laws, product safety laws, and all sorts of other regulations. People there look to the U.S. and Europe and see rich countries that have a plethora of regulations and yet are far richer than they are.

I live in Korea but I'm in contact with a lot of Chinese people too. If we view Korea as a more developed model of China's future then I'd have to disagree with your statement about environmental laws and labour laws. Korea is developed and they certainly don't believe in making environmental regulations so tight that oil refineries would not be opened in 30 years, like the US has done. In fact, Korea has some of the biggest oil refineries in the world. There is no environmentalist ideology here like there is in the US. There are leftists but there is an absence of the New Left. Being in Seoul is like a breath of fresh air, you know there are no beggars and drug addicts all over the streets like there are in the US in Canada? And that's in a city of 20 million. This is a developed country and there is almost no welfare and pension system. My Korean girlfriend's father works 6 days a week and comes in to the office Sunday mornings--and that's normal here, even for elementary school students.

My experience with Chinese people and knowledge of China leads me to opinions about that country similar to Korea. When people apply for a job in China they ask how many days they can work not how many holidays they will get. There are 500,000 engineers graduating every year in China and these people don't go on ski trips on the weekends, they want to work. Even if they up the regulations a bit, who are they going to lose out to? Maybe Bangladesh and India in select cases, but you can't build a steel mill in those places as fast as you can in China and those countries have pitiful infrastructure. You can open a major factory in 6 months in China--think about the time it would take in the US.

Why should the Chinese emulate Europe and the US when they have Hong Kong, Singapore, and Taiwan to look to full of Chinese people? Arguably, those are the examples that originally sparked a change in the minds of some Chinese political leaders.

China's regulation is location based. That is, you can move from one place to another and they will have different laws about production. China's economic success comes from the fact that they established free trade zones, financial zones and special economic zones throughout the country and then millions of people moved to these places. People moved to freedom in their own country, yet large amounts of people are still poor farmers in areas that are virtually the same as 30 years ago politically speaking. This structure, in my opinion, does not lead to overarching environmental or labour laws which will apply to everyone. They have had those labour and property laws in place for a long time--they are still in existence outside the cities that were allowed to develop.

This political structure means that hundreds of millions of people are still economically unfree, while those who have migrated to places such as Shenzhen (20 million in a couple decades) are able to enjoy economic freedom. Hundreds of millions of people are currently restricted by a system of registration called the Hukou system which does not allow them to leave the countryside. There is major political pressure in China to abandon this system. Newspapers recently broke with the government and published articles en masse promoting the disbanding of this system. If it is abolished it means adding hundreds of millions of people to the economic machine of China. It would be like the collapse of communism to another 300-600 million people. Whatever regulations are likely in some industries in China as they become more affluent will never touch the economic growth potential of freeing 300-600 million new people. I think this system will be reformed and therefore I have high hopes for continued economic growth in China.

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Why should the Chinese emulate Europe and the US when they have Hong Kong, Singapore, and Taiwan to look to full of Chinese people? Arguably, those are the examples that originally sparked a change in the minds of some Chinese political leaders.
Great post. I hope you're right.

In my post, I was thinking of a multi-generational process, not something that's going to happen in a decade or so. China might well overtake the U.S. in total wealth and production within its current generation, but not in per-capita terms. I doubt the U.S. will balance its budget anytime this decade. I think the odds are that the U.S. won't go anywhere in a hurry, but will move from government stimulus mini-bubble to government stimulus mini-bubble, with each cycle becoming less convincing. Despite this, passing the U.S. in per-capita terms is going to be virtually impossible to a single generation of Chinese. For instance, the Taiwanese have been at this far longer and they're still below the U.S. in per-capita terms. (Aside: I don't think folk in the U.S. quite recognize how much real capital their forefathers created.)

I don't know much about China, but I compare it to India. It's true that India is a far slower-moving political system. However, the attitudes you describe about working hard and so on are very similar. Yet, I see attitudes changing among Indians of my generation who are now well to do. I see more pro-environmentalism, more willingness to spend the money they earn (not a bad thing), a desire that their children not be sent to schools that stress academics over everything else (a mixed thing). This generation is happy to have the government increase welfare slightly, but not too much. The work-ethic of the current generation is unchanged. However, I wonder if their kids and grandkids will be the same: having been born into a more comfortable life. I guess my point is that one sees a pro-work ethic playing out, but it is not really supported by a strong pro-work, pro-individual philosophy (i.e. not any more pro-work, pro-individual than the so-called "Protestant ethic"). Rather, people have an approach that one has to do what one has to do, despite the moral ideal. With comfort, I fear, there also comes the ability to indulge in the recommendations of their underlying morality.

The U.S. reached its current political ideology slowly: probably starting with the progressives/populists in the late 1800's. If these countries turn toward more welfare and more environmental regulation, it'll be a multi-generational process. Given human volition, it's hard to say which way things will go. For instance, seeing stagnation, higher structural unemployment, etc. the U.S. could go further toward more government control of the economy as the solution, but I think that's less likely than the opposite: a growing voice that says we cannot afford so much government and have to bite the bullet and pull back.

China and India of the 1970's had held back a huge resource in the form of people not allowed to produce freely. Allowing these people increased freedom has resulted in huge growth rates. However, once people have used these freedoms to grow at unnaturally fast rates, the next generational is left with more normal growth rates that have to come from increased productivity. Already today, we see the Chinese economy increasingly supported by government stimulus rather than by the removal of restrictions. I think the odds are that China will hit a major downturn in the next decade as investments have to be written off and books readjusted. It will be interesting to see how China reacts to that.

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In my post, I was thinking of a multi-generational process, not something that's going to happen in a decade or so. China might well overtake the U.S. in total wealth and production within its current generation, but not in per-capita terms.

I think it is highly dependent on whether China offers equality of rights to its people. There is pressure to do so in their culture and it is not necessarily against the philosophy of their government so I think it is possible. There are millions of Chinese in Yunnan province, for example, still getting by on $3 per day. If Hukou is abolished, migration continues and is eased, I would safely bet on China meeting US GDP within a generation (total, not per capita). It wouldn't be that hard with the population and everything, since they'd only need to be about 20-25% as productive as an average American.

If China's rise is anything like Korea's, I wouldn't rule out per capita GDP getting close, either. In 1985 Korea's GDP (PPP) per capita was about 5,000. It's 30,000 now. South Korea also went from a military dictatorship to a country that respects free speech and freedom of assembly in that time.

I also think US GDP is set to drop a lot once creditors stop buying US treasuries. GDP is a measure of "economic activity" and not production. There is no subtraction of foreign loaned debt to the GDP numbers. If Obama borrows 1.5 trillion dollars this year from Japan, China, South Korea, and other countries, and then spends it on ditch digging and food stamps for 44 million Americans, that is "economic activity" to the tune of 1.5 trillion dollars which is added to the US GDP.

The other problem is that the US is in, what I see, a massive bubble based on consumption and service industries. This is a malinvestment caused by the Fed's easy money. Americans are consuming like crazy and going into debt to do it, yet they are not producing proportionately. When inflation rises because of money printing to pay down the deficits, or when China allows its currency to appreciate, the cost of consumer goods will go up dramatically in the US. If the consumption bubble pops that will mean a fairly large economic contraction. I'm betting on it being fairly significant. I think it may even be a sustained depression because who would build factories in the US? There will just be unemployed service sector workers. So I don't want to compare, for example, the current US GDP to China's current GDP. Sure, there's probably a bubble in China right now too but I don't think the fundamentals of the economy there are as bad.

Despite this, passing the U.S. in per-capita terms is going to be virtually impossible to a single generation of Chinese. For instance, the Taiwanese have been at this far longer and they're still below the U.S. in per-capita terms.

I don't know much about Taiwan, but I looked into moving there for a bit and didn't because their taxes were too high. I pay a 3% income tax here in Korea, whereas I heard I would have to pay around 25-30% over there. Why even leave Canada for that? Hah. But it's true I have to pay high prices for goods because of the Japanese style protectionism and tariffs in Korea. Still, sitting down at a restaurant for dinner is $4.50 with no tip needed and no tax, not $20 plus 15% tax and 15% tip like in Canada.

I guess my point is that one sees a pro-work ethic playing out, but it is not really supported by a strong pro-work, pro-individual philosophy (i.e. not any more pro-work, pro-individual than the so-called "Protestant ethic"). Rather, people have an approach that one has to do what one has to do, despite the moral ideal. With comfort, I fear, there also comes the ability to indulge in the recommendations of their underlying morality.

I think education will be stressed in China for a while, because of the Confucian element. It still is in Korea, Taiwan, Hong Kong, and Singapore--to the extreme. Look at Asian-Americans as a group and on average they are still hard working despite their wealth and their children are on average high performers at school. It's only the third generation that ends up a little lazy like the rest of their country, like myself (my grandparents came from India).

Already today, we see the Chinese economy increasingly supported by government stimulus rather than by the removal of restrictions. I think the odds are that China will hit a major downturn in the next decade as investments have to be written off and books readjusted. It will be interesting to see how China reacts to that.
Yeah but their stimulus was stuff like building a 200 billion dollar railroad. Whereas the US spends money on giving food stamps to 44 million people, or pensions of public sector employees so they can consume, China's government spending involves industrialization, transportation and the creation of equipment. Of course it is preferable to let the market do that, but at least the money isn't completely thrown out like it is with welfare in Europe. I think there will be a lot of bumps in the road for China though and agree that people were trying to protect their money from inflation by buying up real estate. At least they can buy gold now. But the US also had a rocky rise to the top with a lot of depressions and wars. Edited by ex_banana-eater
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