Posted on 01/17/2009 2:16:11 PM PST by Golddigger3
This week, in a speech before the London School of Economics, Fed Chairman Ben Bernanke offered a perverse economic theory in his quest to gather support for never-ending Wall Street bailouts; “This disparate treatment, unappealing as it is, appears unavoidable. Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt.” In other words, credit is the lifeblood of our economy, and the continued operation of credit providers is an issue of national security.
In truth, not all economies run on credit. But over the last decade, the United States became a bubble economy that needed unlimited credit to keep from collapsing. In a legitimate economy, it is not credit that fuels spending and investment, but simply income and savings. It’s too bad our Fed chairman does not understand the difference.
That American families now routinely rely on credit to make every-day purchases is a habit that needs to be broken and not encouraged. What we need in America is more restraint and less indulgence. For example, Americans in the current economy should not go into debt to buy new cars. Given the level of debt that weighs down the typical family, Americans should defer such purchases until they have paid down existing debt, or replenished their savings to the point where they can afford to pay cash. Until that time, Americans should continue driving their old cars. In the meantime, the untapped savings could be made available to local businesses that would use it to finance badly needed capital investments.
But such a drastic reversal in financial culture represents the kind of change that no one in the outgoing or incoming Administrations appears willing to consider. By providing perpetual support to lenders who have bankrupted themselves through bad loans, the government merely guarantees that bad economic behavior will continue.
Credit is indeed vital to an economy, but it does not constitute an economy within itself. The important thing to remember is that credit is scarce, and is limited by the stock of savings. Savings loaned to one individual is not available to be loaned to another until it is repaid. If it is never repaid, the savings are lost. Loans to consumers not only crowd out more productive loans that might have been made to business, but they have a far greater likelihood of ending in default. In addition, while business loans increase our capital stock and lead to greater productivity, loans made to consumers are merely spent, and do not create conditions that will make repayment easier. When businesses borrow to fund capital investments, the extra cash flows that result are used to repay the loans. When individuals borrow to spend, loans can only be repaid out of reduced future consumption.
One of the reasons we are in such dire straits is that consumers have already borrowed and spent too much. Many did so based on the false belief that ever-appreciating real estate would ultimately provide the means to repay their debts and finance their lifestyles. Now that reality has finally set in, why should the spending spree continue? The fact that a GDP comprised of 70 percent of consumption is currently contracting should not surprise anyone. In fact, such a contraction is long overdue and the government should not do anything to interfere.
In trying to perpetuate the illusion, the government wants to revive the spending spree that has led us to this disaster. But how can such actions possibly help? How will more debt improve the economy? Wouldn’t our circumstances be vastly improved if we paid off some of our debts and replenished our savings? Wouldn’t we be in better shape if instead of buying more stuff we concentrated on producing it?
The unpleasant reality is that years of bad monetary and fiscal policy have over encumbered our economy with debt and undermined our industrial capacity. The sooner we can begin to repair the damages, the sooner we can right the ship. If instead we merely administer more of the same, the ship will sink in a sea of inflation.
Mr. Schiff is president of Euro Pacific Capital and author of "The Little Book of Bull Moves in Bear Markets"
I save and I wish the goobermint would do the same.
For those unfamiliar with Peter Schiff, he predicted the crash over the years and was fearless in facing down the pollyannas on TV. Watch this famous and great video of him taking on all comers:
http://www.youtube.com/watch?v=2I0QN-FYkpw
Saving is putting companies like Circuit City and Linens N Things out of business, as the vicious circle continues.
Law of the jungle.
What do you think of the article's rebutal to your point?
Those companies expanded beyond all reason, using growth projections based on easy credit continuing to induce people to spend money they didn't have. Their going out of business now is a just result of their poor business plans.
“Saving is putting companies like Circuit City and Linens N Things out of business, as the vicious circle continues.”
Then let’s create compaines that EXPORT to other countries or produce goods that Americans NEED instead of just want.
In any case why go into debt for anything at either Circuit City or Linens N Things.
Not many more things foolish than going in debt for a TV. It would be funny if it wasn’t so sad.
But if we don’t go shopping, the terrorists have won.
lol
We have too many stores and malls and not enough factories. As a result we have too much consumption and not enough production. This is why we are called consumers and not producers. We have brought down the world economy and we are now paying the price. Hyper inflation is right around the corner.
Agreed . Best Buy is still in business and doing (relatively) well.
The guy is a financial prophet!
His detractors were ridiculing him but his detractors are the ones who look stupid now.
Everything Schiff predicted has or is coming true. Wow!
Thanks for the link.
Actually it is not "savings" per se but decreased demand that is thinning out the redundancies of the retail sector. the herd. Those companies provided only marginal utility, propped up by credit. Now, some people are saving, but many more people are reducing their debt instead of extending it. So the excess is going away.
There are abundant retail sources to meet the needs of the population. Their existence turned out to be superfluous. So they are going away. Tough break for the employees but that is exactly what needs to happen for the economy to have a chance at survival in something like its present form.
Excellent point here.
Wow...just wow!! His logic was dead on...I am going to have to take a very long look at putting all my investments into his firms hands because he gets it completely.
Do your due diligence. Some people on the thread like Peter Schiff in general but take issue with some of his investments. For instance:
1) one FR economist thinks that he has too much faith in the Asian economy
2) another FR guy thinks that Schiff's investors would do better if he was spending less time going around talking about macro issues and spending more time in private figuring out which companies are being led by good people.
3) For myself, I'm very attracted to Peter but Madoff was very attractive as well. My retired investment banker father once served on a board with Madoff and he and my mother were just dumbfounded that he would do that. "He seemed like such a wonderful guy. I don't understand why he would do that."
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.