Watching economists and media analysts react to breaking economic news is a bit
like looking at a flock of pigeons flying over the New York skyline. A true
wonder of the urban landscape, the flocks can include hundreds of individuals
who show an uncanny ability to stay in tight formation as the group quickly
zig-zags between buildings. What may be even more remarkable than their ability
to randomly fly while maintaining cohesion is the flock's refusal to stick to
any particular direction for very long, and their determination to fly
feverishly without actually going anywhere. Sound familiar?
The latest weak United States gross domestic product data numbers have finally
caused the mass of economists to revise downward their formerly optimistic
recovery forecasts, with many
finally entertaining the possibility of a "double-dip" recession.
It should be obvious by now that these economists only have the capacity to
describe where the economy is moving in the short-term ... they have no ability
to explain the reasons behind the macro trends or make predictions that go
beyond the next data release. But economics is not dart throwing. It can be
understood and properly forecast.
The major mental block is that most economists believe that an economy grows as
a result of spending. Any policy that encourages spending and discourages
savings and investment is considered beneficial. Unfortunately, these policies,
which only succeed in growing debt and government, act more as an economic
sedative than a stimulant.
On the subject of the "recovery", I'd like to highlight some of my past
predictions, and those of my colleague Michael Pento. With the benefit of
hindsight, you can see that although these thoughts were widely dismissed as
chronic pessimism at the time of their publication, the current situation
supports our conclusions. Although some of our predictions, such as for a
higher bond yield, have yet to materialize.
Michael and I may be birds of a feather, but we don't blindly follow the flock.
We believe economics is a scientific discipline with established laws, and that
applying those laws will yield fairly accurate predictions over time. Most
other economists say what they need to say to appease their employers (whether
on Wall Street or in Washington) and maintain the respect of their peers.
Selections from my past commentaries: Monday, June 7, 2010 - "Rather than a recovery, the jobs data
seems to indicate that we are still mired in the first economic depression
since the 1930s. Increased spending, financed by unprecedented borrowing, will
prove to be just as temporary as a job opening at the US Census. When the bills
come due, the next leg down will be even more severe than the last. The
swelling ranks of the government payroll, and the shrinking number of private
taxpayers footing the bill, will guarantee larger deficits and a weaker economy
for years to come."
Monday, March 1, 2010 - "It is astounding how many economists,
government officials, and Wall Street strategists construe the current economic
conditions as evidence of a bona fide recovery. ... The myopia leads us to
enact policies that actually exacerbate our problems. The 'remedies' are
postponing, perhaps indefinitely, a true recovery. The oracles who have
described the nature of this imminent recovery do so based on their conviction
that consumer spending is slowly returning to levels that existed prior to the
recession.
"However, missing from their analysis is any plausible explanation as to why
consumers will be able to sustain such spending given the plunge in income and
credit, and the lack of available savings. But most consumers are tapped out,
millions are unemployed, and home equity has been wiped out. The only
reasonable thing for them to do is to pay down debt and sock away as much money
as possible to rebuild their savings."
Monday, December 14, 2009 - "Over the weekend, top White House
economic adviser Lawrence Summers even pronounced that the recession is now
over. ... Obama's claim of success largely derives from the slowing tally of
job losses, the seemingly renewed strength in the financial system, the pickup
in home sales and home prices, and the positive GDP figures. But these
'achievements' fall apart under close examination.
"First, a closer look at the jobs numbers shows that employment improved in
sectors that benefited most directly from monetary or fiscal stimulus:
government, healthcare, financial services, education and retail sales.
Meanwhile, sectors such as manufacturing continued to shed jobs at an alarming
rate. These dynamics actually exacerbate our economic imbalances.
"While it is true that home prices have stopped falling, this represents
failure, not victory. True success would be a drop in home prices to a level
that homebuyers could actually afford. Instead, we have maintained artificially
high prices with tax credits, subsidized mortgage rates, low downpayments, and
foreclosure relief. With 96% of new mortgages now insured by federal agencies,
market forces have been completely removed from the housing equation. With so
many government programs specifically designed to maintain artificially high
home prices, devastating long-term consequences for our economy are
inevitable."
Friday, October 2, 2009 - "In recent interviews, Treasury
Secretary [Timothy] Geithner has been almost giddy in his descriptions of the
recovery - all the while crediting his own policies for averting disaster.
Americans are once again taking the government's bait by spending money they
don't have to buy things they can't afford. ... But depleting savings and
increasing borrowing does not a recovery make.
"A prerequisite to any real economic expansion is the potential for business
owners to earn profits. With increased regulation and higher taxes on the way,
these incentives are being diminished. In fact, via a phenomenon called 'regime
uncertainty,' our current policy path is actually encouraging businesses to
contract in order to prepare for a more hostile business environment. There is
no 'jobless recovery', only senseless cheerleading."
Friday, July 31, 2009 - "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.
"By holding up over-valued home 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. By running such huge deficits, we further crowd-out private enterprise
by making it harder for businesses to invest or hire. Since we have learned
nothing from past mistakes, we are condemned to repeat them."
Selections from the writings of Michael Pento, chief economist at Euro Pacific
Capital: June 30, 2010 - "The cause of the Great Depression in the 1930s,
and the Great Recession beginning in 2007, was one and the same: an
overleveraged economy. Excessive debt levels are the direct result of the
central bank providing artificially low interest rates and of superfluous
lending on the part of commercial banks.
"The easy money provided by banks eventually brings debt in the economy to an
unsustainable level. At that point, the only real and viable solution is for
the public and private sectors to undergo a protracted period of deleveraging.
The ensuing depression is, in actuality, the healing process at work, which is
marked by the selling of assets and the paying down of debt. Unfortunately, our
politicians today are focused on fighting this natural healing process by
promoting the accumulation of more debt."
January 12, 2010 - "The pending downfall will surprise the many
investors who have been tricked into believing that a government can print and
spend its way to prosperity.
"Many economists also believe that the consumer will spend us into a viable
recovery. They are mistaken here as well. Household debt as a percentage of GDP
was "just" 46% back in 1983 - that was the last time the unemployment rate was
10%. Today household debt is 96% of GDP. That's correct; consumers have more
than twice the level of debt as they did during the last serious recession. Can
they be counted on to pile on more debt at this juncture?
"In order to believe the economy is on the brink of a lasting recovery we need
to see that banks are lending money to the private sector in order to purchase
capital goods that are used to create wealth. However, total loans and leases
at commercial banks were down 7.7% in December from a year earlier. The only
money banks are lending is to the government. Without capital being extended to
small businesses they cannot expand production or hire new employees."
November 2, 2009 - "If the Treasury and Federal Reserve truly
believed the economy and the stock market were on a sustainable recovery path,
talk of extending and increasing the home-buyer's tax credit would be off the
table. The Fed would already be reducing the size of the monetary base. The
truth, however, is that no one in government really believes in this recovery.
If they did, they would be hiking interest rates and the deficit would be
shrinking.
"The government's realization of our precarious economic condition means its
largess will continue. Near term, that may ease some pain. So did the
artificial stimulus that gave rise to the housing boom. In the end, a
protracted period of a near-zero interest rates, along with endless economic
stimulus, will spawn another bubble and not a genuine recovery."
Peter Schiff is president of Euro Pacific Capital and author of The
Little Book of Bull Moves in Bear Markets. Michael Pento is senior
economist and vice president of Managed Products. For in-depth analysis of this
and other investment topics, subscribe to The Global Investor, Peter Schiff's
free newsletter. Click here
for more information. Euro Pacific Capital commentary and market news is
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