Tuesday, May 31, 2016

Fed will not hike rates this year because of the weak economy

Peter Schiff is a smart investor and author of several best selling books. He correctly predicted the economic meltdown of 2008 - 2009

Monday, May 23, 2016

Donald Trump may continue with economic policies of Inflation and a weak Dollar

During an interview on CNBC recently, Donald Trump, fresh from becoming the presumptive Republican nominee, came as close as any major presidential contender ever has to saying that America is not capable of repaying her debts in full, and that America’s path to economic recovery might involve some pain for her creditors.

To many, the idea that U.S. debt obligations involved even the slightest risks to investors was both the height of financial naiveté and the epitome of political recklessness. The pressure was so great in fact that The Donald, who has consistently refused to engage in even the most sensible strategic retreats, appeared on CNN a few days later to “clarify” his earlier remarks. However, he ignited another firestorm when he inadvertently let slip another unspoken truth, namely that the U.S. can always print however much money she needs to “repay” her debt. Apparently the only acceptable position to hold on this issue is to completely deny reality.

Prior to Trump’s “clarification,” Jordan Weissmann of the online news site Slate stated the case succinctly, “When a country prints its own currency, markets don’t typically worry about them running out of money, and thus are willing to lend freely. … The fact that the U.S. controls its own currency does give us flexibility when it comes to debt. If it weren’t for our farcical, self-imposed debt ceiling, default would rarely, if ever, be something people seriously discussed.”

It seems to me that Slate was arguing that Trump doesn’t really understand that the U.S. prints her own money at will. There may be a great many things of which Trump is unaware, but he clearly knows where money comes from. The difference between Trump and his critics is that he must believe there is a cost in printing too much money. Modern economists do not appear to grasp this basic concept.

New York Times columnist Paul Krugman went even further. Despite the fact that he has argued that the Federal Reserve should print an unlimited supply of dollars to keep the economy afloat, he believes that the greenbacks themselves will remain precious and coveted forever, as long as reckless demagogues like Trump don’t spoil the party. Krugman said that Trump’s default suggestion would, “among other things, deprive the world economy of its most crucial safe asset, U.S. debt, at a time when safe assets are already in short supply.”

That same day, during an interview with Jake Tapper on CNN, conservative economist Douglas Holtz-Eakin, former director of the Congressional Budget Office, warned that if Trump, as president, ordered the Federal Reserve to print money to buy debt, it would “break the independence of the Fed” and undermine a Federal Reserve System that “has been the foundation of our economic success.” I would ask Holtz-Eakin what exactly he believed happened with Quantitative Easing or Operation Twist, programs in which the Fed purchased trillions of U.S. government bonds? Does he expect that during the next economic downturn an “independent” Fed may refuse to buy government debt, forcing the government to make unpopular budget cuts, raise taxes, or default?

At least some of the countless articles that have appeared on Trump’s debt ideas have begrudgingly admitted that there is a potential downside to printing money as the only solution to debt management, in that it could spark high inflation. In addition to the hardships that this could create for consumers, especially at the lower end of the economic spectrum, they also admit that high inflation would constitute a “haircut” for holders of U.S. bonds, as they will be repaid with dollars of lesser value than those that they lent. In other words, partial defaults are possible through above-the-table negotiations (such as those Trump hinted at) or the backdoor channel of inflation. But they almost universally agree that the covert losses through higher inflation is the far, far better scenario than the global financial meltdown that they believe would result from an overt restructuring of U.S. debt.

But even with these inconsistent musings, Trump acknowledged a hint of realism that other politicians can’t. He said that the U.S. economy remains extremely dependent on ultra-low interest rates, and that even a one per cent increase could make America’s budget position untenable. But Trump’s policy ideas on expanding the military and shoring-up social security, taking better care of vets, building walls, deporting illegals, and replacing Obamacare with some undefined program, will require even more borrowing. To square that budgetary circle, Trump acknowledged that the U.S. has to push down the value of the dollar.

In the CNBC interview, he said that a strong dollar sounds good “on paper” but that a weak currency offers much greater benefits. In fact, he credits weak currencies as the primary weapon used by China to engineer its own success. He wants to do the same for America. Of course the Achilles heel of such a plan is that a significantly weaker dollar is bound to usher in a wave of inflation that could rival, or even surpass, the 1970s. If Trump is willing to let the dollar fall steeply, the poor especially could suffer as purchasing power evaporates and poverty rates increase.

But based on the opinions of economists, that is exactly the policy path for which Americans should prepare. Inflation and a weak dollar are the only solutions they can envision to “solve” America’s problems. With Trump, that may be exactly what Americans will get.a

Monday, May 16, 2016

How Canadian economy can benefit from a US Dollar collapse

Larger deficit spending and more money printing in the U.S. will not stimulate the American economy, but the resulting collapse in the value of the U.S. dollar will reignite a commodities bull market, particularly in gold, that will prove to be a strong stimulus for the Canadian economy and the TSX.

Peter Schiff is a smart investor and author of several best selling books. He correctly predicted the economic meltdown of 2008 - 2009

Monday, May 9, 2016

The Donald deserves some credit for bringing attention to our problems

Donald Trump’s critics have heaped scorn on his calls for protective tariffs to deal with America’s widening trade imbalance and the resulting loss of higher-paying blue color jobs. Some have accused him of trying to turn back the clock in pursuit of a cheap populist ploy and have said that he simply refuses to acknowledge that America is now an information and service economy for which large trade deficits are the new normal.

But voters are sensing that The Donald is right to sound alarm bells, and that something radical needs to be done to revive manufacturing to make America great again. But his tariff solution is hardly the best medicine. To be honest, given the even worse solutions that are being offered by the left, Trump’s instincts may be preferable.

Ironically, in the late 19th and early 20th Centuries, the elimination of tariffs was a populist issue. A little more than a century later, the polls have reversed completely. Prior to the introduction of the income tax in 1913, tariffs were the Federal Government’s principal source of revenue.

During the long and contentious campaign to enact the 16th Amendment (which allowed the government to tax incomes for the first time since the emergency Civil War-era 3% to 10% income tax), proponents argued that the passage of a “soak the rich” income tax would allow the government to repeal the tariffs and thereby transfer the tax burden from the working class, who paid the tariffs through higher prices on imports, to the ultra-wealthy, who were the sole target of the income tax as it was originally conceived, packaged and sold.

(The tax originally imposed rates from 1% to 7%, and only applied to fewer than 1% of Americans. The 99% supported its enactment solely because they believed they were getting something for nothing, in this case, government services paid for by the rich. In fact, in 1895, when the Supreme Court bravely declared the government’s first attempt to replace tariffs with an income tax unconstitutional, the justices were personally vilified as defenders of the rich.)

But once the Federal Government got its foot in the door, it rapidly raised the tax rates and expanded the base of taxpayers, ultimately subjecting the middle class to rates far higher than anything originally contemplated for the Rockefellers, Carnegies, or Vanderbilts. If this does not provide a sterling example to the legions of Democrats “Feeling the Bern” of how class warfare can backfire on the class waging the war, I don’t know what does. Ironically, no single tax has done more harm to the middle class than the income tax.

So while the populist movement of the early 20th Century demanded the removal of tariffs, the populist movement of today wants to bring them back. But Trump is not talking about replacing income taxes with tariffs. He simply wants to add tariffs to the existing tax structure (though he does want to lower the rates). This will only compound our problems and make our economy far less competitive. It will not bring back our jobs; it will only increase the tax burden on the American economy, destroying even more jobs. If we want to undo the deal we made with the devil over 100 years ago, we need to repeal the income tax as well.

If that substitution were on the table, I would argue that tariffs offer the lessor burden. Tariffs are a much simpler form of taxation that do not require armies of accountants, lawyers, and tax preparers, who are needed to comply. And while we are repealing the income tax, we should repeal most of the other federal taxes (particularly the payroll and estate taxes) and laws enacted since then as well. But that is not what is being discussed.

Our trade deficits do not result from bad deals but bad laws. Put simply, the amount of taxation and regulation that have been layered on our business owners and their employees have made it impossible for American firms to compete with foreign rivals. Contrary to the currently popular talking points, low wages are not the only means to establish successful trade balances. America became the dominant exporter in the world in the 19th and 20th centuries while our currency was strengthening, we were paying the highest wages, and our workers enjoyed the world’s highest living standards.

Germany is doing so today. Strong economies compete with quality, innovation, efficiency, and flexibility. Those capacities have been stifled by government policies that have nothing to do with trade agreements and have everything to do with domestic policies. We need to repeal those laws. Trade deficits are not the problem. They are the consequence of the problem. The problem is big government, financed largely by the income tax, which has
made America uncompetitive.

But it is unlikely that tariffs alone, or even a broad-based national sales or value-added tax, could bring in all the revenue generated by the direct taxes we should eliminate. To survive on excise taxes, as the founding fathers envisioned, requires making the Federal Government a lot smaller. But Trump is not promising to make government smaller. If anything, he is promising to make it even bigger. He has made no promises to cut government spending across the board, including popular “entitlements” like social security, which Trump has promised not to touch.

To make America great again, we need to recreate the free-market environment that made her great in the first place. It’s not just oppressive direct taxes that must go. It’s all the regulations that have driven up the cost of doing business, and labor laws that make employing workers so expensive and risky that business does all it can to create as few jobs as possible.

But contrary to Trump’s stump speeches, our trading partners are not taking advantage of us; we are taking advantage of them. They give us their product intrinsically worthless dollars out of thin air. But years of excessive regulation and taxation have resulted in an accumulation of trade deficits that has transformed America from the world’s largest creditor to its largest debtor. Our once mighty savings financed a high-wage industrial economy that has been hollowed out, replaced by a weak, debt-financed low-wage service sector economy.

Trump is right. This is a big problem and it needs big solutions. If tariffs were offered as a replacement to our ridiculous and destructive personal and corporate tax, and payroll and estate taxes, then America may become more competitive and our greater efficiency may even allow us to overcome the tariffs that other countries would likely impose on us in
response. But slapping tariffs on imports, while doing nothing to improve the conditions for business efficiency, simply means that prices for American consumers will rise significantly, without sparking a revitalization of American manufacturing prowess. Don’t forget the global market contains over 7 billion consumers, the U.S. market just under 320 million. Insulating our manufacturers from this larger marketplace guarantees that we will never become globally competitive.

Tariffs or sales taxes will drive up the cost of goods for consumers, a fact that Trump seems to ignore. If he would acknowledge this issue, he could offer the counter argument that if we could couple tariffs with income tax relief that Americans would also have higher incomes to pay those higher prices. But even if incomes rise, higher prices will inevitably lead to less consumption and more savings, especially if we allow interest rates to be set by the free market rather than the Federal Reserve. More savings and less spending is exactly what we need if we want the capital to rebuild our industry. Protective tariffs alone will not work, especially when there is little industry left to protect.

So instead of criticizing Trump for his misguided advocacy of tariffs as a panacea, we should at least give him credit for recognizing a serious problem that so many others ignore. The real criticism should be directed at those who would allow America to continue down this self-destructive path.

Monday, May 2, 2016

Gold price rise is proof of fake US recovery

Peter Schiff is a smart investor and author of several best selling books. He correctly predicted the economic meltdown of 2008 - 2009