Monday, September 21, 2009

Business U.S. economic recovery 'can't work'

US economic recovery 'can't work': Peter Schiff
By Paul Vieira in Ottawa, Financial PostSeptember 18, 2009

Peter Schiff, the president and chief global strategist for Euro Capital Management, is a star of sorts on YouTube, especially among the contrarians and gold bugs.

One popular video clip, entitled Peter Schiff Was Right (2nd edition), includes an August 2006 appearance on CNBC, in which Mr. Schiff’s dire economic outlook was ridiculed by Art Laffer, a key economic advisor to former U.S. president Ronald Reagan.

“The U.S. economy has never been in better shape,” said an incredulous Mr. Laffer, in response to Mr. Schiff’s prediction that Americans’ home equity was destined to evaporate, the U.S. consumer was set to embark on a long hibernation and a deep, long recession was near.

“I think Peter is totally off base. I don’t know where he’s getting his stuff,” Mr. Laffer told the CNBC host.

It is now clear Mr. Schiff saw what others ignored.

... Mr. Schiff is among those who believe the worst is yet to come for the U.S. economy. This bleak group argues that all the U.S. policymakers have done with the trillions in stimulus -- through the expansion of the Fed’s balance sheet to spending on construction projects and schemes like cash-for-clunkers -- is delay the day of reckoning by a year or two.

...Mr. Schiff ...says policymakers are attempting to maintain the status quo, whereas what’s needed is a recession that separates the weak from the strong, and forces households to scale back their debt-induced lifestyles.

“What’s the new lease on life? Flood the world with cash,” Mr. Schiff says. “And the result once all this money is spent? We are in a deeper hole than we were before.”...

This massive amount of debt is destined to become the albatross around America’s neck, naysayers warn. What appears to be a recovery in the making is nothing more than a temporary replenishment of inventories after they were drawn down drastically following the events of a year ago.
The Fed has played down the risk of inflation. Others say this is nonsense, given the amount of liquidity policymakers have made available that is bound to chase goods.

“The Fed succeeded in the process of stopping price deflation. But the side effect is to unleash inflation that will be very difficult for it to stop,” says Eric Janszen, founder and president of iTulip Inc., an economic forecaster and consultancy...

“Everyone is trying to recreate the past, but it won’t work,” Mr. Janszen warns. “All these efforts to maintain the status quo will lead to worse crises. We are going to have to take a hit to our standard of living for a period of time. That epiphany will occur.”

Financial Post

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