Friday, January 23, 2009

Schiffonomics Concerning Inflation and Healthcare

The Little Book of Bull Moves in Bear Markets by Peter Schiff, reviewed by Cato

I recently had the opportunity to read a book by Austrian economist Peter SchiffThe Little Book of Bull Moves in Bear Markets. In this book Schiff makes the case that the U.S. economy has transformed from a manufacturing economy that produces to a service economy that consumes. He points out that 47% of the new jobs created since 2000 have been in the service industry related fields and that economic growth along with wealth creation can only be made through production, Schiff argues that these elements have created a bubble economy that will deflate with the collapse of the dollar. The dollar collapse will occur when foreign investors, who are currently financing our annual deficits through credit, lose confidence and demand payment of the treasury bonds. Schiff cautions that the only way to preserve wealth with declining value of the dollar is to move wealth in non-dollar based assets such as precious metals and stocks traded with foreign currency.

Being an individual with not very much wealth, most of his suggestions about wealth preservation did not apply to me. The one suggestion that I did find applicable was his advice towards those with student loans. Schiff advised if you have variable rate student loans you should consolidate them at a fixed interest rate before the dollar collapses and interest rates rise.

Below are some excerpts that I found interesting:

Health Care

“In the face of these harsh realities, legislators on both sides of the aisle have begun calling for universal health coverage, but that won’t solve the problem either. The government doesn’t have enough money to provide health care for all Americans, and it won’t be able to keep borrowing. The only way to pay for universal health coverage would be to tax a populace that is already reeling from economic setbacks, an idea that’s sure to be deeply unpopular. Indeed, in the coming years, the government will have a hard time funding Medicare and Medicaid, the two national health plans already in place.” Pg194 The Little Book of Bull Moves in Bear Markets

“In the end, it may not be the quality of health care that contracts, but the quantity, as a poorer United States seeks to economize and some of the excesses get wrung out of this bloated system. For that to happen, however, the government will have to get out of the health care business and return this important segment of our economy to the private sector, subject to free-market forces—where it should have been all along.” Pg 195 The Little Book of Bull Moves in Bear Markets


“I pointed out that mailing checks straight to the taxpayers instead of channeling money through the banking system meant that consumers could bid up consumer prices immediately. This avoids the usual time lag when the Fed’s expansions of the money supply, such as the $436 billion injected recently, have to filter through the asset markets before eventually affecting consumer prices. I’m being sarcastic, of course but the point is valid.” Pg 18 The Little Book of Bull Moves in Bear Markets

Why the Government Likes Inflation

  • Inflation is used for political reasons to stimulate the economy and counteract down-cycles that are perfectly normal and corrective of excesses but are unpopular with voters.

  • Government debt and other obligations such as social security become more manageable when payable with cheaper dollars.

  • Inflated incomes increase government revenues by forcing people into higher tax brackets.

  • Inflation helps finance entitlement programs that would otherwise cause tax hikes.

Pg 27-28 The Little Book of Bull Moves in Bear Markets

The motive for choosing to print money is purely political. The other way to do it would be to raise taxes, which would cause a public uproar costing elected officials their jobs. Not that the voters would stand for any reduction in social programs. The voters want it both ways, and the elected politicians have found a way to accomplish that.” Pg 46 The Little Book of Bull Moves in Bear Markets

Inflation is a concept that I am still trying to understand. I remember in college learning about M3, a statistic that The Federal Reserve released each year denoting the total money supply. Schiff mentions that since 2006 The Fed quit reporting that statistic. Steve Morris of the Wall Street Journal recently reported that it looks like the money supply has been increased by 70% since last October! By not reporting M3 and by doing other maneuvers the government is able to misrepresent the actual rate of inflation, which has been said to be “the greatest tax on the poor.”

I think Schiff’s book does a great job of explaining what is going on with our economy. His arguments and the Austrian view fit very well in line with those of FMP. Like many I hope the dollar does not continue to lose value and collapse. However with the current trend of unfunded stimulus packages, government entitlement programs, and current war in Iraq and Afghanistan, one can only wonder how much insult the United States dollar can stand.


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