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Peter Schiff: “Government is a burden on the economy”

Peter Schiff is that market wizard people were laughing at just a year ago because of his extreme views. Well, things have turned out much as he has indicated they would. So, now he has a captive audience. And what is he saying? Government is a burden that we need less of. The way forward is not government stimulus but less government, less consumption and higher savings.

Well Peter, I have news for you: that game plan of yours is a recipe for deflation, depression, civil unrest and financial Armageddon. You see, Schiff is an ideologue from the small government, free markets crowd. While I agree with his broader themes about less consumption and more savings, I do not see eye-to-eye with his ideology. What America needs now is a practical solution to a real problem, not ideology from the small government crowd.

Schiff suggests stimulus is seen as a way to increase consumption in order to keep the gravy train going. I would suggest it is a way to ease America into a downturn and prevent the death spiral that would be likely if we took his approach. Private citizens can spend less and save more but having the government do the same will certainly lead to a collapse of our banking system. Witness Bank of America and Citigroup as case examples. And if you want to see what less government spending will do for an economy, take a look at what is happening in California where spending cuts are likely. I predict this will lead to economic hardship, mortgage defaults, lower home prices and on it goes.

No one is saying that government spending is going to save us — at least I am not. However, it can temporarily replace some of the collapsing private consumption until we have beaten back the worst of this downturn. (For what its worth, I am a small government, lower, flatter taxes proponent – when depression is not at our door.)

I see Schiff’s views as ideological and not practical. The ‘free market’ is not going to save us. Here’s the video. Judge for yourself.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

21 Comments

  1. hbl says:

    I agree with you on Schiff. While a person's arguments should be allowed to stand on their own, I saw an interesting observation that his father's jail time for tax evasion may have left him with an axe to grind against the US government and it seems to perhaps drive his myopic focus on the US aspects of this crisis alone.

    • hbl, I agreed with Schiff 100% in July of 2008. I was reading through my posts to see what I was saying before the market implosion. And I was as categorical regarding no government stimulus as Schiff.

      But, the market meltdown taught me that a systemic collapse was much more likely than I had thought. There is no way to get out of this mess without a total collapse in the banking system and in the economy without some measure of government intervention and stimulus. SO you could say that my views have been tempered by events while Schiff's have not.

    • J.R. Serisier says:

      That's the way, hbl, how does your argument stand on it's own when you…..play the man not the ball.

      • hbl says:

        My response was primarily on the topic of Ed Harrison's label of Schiff as an ideologue rather than on Schiff's views. In my experience, the most unwavering ideologues often have something personal or emotional driving a level of conviction that leaves them more likely to discount new information. However, as my disclaimer was meant to imply, that doesn't automatically make Schiff wrong with respect to his prescriptions, though from what I understand (perhaps wrongly as I don't follow him firsthand) he has already been measurably wrong on his predictions regarding the rest of the world (despite being mostly right about the US predictions).

        Ed Harrison, I appreciate your level-headed thinking and willingness to adapt your views as events unfold — and thanks for this blog!

        • Matt Richards says:

          I've seen what Schiff has said about foreign markets as well, but I think it's too early to say he was wrong. I think some Asian countries will fare far better than the US, the UK, or the EU.

  2. jschmid says:

    Edward, this is why I appreciate your blog — in a world of quick sound bytes, off-the-cuff statements, and overly simplistic arguments these times require more thoughtful analysis and appreciation of the risks that we're facing. It's easy to say "let them all fail and let the market clear the wreckage" but the time for such prudence is long past. I lean toward the Austrian school and would have preferred to see much less intervention in past events ('98 LTCM, '02 tech bust, etc.) but at this point such virtues become vices. Can Schiff, Mish, etc. really say with a straight face that if they were in charge they'd be willing to take the risk of a total systemic collapse with the associated consequences? (BTW, I appeciated Schiff being so vocal the past few years about the impending events and agreed with him, too. However, I can't escape the fact that any serious consideration of the current circumstances must acknowledge extreme downside risks.)

    • Matt Richards says:

      Everything will not collapse nor will the world end if we fail to prop up those who've made bad decisions. We might have lines for MRE's or bread (like Egypt), but I think that is an unavoidable, temporary consequence of redistributing wealth inefficiently. What we're doing is awarding those who've made bad decisions. The consequence of leveraging your bank 30:1 should be failure, not a bailout. The consequence of running your payroll based on a line of credit should also be failure. Furthermore, the consequence of union organizations run amok should be wage and benefit reductions. These companies, and in some cases a large percentage of the employees, have nobody to blame but themselves.

      There is this silly notion that we need to prop up home prices, which you will find at the root of many of the arguments about why a bailout is necessary. If you think we need to prop up home prices, you are part of the problem not the solution. Yes people are under water on their mortgages, but that is rightly so because the value of homes are still far too high compared to historical averages. Now they must decide to stay or walk away. Average real estate values will fall a lot further and they will not reach their previous highs for 10-30 years (the same goes for equities).

      The stimulus will only prolong the process. What I mean is that a major correction CAN NOT be avoided, it can only be delayed with detrimental effects. The methods of economic stimulus being used should be viewed as toxic interference in the true recovery. Intervention is just as bad as the junk derivatives and securitized debt monstrosities that we're trying to gently unwind. The problems are so bad, so deep, so systemic that we can't even get honest answers from the Treasury, the Fed, or the companies being bailed out, about the EXTENT of the problem. My best information says that we're looking at a total of between 500 trillion and 1 quadrillion in toxic, leveraged bets. Even the Fed will run out of options soon when the printing press can't handle the weight of the paper money.

  3. Jim says:

    Look, if you guys never let free markets work they won't work – how's that for simple? I challenge you to find me one time when government was able to use taxpayer money more responsibly than private enterprise – even in this environment and you'de better not say TARP.

    • "TARP."

      But, seriously, Jim, find me one time when the government sat on its hands when the economy was imploding. 1921 in the U.S. might qualify. But, my point is that intervention is going to happen. It's axiomatic when it comes to crisis. Basic human psychology would predict this. The question is what should/could the government do. You have to remember, absent the need for intervention that I am making, there also is the need to be re-elected. It is not a politically viable decision to sit on your hands. Even the Germans are waking up to this.

      So again:
      1. Economic pain leads to calls for government action
      2. Inaction means no re-election
      3. Therefore, government action in crisis (economic or otherwise) is always going to be a factor
      4. Therefore, the real question is: what can a government do that is likely to do the least harm, temporarily alleviate economic distress, and allow politicians to keep their jobs.

      I live in Washington. I was born here. I know how government works and I understand that the Peter Schiff solution is both improbable because of the politics of crisis and ineffective because of the realities of systemic risk.

      • J.R. Serisier says:

        Ed, you're probably right to say that government 'action' is inevitable and that the 1920-21 recession was also the last time (as opposed to the only time) that government sat on it's hands.

        At that time though, don't forget that the then Secretary of Commerce, Herbert Hoover, was agitating for intervention but was over-ruled by President Harding who rejected governmental planning and Treasury relief. Harding said that " the excess stimulation from that source is to be reckoned a cause of trouble rather than a source of cure." The 1920-21 recession was subsequently over before Hoover could bring to bear his interventionist anti-depression policies…….but as we all know he got his chance later.

        Nevertheless, I have no doubt that these days to be succesful in business over the long term you need a thorough going knowledge of Keynesian economics. This is so you can follow the boom/ bust cycles created by governmental/ central bank 'fine tuning' of the economy…..and then apply Austrian business cycle theory to see how it will really play out.

        But, all that means to me is that the present system is wrong.

        • J.R. Serisier says:

          Ed, have you really considered that in fact doing nothing is historically the best way for government to do the least damage? The result is of course the elimination of mal-investments, bankruptcy for insolvent companies, the loss of jobs, etc….but then, anti-depression policies demonstrably don't prevent these things from happening either. They just slow them down to….dare I say, a 'politicaly acceptable' level.

  4. steven says:

    Does "Depression Economics" Change the Rules?
    http://mises.org/story/3290

    • steven, I like the example. It does demonstrate the opportunity cost of government spending. Steven, don't get me wrong, government stimulus comes at a price. I am no Keynesian. However, tell me that we are going to see a downturn without a systemic collapse and I'll recommend your solution. I don't think you can say that.

      One other thought: Austrian Economics is very concerned with efficiency. As a result, I think many miss the very real human need for fairness both in the short and in the long-term. An efficient outcome does not always seem fair and is thus sometimes inherently unstable. An example might be a monopoly in operating systems for Microsoft. A situation like this will always be seen as unfair and will be resisted regardless of efficiency.

      I guarantee you that if you gave a Myers-Briggs test to a random sample of Austrian school devotees, there would be a massive skew toward rationals: NTs. (http://www.wischik.com/damon/Texts/myersbriggs.ht…We rationals (I am clearly a rational) are too fixated on efficiency at the expense of other factors. That often makes proposed remedies unrealistic: think the efficient market hypothesis here.

      hbl, thanks for your kind words.

      • hbl says:

        Now that's an interesting conjecture — I've always found Myers-Briggs / Keirsey type information to be quite valuable. Austrian economics folks as NTs, eh? It seems feasible though I would have speculated many were NFs (the idealists). Perhaps some are Nx's (x being near the middle of the T and F range). I just did a couple searches and didn't find any good studies on it, unfortunately.

        I'm an INTx and personally I identify more with Hyman Minsky's theories than Austrian ones, though I think Austrian economics has some real strengths. But I know your argument was many Austrians are NTs, not the converse, so I wonder what other factors come into play.

        Also I'm not convinced Austrian prescriptions are even the most efficient approach, given the overshoot and third-party impact that downward momentum can provide in highly complex and coupled systems. Yet this would be difficult to prove or disprove framed as an optimization problem, relative to other prescriptions.

        • J.R. Serisier says:

          Gee willikers, hbl….there's us, the Austrian economics "folks" and then there is you, an INTx Myers-Briggs/ Keirsey type using big words I can't even understand.

      • steven says:

        How This Happened
        http://mises.org/story/3295

        Was it some sort of national insanity?

        No, it was a power grab, and the current political moment shows precisely how this happens. A small group of elites, cut off from the broader reality, decides to finagle the system to serve itself and its friends in the short term while forgetting the big picture and the long term. Sensible people try to point out obvious facts, but their voices are drowned out.

        Not In My Name
        http://suddendebt.blogspot.com/2009/01/not-in-my-

  5. Wag the Dog says:

    Worldwide vaccination program to wipe out smallpox organised by the World Health Organisation in the 1970's which at that time was funded mostly by government contributions. Not sure how letting the free markets work would have eradicated smallpox – perhaps globalisation might have led to a worldwide epidemic and thus drive growth in the private vaccination industry, but by the time the price of the vaccine was driven low enough to be affordable to the entire population, countless people would have died. Even here the purist Austrian argument does apply — let the weak fall so that the stronger can take over their roles to yield a better stronger economy. The free market does indeed work efficiently but that is not the same as responsibly. This thought experiment is somewhat analogous to the present situation.

  6. Matt Richards says:

    If you believe that government intervention will save us, you must disagree with Schiff (and those of us who have similar beliefs) about the scope of the problem as well. What Schiff is saying, what Ron Paul is saying, and what many others are saying is that the financial system as we know it is a giant Ponzi scheme which will collapse under it's own weight. We've avoided the correct decisions for so long… but we're reaching the point where kicking the can down the road a bit further will not work.

    Sadly, many people simply won't listen because they have too much invested in their current view of reality. In my view we're going to see a major Depression no matter what. Suffering can't be avoided, so it would be better to suffer now instead of later. If we avoid the short term suffering, the amount of EVENTUAL suffering will be even greater (and more prolonged). Just wait a little while… these problems are still far deeper than most people realize. Of course, I hope Schiff, Ron Paul, and all the other bearish people are wrong…

    • J.R. Serisier says:

      Well said Matt Richards, the interventionists believe in their Hooverite conceit that they know what is necessary to make things better. The historical record from the 1930's showed that they don't and there is no evidence or reason to believe that the current ship of fools running things will be any better at it than they were.

    • Good points all around from everyone. We may disagree on some of the specifics, but I must say that many of your sentiments are well-placed. I would say, however, a true Libertarian interpretation of events does not include a 'moral' component here. That is antithetical to Libertarianism. I have sympathy for those who got in over their heads. The true 'moral' problem rests with policy makers who created poor incentives, encouraging excess consumption and debt.

      As for Ron Paul, I like Ron Paul. He is on my blogroll and he speaks a truth many do not want to hear. I suspect some of his views may become more mainstream as the depth of contraction becomes apparent.