The Inevitable California Bailout

Peter Schiff makes the case that California should be refused a bailout:

California, like many states, expended its bureaucracy as the nation’s bubble economy inflated. When condos flipped like hamburgers and homeowners flush with equity spent like lottery winners, extra tax revenue flooded into Sacramento. However, instead of saving the money for a rainy day or paying off prior debts, the state government simply ballooned its spending. Now that the bubble has burst, and revenues are severely depleted, it is time for California to reconsider its excesses.

Governor Schwarzenegger’s claim that a federal guarantee is not a bailout is ludicrous. No one in the private sector will lend California any money because the state can’t pay it back. Just like AIG and GM, it needs federal help to stay solvent. And although the Federal balance sheet is in far worse shape than California’s, there is one crucial difference: Washington has a printing press, and Sacramento does not. With the ability to pay off debts with newly created funds, a federal default is not a concern.

However, if Obama comes to the rescue, none of the needed cuts will be made. Instead, California will continue to operate its bloated bureaucracy and will be in constant need of more bailouts. In other words, if Schwarzenegger gets his bailout, look for him to utter his famous line – “I’ll be back.”

But hey, Arnie can be proud of his "green initiatives." What a joke.

You know he'll get the money. I'm finding it very grating to follow the news these days.

Hat Tip: Pat

UPDATE: Not a bad quip from Conan O'Brien about his new show debut

After all those months of breathless network preparation, the program began with a semi-monologue in which O'Brien poked fun at himself. He said he's doing a show on the last-place network and has moved to a bankrupt state to do a show that was sponsored by General Motors.

Abuse of Power

Once again, Peter Schiff in plain language is able to drill down and see the big picture: Funds Hoodwinked

Reacting to the setback, President Obama took aim at the few Chrysler bondholders (including hedge funds and private investors) who had scuttled the plan. He described these “holdouts” as unwilling to make the sacrifices that the company, the workers, the pensioners, and the taxpayers had been prepared to make for the good of the country. Ironically, the “greedy” group that Obama holds responsible for killing the auto industry is the only force capable of saving it.

Singling out hedge funds as the bad guys will not be politically controversial. The accusation falls comfortably into the Administration’s view that unfettered capitalists on Wall Street and poor planning by short-sighted CEO’s are responsible for our problems. These ideas, echoed in Congress, the media, and on Main Street, completely ignore how government intervention incentivized the bad behavior and brought down our economy.

The investors’ reluctance to cave in sends Chrysler to bankruptcy court. Normally, this process would be the best means to reallocate Chrysler’s assets in a way that benefits our economy. But Obama made clear that this will be no ordinary bankruptcy. The guiding hand of Washington had already formulated its far-sighted plan to save Chrysler, and this proceeding is meant to strong arm those won’t cooperate. As a result, expect a cram-down rather than a negotiation. The sanctity of the bondholder’s investment contracts will crumble under the political weight of Obama’s vision.

Hat tip: Pat

As Gold Hits $1000 Per Oz.

Once again Peter Schiff at Euro Pacific Capital has a bleak outlook on the fiscal stimulus. It appears that he's caught the gold bug. (read)

The latest spending, signed into law yesterday by President Obama, came on top of $300 billion committed to Citigroup, $700 billion for TARP 1, $300 billion for the FHA, $200 billion for TAF and some $300 billion for Fannie and Freddy. Just over the last six months, which excludes the initial Bush stimulus and several massive, unfunded Federal guarantees, nearly $5 trillion has been committed by the government to the financial industry. Rational observers cannot be faulted for concluding, despite Administration claims to the contrary, that the government is merely throwing money at the problem.

Although the rhetoric has managed to convince many observers of the possibility of success, the gold market appears to clearly understand the implications of this unprecedented spending.

The feeling that the government has no idea how to proceed has created palpable panic. In response, pragmatic investors are seeking the ultimate store of wealth. In 2009, as has occurred countless times throughout history, that store will be stocked with gold. Thus, whether the Federal government's interventions will succeed or fail will be anticipated by the price of gold. Right now, the market is screaming failure.

Prior to the latest round of Federal spending, the Federal government had committed $4 trillion to postpone bank collapses and to lay the groundwork for subsequent restructuring. But has any of this activity actually rescued the banking system? In light of the evidence of deepening recession, is it likely that the additional $787 billion in the latest stimulus will instill enough confidence to restore economic growth? If not, what damage will it do to the eventual recovery?

How true. This stimulus has done nothing to restore confidence. Even at these low prices, does anybody feel like pouring their life savings into the stock market now? Or buying your dream house? No way. Gold sovereigns and guns are looking blue chip to me.

Hat tip: Pat

Peter Schiff's Grim Evaluation of the Stimulus Bill

Peter Schiff at Euro Pacific Capital makes me want to add a shot or two of vodka to my orange juice this morning. Read and weep.

Despite the Presidential rhetoric of change, the Pelosi plan is Washington at its most habitual. Her version is a massive, pork-laden monster. Tilted heavily towards consumption, only 10 percent of the bill is allocated toward the infrastructure spending that the President talked about so frequently during the campaign. President Obama initially favored a middle-way. It was to be based on massive public spending, but specifically on infrastructure.

Far from restoring the economy to health, the 'pork-barrel' Pelosi plan will likely force the U.S. economy into the catastrophe of acute stagflation and decline, with grave long-term repercussions at home and abroad.

It is clear that we are now headed into an abnormally severe recession, and we may be face-to-face with Second Great Depression. Tell-tale symptoms of Depression include competitive currency devaluations and protective trade measures. Of even greater concern is the historic fact that trade wars too often lead to hot wars. The times of peace and unprecedented prosperity that we have
enjoyed for decades are now under threat.

(...)

The Washington regime, particularly members of the Democrat persuasion, leans towards a socialist solution of avoiding recession at any cost. After all, the bills are paid by others, such as taxpayers and holders of U.S. dollars. This results in an increasing amount of other peoples' money being spent on 'public' works that would in other times carry the label 'pork barrel.'

Read the whole thing. Schiff has credibility. He was the one who predicticted the 2008 melt-down. If only there was more debate. Obama paased it too quickly, and used the rhetoric of fear: "We can't wait, we need this now to avert catastrophe."

Ugh.

Peter Schiff: The Absurd Position of American Creditors

Once again, Peter Schiff of Euro Pacific Capital wants to remind us how precarious the health of the US is economy is. As a debtor nation, the US relies on foreign creditors.

What he might have said was that the nations funding the majority of America's public debt -- most notably the Chinese, Japanese and the Saudis -- need to be prepared to sacrifice. They have to fund America's annual trillion-dollar deficits for the foreseeable future. These creditor nations, who already own trillions of dollars of U.S. government debt, are the only entities capable of underwriting the spending that Mr. Obama envisions and that U.S. citizens demand.

These nations, in other words, must never use the money to buy other assets or fund domestic spending initiatives for their own people. When the old Treasury bills mature, they can do nothing with the money except buy new ones. To do otherwise would implode the market for U.S. Treasurys (sending U.S. interest rates much higher) and start a run on the dollar. (If foreign central banks become net sellers of Treasurys, the demand for dollars needed to buy them would plummet.)

In sum, our creditors must give up all hope of accessing the principal, and may be compensated only by the paltry 2%-3% yield our bonds currently deliver.

As absurd as this may appear on the surface, it seems inconceivable to President Obama, or any respected economist for that matter, that our creditors may decline to sign on. Their confidence is derived from the fact that the arrangement has gone on for some time, and that our creditors would be unwilling to face the economic turbulence that would result from an interruption of the status quo.

A definite weakness of democracy is that it's hard to call for belt tightening, and sacrificing today, for tomorrow's good when you have to win another election.

Schiff: US Dollar Panic?

Peter Schiff does not like what he sees and worries about a run on the greenback. He's a guy who confidently predicted the current economic crisis. Scary stuff:

In the current crisis, there is growing evidence that Washington is in a state of increasing panic. Despite its massive cash injections, market manipulations and ‘rescue’ plans, the recession is clearly deepening and spreading. With little to show thus far, politicians don’t know if they should redouble past efforts, break ground on new initiatives, or both. However all agree, unfortunately, that the consequences of doing too little far outweigh the consequences of doing too much.

Although there are many parallels between the current crisis and the Crash of 1929, one key difference is the global profile of the U.S. dollar. In 1929, the dollar was on the rise, and would soon eclipse the British Pound Sterling as the world’s ‘reserve’ currency. Furthermore, the American economy was fundamentally so strong that in 1934 America was the only major nation able to maintain a currency tied to gold.

Ever since, the U.S. dollar’s privileged ‘reserve’ status has been a principal factor in America’s continued prosperity. The dollar’s unassailable position has enabled successive American governments to disguise the vast depletion of America’s wealth and to successfully increase U.S. Treasury debt to where the published debt now accounts for some 100 percent of GDP. The total of U.S. Government debt, including IOU’s and unfunded programs, now stands at a staggering $50 trillion, or five times GDP! If the dollar were just another currency, this never would have been possible.

I think the public is mature enough to try and tighten their belts now and stave off this disaster. But there is no political leadership out there who has the guts ask people to sacrifice.

Peter Schiff: There's No Pain-Free Cure for Recession

Once again, Peter Schiff is the voice of reason and common sense. With bailout mania in full swing, he asks us to think about what we're doing. (Read)

As recession fears cause the nation to embrace greater state control of the economy and unimaginable federal deficits, one searches in vain for debate worthy of the moment. Where there should be an historic clash of ideas, there is only blind resignation and an amorphous queasiness that we are simply sweeping the slouching beast under the rug.

...

Individuals, companies or cities with heavy debt and shrinking revenues instinctively know that they must reduce spending, tighten their belts, pay down debt and live within their means. But it is axiomatic in Keynesianism that national governments can create and sustain economic activity by injecting printed money into the financial system. In their view, absent the stimuli of the New Deal and World War II, the Depression would never have ended.

On a gut level, we have a hard time with this concept. There is a vague sense of smoke and mirrors, of something being magically created out of nothing. But economics, we are told, is complicated.

I bolded the last line. It's so true. If it defies common sense people are secure with the thought that people smarter than themselves are taking care of it. I remember getting into an argument with a person about some "modern art" painting of a few colored lines on a blank canvas. I said I thought it was garbage, a joke. The guy countered, with: "How the hell to you know? There are experts out there who think it has value." He admitted he himself didn't see it. People are too willing to trust the experts, instead of their own eyes. (But I digress.)

Similarly, any jobs or other economic activity created by public-sector expansion merely comes at the expense of jobs lost in the private sector. And if the overnment chooses to save inefficient jobs in select private industries, more efficient jobs will be lost in others. As more factors of production come under government control, the more inefficient our entire economy becomes. Inefficiency lowers productivity, stifles competitiveness and lowers living standards.

I've never had a bleaker feeling for the future. The media are ignoring the situation. All we get are People magazine type shots of the President-Elect on the beach.

Trillions are the New Billions

Once again, Peter Schiff is the voice of sanity in this economy. The bailouts keep going on and on.

It was inevitable that the size of these bailouts would up the ante for an economic stimulus package aimed at consumers. Not missing a beat, Barack Obama announced a $700 billion dollar fast-tracked package that will likely exceed $1 trillion before passage. (Trillions are the new billions.) The plan must be sending shivers down the spines of our foreign creditors who are expected to foot the bill. Add this cost to the hundreds of billions of prior stimulus and bailout packages, and the cost to our creditors is quickly heading into the multi-trillion dollar range. It can’t be long before they cry uncle and repeat the words of prizefighter Roberto Doran “No Mas.”
....

It is no surprise therefore that both Democrats and Republicans offered healthy “huzzahs” to Henry Paulson’s latest bazooka: $200 billion to purchase securities backed by auto, student, and credit card loans. It is hoped that with this transference of risk to taxpayers, lending institutions won’t be so cautious, and the credit-fueled American economy can thrive anew. This is unalloyed insanity that can only lead to total ruin.

We need a full Congressional inquiry about this. We need the media on top of this. It seems like they are making irrepairably disastrous mistakes and everybody is asleep.

Schiff: Bailouts Won't Work

Peter Schiff, once again, is the voice of sobriety. Here's why he thinks the bailouts won't work.

This paragraph cuts like a straight razor:

Similarly any money that the world lends to America to finance more consumption will never be repaid. We will simply blow through it, and be back, hat in hand, begging for more. As we painfully learned in the housing bust, lending people money that they cannot pay back makes no sense. This applies equally to foreign central banks lending to America as it does to commercial banks lending to homeowners.

Schiff was a modern Cassandra figure leading up to this crisis. He forecasted the financial collapse and nobody believed him. See my earlier link:

Peter Schiff Was Right: Incredible Youtube Compilation

Peter Schiff Was Right: Incredible You Tube Compilation

Look at Euro Pacific Capital's Peter Schiff as he gets laughed at, Cassandra-like, when he predicts the coming economic collapse. These highly respected and paid financial pundits look pathetic in hindsight. Talk about "I told you so."

Peter Schiff Was Right 2006 - 2007 (2nd Edition)


Here's the link to You Tube if you're having trouble viewing
http://www.youtube.com/watch?v=2I0QN-FYkpw