Peter Morici on Breakfast, Radio National, Australian Broadcasting Corporation – Alice-in-Wonderland financing

Peter Morici

Peter Morici

Peter Morici is a regular contributor to Counterpunch. From this interview Peter seems to be a fiscal conservative.

Here Peter is discussing the President Barack Obama’s stimulus package.
Quotes –
“We are leaving the era of Voodoo Economics and entering the era of Alice-in-Wonderland financing.”

“We have a test case right now, we call it California… They can neither afford the welfare state they have nor can they trim it.”

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Peter Schiff on Breakfast, Radio National Australian Broadcasting Corporation, 25 Feb 2009

Part of writing a blog is recording for myself events and issues. I include this interview of Peter Schiff of Europacific Capital because of his large following. If you have been following Peter Schiff there will be little that you have not already heard.

Peter Schiff

Peter Schiff

In summary Peter says that the USA debt burden is too high, argues for the efficient allocation of capital by allowing creative destruction (taking the pain quickly and massively, and shift from consumption and debt to saving and production. He mentions that there is a global cost to the USA continuing to consume.

To listen (quality may vary) or search Radio National at abc.net.au or check Europacific Capital as Peter normally captures everything for the record.

To download for better quality sound.
Peter Schiff, Breakfast

The implications for Australia is that our national paradigm is based on a strong USA with a growing economy. We rely on this to shape our financial policy, our foreign policy, our trade policy and our defence policy. To argue that we need to make major changes is a bit like trying to argue the theory of Evolution before the Pope at the time of the Reformation.

Mish Shedlock – Fiat World Mathematical Model

Mish Shedlock has written a most elegant post entitled Fiat World Mathematical Model.

This article should be read in full.
The intro –

In a fiat world, money is printed into existence by the central bank – in the United States the Fed. Given there is nothing backing up this money, it is inherently worthless. However, one can think of as real. It was printed (even if only electronically), therefore it exists.

In addition to the previously mentioned money supply, fractional reserve lending allows credit to be extended by banks and financial institutions on top of that inherently worthless money. Indeed, banks and financial institutions have leveraged credit to base money at ratios of 30-1, 50-1 or even higher.

It’s pretty amazing if you think about it: Credit is extended with 30-50 times leverage on inherently worthless paper.

As an Australian I love Mish for honouring Steve Keen of the University of Western Sydney.

There are a lot of points worth noting but I have selected the points that affect me every day.

Finally, it is important to consider the role of attitudes going forward. Attitudes affect the willingness of consumers to take on debt and banks to extend it.

Attitudes

Boomers are heading into retirement. A significant portion of their retirement plan (home prices) has already been wiped out. Another portion of boomer retirement plans is being wiped out in the stock market crash. Toy accumulation is out. Fears of insufficient saving is in.
Boomers will be traveling and spending less than they planned.
A secular shift to frugality and risk aversion in all age groups has begun. Signs are everywhere.
The lend to securitize model at banks is dead. So are toggle bonds where debt is paid back with more debt, and a myriad of other financial wizardry schemes.
Children who have seen their parents wiped out in bankruptcy or foreclosed on are going to have a completely different attitude towards debt than their reckless parents did.

Expect to see more frugality from parents and their children alike.

Because Mish lives in the real world consider what he raises at the end of his post.

Global Stimulus Kicker

There is yet another kicker to this model. And that kicker is the Eurozone, the UK, Japan, and essentially every county on the planet is all attempting some sort of stimulus plan or other. This is bound to cause a major distortion at some point, as no country has anything remotely close to an exit strategy for this. What kind of distortion and when cannot be certain because we are indeed in uncharted territory, worldwide.

Political Will vs. Consumer Psychology

What happens next depends somewhat on the political will of the central banks and politicians. However, it depends more on the psychology of the borrowers. If consumers and businesses refuse to spend and instead pay back debts (or default on them along with rising unemployment), the picture simply is not inflationary, at least to any significant decree.

The credit bubble that just popped exceeded that preceding the great depression, not just in the US but worldwide. Thus, it is unrealistic to expect the deflationary bust to be anything other than the biggest bust in history. Those looking for hyperinflation or even strong inflation in light of the above, are simply looking at the wrong model.

At some point the market value of credit will start expanding again, but that is likely further down the road, and weaker in scope than most think.

If there was a people’s choice category for the Nobel Prize for Economics I would nominate and vote for Mish Shedlock for his contributions to the understanding of the complexities of economics in the real world.

Heart attack city

I love Asia Times on Line (AToL). The quality of the articles have been consistently high.

One of their columnists Chan Akya just wrote an article “Honey, I switched the medication.”

The author suggests the rebalancing of the US economy and the Chinese economy. In my opinon the author is calling for controlled implosion that will occur anyway. The re-balancing of the US economy could shrink the economy by as much as 30%. The Chinese economy could shrink by as much as 20%.

This is definitely a case of desperately hoping somebody is wrong but fearing that they are right. The Australian economy would also shrink (by as much as 20%), at worst case an Argentinian level crisis.

I wonder what guinea pig tastes like?