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Nate Heckmann: Peter Schiff is Wrong About Everything

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Yves here. I’m of two minds about featuring a post about Peter Schiff, since criticizing him treats him as being a more legitimate commentator than he is. But some targets ask so hard for a debunking that it’s hard to resist.

Schiff has been in the press recently for having said on the Daily Show that some people, such as the “mentally retarded,” didn’t even deserve minimum wage but should be paid only $2 an hour. But being offensive is not the worst of his sins.

Schiff is a money manager who claims to be an economist but has no formal credentials.* He such a terrible money manager that one wonders why the SEC hasn’t come calling. He lost 60% to 70% of customer assets in a two-year period when he was supposedly making correct macro calls. It isn’t just that he made disastrously bad timing decisions. He violated one of the basic rules of investment management, which is diversification (as of the last time his account results were made public, his picks represented only 2 bets: energy and gold, and that via small gold stocks or trusts). And he also appears to loaded up his customers with lots of risk. If so, he might have violated “know your customer” rules.

Mind you, this performance occurred when his public calls were generally correct. One can only imagine how he’s done when he’s been screaming “hyperinflation” and we instead have disinflation tending to deflation.

Now some readers might surmise that the fact that Schiff still has an investment business is the result of personal charm and selling skills, at least in the presence of Important People. Quite the reverse. so gratuitously rude. He got to the studio so late that he nearly missed the hit time (a huge deal in TV) and was unapologetic and haughty toward the tech who had to put up makeup and mike him up in haste. He repeatedly interrupted the host and even the Australian Finance Minister, who dealt with him with unruffled professional calm. And even though we sat elbow by elbow during the shoot, he pointedly never introduced himself and brushed off my move to shake his hand (I guess he’s afraid contact with non-libertarians might contaminate his precious bodily fluids). Mind you, I wasn’t offended but rather much as bemused and perplexed. What was the point of this display of lack of self control and basic manners? Did he really think it meant people would take him more seriously?

My recollection is that on the SBS show, the producers were able to contain Schiff by virtue of both him (and me) and the Australian Finance minister being on remote video. They could cut to someone else when they thought he’d had his say. Philip Pilkington sent this clip of Schiff with Cenk Uygur, “Uyger is the only one who handled him properly.” Of course, a fanboy or more likely, a flack put up overlay attempting to depict Schiff as a victim, as opposed to getting the treatment he deserved.

So let’s turn to Nate Heckmann’s takedown.

By Nate Heckmann, a graduate student at UC Irvine’s medical school who writes about health care, economics, and tax policy. Originally published at Et Vita

“The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.” 
― Stephen Hawking

A libertarian friend of mine who — like most libertarians — subscribes to the Austrian school of economics sent me a video, convinced that I would no longer think about inflation the same way after watching it. The video is of well-known libertarian pundit, investor, and self-proclaimed Austrian economist, Peter Schiff.

In the video, Peter Schiff responds to his critics who attacked him for a prediction he made at the end of 2009 about hyperinflation:

You know, look, I know inflation is going to get worse in 2010. Whether it’s going to run out of control or it’s going to take until 2011 or 2012, but I know we’re going to have a major currency crisis coming soon. It’s going to dwarf the financial crisis and it’s going to send consumer prices absolutely ballistic, as well as interest rates and unemployment.

According to Schiff, the reason we haven’t seen hyperinflation yet is because the CPI is flawed, “deliberately designed” by the government to hide the true rate of inflation.

The video was so bad, it compelled me to write this post. First, watch the video above. Then read about what Schiff gets wrong:

1) “I never said the money printing would cause inflation. I said the money printing is inflation.”

Any student who has taken macroecon 101 knows this is an overly-simplistic view of inflation. It’s hard to believe that an “economist” holds this view.

Schiff’s view doesn’t take into account inflationary expectations, the rate of money exchange, or where said money ends up in the economy (e.g. M1, M2, M3, etc). If the treasury printed $1T and buried it in a hole the money would not exert the same inflationary pressure as it would if the printed $1T were distributed to the nation’s poor and middle class. The former would have a much smaller inflationary effect than the later. Schiff, at least, ought to acknowledge the fact that while the Fed has expanded the monetary base from $0.87 to $2.92 trillion, it is holding on to $1.62 trillion of excess private bank reserves. That’s $1.62 trillion sitting in a hole, not being circulated, exerting no inflationary effect. This money parked at the Fed is not inflationary.

This is not a difficult concept to grasp, but Schiff fails to grasp it nonetheless.

2) “But Krugman would say that Peter Schiff is wrong because prices haven’t risen. But, again, the proof that he offers, and that other Keynesians offer, are government-created statistics that purport to measure inflation like the CPI.”

For someone like me that has been following this narrative closely, it’s plain to see that Schiff is misrepresenting Krugman’s critique. I’ll explain.

First, Krugman has criticized Schiff’s predictions of hyperinflation, not normal levels of inflation (i.e. “rising prices”). According to Schiff’s predictions in 2009, we should have sky-rocketing prices by now, but we don’t. And this is exactly why people like Krugman say Schiff’s predictions haven’t panned out.

Furthermore, in Krugman’s most recent post about Schiff, he doesn’t offer the CPI as proof that inflation is under control because he knows that Austrians don’t care for “government-created statistics”. Instead, Krugman offers MIT’s Billion Prices Project as a third-party estimate of inflation. This project monitors the daily prices of over 5 million online transactions in over 70 countries. Guess what? This metric only varies slightly from the CPI and it tells the exact same story — namely, that inflation is not a problem.

According to my calculations, from the end of 2009 when Schiff made his prediction, until the beginning of 2012 when this video was made, inflation has increased by the following:

CPI less food and energy ~5.1%
PCEPI ~5.5%
CPI ~6.4%
MIT’s BPP ~7.1%
Monetary Base (“money printing is inflation”)  ~32.9%
Gold ~51.2%

The first three metrics are “government-created statistics”, the 4th is a third-party estimate of inflation, and the 5th and 6th are the Austrian metrics of inflation. Ask yourself: Which of these measures of inflation is inconsistent with reality? Has your cost of living gone up 30-50% since late 2009 or has it increased somewhere on the order of 5-7%?

3) “The CPI does a lousy job of measuring inflation. And I think it deliberately does so by design.”

By design? Evidence?

4) “In fact, I’m not the only one that’s convinced that inflation is a lot higher than the government admits.”

Schiff’s support for this claim? No, not a third party mathematically driven model like MIT’s or some other equivalent   a FOX News poll. The poll referenced, however, does not support Schiff’s claim that the CPI underestimates inflation. All the report states is that 41% of people polled felt that rising prices were their primary concern.

5) “Well, if the government is correct, if the CPI is accurate, then why are so many people worried about inflation that doesn’t exist?”

First, nobody said inflation doesn’t exist (see point #2).

Second, this poll does not support the notion that the CPI is inaccurate. Inflation is real and people who are out of a job or underemployed ought to be concerned about rising prices. As a student, I am concerned about rising prices, but this does not mean that I believe the CPI is inaccurate. Nor does my concern mean that I think there is ongoing hyperinflation.

6) “Afterall, what makes more sense? That the government can print all this money, and prices not rise? Or that prices are rising and the government is just not being honest?”

Arguments of incredulity are not only weak, but they often-time reveal a lack of knowledge or understanding in the person that uses them. Also, once again, nobody is saying that prices aren’t rising (i.e. see point #2).

Schiff doesn’t understand that printing money against the zero-lower bound — the point at which the federal funds rate is zero — does not have the same inflationary effects that it would in times of economic prosperity. I’ll outsource the explanation as to why this happens but, in a nutshell, “if interest rates are near [or at] zero, money printed now just gets hoarded, and monetary policy has no traction on the real economy.”

Given Schiff’s definition of inflation, I don’t blame him for not grasping this concept.

7) “The items that I selected for my basket were eggs, cars, milk, gasoline, bread, rent for a primary residency, coffee, dental services, potatoes, electricity, sugar, airline tickets, butter, store-purchased beer, apples, public transportation, cereal, tires, beef, and prescription drugs.”

According to Schiff, the CPI’s basket of goods is deliberately misleading, but his own basket of (20) goods is stable, unbiased, and more accurately represents price levels than the CPI? Does anybody buy this? I don’t.

First, Schiff’s basket is food and fuel-dominant, relying heavily on two factors that are commonly removed from measures of core inflation because of their inherent volatility.

Second, even if we accept Schiff’s high-ball basket of goods as being accurate, we are still left with a decade with only 44.3% of inflation. This is odd because it contains the recent post-recession period of hyperinflation (or high inflation) that many Austrians are angry about, yet inflation in this past decade is still well bellow the 117% increase during the 70s. So according to Schiff’s calculations, we’ve still only seen a fraction of the inflation that plagued us during the 70s.

Did Schiff intentionally show that inflation during this past decade was actually much lower than it was during the 70s, or did he do this by accident?

8) “But it actually gets worse because the government numbers are wrong. And I’ll prove it…”

Schiff continues by pointing out, what he claims to be, specific “inaccuracies” in the CPI. These warranted a fact-check on my part.

I checked Schiff’s claim about healthcare premiums only increasing 4.3% from 2008-2012 according to the CPI. According to the CPI — the CPI that I just looked up  health insurance premiums have increased by almost 20% over this period. The Kaiser report that he references, which by the way only refers to employer provided insurance, shows an increase of 24.2%. This doesn’t seem like a contradiction, but it makes me wonder where Schiff is getting his CPI numbers.

It appears that the CPI is actually referring to a 4.3% increase in the healthcare premium costs per year, but Schiff is — either misleadingly or accidentally — implying that according to the CPI, premiums have increased by a total of 4.3% over the entire five year period of 2008-2012, which, of course, is not true.

9) “So if the government is wrong about newspapers and magazines, if they’re wrong about health insurance, how should we believe that they are right about anything?”

Wait, how did Schiff prove that the government is wrong?

Krugman’s description of the Austrian viewpoint sums it up best:

Substance aside — not that substance isn’t important — Austrian economics very much has the psychology of a cult. Its devotees believe that they have access to a truth that generations of mainstream economists have somehow failed to discern; they go wild at any suggestion that maybe they’re the ones who have an intellectual blind spot.

Schiff is wrong, but he’s sticking to his guns. And, in the process, he’s revealing just how little he knows about economics, policy, and pretty much everything else. Why do people still listen to this guy?

______________
*Schiff has a BA from UCLA in Accounting and Finance. His father is a well-known con artist who sold books and led seminars claiming no one had to pay Federal taxes and told followers his “secrets”. Schiff’s father is now serving a 13-year prison sentence for tax evasion, his second prison term (he previously served a four year term, again for tax evasion).

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85 comments

  1. Massinissa

    “Why do people still listen to this guy?”

    The same reason people listen to cults: They’re told what they want to hear.

    That’s the only reason. The various parts of the Austrian school narrative is appealing to many people.

    Debunking someone like Schiff is as pointless as trying to debunk a Creationist.

  2. allcoppedout

    I have no problem with you ‘setting fire’ to Schiff’s straw man Yves, other than your own re giving him more credibility than he’s worth. Inflation was never much bother back in the day when you could take out a mortgage, know our job and ability to change it were safe, wages went up so what you were paying off in loans generally went down, your pension was protected because other people died, no one lived so long and so on. We might address what we have traditionally framed as an inflation problem very differently now, in terms of the money trail of who is getting what and the economic rents mass accumulation and finance have brought about.
    Even in terms of money in the ground, there may be a future problem if we can’t just write it off and someone finds a way of spending it into circulation, rather than funding a debt jubilee for ordinary folks.

    Nothing you say about Schiff strikes me as wrong, even the ad hominem being relevant. I feel we have this whole debate arranged around abstractions largely irrelevant to genuine change for the better and are suckered into the easy arguments rather than addressing the best. We once did unemployment research by knocking on doors and counting the people in the employment age range who were not in employment. Years ago this produced rates from 18% in leafy well-off Woking to 59% in Govan when official rates were 3% and 20% respectively. One could do this on inflation effects across communities. In the UK we are being told inflation has hit the rich harder than the poor. Like not being able to go out for meals so often is worse than going hungry so your kids can eat. The current inflation containment practices and lack of decent job creation (or wealth redistribution away from the rich) have also made escape routes from poverty smaller.

    I’ve read enough here to know you know. I happen to think an inflation dam may be about to flood, something we have seen in the bread price rises behind the Arab spring and now in emerging markets and countries short of food. Still, whatever I think about the need for wider explanations, it’s obvious the only thing Schiff and many similar are offering is the old story of creative destruction and free market myths.

    1. j gibbs

      Schiff is clearly an id ot but inflation is ignored by established price indexes. I have watched the prices of those things I actually buy year after year increase at nearly 15% pa since 2010. Does this qualify as hyperinflation? No, but it qualifies as a serious problem for those trying to stay alive without some connection to monopolized industry and finance.

      1. Ben Johannson

        Inflation is a rise in the general price level, meaning pretty much everything is growing more expensive over time. The things most consumers are concerned about happen to experience the most price volatility so, because that’s what we focus on, we get the sense that it’s out of control.

        Aside from fuel and food I have seen little change in prices.

        1. Skippy

          Ben everything I see and hear is food is ether a margin squeeze for profit – stock buffing, battle to the bottom [kill the small caps et al - increase market share], w/a energy surcharge value added.

          skippy,,, raw inputs are actually down.

        2. washunate

          “Aside from fuel and food I have seen little change in prices.”

          Where are you looking? I don’t think hyperinflation is likely, either, but are you really claiming with a straight face that prices haven’t risen a lot? And that fuel and food are irrelevant?

          Sure, for people making $80,000 a year, this is still largely true. But for the bottom 80% of the American population, personal finance is basically a matter of choosing which parts of the middle class lifestyle to abandon.

            1. washunate

              You make an incredible claim and then when pressed, you simply link to the BLS? I guess you’re fine using Chained CPI for Social Security, eh? I guess we can cut back Food Stamps since food prices aren’t a problem? I guess the EIA is lying when they say gasoline prices have tripled over the past couple decades? I guess it is irrelevant that wages have decoupled from productivity?

              The CPI doesn’t measure the cost of living, of maintaining a standard of living. Rather, it measures the prices of individual things, and then models a theoretical basket of goods and services. It doesn’t measure actual consumption by households.

          1. JTFaraday

            I agree with the peanut gallery. Economists, the government, and “Deficits Good!” liberal rationalizers, have about zero credibility on “inflation” as far as the general public is concerned.

            They’ve become the new elitist George Bush just before he lost the election to Bill Clinton– someone who has never even seen a grocery scanner.

            In the process, they cede credibility to those they regard as right wing cranks, completely mystified as to why they never make any progress in advancing their views.

            That this same conversation happens over and over again– the end result of which always sees the liberal economic ideologue telling the public how stupid it is, because they can make no better response, and don’t think they’re required to– is not reassuring.

        3. rob

          Yeah, if you don’t pay attention to food and fuel; or steel, copper,cement,paint,aluminum,wood,auto parts,lubrication oils,antifreeze,or good clothes,or fertilizer,or any petrochemicals like plastics and you don’t need tires,rubber goods,or lighting or plumbing or electrical parts or mechanical parts, or really anything of an actual value, that is in the same realm of quality that was in existence before.If you ignore those things,and the price of healthcare,medicine,insurance,and anything else that has gone through the roof ….into the realm of 200%-400%… over the past ten years…then we can realistically take those cpi inflation numbers for what they are….. crap… no I mean… justified…Yeah right. Dream on.
          What people who don’t understand factual realities ususally miss, in the comparison of apples to oranges when they think they are getting a comparable product with what they used to get.Is either quality,in many cases. Or a completely change in technology that allows a once costly TV to be replaced with a “cheap” flat screen TV.The savings come from advances in manufacturing technology, not a currency holding its value.Throw in the re-utilization of slave labor and that currency value has really little to show.
          Oh ,Believer in “the rules”.

          1. Bernard

            what planet does this guy live on. watching prices go up all the time is the only sure thing i have watched in horror. watching things like orange juice, bread, cake mixes/icing, and other baking items. sausages, cheese, eggs, cold cuts and other meats. i can go into most every aisle at Walmart and tell you what it used to cost.
            maybe in Venus or Mars, there is no “inflation”. here on Earth, i can show you otherwise.

            such fantasy land comments are nice. those of us who watch our pennies/dimes/dollars, i can easily show you how everything has gone up, almost everything has gone up. Amazing to think anyone could say such a thing.

            flower/vegetable seeds/plants have all skyrocketed in price. as an avid gardener, let me show you how much everything for the garden has gone up.

            and is there any doubt to the “trust” level when you hear such nonsense. sad, really sad. i do wish i had his money to “see” such stability in prices. i just guess this guy doesn’t have to watch his spending, or else he would “feel” the dissonance of his statements.

            Peter Shiff is just one of the anointed PTBs that are afforded endless promotional soundbites, trying to keep the con going smoothly. the con is not going smoothly down here in the working world.

              1. rob

                Thanks for the link.
                That is a good read.But doesn’t really say anything. Obviously,there is an army of hunter gatherers out there compiling data;but of what quality?The quality of the data is only as good as the quality of the investigation.
                If I want someone to tell me that the price on a 4 oz can of “chunk white” tuna fish has only risen moderately,on the supermarket isles, on average across all the markets where data is collected,over the course of the last few years;I would read those cpi reports.urban or otherwise..(really they would be telling me the same thing year after year, as the wages they receive don’t depend on the quality of their investigations ,only the promptness and quantity. Which they do and add to their lists…)
                But really I would want to know what the hell happened to the tuna fish in the can. Decades ago, when some label read “chunk white tuna”, you would open the can and see rings of flesh,and you would have to take a fork and chunk up that meat. Now that can that says “chunk white tuna”. is filled with what evidently has been scraped off the factory floor, and the extra cost must be because of the labor saving quality ,in that one no longer needs to chop it up themselves.
                While the over paid people who propagandize for the status quo, get their help to buy the “good” albacore tuna, that they pay 8 times what they used to pay for the same quality tuna meat which used to be called chunk white. Now those lists don’t represent reality,but people who are trying to make ridiculous claims have them to cling to.

                What I am saying is that people who use broad catagories of numbers(which in a perfect world would represent the best aggregate value of things),can easily be fooled without taking into account the quality of the data collection.Just because I can go into a wall mart or some other big box store and buy a piece of crap anything for the same price I used to be able to find something of quality,for;doesn’t mean prices are the same.The price for “what”?, has to be asked.
                And after this decade, someone can’t seriously say prices for everything haven’t gone crazy.well past 1-2% per year.

              1. rob

                The thing is, “food”, wouldn’t even be on my “big” list of what has gone up.Everything has gone up.And while I am sure the end result is called “inflation”, I don’t see it as the driver of “prices”.Speculation, is more a driver of prices.Market manipulations.political policies and the decisions made lead to mis allocation of resources, which allows sordid speculation on what it takes to live.
                I could understand why an urban dweller would not really see the price spikes in everything, because they already live in an inflated atmosphere from everywhere else that makes their living possible.Say in NYC, there is price competition among the local street venues, which keeps the “what I see everday on the street,”"prices” relatively stable.It is also already an economic anomaly, in the wage distributions.But when anything is built, the sand,gravel,cement,steel,copper aluminum,glass,gypsum,asphalt,stone,,has all seen these speculative driven spikes.Everything that is a food stuff has to be driven on either truck,train,barge,etc… where again the steel,fuel,maint costs,have all been effected by market manipulations. The investment class has be living high on the hog, by taking everything of a certain quality, making it less so, and charging more for it.And yet the investors in this country don’t realize that when they invest in a company that is offshoring, and building sub par real investments, and which then are “included ” on statements which overstate their actual value.,while ignoring the eventual liabilities that short term profits will have on the investment over the long run,they do the shareholder a disservice.
                In fact , this question of “inflation”, is the wrong point on the wheel. For the last ten years specifically, the prices everyone pays for the same thing they used to need to live has been artificially driven up by rampant speculations and political chicanery;i.e. global occupations destabilizing regions where speculators can make fortunes “worrying” about it.That is money that comes out of everyones pockets,that is food out of everyone’s childrens mouths.
                To look at prices, going up as” natural”,is crazy when in this era, what is “natural”, has little to do with anything.I also think these increase in money spent for the same thing we used to need, is why the economy sucks. It took the “extra” money, out of too many peoples pockets.
                So, leaving food out of it, everything else in the rest of the country has gone crazy. If you drive, or live in a structure, or have a profession where actual physical anything is required, there is an effect. People that don’t really ever need to “do” anything, and can live from cerebral musings,may not really get the difference, but everyone else does.We’re just not that lucky.And the reality is, even those in the offices in NYC, are being charged indirectly for these spikes in prices. All the enablers of urban dwelling are charging you guys for it.somewhere.

          2. Stephen

            Since petroleum (fuel) is used in the process of making most of those products the price of those products is likely to raise. A better argument would be for position limits on commodities (food and fuel) but that’s just more guvmint and schiff bots say no no.

  3. jrs

    I think Schiff had his day in the sun, and was mostly popular not because of any particular ideology, but because he preached economic collapse at the point when anyone who was paying attention suspected economic collapse was around the corner (2006, 2007 or so). Yes economists claim to have had NO IDEA – unable to predict, how scientific is their science? But meanwhile the man on the street if they paid any attention to even housing prices, knew things were wacky and that that kind of wacky might not end well …

    So Schiff was another one preaching collapse, like Roubini. A libertarian? Sure, but not everyone is so ideological, if libertarians at the time seem to be describing the world then they’ll be popular at that time. Only the things Schiff said to invest in to avoid collapse were total busts (especially foreign stocks). So while those investing in a total market index would have lost 40%, Schiff managed to lose twice that. The market crashed AND you’d be better off in the market. Then of course he’ll claim to have been correct because he predicted the crash, but if you manage to lose twice as much money you’re not correct in any way that matters.

  4. M. Rains

    I actually think that Schiff has a lot of things right. What he has wrong is how long this house of cards can last. He certainly plays the self promotion game and the “news” media love to bring him in if not just for the controversy.

  5. F. Beard

    To think I actually bought one of Schiff’s book. But that was around 2007 (earlier?). I’ve learned a bit since.

    But the problem isn’t really Peter Schiff (jerk that he is); the problem is a an unstable money system that recurrently wrecks the economy and provides fertile soil for all sorts of idiocy. How about we fix that?

    He violated one of the basic rules of investment management, which is diversification* … Yves Smith

    So then why do we have what is essentially a single, government-enforced/backed monopoly money supply (bank credit) for private debt? Who ordered that idiocy?

    *And which comes from the Bible:
    Cast your bread on the surface of the waters, for you will find it after many days. Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.
    Ecclesiastes 11:1-2 New American Standard Bible (NASB)

  6. JCC

    I’m no fan of Schiff, but no fan of the CPI either. After all, CPI stands for Consumer Price Index and the bottom line is that Schiff’s basket of goods far better represents the majority of “consumer” spending than does the Gov’t's basket of goods minus food and energy.

    Constant discussion about what level of inflation we are experiencing and using the CPI as the prime example of argument is like listening to people argue about who is more “in touch” with “the consumer”, the Republicans or Democrats, Liberals or Conservatives, Central Planners vs Libertarians. At the end of the discussion no one is wiser.

    1. jrs

      Well the M.I.T. measure actually is interesting. But at a certain point any inflation is too much when pretty much noone is experiencing wage increases. A few decades of that and …

    2. Ben Johannson

      We have CPI and we have the Billion Prices Project, which are in very close agreement, For all the people decrying CPI, I don’t see anyone doing the work to provide an alternative.

      And please don’t bring up shadowstats: they don’t use anything resembling an alternate methodology to compute inflation. They just take CPI and add a constant.

  7. pebird

    I understand leaving out food and energy for comparing inflation on a monthly or previous year basis. But when calculating over a decade, volatility isn’t a concern, so all consumer prices should be included, otherwise it doesn’t provide an accurate indicator of price changes.

  8. John Mc

    I enjoyed Hawkings quote here as it fits perfectly with Schiff’s propaganda.

    As JCC posits, I struggle with the veracity of governmental data reporting. Can someone enlighten me about how the work of John Williams at http://www.shadowstats.com/ fits with Schiff’s critique? Is Schiff co-opting Williams’ narrative? Or is there some other institutional or ideological connection between them that is less visible to the public?

    Currently, I am reading Mirowski’s & Plehwe’s – The Road to Mount Pelerin: The Making of Neoliberal Thought and I find myself confused with all the various strains of neoliberal histories (Swiss, French, British & American). Anyone translate this strain in America at the present?

    1. MLS

      I know a bit about John Williams’ work over at ShadowStats, and it largely modifies current iterations of CPI (along with other government measures) to account for hedonic adjustments made over time (e.g., a you get more features on a car than the previous year, so even though the price may be higher, you are really just paying for those additional bells and whistles, so there could in theory be no real increase in price if we make some adjustments). I think the entire notion of hedonic adjustments is riddled with potential problems since the calculations are too often subjective, and Williams’ work shows higher-than-CPI-reported inflation figures over time. I tend to think he does a pretty good job but others feel his agenda is at least somewhat politicized. Williams does at least share Schiff’s view that the government has an incentive to understate inflation, in his mind to reduce Social Security payments. To my knowledge there’s no link between the two, however.

      1. Yves Smith Post author

        No, you have that wrong. John Williams used to have a strong following (circa 2007-8) but has fallen into disfavor.

        He does a very good job of maintaining a record of how the various sources of government economic data have changed their reporting methodologies over time. However, his alternative measure of inflation has no methodological foundation. He’s just slapped another 4% onto CPI, apparently based on a side remark by one person at the BEA years ago (and that was when reported inflation was higher than now, more like 3%).

        1. slothrop

          Fallen out of disfavor according to whom? People pay for his numbers. You are using ridiculous government numbers they hand out for free. Which numbers are prima facie more credible? Since 2011 he’s begin calling for a US dollar crisis in 2014 and he will be a lot closer on that score than anyone posting at this blog.

          Looks like it’s ad hominem hitpiece day at Naked Capitalism.

          1. Yves Smith Post author

            And are we having a dollar crisis? Emerging markets currencies are tanking and the dollar is going up relative to them. It’s also rising v. the euro. It’s down today because the bad ISM numbers are leading to doubts as to whether the Fed will continue the taper. But the Fed’s body language has been that it really wants out, it finally recognizes the policy hasn’t been very productive.

            Williams was widely quoted in the econoblogosphere in 2007 and 2008 and he is not now.

            As for “people pay for his data” unless you can prove MORE people are paying for his data now than in 2008, that does not disprove my remark. And his alternate CPI numbers are crap. When I realized how he was preparing them, I could not longer in good faith rely on him.

            1. Anon

              You have to wait till the reserve currency status fails. By the way, all the reserve currencies have fallen, US is no different. By then, you will know the effect of 1 trillion a year over 5 yrs.

  9. susan the other

    The kind of return Schiff was looking for amounts to looting and vigilnte-ism. He is more like the Don Quixote of investing. A lot of investment advisors have been confounded by this depression. But none of them lack subtlety like Schiff. At least Roubini knows gold is a mirage, a “barbaric relic.” Schiff is now becoming arrogant because he is embarrassed about his simplistic faith in gold. And it will be a long time before he admits that the real value of gold is based on the forces of fiat too. This is a topic that needs airing because the gold vigilantes are the same as the bond vigilantes – all of them looking for a quick profit from any fluctuation in the markets. Which behavior really seems nuts when it preempts long term goals. Social goals that is (the only true currency). And sovereign currencies and debt used to promote social goals. Blahblahblah.

  10. Steve The Great

    The grain of salt that I take with the general narrative presented by Peter Schiff is that he fails to adequately account for how much more humanly disfunctional most of the world is in comparison to the United States. The leadership in China for example is not nationalistic in the sense that they give a crap about the Chinese people. I don’t believe they are very much more altruistic about their fellow Chinese than the Korean leadership is about their fellow Koreans. Americans tend to assume that rational players by definition are concerned about the welfare of the people around them. That’s not how a “rational player” considers their course of action in every other place on earth. Sure the 1% on Wall Street and K street are psychopaths, but they’re just playground bullies compared to their counterparts in Asia. That is, of course, why you – the innocent reader, is reading this now on a devise that was produced in the labor markets over there. You have voted with your dollars to support the most antihuman, psychopathic labor markets on earth. But you, of course, would only support this imposition on human progress from distance. Wise man say: “perhaps Americans regard their own innocence too highly.” That’s why the house of cards doesn’t necessarily fall in the direction with the wind.

    apologies if I posted this twice
    copied it as I went due to the possibility of comment obliterating page refresh
    then clicked reply instead of post comment
    hence the second time around
    or maybe the first
    at this point I just don’t know
    but here’s my fabulous comment again?

  11. Robert Dudek

    I dislike Schiff intensely, but the author of this piece doesn’t seem to know about Shadow Stats. John Williams uses methodology formerly used to measure CPI in the US and has consistently reported that inflation is significantly higher than the rate reported using current methodology.

  12. Robert Dudek

    About his investing acumen… Schiff must have incredibly bad timing or else was smashed by playing the leverage game, because two things he talks about all the time have done exceedingly well for the buy-and-hold investor. Can you guess what they are?

    Gold: Sept 1, 2008= $822.25/oz (p.m. fix), current=$1,261.10
    Silver: Sept 1, 2008= $13.58/oz; current=$19.38

    1. jrs

      Foreign stocks? He was pretty big on those also, before the crash, because see the U.S. was going down but the rest of the world would be coming up … uh huh.

      Gold and silver well yea all about timing as they were a lot higher than present prices also.

    2. Yves Smith Post author

      He bought junior equity in Australian gold trusts. You can go to the post I link to, which will take you back to the Shedlock post, which has his portfolio. Real trash.

  13. Yancey Ward

    Schiff isn’t wrong about everything, but I have always thought he was wrong about inflation (especially the timing), and that is what hurts him. Demographics are firmly in control, and deflation is what is coming. Hyperinflation in the US is only going to happen if the Fed allows it, and I think, in the end (at least as far as my lifespan is concerned) the Fed will balk at full monetization of the unpayable debts and will start allowing defaults when push comes to shove.

    A thing to look for over the next decade will be a continued fall in the US birthrate that will eventually land the US in the same place a lot European and Japan are today.

  14. Robert Dudek

    Has your cost of living gone up 30-50% since late 2009 or has it increased somewhere on the order of 5-7%?

    I live in Canada and our dollar has held up pretty well, but I would say that rent, food and basic household items (roughly 65%-75% of my spending) has gone up between 20-25% over the last four years.

  15. Robert Dudek

    “A thing to look for over the next decade will be a continued fall in the US birthrate that will eventually land the US in the same place a lot European and Japan are today.”

    Unless the US severely restricts immigration (possible, though unlikely in my view) there is no way the demographics will be comparable to Europe and especially Japan. One of the “benefits” of having an extremely poor public education system overall (compared to any OECD country) is that you retain a massive “no-hope” underclass who tend to have higher birth rates than well-educated people.

  16. Tinky

    Frankly, this “smackdown” is mostly a hodge-podge of ad hominem attacks, straw men, and poorly constructed critiques.

    Schiff’s personality, which is obviously of great importance to both Yves and Heckmann, is irrelevant to the substance of his arguments. He has made a common mistake in that he has attempted to time the market, but does that, as Heckmann suggests, mean that his views are necessarily wrong? I discerned the housing bubble in 2004, and sold a Florida condo on that basis in ’05. Was I “wrong”? Only in the narrow sense that a trader might emphasize.

    Heckmann question’s Schiff’s criticisms of the CPI, yet there is abundant evidence that it is a poor gauge of true inflation, and that it has been refined to serve the Government’s “low inflation” preferred narrative.

    Does Heckmann actually believe that the Fed’s credit creation hasn’t impacted the stock market? Does he believe that basic food stuffs, home energy costs, and health care costs have only been rising at around 2% annually? If so, I’d recommend that he abandon the ivory tower for a while and live in the real world.

    1. Yves Smith Post author

      Schiff has been calling for hyperinflation and it hasn’t happened. Did you miss that commodities prices were also falling prior to the Fed starting to talk about the taper? House prices are still below pre-crisis levels in most markets. The stock market is asset prices, not inflation, so that part of your argument is off point.

      And no, the Heckmann article is a point by point takedown.

      This article goes on at considerable length about how Schiff is wrong. The fact that he is also a jerk (which is an aside) is included because it make his visibility even more perplexing.

      1. Anon

        You conveniently ignore that other countries are absorbing the inflation in order to save the investments in UST and the export oriented nature of their own economies. Also US does not have hyper inflation yet, but there is severe inflation. Junk your CPI numbers and include : education, healthcare, gas and food. You will be in for a surprise.

      2. Tyrone Shoelaces

        You have been following this Peter pretty closely for someone who claims to think he’s a jerk. Are you sure there isn’t an unidentified sexual attraction / tension motivating your fascination with this man?

        1. Yves Smith Post author

          Oh, puhleeze.

          This is the first time I’ve written about him since Jan 2009. And that was only because Philip Pilkington sent me the excellent Heckmann takedown and urged me to run it. And it was Pilkington, as I pointed out, who sent me Cenk clip. I’ve been blissfully ignorant of what Schiff was up to until Pilkington informed me of his recent shenanigans.

          So are you going to accuse Pilkington of being sexually attracted to him? Trying to denigrate women by accuse them of being emotional is the cheapest trick in the book.

  17. MG

    Schiff is just a classic self-promoting narcissist who just yells loudly and often enough to get the attention of people to push his business. Also doesn’t hurt that he has a father who provides him with a little name recognition too.

  18. Teejay

    “… only 44.3%”
    Just keeping up with this “low” inflation my $100.00 IRA deposit would need to accrue to $144.30 in ten years. If my math hasn’t failed me, a “generous” 2% interest would yield
    $121.90. The interest doesn’t even keep up with inflation.
    What is invalid with including food and fuel in CPI? I do consumer them and they are eating a hole in my pocket. Would it be possible for the Fed to calculate a mean value for volatile
    consumables like food and fuel?

    1. Souvarine

      Don’t be confused. Headline inflation, or CPI (calculated by the BLS, not by the Fed) does include fuel and food prices. But those elements aren’t saisonally (monthly) adjusted.
      Core CPI, generaly used by economists, does not include them.

  19. bob smith

    I detest and despise shiff, his free market panacea has never worked, and it will never work in this world- the real world that is.

    on inflation however.
    Since 2000- almost everything has doubled in price- except: electronics, cars and salaries.
    does a doubling in the cost of virtually everything equate to severe inflation?

    1. Ben Johannson

      Many comments are excellent illustrations of why economics is more akin to religion than science: people rely on anecdotal experience more than aggregate data. They “feel” that everything is much more expensive and say “Lie!”, to anything that conflicts with the inner narrative.

      1. bob smith

        then what costs the same as it did in 2000?
        the rent / a McDonalds meal / gas / food / medical costs / gold / milk / public transportation / tolls / fines and tickets?

        please explain to me- other than electronics made in china, what hasn’t doubled in price since 2000?

  20. washunate

    This is a really interesting tone. It is hyperbolic and dismissive, so it is preaching to the choir, not trying to persuade those of a different opinion. The obvious question I have, then, is why? Why not let Schiff’s own self-promotion and aggrandizement, not to mention violation of the first rule of prognostication (don’t give a timeline!) speak for itself?

    The elephant in the room is that in plain English, the cost of living – of maintaining a middle class lifestyle – has gone up a lot in the US over the past couple decades. The failure to address that central problem is what allows people like Schiff to fill the vacuum with their noise.

    1. Yves Smith Post author

      The onus is on you to establish that the post is hyperbolic. Calling a spade a spade is not hyperbole. Schiff is such an extreme character, including in his investment performance and his exaggeration of his credentials and other “successes” that an accurate depiction is extreme. As for dismissive, I suggest you read my post on, say Adam Davidson, or on the first award of the Frederick Mishkin Prize for Intellectual Integrity. This is tame by comparison.

      I take great offense at money managers who basically steal from clients. Schiff is worth $70 million dollars and has destroyed the lives of many small customers. 60% to 70% losses in two years is simply unheard of, yet he still has a business. The people who give Schiff a platform are enabling him to continue to prey on people. He makes Jamie Dimon look like a paragon of virtue, by contrast, as a businessman. That’s why I am after Schiff.

      1. washunate

        The headline is called: “Peter Schiff is Wrong About Everything”

        “Any student who has taken macroecon 101 knows this is an overly-simplistic view of inflation. It’s hard to believe that an “economist” holds this view.”

        “Does anybody buy this? I don’t.”

        “Substance aside — not that substance isn’t important — Austrian economics very much has the psychology of a cult.”

        I thought the tone was pretty obvious reading through this. If I described MMT as a cult, how would that be received? If others read it differently, then that really demonstrates how we bring different perspectives to things. Which is what I am observing:

        This piece is not aimed at people worried about inflation. It’s aimed at people who say inflation isn’t a problem. So, my interest is, why is Nate Heckmann worried that people who don’t think inflation is a problem would listen to Peter Schiff? Is this a sign that the wage stagnation/price inflation we have been experiencing has reached such extreme levels that even acknowledging its existence threatens carefully crafted and sheltered academic models of how things ought to work in a world where fraud and inequality aren’t problems?

        This style reminds me of Dem pundits who would bash Ron Paul when he said something opposing the drug war or the war on terror or something, as if pointing out the kernel of truth in someone’s message is the same as supporting the entire belief system of the individual. Schiff is wrong about hyperinflation (IMO, although I certainly concede it’s possible we have such a collapse), and he seems like pretty much the same smarmy self promoter that everyone else in DC and Wall Street is.

        And yet, even if he’s wrong, he’s at least talking about the subject.

      2. Trent

        “60% to 70% losses in two years is simply unheard of, yet he still has a business.”

        Berkshire Hathaway close 12/07/2007 – 148220
        Berkshire Hathaway close 03/09/2009 – 73195
        . . . . 50% loss in 15 months
        Goldman Sachs close 10/26/2007 – 235
        Goldman Sachs close 11/21/2008 – 55
        . . . . 75% loss in 13 months
        General Electric close 10/07/2007 – 41
        General Electric close 03/06/2009 – 7.25
        . . . . 82% loss in 17 months
        Boeing close 10/05/2007 – 102
        Boeing close 03/06/2009 – 30
        . . . . 72% loss in 17 months
        Intel close 12/07/2007 – 27.75
        Intel close 03/06/2009 – 12.50
        . . . . 55% loss in 15 months

        1. Yves Smith Post author

          That’s not a diversified portfolio. Anyone can point to stocks that did badly. Lucent went from 100 to barely above a buck a share in the dot bomb era. I was running a portfolio with GE in it (I didn’t pick it, I assumed control) and I dumped it IIRC at around 30.

          You need to point to a professional money manager with entirely retail customers, which means a lower risk profile than for accredited investors, and not using leverage like a hedge fund that had results like Schiff’s.

          Plus none of the stocks you list fit Schiff’s pre crisis thesis.

  21. backwardsevolution

    Schiff has an agenda, and so does Krugman. Neither of them is calling for an end to what is really killing everyone – constant, never-ending inflation. They both want it for different reasons.

    Character-wise, I don’t see much difference between the two idiots.

  22. Skippy

    Or is it a case of wages not tracking cost of living, because of some schools whacky theory’s…. cough…political agenda.

    1. backwardsevolution

      Skippy – “Or is it a case of wages not tracking cost of living, because of some schools whacky theory’s…. cough…political agenda.”

      Of course wages are not tracking the cost of living, but why is the cost of living going up by leaps and bounds? Isn’t it silly to keep putting a Band-Aid on things by raising wages? Wouldn’t it be more prudent to stop the never-ending inflation so that we don’t need to beg for raises?

      This is what always happens. TPTB create inflation (go, Krugman!), and then everybody gets a raise. Wow, that really solves things, doesn’t it (sarc)? Then we all end up back in the same situation when the next crash happens. Crash – bailout- inflation artificially created – wages go up – prices go up.

      We’re saved – yay! What a crock.

      1. skippyd

        According to MMT in a floating exchange-rate regime there is an unlimited supply of funds, but these are given a fixed price by the central bank. This is a bit like a monopolist with enormous excess capacity that can, for all intents and purposes, produce an infinite amount of cars. The monopoly firm sets the price of the cars that they sell and allow demand to adjust in line with that price. Ditto for money in the MMT understanding of how the banking system works. The central bank is effectively a ‘money monopolist’ that allows the production of an infinite amount of money at a set price.

        There is an enormous difference here in how these processes are conceptualised. The mainstream approach deals almost exclusively with ‘stocks’ of money within the banking system, while the MMT approach deals with ‘flows’ and their rate of rate of expansion and contraction. The mainstream view is that a ‘stock’ of money is injected into the banking system by the central bank and this in turn creates another ‘stock’ of money in the economy through the process of the money multiplier. The MMT view, on the other hand, is that the central bank sets a price for money and allows the demand for this money to determine the ‘flows’ into the economy that result.

        The mainstream ‘money stock’ approach is actually remarkably primitive when thought through in any depth and leads to misunderstandings about money and debt creation. This harks back to the fact that mainstream theorists use crude ‘static’ modelling straight out of 19th century engineering when trying to understand the economy – but this might be a bit too complex to get into here; let’s just say that the approach is a tad dated. – snip

        “Again, the hiring part has little to do with MMT, the Job Guarantee is a boldfaced propaganda lie.”

        No, you’re wrong. It’s an inflation anchor policy to replace the current inflation anchor policy where the central bank creates unemployment so that people go on welfare and spend less. Do your homework before making such po-faced assertions.

        “The problems we face have nothing to do with lack of money – the banks are swimming in money, they are drowning in money… ”

        Banks holding money as reserves and you having money in your pocket are two VERY different things. Bank reserves don’t get spent into the economy (duh!) so they cannot create demand and employment. Pretty obvious, really. And not exactly controversial…

        http://www.nakedcapitalism.com/2012/03/philip-pilkington-policing-the-economists-from-within-their-own-minds-%E2%80%93-islm-as-a-model-of-intellectual-control.html

        I think you need to bone up on MMT… you can have unemployment as the inflation tool or JG… take your pick. BTW the Austrians et al really screwed it up and now compound their mistakes…. out of their quasi religious moralizing.

        skippy… Krugman [rational expectations w/market failures new Keynesian] and Schiff [praxeology - bring on the deflation market clearing Austrian ninny] lmmao… are both status quo monkey grinders.

      2. washunate

        That does seem to be the fundamental problem theoretically. MMT claims that employment/wages regulates the currency (serves as a price anchor by being a buffer stock – MMT thus proposes a reserve army of the employed rather than a reserve army of the unemployed or a gold standard or whatever).

        Yet, we’ve experienced massive unemployment over the past couple decades even as prices have risen considerably. That seems to invalidate the hypothesis that a price anchor must be chosen. The sovereign apparently can debase the currency regardless of the existence of a buffer stock.

          1. washunate

            You can call it whatever you like; I don’t care about semantic games.

            It is a request for real world testing of the theoretical claim that a system of political economy must choose a price anchor. It seems that our history shows just the opposite – neither gold nor silver nor copper nor nickel nor unemployment has been sufficient to maintain price stability.

            1. Skippy

              “You can call it whatever you like; I don’t care about semantic games.” – washunate

              skip here… Unquantified dismissive w/games attachment is poor form. Other wise… your opinion on price anchors leads me to think your a free market fundamentalist of some stripe and that opens up a whole box of goodies, tho it seems your keeping your powder dry at the moment.

              “The sovereign apparently can debase the currency regardless of the existence of a buffer stock.” – If your seeking a long term store of value, currency is not the place, the world does not use hard money anymore, its just numbers that reflect accountancy and nothing more.

              Skippy… you have to remember that the first coins were not stores of value, but, a numerical form of record.

              1. washunate

                “If your seeking a long term store of value, currency is not the place…”

                I heartily agree.

                It’s MMT that claims theoretically that a system of political economy requires a price anchor, despite the repeated real world failures of price anchors to actually do what their name suggests.

  23. The Dude

    Does Naked Capitalism really have to descend to the level of CNNs of the world and engage in character assassination? Argue with the ideas instead of calling your opponent names.

    1. Yves Smith Post author

      Reading comprehension fail. The article discusses at some length how Schiff has been utterly and completely wrong in his hyperinflation calls. And it is also germane that he appears not to be competent in his day job, that of being a money manager, and falsely claims to be an economist. How is that “character assassination”? People usually get on financial TV because they have some sort of demonstrable expertise, but I struggle to find any in the case of Schiff.

      1. rob

        I think Shiff is an idiot, But I have to say, I thought everyone on financial TV was selling something.Who has ever demonstrated ability?All of the pudits and cable broadcast personalities are there because someones boss wants someone spouting what they are selling.The stock market doesn’t make money because it is good at something. It moves forward because of multilateral propaganda campaigns that have indoctrinated the masses with myths and anecdotal” made a million/billion bucks”,stories.
        The vast majority of those on wall st are the little guys trying to play the game. Too bad the game has been rigged for so long, and those little guys are just there to impose the aura of legitimacy to a corrupt system.

  24. backwardsevolution

    “Krugman’s description of the Austrian viewpoint sums it up best:

    Substance aside — not that substance isn’t important — Austrian economics very much has the psychology of a cult. Its devotees believe that they have access to a truth that generations of mainstream economists have somehow failed to discern; they go wild at any suggestion that maybe they’re the ones who have an intellectual blind spot.”

    Someone else could sum Krugman up thusly:

    “Substance aside – not that we ever worried about that – Keynesian economics very much has the psychology of a cult. Its devotees believe that they have access to a truth that generations of mainstream economists have failed at; they can’t fathom that they are blind as well.”

  25. impermanence

    Schiff makes the mistake that nearly everybody else makes…attempting to profit off of other people’s misfortune, the very heart of this financialised economic system.

    God forbid that people actually produce something of economic value.

  26. Greg

    As big an idiot as I think Schiff is, I greatly enjoyed seeing him make a fool of Art Laugher back in 2007. Laugher was denying the reality of a housing/stock market bubble and Schiff knew the credit led boom was due for a major correction. Schiff was right about people being overextend on credit being bad, he just has no clue for a stable alternative system being a gold bug and all.

    1. Dave

      Laffer is a libertarian. The only way free market capitism and/or the gold standard is going to work is every country in the world adapts it. That is never going to happen, it is a keen to one world government. Their whole concept of nirvana is just clap trap that is pure fantasy.

    2. skippy

      Fraud led boom – fixed

      skippy… its not like the credit had its own agency, someone had to issue it.

  27. Inflations

    Well, before you guys debunk his inflation theory, travel out to the developing world or the EM markets, which have absorbed the inflation in order to save their investments in UST. Do your so called elite economic schools ever teach this ? Its one thing sitting in an AC room and wondering where the inflation went. Its another thing when a farmer in another part of the world is experiencing it, particularly nations which import oil and are bound by the dollar for oil payments system.

    1. Yves Smith Post author

      He predicted hyperinflation and I believe a dollar collapse. Nice try at a save, but this is not what Schiff has been preaching.

      1. Dave

        Went on Glenn Beck between 2009-2011 and called for hyperinflation and USD index going to 20 causing Obama to not win a second term. Just a bit outside.

    2. slowlee

      Emerging markets have experienced food inflation as indigenous, small scale farmers have
      been displaced by industrial farming operations, the produce of which is sold on world
      markets. Food for consumption becomes scarce; much of what replaces it is imported and
      sold at prices which now unemployed displaced farmers cannot afford.

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