Peter Schiff is Wrong __ James Turk is Wrong
Peter Schiff's Euro Pacific Capital newsletter from April of 2009 stands out as especially revealing. That newsletter clearly demonstrates just how far off the proponents of the Austrian school are on understanding inflation and hyperinflation. The newsletter featured a guest article written a month earlier by James Turk entitled "On the Cusp of Hyperinflation". [James Turk is the author of The Collapse of the Dollar and the founder of goldmoney.com.] In this March 2009 article, James Turk enumerated 6 reasons for his predicting that "hyperinflation of the US dollar is imminent" and also said "[the US dollar] is on the cusp of hyperinflation. I expect this to become increasingly clear within twelve months." Of course this hyperinflation prediction has proven to be wildly off the mark. Average consumer price inflation by any measure has registered in the low to mid single digits in the 2½ years since. Nevertheless, in September of 2010, eighteen months after his 'hyperinflation within a year' prediction, Turk unapologetically published another such prediction, in which he hyperlinked to his original prediction. Though no doubt he is sincere, James Turk is dead wrong. It will be interesting to see for how many more years James Turk and Peter Schiff, et al, will continue to reiterate these runaway inflation predictions that will completely fail to materialize.
Austrian Economics is Wrong
This, folks, is your fair warning: Peter Schiff, James Turk, John Williams, Marc Faber, Charles Goyette and others will surely continue ad nauseum with their predictions of runaway inflation in the dollar but consumer prices simply aren't going to cooperate with them. Sooner or later these pundits will have to face the reality of radically lower consumer price inflation than they predict. Eventually their predictions will lose all credibility. These guys really don't understand economics holistically—especially the factors affecting why people raise prices. Yes, I say factors (plural), as Milton Friedman's famous quote, "Inflation is always and everywhere a monetary phenomenon" is simply wrong. And I say people, as the Austrian school simply views consumer prices as inextricably linked to the money supply, as if little else matters, such as people's perceptions, and people's propensities for taking pricing action (or no action). You just can't have a viable price inflation model that completely removes human behavior from the equation. Sorry Milton.
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Although Peter Schiff and certain Austrian economists talk a very convincing talk, they are dead wrong on several fronts. Their key tenets stem from faulty premises which they stubbornly refuse to reconsider. Their conclusions follow from simplistic and unrealistic half-truths. For example, consider the catchphrase, "You can't spend your way to prosperity." It is half-true, because for an individual, spending will indeed reduce rather than increase his/her own wealth. But for a whole economy it's a very different story. One consumer's spending is a zero-sum wealth transfer in terms of the whole (since the spending of one party is always revenue to another party). It’s a wash. Total spending equals total revenue (ignoring taxes & entitlements), and so as total spending goes up, total revenues go up in lockstep. Spending and revenues are really like two sides of the same coin.
Consider that if all spending were to cease, then all revenues would also cease. No spending by anyone would mean no income for anyone, and then there would be no economy. Prosperity would of course be impossible. For the whole, then, consumer spending acts as essential to prosperity by enabling its flip side—income. And spending is also what entices further production. For example, a retailer may initially stock a certain amount of a product, but will not order any more of it until the product has been selling. Consumer buying is thus essential to support jobs in goods manufacturing. There is no question that consumer spending's flip side is revenue (income) and that consumer spending also boosts both production and employment. So why does a guy like Peter Schiff keep saying that consumer spending is bad for the economy and that investing/saving is good?
Saving rather than spending is good for the individual, yes, but people parking money in savings is detrimental stagnation for the economy as a whole. (These pundits fail to see such distinctions.) It's no coincidence that since the 2008 crises, just as we've had the weakest economy in generations, record amounts of cash have been idly 'sitting on the sidelines' on corporate balance sheets, in bank reserves, and in Americans' portfolios.
Austrian economics is enjoying so much resurgence these days that Mises and Hayek are actually now on the lips of several candidates in the 2012 election cycle. But don't be fooled. Austrian economics misleads because it is based upon plausible-sounding half-truths. Bottom line: the overwhelmingly likely future inflation scenario is that average consumer prices will continue to rise only in the single digits for many years to come. This is despite trillions of 'money printing' by the Fed being quite likely. I personally think it's even highly probable that consumer prices will average low single digit inflation, i.e. below 5.5%, over the next 5 years and beyond. That would mean, on average, goods and services will cost at the most about one third more than they do today by November of 2016. Copy the URL for my website into your google calendar a year or two out as a reminder to check back for new articles and updates—I'll see you then!