Peter Schiff's April 5 commentary, "No More Legs to Stand on," offers succinct analysis about the economic troubles we are now facing. Here's an excerpt:
As investors and market strategists sift through every new economic tea leaf for clues about the health of the U.S. economy, I am reminded of a group of railroad engineers discussing the structural qualities of the track bed while an overloaded fright train careens around a sharp turn. For those not lost in the inconsequential minutia, a severe recession is an outright certainty, regardless of what current statistics might indicate on a day-to-day basis.Consumer spending must dry up, and yet as the prices increase due to a weakening US dollar, the Fed will probably not be able to cushion the landing by decreasing interest rates. Rather, to try to keep foreign investors from dumping the US dollar as it weakens, they will have to increase interest rates to compensate. All this could create a crushing economic burden for the US economy.
Since the bursting of the dot.com bubble, the U.S. economy has been fueled by an enormous consumer spending spree. This largess has been artificially propped up by the largest real estate bubble in U.S. history. In fact, housing has acted as a three-legged stool upon which American consumers have been precariously perched. Those legs are: 1) home equity extractions; 2) adjustable rate mortgages; 3) the wealth effect.
First, rising real estate prices allowed Americans to routinely borrow against home equity and repeatedly refinance loans of any stripe (be they mortgage, credit card or automobile) at lower rates. If the home equity was turned into cash, or used to pay off other debts, the result was additional spending beyond what consumers could have afforded based solely on their incomes.
Second, adjustable rate mortgages, especially the "negative amortization" or the "interest only" varieties, allowed Americans to enjoy temporarily low mortgage payments despite accumulating bigger mortgages. The difference between those temporarily low rates and the normal rates, to which these loans would ultimately reset, was available to be spent by homeowners.
Third, as real estate prices rose, homeowners felt wealthier, which has been shown to be a stimulant to spending. In addition, the pervasive belief that home prices would continue to rise indefinitely led many Americans to make false assumptions regarding their financial circumstances and their need to save to meet future obligations and retirement goals. As a result, money that would have typically been applied to savings was spent.
Ladies and gentlemen, it's time to get out of debt now and start saving in ways that will still have value when the dollar tanks.