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Tuesday, July 10, 2007

Peter Schiff: will Japan pull the plug on America?

Peter Schiff, in The Market Oracle yesterday, reports that Japanese monetary inflation is about to show up in their consumer prices. They may be able to cover it by fudging the inflation index (some of us have seen that done elsewhere), but it can't fool everyone forever.

For a long time, Japan has increased its money supply and exported the excess cash by purchasing US Treasury bonds. This keeps the yen steady against the weak dollar, protecting Japan's exports; and it also keeps US interest rates low, so reducing the pressure to raise rates in Japan.

Schiff felicitously terms this a "vendor financing scheme", but regards America's economic collapse as "inevitable". He thinks hyperinflation is too high a price for Japan to pay, and if she retreats from the brink and alters her monetary policy, then the result will be inflation in the US, forcing higher interest rates, and collapsing stock and real property values.

This is what Schiff has predicted in his book, "Crash Proof" (see my review here) and it's interesting to note that the author has been appearing more frequently in the news lately. Either he thinks the turning point is close, or he's marketing the book more actively.

Schiff also comments on the fear of deflation, saying "falling consumer prices are one of the natural rewards that people enjoy in market economies", a point made in Richard Daughty's masterly performance on You Tube. It's so funny and succinct that I re-watch this myself from time to time - have another look:



UPDATE

For a counter-view (in the sense that he doesn't expect the crisis for some years yet), see Puru Saxena as I reported on July 28 here.

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