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Peter Schiff vs. Art LafferPeter Schiff Although I would love to refute all of his absurd positions, two in particular stand out as worthy of discussion. First, Laffer compared today's current account deficits to those experienced during America's first two hundred years as a developing nation. This flawed comparison ignores that as a developing nation America borrowed to invest. Those current account deficits funded the construction of vast infrastructure, such as roads, canals, ports, and rail roads, as well the formation of capital equipment, farms, and factories, all of which fueled American productivity. Such investments enabled the production of vast quantities of consumer goods, which America sold back to its creditors, to both pay interest and retire principle. In the end, America's creditors got consumer goods, and America became the wealthiest industrial nation the world had ever seen, in the process turning its current account deficits into enormous surpluses. In a "night and day" contrast, today's current account deficit has the much more limited role of solely financing consumer spending. Borrowing to produce is the way poor nations become rich. Borrowing to consume is the way rich nations become poor. By squandering borrowed money on consumption, America has no way to repay the principal of its debts, let alone the interest. Borrowing to build factories is not the economic equivalent of borrowing to buy flat panel, high definition televisions, and it's amazing that Laffer can't see the difference. Second, Laffer confused legitimate
wealth creation with the mere paper appreciation of stocks and
real estate. Real wealth creation refers to additions made to
the capital stock or improvements made to land; such as constructing
new homes, building new factories, opening new mines, laying
new infrastructure, planting new farmland, etc. However, if an
unimproved house simply appraises for twice its value of five
years ago, how is society any wealthier as a result? The house
provides no more shelter now than it did then. If stock prices
rise merely as a result of multiple expansions, what real wealth
has been created? America's paper wealth however is merely a dream that will soon vanish. Perhaps it's our gargantuan trade deficit that will actually provide the wake up call. When it does all that will remain will be the debt. As higher interest rates make servicing that debt impossible, the dream will become a horrific nightmare. Perhaps if I drew it out on a napkin Laffer might finally get the picture. Don't wait for reality to set
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