 More Gasoline
on the Fire
Peter Schiff
Dec 14, 2007
This week's announcement by
the Fed that it will create a new mechanism to provide funding
for credit challenged banks has been lauded by Wall Street as
an innovative approach to solving the credit crisis. In truth,
it is really just the same response the Fed has had for all problems
great and small: crank up the printing presses, shower money
on the problem, and hope that financial pain can be obscured
by the balm of inflation. Both the Fed and Washington politicians
are completely clueless regarding the ill effects of the plan,
and are simply acting in desperation to keep a ticking time bomb
from exploding before the next election.
The Fed and other foreign central
banks will provide this liquidity by auctioning low interest
rate loans to holders of U.S. mortgaged-backed securities. The
loans will be made under the same terms currently in use at the
Fed's "discount window", with the added benefits of
even lower interest rates and anonymity (borrowers wish to avoid
the public stigma that comes from utilizing the discount window).
Since the loans can be collateralized by mortgage-backed securities,
the Fed will be on the hook should these loans not be repaid.
In other words, the losses will simply be monetized, or more
precisely socialized, as they are passed to the public in the
form of inflation.
To get a sense of the losses
that potentially await the public, in a recent transaction, E-Trade
Financial liquidated its entire portfolio of subprime mortgaged-backed
securities for a mere 27 cents on the dollar!
The hope that this additional
credit will somehow alleviate the problems in the U.S. housing
market is extremely naïve. Virtually none of this newly-created
credit will find its way back into the domestic mortgage market.
With our real estate prices still too high, the gathering potential
for lenders to be forced to assume liability for "unsophisticated"
borrowers, the added uncertainty regarding mortgage terms, and
the persistent weakness in the U.S. dollar, such loans will be
far too risky for most foreign lenders to consider. Instead,
these banks will take this cheap Fed money and invest it in higher
yielding assets overseas. Off-loading risky U.S. mortgages to
the Fed in exchange for cheap loans that can be used to finance
better-yielding foreign investments could well develop
into the next carry-trade of choice.
The real losers will be ordinary
Americans, who do not get the benefit of the newly-created
money, but merely suffer the consequences of rising domestic
prices and a falling standard of living. With this new plan,
the Fed is laying its cards on the table and its hand is a loser.
If mortgage losses are socialized through inflation, this new
cure will be even worse for the economy than the "housing
bubble disease" the Fed infected us with in the first place.
Now that the Fed has upped
the inflation ante it's time to press our bets on gold. About
two weeks ago Goldman Sachs predicted that shorting gold will
be the best trade of 2008. Call me cynical, but knowing Goldman
Sachs, my hunch is this shrewd investment bank, recently criticized
for shorting the very subprime loans it was touting to its customers,
may be perusing a similar strategy with gold. Perhaps Goldman
has a current short position it needs to cover or wants to buy
a lot more gold, but needs to convince others to sell it to them.
Maybe Goldman will be right
after all. Shorting gold could turn out to be the best trade
of 2008, but not for those who short it, but for Goldman Sachs
as it takes the other side of the trades. Recent moves by Paulson
and Bernanke virtually guarantee that gold will rise. It's good
to be the king.
For a more in depth analysis
of the inherent dangers facing the U.S. economy and the implications
for U.S. dollar denominated investments, read my new book "Crash
Proof: How to Profit from the Coming Economic Collapse."
Click here
to order a copy today.
 More importantly, make sure to protect
your wealth and preserve your purchasing power before it's too
late. Discover
the best way to buy gold at www.goldyoucanfold.com, download my free
research report on the powerful case for investing in foreign
equities available at www.researchreportone.com, and subscribe to
my free, on-line investment
newsletter.
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
Archives
 Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
321gold Ltd
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