Wikinvest Wire

The Mish-Schiff catfight

Thursday, January 29, 2009

Having just stumbled upon the Mike Shedlock-Peter Schiff online feud as Schiff had executed a fine compound-riposte in response to Mish's dazzling ballestra-lunge earlier in the week, it suddenly became clear that data supporting one of the central arguments on one of my favorite subjects - "deflation" - was in dire need of an update.

First, for those of you who missed it, here are the two attacks:

Jan. 25 - Mish: Peter Schiff Was Wrong
Jan. 29 - Schiff: A Response to My Critics

There may be more commentary by one or the other, possibly both, over the last few days but you'll surely get the gist of what's going on by starting out with the references above.

To summarize, Peter Schiff was said to be very, very wrong last year and his clients are a little lighter in the wallet as a result (some, apparently, a lot lighter), while Mish's criticism was deemed wide-of-the-mark because it focuses on too narrow a time period.

It's all good clean fun reading...

Anyway, here's the chart from the first reference above that needs a little updating.

It shows year-over-year money supply growth and is presented as evidence that big increases in the monetary base do not necessarily lead to inflation since money supply grew during the Great Depression which, as everyone knows, was a period of "deflation".
IMAGE The fact that the 25-30 percent growth in the money supply during the 1930s came after the worst of the depression from 1930 to 1933 aside (recall that the Great Depression was actually a three or four year depression followed by a recovery, followed by a nasty recession later in the decade - GNP actually grew 8 percent in 1934, 8 percent in 1935, 14 percent in 1936, and 5 percent in 1937), what is of much greater interest is to see what's happened to the recent data in the chart above.

Note the change in scale and the blue line slightly obscured by the gray recession bar.
IMAGE Clearly, this calls for another use of one of last year's most popular words - unprecedented.

14 comments:

Anonymous said...

Here's the inflation data from that period:
1930: -4.5%
1931: -12.0%
1932: -11.6%
1933: -1.4%
1934: +6.6%
1935: -1.3%
1936: +4.2%
1937: +0.97%
1938: -0.5%
1939: -0.7%
1940: +1.1%

- Ted

Anonymous said...

Mish is just jealous of Peter's new-found fame.

Chuck said...

Wouldn't Mish say that these charts don't matter because credit is being destroyed at such a high rate?

Anonymous said...

Sounds like Schiff's latest defense is "Yeah, I screwed up 2008, but just wait." He may not be wrong, but he is early and when it comes to trading, early is wrong.

The Mish/Schiff tift aside, if he advised his clients to save up for future opportunities, why wasnt he investing in low-risk stuff in 2008?

albrt said...

Mish is right, for now. It is very difficult for Helicopter Ben and Turbo Tax Timmy to create enough money to offset vanishing credit. But it's a "tortoise and the hare" type of race.

Just like in GD-I, once credit has fallen to a very low level it can't keep falling by the same amount the following year. Then Timmy and Ben have a chance to catch up.

This is basically the "ka-poom" theory that has been around for a few years, although I haven't heard too many people credit iTulip lately. At some point inflationary expectations meet inflationary reality, and then the feds rediscover that mopping up printed money is much harder than mopping up money that was loaned into existence.

Adam said...

If I had to choose Austrian Financial advisers, which I don't, I would choose Mish of course.

Like Keynes said .. "In the long run, we are all dead"

And stop ignoring Keynesian economists like Paul Krugman. We are in a debt induced liquidity trap (deflation). Without a fiscal stimulus we will be stuck in it for a decade or more.

As you know it was Freidmanian/Greenspanian Monetary policy got us in this mess as well as supply side fiscal policy. It (ZIRP) will not get us out.

And you are worried that whatever Keynesian fiscal policies will just get us back into this mess. I could look at history and say, well it might but not for another 50 years. The New Deal didn't give us hyperinflation, why would an Obama fiscal stimulus?

It is not like we have been jumping from Depression to Depression every 10 years.

image009 said...

It doesn't matter if Mish is jealous of Schiff (as another poster opined). He is still right and Schiff was wrong.

Anonymous said...

Just a guess, but... I think it's possible that we will look back and find that Mish's chest-thumping marked a top in the deflation trade.

dearieme said...

Correct me if I'm wrong, but both Schiff and Mish were right that disaster loomed - to that extent they have been far superior to almost the whole of the Economics profession. Where they differed is about how best to respond to their insight. As yet, Mish looks to have the better of it. But we have a fat lady absence issue.

Anonymous said...

I don't know what to think of the cat fight. Schiff probably made some bad calls.

I love both sites though.

My belief is there will be a bunch of chaos in the markets as currency trade shifts around. Dollar fluctuates up and down. Deflation occurs and spending patterns shift. If you could make a bet on anything, volatility, would be it.

China could go on a mjor spending spree with their currency reserves and hopefully we will be in a position to increase productivity.

Right now, I think Mitch was correct and deflation is domminating the equasion. So, I parked my money is dollars and treasuries. Not expecting a good return but in a safe move. Do have some gold too.

Watching things on the good sites Mish, TMTGM, oftwominds and CR.

My goal is to get out of this with a few minor flesh woulnds.

James/LAEF2

Anonymous said...

If Mish is so great at market timing, let's see him publicly call *the day* when he switches from deflation to inflation.

Anonymous said...

The thing about market timing is - you don't have to make a call any farther in advance than a minute before it happens.

So, what's the point of asking him to call *the day* he switches? He knows he will switch someday, but will wait until indicators suggest it is coming soon. As long he doesn't miss it, he's still fine.

He even makes this point later in his article. Basically saying he can and will switch his story when the time is right, but the time is not right.

Lynette said...

Schiff hasn't been wrong. Shedlock (Mish) has mischaracterized what Schiff has said. Schiff advocates a long term strategy. He never said his clients' portfolios couldn't fluctuate downward in a crisis. He does, however project that they will recover in the long run, unlike investors who are stuck holding American stocks.

Schiff contends that the dollar will drop precipitously and that foreign governments will, at some point in the not too distant future, begin to call in their debt and seek to separate themselves from the sinking American economy. This doesn't mean that other countries won't be experiencing the same financial crises that we are. Some will seek to take the same tack as the US, but others will make trade alliances which are less dependent on the US as consumers.

He never pretended to be able to tell you the month and day decoupling and rapid US dollar devaluation would occur, just as no one could tell you the exact month that the real estate bubble would begin to deflate. He's a big picture guy. His projections are based on his clear and uncomplicated understanding of the world financial situation on the whole, not so much the short term intracacies of it, some of which you're seeing now. Schiff's reasoning that printing trillions at a time from thin air with nothing of value to back your currency will lead to high inflation is sound and I think that long term events will bear him out. Commodities, gold, and silver are set to shoot up and the US dollar will drop significantly. No one can predict what day and month that will be, but when it happens it will happen quickly.

It's true that in the short term last fall Peter Schiff didn't expect the dollar to rally on the stock and investment sell-offs, but his projections are still on track.

Remember November 20? It was a bad day. People were anguished about the direction of the market. November 20th was the worst point in the current crash. That day the Dow closed at 7552? The Dow ended the day worth 10.3 ounces of gold.

As of last Friday the Dow Jones was worth about 8.6 ounces of gold. I didn't see anguish and panic then, but they should have been gravely concerned because Friday January 30th was markedly worse than November 20th. Keep an eye on that Dow/gold ratio and where it goes after the government's next trillion dollar spending spree.

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