Peter Schiff, the investor who called the subprime crisis well in advance, now says that the U.S. government debt bubble will pop.
Schiff, author and CEO of Euro Capital Pacific, says President Barack Obama wants foreigners to sacrifice and to keep financing mountains of U.S. government debt to bail us out of this mess.
A global economic contraction, however, will end that game, Schiff warns in The Wall Street Journal.
Obama calls for Americans to sacrifice. His idea of sacrifice, however, is lower taxes, more corporate bailouts, and checks mailed to the masses, Schiff says.
In reality, foreigners, especially the Chinese, Japanese, and Saudis, are being called on to sacrifice by funding America’s trillion-dollar deficits.
“That’s a trillion dollars each year for the foreseeable future on top of the trillions of dollars those countries have already financed,” Schiff writes. “To keep up the game, the creditors would have to forego investing in other assets or funding domestic spending to help their own people.”
When U.S. Treasurys held by foreigners mature, they’ll have to invest the money somewhere. If they choose U.S. debt, they will collect tiny 2 percent or 3 percent yields.
If they don’t, the Treasury market will collapse and interest rates will shoot up.
If other countries faced this situation, they’d face huge cutbacks in government spending and a slashing of safety-net programs, or have to deal with a massive currency devaluation, Schiff says. But not us.
“Obama and most economists believe foreign creditors will continue underwriting U.S. debt. Why? Because they have always done so in the past,” Schiff writes.
The game won’t last forever just because it’s been played for so long, he warns.
“While ever-growing budget deficits raise the stakes, the global recession will make picking up America’s tab politically and economically harder for creditor nations,” Schiff writes.
Many experts believe the Chinese and Japanese won’t shy away from Treasuries any time soon. If they choose to dump U.S. bonds, their currencies will climb, making their exports more expensive.
“The exporting economies are sucking wind,” says Charles Dumas, a former JPMorgan Chase economist who heads the research department at Lombard Street Research in London.
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