WHY NOT LET THE MARKET SET PRICES?
Peter Schiff
Those unfamiliar with marketplace dynamics may not recognize how
government activity has created price distortions across our economy. But when these chains fail to restrain the
market, the underlying forces become easier to see.
Much as government mandated easy credit propelled home prices to bubble
levels, similar forces pushed college tuitions up to the stratosphere. Both systems are currently breaking down along
similar lines.
In light of the staggering cost of college education today, it may seem
unbelievable that my father in the early 1950s was able to finance his own
education with a summer job waiting tables. Like most in his generation, eight weeks of
work per year allowed him to graduate debt free. In contrast, the debt
burden now heaped on today’s college graduates is so oppressive that the
financial challenges are becoming a palpable psychological strain on an entire
generation.
The irony is that without easy access to student loans, which have been
touted as a means to ease college affordability, tuitions never could have
risen so high in the first place. Sadly,
it is not students who have benefited, but the educational establishment that
receives the proceeds. Colleges collect huge sums of money up front while
students get saddled with staggering balances.
Now that repaying loans has become increasingly difficult for home
buyers and students (especially since the home equity well has run dry and the
employment market has cooled), more debtors are defaulting. As a result,
the market for securitized loans, which has completely dried up in the mortgage
market, is now equally desolate for student loans. Here again, the government
is being asked to pick up the slack by buying existing student loans and
issuing new loans directly to students.
In so doing, the government is helping to sustain high tuitions just as
similar actions are working to prop up real estate prices. If the
government stayed out of the student loan market, students would not be denied
educations. Colleges and universities would simply be forced to offer
affordable tuitions or go out of business --just the way they used to back in
my father’s day. Similarly, if the government allowed real estate prices
to collapse, Americans would not have to take on so much debt to buy houses.
To buy up all of these loans, the Fed is running the printing presses
non-stop. As a result, prices of other goods, such as food and energy,
are spiraling out of control.
Of course, mainstream Wall Street firms and the conventional financial
media do not see this obvious connection. While CNBC searches the world
for clues to this “mystery”, no one sees the evidence “hiding” in plain
sight. Higher prices simply result from all the money printing, both by
the Fed and foreign central banks trying to maintain currency pegs to a sinking
dollar.
It is amazing how those who were completely blindsided by the surge in
food prices are now so quick to come up with ridiculous reasons to explain the phenomenon.
However, for those of us who actually understand what inflation is, predicting
the current surge in food prices was a no brainer. Read one of my
commentaries from Oct. of 2006 and see for yourself.
Similarly, analysts are blaming $120 oil on the hidden machinations of
greedy speculators. They buttress these
claims by noting that absent a bona fide oil shortage, current prices are not
justified by fundamentals. This overlooks that while there is no shortage,
there is also no surplus. The market is
in perfect equilibrium at today’s price, and recent spikes merely reflect the
substantial increase in global money supply. If today’s prices really
were artificially high, like house prices, they would be a glut of oil in
storage facilities while users, priced out of an inflated market, cut back on
their consumption (This is precisely what
is happening in the real
estate market).
As consumers are getting wise to inflation, they are beginning to stock
up on those products showing the most rapid price increases. This week,
Cosco and Sam’s Club began to limit bulk purchases of rice. After all, if
you have the cash why not by the things you know you will need in the future
now, before the prices go any higher. My
guess is that if home storage were possible, consumers would be buying as much
gasoline and home heating oil as they could currently afford…they might even
load up their credit cards to do so. After airfares (which unfortunately
cannot be stockpiled), apparel may be next major category of goods that will
experience rapid price increases. Why not buy a few extra pairs of socks
while they are still cheap?
As the government creates more inflation, and prices for all sorts of
consumer goods spiral upward, the authorities,
as they always have, will institute price controls and other forms of rationing
of consumer staples. My advice is to stock up now, before you end up
having to spend hours waiting in line.
April 25, 2008
For a more in
depth analysis of our financial problems and the inherent dangers they pose for
the U.S. economy and U.S. dollar denominated investments, read my new book
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More importantly, don’t wait for reality to
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.
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