Yves here. I’m of two minds about featuring a post about Peter Schiff, since criticizing him treats him as being a more legitimate commentator than he is. But some targets ask so hard for a debunking that it’s hard to resist.

Schiff has been in the press recently for having said on the Daily Show that some people, such as the “mentally retarded,” didn’t even deserve minimum wage but should be paid only $2 an hour. But being offensive is not the worst of his sins.

Schiff is a money manager who claims to be an economist but has no formal credentials.* He such a terrible money manager that one wonders why the SEC hasn’t come calling. He lost 60% to 70% of customer assets in a two-year period when he was supposedly making correct macro calls. It isn’t just that he made disastrously bad timing decisions. He violated one of the basic rules of investment management, which is diversification (as of the last time his account results were made public, his picks represented only 2 bets: energy and gold, and that via small gold stocks or trusts). And he also appears to loaded up his customers with lots of risk. If so, he might have violated “know your customer” rules.

Mind you, this performance occurred when his public calls were generally correct. One can only imagine how he’s done when he’s been screaming “hyperinflation” and we instead have disinflation tending to deflation.

Now some readers might surmise that the fact that Schiff still has an investment business is the result of personal charm and selling skills, at least in the presence of Important People. Quite the reverse. so gratuitously rude. He got to the studio so late that he nearly missed the hit time (a huge deal in TV) and was unapologetic and haughty toward the tech who had to put up makeup and mike him up in haste. He repeatedly interrupted the host and even the Australian Finance Minister, who dealt with him with unruffled professional calm. And even though we sat elbow by elbow during the shoot, he pointedly never introduced himself and brushed off my move to shake his hand (I guess he’s afraid contact with non-libertarians might contaminate his precious bodily fluids). Mind you, I wasn’t offended but rather much as bemused and perplexed. What was the point of this display of lack of self control and basic manners? Did he really think it meant people would take him more seriously?

My recollection is that on the SBS show, the producers were able to contain Schiff by virtue of both him (and me) and the Australian Finance minister being on remote video. They could cut to someone else when they thought he’d had his say. Philip Pilkington sent this clip of Schiff with Cenk Uygur, “Uyger is the only one who handled him properly.” Of course, a fanboy or more likely, a flack put up overlay attempting to depict Schiff as a victim, as opposed to getting the treatment he deserved.

So let’s turn to Nate Heckmann’s takedown.

By Nate Heckmann, a graduate student at UC Irvine’s medical school who writes about health care, economics, and tax policy. Originally published at Et Vita

“The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.”

― Stephen Hawking

A libertarian friend of mine who — like most libertarians — subscribes to the Austrian school of economics sent me a video, convinced that I would no longer think about inflation the same way after watching it. The video is of well-known libertarian pundit, investor, and self-proclaimed Austrian economist, Peter Schiff.

In the video, Peter Schiff responds to his critics who attacked him for a prediction he made at the end of 2009 about hyperinflation:

You know, look, I know inflation is going to get worse in 2010. Whether it’s going to run out of control or it’s going to take until 2011 or 2012, but I know we’re going to have a major currency crisis coming soon. It’s going to dwarf the financial crisis and it’s going to send consumer prices absolutely ballistic, as well as interest rates and unemployment.

According to Schiff, the reason we haven’t seen hyperinflation yet is because the CPI is flawed, “deliberately designed” by the government to hide the true rate of inflation.

The video was so bad, it compelled me to write this post. First, watch the video above. Then read about what Schiff gets wrong:

1) “I never said the money printing would cause inflation. I said the money printing is inflation.”

Any student who has taken macroecon 101 knows this is an overly-simplistic view of inflation. It’s hard to believe that an “economist” holds this view.

Schiff’s view doesn’t take into account inflationary expectations, the rate of money exchange, or where said money ends up in the economy (e.g. M1, M2, M3, etc). If the treasury printed $1T and buried it in a hole the money would not exert the same inflationary pressure as it would if the printed $1T were distributed to the nation’s poor and middle class. The former would have a much smaller inflationary effect than the later. Schiff, at least, ought to acknowledge the fact that while the Fed has expanded the monetary base from $0.87 to $2.92 trillion, it is holding on to $1.62 trillion of excess private bank reserves. That’s $1.62 trillion sitting in a hole, not being circulated, exerting no inflationary effect. This money parked at the Fed is not inflationary.

This is not a difficult concept to grasp, but Schiff fails to grasp it nonetheless.

2) “But Krugman would say that Peter Schiff is wrong because prices haven’t risen. But, again, the proof that he offers, and that other Keynesians offer, are government-created statistics that purport to measure inflation like the CPI.”

For someone like me that has been following this narrative closely, it’s plain to see that Schiff is misrepresenting Krugman’s critique. I’ll explain.

First, Krugman has criticized Schiff’s predictions of hyperinflation, not normal levels of inflation (i.e. “rising prices”). According to Schiff’s predictions in 2009, we should have sky-rocketing prices by now, but we don’t. And this is exactly why people like Krugman say Schiff’s predictions haven’t panned out.

Furthermore, in Krugman’s most recent post about Schiff, he doesn’t offer the CPI as proof that inflation is under control because he knows that Austrians don’t care for “government-created statistics”. Instead, Krugman offers MIT’s Billion Prices Project as a third-party estimate of inflation. This project monitors the daily prices of over 5 million online transactions in over 70 countries. Guess what? This metric only varies slightly from the CPI and it tells the exact same story — namely, that inflation is not a problem.

According to my calculations, from the end of 2009 when Schiff made his prediction, until the beginning of 2012 when this video was made, inflation has increased by the following:

CPI less food and energy ~5.1%

PCEPI ~5.5%

CPI ~6.4%

MIT’s BPP ~7.1%

Monetary Base (“money printing is inflation”) ~32.9%

Gold ~51.2%

The first three metrics are “government-created statistics”, the 4th is a third-party estimate of inflation, and the 5th and 6th are the Austrian metrics of inflation. Ask yourself: Which of these measures of inflation is inconsistent with reality? Has your cost of living gone up 30-50% since late 2009 or has it increased somewhere on the order of 5-7%?

3) “The CPI does a lousy job of measuring inflation. And I think it deliberately does so by design.”

By design? Evidence?

4) “In fact, I’m not the only one that’s convinced that inflation is a lot higher than the government admits.”

Schiff’s support for this claim? No, not a third party mathematically driven model like MIT’s or some other equivalent — a FOX News poll. The poll referenced, however, does not support Schiff’s claim that the CPI underestimates inflation. All the report states is that 41% of people polled felt that rising prices were their primary concern.

5) “Well, if the government is correct, if the CPI is accurate, then why are so many people worried about inflation that doesn’t exist?”

First, nobody said inflation doesn’t exist (see point #2).

Second, this poll does not support the notion that the CPI is inaccurate. Inflation is real and people who are out of a job or underemployed ought to be concerned about rising prices. As a student, I am concerned about rising prices, but this does not mean that I believe the CPI is inaccurate. Nor does my concern mean that I think there is ongoing hyperinflation.

6) “Afterall, what makes more sense? That the government can print all this money, and prices not rise? Or that prices are rising and the government is just not being honest?”

Arguments of incredulity are not only weak, but they often-time reveal a lack of knowledge or understanding in the person that uses them. Also, once again, nobody is saying that prices aren’t rising (i.e. see point #2).

Schiff doesn’t understand that printing money against the zero-lower bound — the point at which the federal funds rate is zero — does not have the same inflationary effects that it would in times of economic prosperity. I’ll outsource the explanation as to why this happens but, in a nutshell, “if interest rates are near [or at] zero, money printed now just gets hoarded, and monetary policy has no traction on the real economy.”

Given Schiff’s definition of inflation, I don’t blame him for not grasping this concept.

7) “The items that I selected for my basket were eggs, cars, milk, gasoline, bread, rent for a primary residency, coffee, dental services, potatoes, electricity, sugar, airline tickets, butter, store-purchased beer, apples, public transportation, cereal, tires, beef, and prescription drugs.”

According to Schiff, the CPI’s basket of goods is deliberately misleading, but his own basket of (20) goods is stable, unbiased, and more accurately represents price levels than the CPI? Does anybody buy this? I don’t.

First, Schiff’s basket is food and fuel-dominant, relying heavily on two factors that are commonly removed from measures of core inflation because of their inherent volatility.

Second, even if we accept Schiff’s high-ball basket of goods as being accurate, we are still left with a decade with only 44.3% of inflation. This is odd because it contains the recent post-recession period of hyperinflation (or high inflation) that many Austrians are angry about, yet inflation in this past decade is still well bellow the 117% increase during the 70s. So according to Schiff’s calculations, we’ve still only seen a fraction of the inflation that plagued us during the 70s.

Did Schiff intentionally show that inflation during this past decade was actually much lower than it was during the 70s, or did he do this by accident?

8) “But it actually gets worse because the government numbers are wrong. And I’ll prove it…”

Schiff continues by pointing out, what he claims to be, specific “inaccuracies” in the CPI. These warranted a fact-check on my part.

I checked Schiff’s claim about healthcare premiums only increasing 4.3% from 2008-2012 according to the CPI. According to the CPI — the CPI that I just looked up — health insurance premiums have increased by almost 20% over this period. The Kaiser report that he references, which by the way only refers to employer provided insurance, shows an increase of 24.2%. This doesn’t seem like a contradiction, but it makes me wonder where Schiff is getting his CPI numbers.

It appears that the CPI is actually referring to a 4.3% increase in the healthcare premium costs per year, but Schiff is — either misleadingly or accidentally — implying that according to the CPI, premiums have increased by a total of 4.3% over the entire five year period of 2008-2012, which, of course, is not true.

9) “So if the government is wrong about newspapers and magazines, if they’re wrong about health insurance, how should we believe that they are right about anything?”

Wait, how did Schiff prove that the government is wrong?

—

Krugman’s description of the Austrian viewpoint sums it up best:

Substance aside — not that substance isn’t important — Austrian economics very much has the psychology of a cult. Its devotees believe that they have access to a truth that generations of mainstream economists have somehow failed to discern; they go wild at any suggestion that maybe they’re the ones who have an intellectual blind spot.

Schiff is wrong, but he’s sticking to his guns. And, in the process, he’s revealing just how little he knows about economics, policy, and pretty much everything else. Why do people still listen to this guy?

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*Schiff has a BA from UCLA in Accounting and Finance. His father is a well-known con artist who sold books and led seminars claiming no one had to pay Federal taxes and told followers his “secrets”. Schiff’s father is now serving a 13-year prison sentence for tax evasion, his second prison term (he previously served a four year term, again for tax evasion).