While global share markets and federal banks are hailing the end of the recession — not everyone is so sure.

One man who doubts the recovery is Peter Schiff. Schiff is the President of prime broker, Euro-Pacific Capital and was criticised for years while accurately predicting the sub-prime crisis and property collapse. It is fair to suggest that when it comes to making forecasts, Schiff has more credibility that most.

Last week, Schiff criticised Federal Reserve chief, “Helicopter” Ben Bernanke on Yahoo Finance’s Tech Ticker, claiming Bernanke, who noted that “economic activity has picked up following its severe downturn” is “keeping his record of perfection in tact … of never getting anything right.”

Schiff stated “spending money is not economic activity … if Bernanke really thought the economy was sound, why does he have it on life support … why is there zero percent interest rates?” The reason, as Schiff claimed, is the only because if Bernanke pulls the plug and raises rates, “the economy is going to die.” Schiff also claimed that the economy is worse now than it was back in March, when everyone thought the financial world would end. “We are much more indebted now”, noted Schiff, “our phony, consumer based economy is not viable, it only exists for as long as the Chinese and Japanese lend us money.”

Schiff’s views are supported by recent US-automotive figures which revealed that vehicle sales slumped in September as US Government stimulus (known as “cash for clunkers”) waned — General Motors revealed that sales dropped by 45%, Chrysler dropped 42% and Ford was down 37% from the prior month. If auto sales are any indication the so-called recovery appears to be a debt-funded mirage, rather than any sort of sustainable growth

Author and editor of the Daily Reckoning newsletter, Bill Bonner, took a similar view last week, questioning the veracity the so-called recovery and noting:

Let’s get this straight.

Household credit is shrinking…

Profits are shrinking…

Employment is shrinking…

Housing values are shrinking…

The wage base is shrinking…

But the recession is over!

Bonner continued:

The expansion of the US economy — broadly speaking — from 1945 to 2007 depended on consumers’ willingness to go further into debt. Wages rose during the first half of that period — supporting consumption. But as the great boom continued, more and more of it was based on credit, not on wages…

And now what’s happening? Well, consumers aren’t borrowing anymore. Consumer credit is going the other way, shrinking rather than growing.

Schiff and Bonner’s views remain outside the mainstream (if more people thought so logically, the share market would not be trading on a near bull market price-earnings multiple of 17). But commentators like Bonner and Schiff have more impetus to be correct — they make a living out of it (by selling their opinions to readers or clients). By contrast, politicians, executives and brokers make a living out of telling people what they want to hear, rather than what they should hear.

The notion that a few trillion (or in Australia’s case, billion) dollars worth of “stimulus” can fix and economy that is fundamentally broken is absurd. Have you ever tried to re-blow a bubble? Can’t be done. But that doesn’t seem to stop our politicians from trying.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey

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