Below is a recent exchange I had with Peter Schiff. Mr. Schiff is the president of Euro Pacific Capital and a frequent commentator on financial news networks such as CNBC and FBN. In addition, he has written numerous articles for various trade publications and has been quoted extensively by mass media outlets. He is also the author of the critically acclaimed: “Crash Proof: How to Profit from the Coming Economic Collapse.”
Tim: You promote various Austrian authors on your website and quote some of their theories (ABCT, Broken Window), what got you interested in this school of thought?
Peter: I was introduced to the Austrian school early on by my father. According to my dad saying Austrian economics makes as much sense as saying Chinese physics. Austrian economics is economics, period!
Tim: What do you think the Austrian school contributes the most to financial planning?
Peter: My investment advice is rooted in my understanding of economics. It is that understanding that allowed me to accurately forecast the trends of the last decade, and to have positioned my clients in advance to both protect their purchasing power and profit from what has already played out.
Tim: Writers such as Bob Murphy had given you a hard time on what seemed to be your anti-trade deficit views, though Murphy has since admitted that you are right in your assessment of our current mess. Do you think a trade deficit is always bad for a country?
Peter: No. Trade deficits are OK under certain circumstance. 1. An emerging nation imports capital goods necessary to enhance its productivity. 2. A developed nation, with a current account surplus, uses some of its investment income to finance the purchases of additional consumer goods from abroad.
The problem with our deficit is that we import consumer goods we can not afford to pay for with either exports or foreign earnings. As such we accumulate external liabilities that we will never be able to repay and our nation’s future productive capacity continues to deteriorate. We are de-industrializing and are condemning ourselves and future generations to falling standards of living.
Tim: Can you elaborate more on the manner in which America is de-industrializing?
Peter: More Americans now work for government than in manufacturing. Most other Americans are employed in retailing, financial and other professional services, healthcare, and education. What we used to produce ourselves we now import. We “pay” for those imports with IOUs (dollars) yet we lack the industrial capacity to ever redeem them with genuine goods.
Tim: Is the Fed deflating or inflating right now?
Peter: Inflating.
Tim: How do you know the Fed is inflating?
Peter: It’s obvious. Plus they even admit as much, though they refer to it as “adding liquidity” a politically palatable euphemism for creating inflation.
Tim: Who is ultimately financing the emergency loans to various financial institutions?
Peter: Anyone with U.S. dollar denominated savings, investments, pensions, insurance policies, wages, or other dollar based assets or income streams.
Tim: How are booms and busts caused?
Peter: They are caused by the Fed setting interest rates too low. The false economic signals that are sent result in an artificial boom characterized by malinvestments that must ultimately be liquidated in the inevitable bust. This pattern, labeled the business cycle, is not an inherent flaw in capitalism, but in central government planning and price fixing.
Tim: How would you characterize the proposed restructuring plan from Paulson?
Peter: A national disgrace.
Tim: Would you characterize the Paulson plan as cartelization, nationalization, reregulation or all of the above?
Peter: Fascism.
Tim: Will these moves prevent booms and busts from occurring in the future?
Peter: Absolutely not.
Tim: Why won’t this plan create the stability or growth that central planners want?
Peter: Central planning never works.
Tim: Isn’t the stimulus package supposed to prevent or stymie the effects of a recession?
Peter: That may be the intention but it will not be the result. Since our problems stem from too much borrowing by consumers, more of the same will only exacerbate our predicament.
Tim: After nearly a century of managing the expansion of credit, interest rates, and the monetary supply do you think the Fed should be allowed to continue its role as a central planner?
Peter: No, there should be no central planning at all. The market needs to set prices, including interest rates and allocate resources. If it were up to me we would abolish the Fed and return to the gold standard. Absent that, the Fed should be completely removed from the political sphere, its dual mandate replaced by a single mission to provide the nation with sound money. This does not mean stable prices, but rather gradually falling consumer prices that are the natural bounty of capitalism.
Tim: Over the past several weeks Congressman Barney Frank has proposed a large bailout for mortgage holders. Should the government get involved with the current housing crunch with relief aid?
Peter: Absolutely not.
Tim: Who wins and loses when real-estate prices decline?
Peter: Losers. 1. Homeowners looking to sell houses and downsize, or those who confused homeownership with an investment. 2. Real estate professionals who make money based on high turn-over, inflated commissions based on high home vales, and peddle the illusion that buying a home constitutes making an investment. 3. Lenders who extended too much credit based on inflated home values and investors who purchased those securitized loans 4. Everyone with U.S dollars as the Fed tries to prevent home prices from falling and bail out irresponsible borrowers and lenders by creating more inflation. 5. Government as it collects excess taxes based on inflated home prices and frequent turnover.
Winners. 1. Anyone who wants to buy a home. 2. Society in general as homeownership becomes more affordable, thus enabling homeowners to accumulated legitimate savings that finances real capital formation and leads to rising living standards for us all.
Tim: In what way have GSEs such as Fannie Mae contributed to the mortgage crunch?
Peter: By guaranteeing mortgages against default they created the moral hazard that allowed risky loans to be originated and securitized, which provided the initial air that inflated the housing bubble.
Tim: Various numbers are thrown around regarding personal debt, savings, equity and consumption. What sources do you consider valid metrics to analyze the solvency of both enterprises and individuals?
Peter: For companies, profits, balance sheets, and dividend yield.
For individuals, income producing financial assets net of debt, not counting primary or other non-investment residences.
For nations, savings rates, industrial production, infrastructure, and balance of payments.
Tim: Are you familiar with the True Money Supply aggregate devised by Murray Rothbard and Joe Salerno?
Peter: Yes.
Tim: Do you think it is a better measurement of what policy the Fed is attempting to implement?
Peter: It certainly appears to be.
Tim: What do you think of alternative metrics such as John Williams’ ShadowStats?
Peter: Empirically that seem to be far more accurate then those provided by the government.
Tim: Several years ago you wrote a fable about 5 Asians and 1 American stuck on an island; how the 5 Asians produce wealth and capital and the American merely sends them IOUs (T-bills) in exchange for their goods. Do you believe this is still an accurate assessment of the situation?
Peter: Absolutely.
Tim: How much longer do you believe this will be tolerated? When do you think the various Asian decision makers will turn off the spigot?
Peter: Not much. Signs of stress are evident all around us. Global inflation is spiraling out of control as foreign central banks try to maintain the dollar’s value relative to their own currencies and the coffers of sovereign wealth funds bulge with surplus dollars.
Tim: In what way are foreign entities such as the central banks of China and Japan propping up the dollar?
Peter: They are directly intervening in the foreign exchange markets by buying dollars. They are also talking up the dollar and declaring their intentions neither to abandon it as the reserve currency, abolish their pegs, nor price key commodities, such as oil, in another currency. However in the end they will stop throwing good money after bad and abandon their support for the dollar.
Tim: Individuals like Jim Rogers are also bullish on overseas markets such as Northeast Asia. What makes these segments more desirable than investing domestically? Aren’t the Asian central banks inflating too?
Peter: Yes, but only to prop up the dollar. Once they come to their senses they will stop inflating. In the meantime they have viable economies that are well positioned to flourish once they bite the bullet on the dollar.
Tim: Are sovereign wealth funds doing a disservice to their shareholders by investing in failing banks? Are they solvent enough to ‘save the day’?
Peter: Of course, but they are doing a greater disservice to their citizens by having these funds in the first place. They should cease accumulating dollars, liquidate these funds, and return the proceeds to their respective citizens to invest or spend the money as they please.
Tim: Last year you wrote a highly acclaimed book Crash Proof: How to Profit From the Coming Economic Collapse. How would you advise the average American to simply protect his wealth and financial security in face of a potential world financial crisis?
Peter: It is not a world financial crisis but American financial crises. For the rest of the word, we could be headed for the greatest economic boom of our lifetimes. My advice to Americans is to get in on it. Divest yourselves of depreciating U.S. dollars and refuse to be a patsy in “bail out Ben” Bernanke’s helicopter drop. You can accomplish both by investing in high yielding foreign stocks, precious metals, and commodities.
Tim: In Crash Proof you mention in passing the (then) new gold and silver ETFs. Since that time those ETFs have grown dramatically, and a spate of new ETFs providing exposure to other commodities, foreign markets and currencies. In light of this, do you still believe it is essential for American investors to open accounts to trade securities overseas, or is it now possible to have sufficient hedges against hyperinflation without leaving the American exchanges?
Peter: Yes, it is easier to gain some protection through domestically listed securities, but the best most well balanced, protection can still only be found abroad.
Tim: Some people say that if you are always predicting a crash, eventually you will be right. What’s your response to that type of objection?
Peter: Not true. While it is true that I have been predicting an economic collapse in the U.S for many years, if the underlying economic fundamentals of our economy were in fact sound, then such a collapse would never occur. It is only because my observations regarding the false nature of our prosperity were correct all along that my analysis is finally being vindicated.
Tim: As governments invest in and mandate the use of biofuels, do you believe this contributes to driving up food prices?
Peter: Yes.
Tim: Do you believe that the federal subsidies of corn to produce ethanol will create the unintended consequences of long lasting agflation? For instance, do you think it is the driving factor behind the dramatic increases of certain commodities (Rough Rice up over 100% in 12 months) or if its simply another consequence of the debasement of the dollar.
Peter: There is no such thing as agflation. Rising commodity prices, or increases in any prices, do not cause inflation. Inflation is what causes prices to rise. Of course, in market economies, prices for individual goods and services rise and fall based on changes in supply and demand, but it is only through inflation, that prices rise in aggregate. If there is additional demand for corn to produce ethanol, all else being equal its price might rise. However, such prices increases are not inflationary.
Tim: Will funding multi-trillion dollar liabilities such as social security and Medicare eventually become a politically charged issue for the tax-free status of a 401(K) or Roth IRA twenty years from now?
Peter: These obligations are impossible to fund. They will be repudiated, either honestly or more likely through inflation.
Tim: In terms of welfare liabilities, what structural problems exist that make them unfundable?
Peter: We are simply too broke to afford them.
Tim: Do you think a 401k or IRA are of practical value in a hyperinflationary environment?
Peter: In such an environment they will be practically worthless.
Tim: When you have analysts suggesting that the destruction caused by natural disasters and the destruction caused by wars are good for an economy what keeps you from taking off your mic and calling it a day?
Peter: I am driven by the fact that my words will resonate with some viewers who will ultimately seek me out for investment advice. I realize that I can not save everyone, but I will do my best to extend my hand to those with the good sense to reach for it themselves.
Tim: Do you believe that it is fair for your colleagues and peers to characterize you as Dr. Doom? Would you counter by saying they are wearing rose-tinted glasses?
Peter: I suppose it is fair as doom which is exactly what I have been predicting. Our phony economy, built on the flimsy foundation of consumer credit and perpetual trade deficits, is in fact doomed. However, I am very bullish on the global economy and in fact remain hopeful that one day a legitimate U.S. economy will one day rise to replace the bubble economy now deflating.
Tim: For those of us that have watched you discuss these issues on CNBC and FBN, why do you think most financial commentators tend to overlook or downplay the role the Fed has in subsidizing malinvestment or causing business cycles?
Peter: They simply do not understand it.
Tim: Investment manager Mike Norman recently suggested that the free-market contributed to and caused the Great Depression. Is he right?
Peter: No, he could not be more wrong.
Tim: Are there any sectors of the US economy you feel are particularly well positioned to remain competitive in the global economy during a sustained domestic bear market?
Peter: Not sure, as there is no way to know what types of onerous regulations or confiscatory taxes might be imposed by desperate politicians looking for scapegoats.
Tim: What is your long-term, 20 year outlook on the health and durability of the American economy as a whole? Will the combination of new regulations, welfare liabilities and inflationary pressure create a prolonged recession similar to what Japan has undergone since the early ‘90s?
Peter: I am not sure. The road ahead will be filled with many potholes and include some important forks. Since I do not for sure which ones we will follow, I prefer to invest abroad until our path is more certain. As it stands now, we are headed to a hyperinflationary depression. I hope we will choose a different path before we actually get there.
Tim: So are you forecasting a long-term economic recession, somewhat independent of the business cycle, or a change in the overall trend of the wealth and living standard of the country?
Peter: More the latter. We need to rebuild the foundation of our economy from one of borrow and consume to one of save and produce. Politicians and central bankers will resist this transformation and make the process that much more difficult and painful for all Americans.
Tim: How would you describe a legitimate economy?
Peter: A nation that produces more then it consumes and saves more than its capital stock and infrastructure depreciates.
Tim: If you were granted 3 legislative wishes from the financial genie what institutions or laws would you change, add or abolish?
Peter: I only need one. Abolish all government spending, agencies, departments, programs, and taxes not authorized by the constitution.
Tim: What other key resources do you recommend investors educate themselves with?
Peter: Read my book Crash Proof: How to Profit from the Coming Economic Collapse, as well as many others recommended on my web site. However, the most important thing to do is not allow the knowledge to go to waste. Make sure to protect your wealth and try to encourage others to do likewise. My brokers and I are ready to help.
[Ed. Note: be sure to read the interviews published in the Austrian Economics Newsletter. And be sure to ask Art Laffer for a penny.]
