The Real Crash - Excerpt from the book by Peter D. Schiff

The Real

CRASH America’s Coming Bankruptcy—How To Save Yourself and Your Country

Peter D. SchiΩ

St. Martin’s Press M New York

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The advice and strategies in this book constitute the opinions of the author and may not be appropriate for your personal financial situation. You should therefore seek the advice and services of a competent financial professional before utilizing any of the investment strategies advocated in this book.

THE REAL CRASH. Copyright 2012 by Peter D. Schiff. All rights reserved. Printed in the United States of America. For information, address St. Martin’s Press, 175 Fifth Avenue, New York, N.Y. 10010. www.stmartins.com Library of Congress Cataloging-in-Publication Data Schiff, Peter D., 1963– The real crash : America’s coming bankruptcy—how to save yourself and your country / Peter D. Schiff.—1st ed. p. cm.

ISBN 978-1-250-00447-5 (hardcover) ISBN 978-1-250-00835-0 (e-book) 1. United States—Economic conditions—2009– 2. United States—Economic policy—2009– 3. Debts, Public—United States. 4. Saving and investment— United States. I. Title.

HC106.84.S35 2012 330.973—dc23 2012007416 First Edition: May 2012

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Introduction

“I g ue ss you w e re right about the crash, Peter.”

I hear that a lot, in reference to my 2007 book, Crash Proof, where I predicted an economic catastrophe in the United States. Since late 2008, when the housing market had collapsed and major banks went to the brink of failure, whenever people credit me with calling the crash, it pains me to tell them that what they saw in 2008 and 2009 wasn’t the crash—that was a tremor before the earthquake.

The real crash is still coming.

Just as the housing bubble delayed the economic collapse for much of the last decade on the strength of imaginary wealth, today twin bubbles in the U.S. dollar and Treasury bills and bonds are providing a similar prop. But the day will come when the rest of the world stops trusting America’s currency and our credit. Then we’ll get the real crash.

During my run for Senate in 2010, I constantly encountered politicians and journalists who blamed the current economic troubles on capitalism and free markets, arguing that more government was needed. When the bigger crash comes, the attacks on capitalism will become louder, and the proposed government interventions will become even more extreme. This makes sense— politicians want more power, and they know that crises and panics are the best opportunities to get people to surrender their freedom for the promise of security. That’s what Rahm Emanuel meant when he said, after the 2008 election, “You never want a serious crisis to go to waste.”

But the government was a chief architect of the mess that we’re in, and every day, government is making it worse.

I invest for a living. I look for where other people are making mistakes. I look for companies or commodities that are mis-valued by the market, and

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I study who is investing where. It’s glaring that American companies are still not making capital investments. American families—after a brief period of paying down debt and increasing savings—are borrowing more than they’re saving.

Just as in 2008, we have too much consumption and borrowing, and too little production and saving. Since the depths of the economic downturn in early 2009, most of the “wealth” we’ve created has—once again—been imaginary.

Real estate is still grossly overpriced. Most stocks are still overpriced as valuations are based on earnings and artificially low interest rates and both are unsustainable. Companies that are hiring are probably making mistakes they will soon regret. The fundamentals of the economy are not sound— not even close.

Four years ago, I said that the disease in the economy is debt-financed consumption, and that the cure would require a recession. But the medicine I prescribed—Americans consuming less and saving more while companies invest for the long term and the government tightens its belt—was deemed too bitter a pill to swallow by the Bush and Obama administrations. Instead, they fed us bailouts and stimulus to blow the bubble back up. This political aversion to austerity has set us up for an even bigger crash.

Not only did I predict the recent collapses of the housing bubble and the stock market, in Crash Proof, I also predicted the government reaction. I was the original opponent of the 2008 Wall Street bailout, because I was opposing it in 2007, a year before the Bush administration even proposed it.

In 2006 and 2007, when I made all these predictions, the “experts” laughed at me (literally—search for “Peter Schiff was Right” on YouTube, and you’ll see). I was dubbed “Dr. Doom” for my dire—and ultimately correct—predictions. While the laughter and the names never hurt my feelings, this time I have decided that rather than simply predicting doom, I would lay out a comprehensive set of solutions. That’s why I wrote this book.

My prescription, at heart, is this: we need to stop bailouts, government spending, government borrowing, and Federal Reserve manipulation of interest rates and debasement of the dollar. We need to reduce government spending so we can offer real tax relief to the productive sectors of our economy. We need to repeal regulations, mandates, and subsidies that create moral hazards, lead to wasteful and inefficient allocation of resources, and artificially drive up the cost of doing business and hiring workers. We need to let wages fall, allow people to pay down debt and start saving, and allow companies to make capital investments so that America can start making things again.

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Introduction

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And regarding our national debt, there is only one good solution, and it’s the one that no politician, debt commission, or TV talking head is proposing: America needs to restructure its debts. We’re already bankrupt, it’s time we declared it. The U.S.A. is insolvent, and should enter the sovereign equivalent of Chapter 11 bankruptcy. Then, like a bankrupt company, we can pay off some fraction of our debts—to China, to social security recipients, and other debt-holders—and then reorganize.

Nobody wants to hear this news, and politicians certainly don’t want to deliver it. But Americans will like it even less when the real crash comes— when unemployment skyrockets, credit dries up, home prices plummet again, or worse, the dollar collapses, wiping out all savings and sending consumer prices into the stratosphere. My proposal is to soften the blow. Instead of a violent crash, my plan would give us a painful, but limited, recession.

In addition to saving us from economic ruin, my plan would have immediate benefits for Americans. Lower taxes and less regulation would mean more freedom, and more room for small businesses. Savers would benefit from sound monetary policy and from realistic interest rates.

I don’t expect policymakers to adopt my plan any time soon. I think it will take some serious economic pain before politicians are willing to do anything outside of the ordinary. When the situation is ugly, Washington will have to consider the sorts of ideas I prescribe.

The unprecedented dangers our economy faces also mean you need to completely change the way you handle your money. Even if you don’t think of yourself as an investor, you need to start paying more attention to your wealth because our economic predicament means there will be no easy way to protect your money.

Conventional wisdom about investing doesn’t work anymore because we are in unconventional times. The Fed will be printing so much money that your dollars could become worthless. Our government is so profligate that your U.S. Treasuries could become subprime assets. You need to look to overseas assets and invest with the knowledge that the U.S. of the future will not be anything close to the economic powerhouse it was in the past.

But in the long run, my proposals could turn things around. We’d have a firmer foundation for our economy, a constrained government, a better education system, a more sustainable financial sector, and more room for innovation, meaning a more prosperous world.

Right now, though, we’re in a car, out of control, speeding down an icy hill. Our politicians pretend they’re in control, and so we just keep accelerating toward the bottom. We need a grown-up to grab the wheel and steer us

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into the ditch on the side of the road. That won’t be pretty, but it’s better to go into the ditch at 80 miles an hour than crash into a brick wall at the bottom of the hill at 120.

This book shows the way out of our mess with as little suffering as possible. The proposals are drastic and sound painful, but the alternative is worse.

The time for a so-called soft-landing has passed. All we can do now is prepare for the crash. If we brace ourselves properly and control the impact, at least we will survive it.

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