I recently finished reading Peter Schiff's Crash Proof 2.0: How to Profit From the Economic Collapse. In it, Schiff makes a prediction - in the next few years, the US dollar will experience a significant drop in value. He makes this prediction based on huge trade imbalances and insurmountable governmental debt. This debt bubble will eventually collapse causing a massive drop in the dollar's value, massive inflation, and possibly a full out depression in the United States.
Now usually, I don't buy into these dooms day predictions. However, there are several things about Schiff that made me pay attention. First, he correctly predicted the housing bubble in 2006 when most other pundits were claiming a new era of prosperity. In the first version of his book Crash Proof, published in 2006, he details his reasons why this bubble will burst soon. And burst it did for exactly the reasons he stated. Second, Schiff predicted a rise of gold prices that in 2006 were already at all time highs. Today, gold is almost 3 times higher. Third, Schiff bases his predictions on the solid economic principles of Austrian economics. He does not buy into the Keynsian approach that have shown time and again to be flawed.
So Schiff is certainly someone to take seriously when he makes a prediction about the imminent collapse of the dollar. However, there are a few things that I found unsatisfactory with his overall argument. First, I'm not convinced that the trade imbalance is as big a deal has he claims. For every dollar lost in trade, a similar foreign dollar is invested in our economy. This provides much of the capital he laments is missing from American savings' accounts. I do not see it likely that foreign investors will quickly pull out that money as much of it is tied up in long term investments.
However, the US government debt IS still a major problem. And my understanding of his argument does seem legitimate. My take is basically that with are growing debt, foreign governments are going to starting moving away from the US dollar as a reserve currency due to the danger of default. As foreign governments stop subsidizing our currency, the dollar will start to fall in value. This will encourage other governments to pull out, facilitating a crash. Our Fed may try to buy all those bonds to keep the dollar afloat, but that will directly lead to sharp increases in inflation. As far as this argument goes, I generally agree. Schiff believes this crash to be imminent. But this is my second problem with Schiff's book, it does not convenience me that such a crash will occur soon. He seems to imply that it will occur sometimes in the next 5 years. But why not 10 or 20? That's a huge amount of time in investing. What is it about the near term that he sees this collapse as something I need to be prepared for now. It could greatly impact how I invest.
But probably the best thing about this book is that he gives good solid advice at the end of the book on what to do to make it through this crash in sound financial position. If his predictions hold true, the advice is certainly logical and fuel for thought when considering investing strategies. I know that I am reconsidering my investments to at least partially follow his advice.
John, Good review! I have similar reservations regarding Schiff's opinion of the timing of the collapse.
ReplyDeleteSchiff's argument is at least partially politically-based, noting that China and others are beginning to openly question the US dollar's reserve currency status (but in a twisted political sense, the US is still able to keep China at bay). He believes that the cards will begin to fall when China & others move away from the dollar, and that this will happen soon. While he may be correct, he did not provide enough evidence that it would be within the next 5 years.
Nevertheless, he provides a salient point that we are operating on an unprecedented system of world-wide fiat currency. The collapse is not an "if" but a "when". He thinks 5 years or less -- what do you think? And why?
Brendan, thank you.
ReplyDeleteI cannot give an opinion as to when a collapse will occur because I am not nearly knowledgable enough about economics or world politics to make an intelligent guess. And it may largely depend on who gets elected next term. Will it be a crash or slow waning of value? I certainly don't know. I would venture as far as to say there is an upper limit of 20 years, as that's when demographic changes in the U.S. will put extreme pressure on Medicare and SS spending. I don't see enough interest from either party at this point to change the system enough to avoid those huge unfunded liabilities.
Could it happen next year? Well, I do know that Greece, Italy, Portugal, and Spain may default dragging the Euro down with it. That may lead to a short term gain in dollar as money flees Europe. But I believe it will be very short term. And is China's economy as strong as many people like to act? I'm not convinced of that. If China's economy falters, money will run back to the U.S. too. So you see, there are far to many variables going on for me to make an intelligent prediction.
"First, I'm not convinced that the trade imbalance is as big a deal has he claims. For every dollar lost in trade, a similar foreign dollar is invested in our economy."
ReplyDeleteChina and Japan exchange real physical goods with the US for pieces of toilet paper (US T-bills). That is not "investment," unless you believe government deficit spending is investment. They will wise up and realize that working their citizens to the bone so Americans can live large is unnecessarily impoverishing themselves and will consequently sell off their treasuries and allow their currencies to rise.
I think Schiff doesn't point out exactly when a crash is coming because it is already happening. I don't think he makes any claim that is necessarily has to be acute and quick. The US dollar is already crashing--look at how much gold or silver you can buy with it since TARP.
I am of the opinion that the US will also suffer from an acute and quick devaluation, similar to the Asian contagion in the 1990's, but that doesn't preclude a slow devaluing of the US currency in the meantime. Right now the central banks of the world are engaged in a race to the bottom, so the USD looks good in a "redneck beauty contest." Once things settle for the time being in Europe and the Fed engages in major asset purchases again, we will see a much faster devaluation of the dollar.
Bryan
Gotta love it when people put their own opinions into the heads of others. The Chinese and Japanese trade real physical goods for T bills Because they believe the trade is worth it. Likewise they don't work their people the way they do so Americans can live better. Those ppl work the way they do because their employers believe it is profitable to work them that way and not because they have some predeliction about Americas standard of living. The question is when will those populations decide the trade is no longer worthwhile for them? When will employers in China recognize that an eight hour day etc might be more profitable?
Delete" If China's economy falters, money will run back to the U.S. too."
ReplyDeleteIf China has problems, they might sell off US treasuries, since they are the biggest holder of them.
The big event we have to worry about is when the US goes to sell T-bills and nobody shows up to buy them. In order to back up the bloated government deficits the Fed would have to step in to monetize the debt or allow interest rates to rise.
An increase in interest rates would mean a lot of belly-up banks and more people underwater on their mortgages. This would cause Fed intervention via TARP2, which is also inflation.
Bryan
Bryan, when I refer to foreign investments, I'm referring to foreign private companies investing in American private companies. And that amount is roughly equivalent to the trade imbalance. Today, most of the purchases of T-bills is done by other governments, not private companies/individuals, either here or abroad. And that, I agree, is becoming increasingly worthless.
ReplyDeleteHowever, the notion that gold and silver are increasing in price (and it started before TARP) is not indicative that the U.S. dollar is falling in comparison to foreign fiat currencies. There can be world-wide inflation where all currencies stay relatively equal in value. It certainly is not good, but let's be clear on our terms.
I also think its important not to ignore the good news and focus primarily on just the worst case scenario. While we should be prepared for bad economic times, it is not guaranteed. And I hope I can educate enough people to avoid those times.
John, I have reviewed both the original and 2.0 and, although I do recognize that he has made some excellent predictions which demonstrate a certain understanding, I found his explanations of US productivity and manufacturing to be very poor. His understanding of international trade and economics is almost non-existant. For example, his claim that other countries are going to ditch the dollar expresses ignorance about their real alternatives. They don't have an alternative to the dollar. If they try to force one, their dollar holdings will drop in value swiftly and they know that. Any change will have to be very long term. What is important to remember is that the central bankers in Asia went to the same schools and read the same books as ours did. Schiff also seems to think that rest of the world compared to the US is somehow different and better. Actually, the US is still freer and more capitalistic, something that plays no role in Schiff's thinking.
ReplyDeleteA good example of how far off Schiff is regarding international trade and finance is that in every appearance of trouble the dollar rises. It isn't that the dollar is good. It is that compared to other currencies the dollar is safer. Foreigners hold dollars because they fear their own currencies more, plus it is the only actual international currency.
Schiff does speak out and attract a lot of attention. He criticizes the mainstream with strong words and assurance. Unfortuantely, his basic understand isn't good, and he has mislead many regarding several important issues.
C.W., thank you for your insights. I think some of the things I find unconvincing with Schiff are the points you just made. You have just stated it far more effectively than I could.
ReplyDeleteSpeaking of China, I just found this lovely item. It is just amazing how some people reveal their own true nature if given half a chance.
ReplyDeletehttp://www.huffingtonpost.com/daniel-wagner/china-economy_b_1019814.html
"However, the notion that gold and silver are increasing in price (and it started before TARP) is not indicative that the U.S. dollar is falling in comparison to foreign fiat currencies. There can be world-wide inflation where all currencies stay relatively equal in value. It certainly is not good, but let's be clear on our terms."
ReplyDeleteJohn, I am clear on my terms. If the US dollar loses value against real money, it is losing value. If all foreign currencies buy less gold or silver, they are all losing value. That's inflation.
I don't really understand the point you are trying to make.
Bryan
Bryan, my apologies if I misunderstood you, but when you said the dollar was crashing, I had assumed you meant crashing in terms of other currencies. That is Schiff's claim and common interpretation of crashing. If you mean the dollar is crashing in terms of the gold standard, than yes, I think we are in agreement. You just used the term crashing differently than is common done.
ReplyDelete