I do not invest in Czech stock; the head of the US central banks lies; and the newest laureate of the Nobel Prize in Economics doesn’t understand economics at all. All that was said by PETER SCHIFF, who predicted the present crisis in detail.
You were one of the few to have predicted the present crisis very precisely; it worked out nearly one-hundred percent as you said. How do you see your chances for a seat in the US Senate, for which you have recently begun to strive?
I am still considering it. I have not yet officially announced my candidacy. It will be clear by the end of the month, no later than in September. And what are my chances? I don’t know. They are probably less than fifty percent. I think that my victory is not impossible. There are examples in history of people like me being elected. Because people like me usually do not strive for a seat.
Who do you mean in particular?
For example Ron Paul, a congressman for Texas. We share a similar economic philosophy. Our positions are not absolutely identical, but very similar.
Are you in favour of doing away with the American central bank? Ron Paul is…
Abolishing the Fed just like that would be very difficult. With what would we replace it? The abolition of the Fed might be a good thing, I agree, but how to do it practically? That might be very difficult. It is easier to reform it.
How?
To change it. To change its mission. To change the way it operates, to make it less political and more independent. I would like to have a Fed that does not buy government bonds, that does not print money just because it wants to patch up government debt. I do not want the central bank to be an inflation machine. And I want interest rates to be set differently. It should not be a decision – a mere estimate – made by several people, but a price set by the market. Because rate estimates are bad and are often made under political pressure. That pressure leads to unduly low rates, which means the inflation of bubbles and the distortion of the entire economy, as we can now see. I think that a reform of the Fed would be a better step than its outright abolition. We Americans say that the devil you know is better. When we give the authority to print money directly to Congress, in the end, we may be yet worse off economically.
Is the worst of the crisis behind us? Recent figures seem slightly optimistic. The key stock exchange index Standard and Poor’s 500 has gone above a thousand points, for the first time in quite a while.
Not at all, for America: things have only started. Let’s realise that the stock market dropped by some fifty percent over a very short period of time, so the present growth was, in fact, to be expected. But many people have succumbed to the delusion that when the stock markets are going up the crisis is going away. The market is blind again.
Again?
Let’s not forget that the recession started in December 2007. Only two months before that, the Standard and Poor’s 500 and Dow Jones indices reached their record highs. The market looked as if everything were perfect; yet we were standing on the verge of the worst crisis since the Great Depression of the 1930s. Stock markets therefore do not have a clue about what is going on. And now, when markets are growing, we therefore cannot say that the crisis is gone. The fact that the stock exchange is growing does not mean that the economy is growing.
Is at least the financial sector (banks, insurance companies, and other institutions) out of the worst of it?
The problems of the financial sphere may have been temporarily warded off, but at the costs of far worse long-term consequences. The losses sustained by the financial sector, which have sent a number of institutions to the verge of bankruptcy – are still here, they have only been socialised – by a transfer to the Fed’s balances. Furthermore, we have taken a number of steps that continue to weaken the economy. We have tried to mitigate the painfulness of the impact of the crisis; but in my opinion, we have just made more of a mess than had we not intervened at all. We have deflected the global economic system from its balance even more. And it is the global imbalance that is the very cause of the crisis. The financial crisis was only a manifestation a deeper economic crisis, and that is certainly not over. On the contrary, it keeps getting worse.
What do you make of the interventions by politicians?
By their effort to solve the situation, they got the nation into even deeper problems. The money which only put us in a yet deeper debt was used unproductively – for stimulating consumption and for government expansion. We did not go into debt to create capital investments or to improve infrastructure. All that politicians have done in the last year in the name of addressing the crisis was a yet deeper debt. We did exactly the same with the borrowed money as we did with borrowed money before the crisis – it was spent. It financed consumption, government, and cash for clunkers. We are therefore still dropping, due to our own doing unfortunately. We are worse off than six months ago, than a year ago, and it will get even worse.
What do you think about the US scrapping bonus – “Cash for Clunkers”?
That is yet another example of how we are doing everything wrong. The last thing this country needs is to encourage people to assume a yet greater debt. And the scrapping bonus leads to precisely that. It is encouraging people who are not in debt to take a debt on. It says: you have a car that is yours, you own it, there are no payments on it, you already have it for free – we will pay you to have it scrapped, so no one could use it. Then you will have to take a loan for a new one – you will go into debt. It is simply the stupidest thing we could do.
In Europe, many countries are also introducing scrapping bonuses – for example Germany and the United Kingdom, and it will probably also be introduced in the Czech Republic.
Well, of course. America does not have a monopoly on foolishness! But for us, the consequences will be worse, because for example Germany is in better financial shape. It is one thing when a relatively rich person goes crazy and another when a pauper who is up to his ears in debt goes mad. Germany can simply afford to do silly things, because it is better off than America. But that does not mean that it should be done.
Which region will, in the end, be most hit by the crisis – the US, the European Union, or Asia, for example China?
Undoubtedly the United States.
And how will developing markets do, especially those in Central and Eastern Europe, and in particular the Czech Republic?
I think that they will do much better; they will get out of it relatively easily.
Peter Schiff (46)
Just enter, for example, “Peter Schiff was right” on YouTube and you will see immediately why the president of the investment company Euro Pacific Capital has become such a star: he predicted the present crisis more convincingly than anyone else. But outside of the financial world, it is as if his decisiveness vanishes: if you ask him about his favourite music, preferred New York restaurant, or just the colour that is closest to his heart, the divorced father of a nearly seven-year-old son has problems giving a decent answer…
Do you recommend investing in Central and Eastern Europe, in the Czech Republic and Poland?
I don’t invest in that region too much; I don’t pay as much attention to it. I do not own any Czech stock.
And what about other regions?
I think that the speed with which the world economy will revive will depend primarily on how quickly the US economy collapses. I do really believe that the rest of the world is drowning in problems primarily because it is supporting the US economy. In the long-term, foreign support is the greatest problem even for the United States. Foreign money allows our situation to get even worse. Foreigners are still buying American government bonds, continuing to support the dollar, and thus letting our government damage the economy even more. They are allowing America to take on a yet greater debt, to find itself in potentially even greater insolvency, which would mean yet greater losses for the rest of the world. They are undermining our economy by expanding the possibilities of the US administration.
How can it be reversed?
We would need to weaken our government in order for our private entities, entrepreneurs, and businesses to strengthen. But doing so would now be thwarted by strengthening foreign support for the United States. We need foreigners to stop buying US bonds – unfortunately, it is also necessary to send the dollar down – such that it would reflect the reduced productivity of US workers. America must adopt an economic policy that will stop that slide. The dollar will go down, but not down to zero – the thing is to set the bottom line. For that, we need to increase interest rates and reduce the government, that is, to do exactly the opposite of what we are doing now.
RUNNING FOR CONGRESS. “My chances? Something less than fifty percent,” thinks Peter Schiff.
You are a supporter of the so-called Austrian School of economics. How did you arrive at that?
My father introduced me to it even before I started high school. I was then never indoctrinated by Keynesianism – not even at UC Berkeley, where it was taught a lot. Keynesianism never clouded my mind. I understood from the beginning what it is about – and that is why I was able to see many things ahead of time. Before the crisis, I viewed everything through “Austrian eyes”, which is why I had greater foresight than others. I had better means available to me for understanding all of the events. The Keynesians are absolutely off.
Which economist of the Austrian School do you like the most? Friedrich von Hayek, Ludwig von Mises?
Yes, both are great figures. But there are also others, for example Murray Rothbard and Henry Hazlitt, as well as the supporters of the Austrian School from the investment field, for example Marc Faber or Jim Rogers (investment specialists who have recently appeared in the international financial media quite frequently, note by L.K.).
Do you see an increased interest in that economic school due to the crisis?
Yes, many more people are interested in it now. Just look at the demand for Ayn Rand’s book Atlas Shrugged – she is an objectivist, but she is close to the Austrian School. The interest grows as the economy drops. The Internet provides an excellent means for spreading ideas; there is also a lot on YouTube, where you can find a lot of my predictions. People can then go back in time and see what I was saying – and compare it with what actually happened. And then they ask: Why was Schiff right, whereas the others were wrong? They look for information about me and in doing so, they find a lot about the Austrian School. And they say to themselves, that guy is a supporter of the Austrian School and predicted the crisis, so there will probably be something to it…
Is Keynesianism passé?
Looking back, Keynesians look like total fools. Everyone can see now how colossally wrong they were. Recently, a group of economists sent a letter to the Queen of England, in which they apologised for not having predicted the crisis. But the reason they did not predict it is because they know nothing about economics! The assumptions of their theories are wrong: Keynesianism is simply not working. But it is not only because Keynes’ theories have not been put into practice well: they themselves are absolute nonsense.
That reminds me that at the beginning of the millennium, Paul Krugman (a leading Keynesian; a Nobel Prize Laureate for last year, note by L.K.) de facto recommended that the real estate bubble be inflated even more as one of the best ways of getting out of the economic downturn that occurred after the technology bubble popped…
When you look at the texts, Krugman was nearly encouraging the Fed to intentionally inflate the real estate bubble. Krugman simply does not understand economics – in spite of the fact that he got a Nobel Prize for it. It only shows that even the people who decide to whom it would be awarded do not understand economics. There are simply a lot of economic lunatics.
Are you currently more afraid of deflation or inflation? Many Keynesians are warning against deflation.
Because they do not understand what deflation and inflation are. In reality, it is the decline of the volume of the monetary supply in the case of deflation, and its increase when we speak of inflation. We are in for truly massive inflation. The prices of goods and services will grow even faster than the prices of stock and real estate. The prices of assets will therefore drop relative to consumer prices. An inflationary environment is due primarily to the nature of the present money, which is not covered by anything, and central banks can create it literally out of nothing. As Ben Bernanke said in one of his speeches, the Fed can create inflation at any time – by printing money. In real terms (for example, in the sense of how much gold can be purchased for a given sum of money) I, however, think that prices will go down. And assets such as stock and real estate will also go down in price in real terms, as well as the prices of goods and services. So if you had hypothetical savings in gold now, then stock, housing, goods, and services would be cheaper for you in two to three years. But if you are saving in dollars, goods and services will be significantly more expensive for you by the same point.
Why?
Because the supply of dollars will grow. The amount of gold grows very slowly, whereas the amount of dollars grows exponentially.
Can it lead to hyperinflation? Even that is being discussed…
That is absolutely the worst possible scenario. Personally, I do not expect hyperinflation.
How high an inflation rate do you then predict?
I don’t know precisely how high it will be; in the US, it will be twenty or thirty percent. But hyperinflation is a far higher increase of the price level – something that happened in the Weimar Republic or now in Zimbabwe. It could happen in the US, as well: that option is still here. And it will become a certainty if we continue in the present policy. But I do believe that we will change our course before it is too late.
Does the Fed have any potentially effective strategy for pulling out all of the money from circulation that was pumped in, when required?
No, there is no such strategy.
But Bernanke recently (21 July 2009, note by L.K.) said with conviction in an article in the Wall Street Journal that he had a strategy.
He has nothing. He is lying. Lying is that strategy. He has always lied about something. Just remember when those problems with risky mortgages appeared, he assured that there is nothing to fear, that everything is under control. Either he is a total idiot or a liar. I think he is not an idiot. He is a clever man, he taught at Princeton. So he is a liar. Those risky mortgages – it was clear even to me that it was a large problem and that we were headed for a catastrophe, and I did not have all of the detailed information at my disposal that Bernanke had. He must have known it too. Hence, he lied to the public.
Why?
Perhaps he thinks that lying is OK, that it is normal. That it is his job to paint things as being rosy. He knows that psychology plays an important role on the markets. That if he goes to the media and says that everything will be perfect, it will actually be that way. He will therefore never say: we did not do this well. He is probably not lying because he would be a dirty guy, but because he knows how key the thinking of the market is. He is only trying to gain time by his assurances. It is similar with the policy of a strong dollar – it is based on us saying that we have a policy of a strong dollar. And with the strategy of pumping out money, it is identical – it consists of us saying that we have a strategy.
Should Bernanke be appointed as the head of the Fed again?
No, not by any chance.
Who then should his successor be?
Me, of course! (Laughs.) But seriously: I don’t know whom they will appoint. Perhaps Paul Volcker (the head of the Fed from 1979 to 1987, note by L.K.) could return; now he is in Obama’s administration.
You predicted the present crisis superbly. Some commentators, such as Mike Shedlock, however, note that since then, you have come out with a dozen major predictions that have not come true. Furthermore, the clients of your investment company had to put up with up to seventy-percent losses last year.
Well, Mike Shedlock only tried to gain publicity for his tiny investment company. Yes, Euro Pacific Capital has many clients – around fifteen thousand client accounts. Were some of down them seventy percent last year? Yes, they were. Look at the Chinese stock market: that dropped by seventy percent last year, as well. Anyone who massively invested into it had similar losses. But this year is phenomenal again. Most of our clients are already up by double, or are getting close: the yield of some is triple, or even higher. We invest in China a lot.
For what reason?
Let’s take Hong Kong. In the last six years, the stock exchange there grew at an average annual rate of thirty percent – having factored in that seventy-percent drop of last year. Over the same period, US markets had an annual yield of about three percent. Over the last six years, therefore, the yield from investing in Asia is therefore ten times that of investments in the US. But people like Shedlock only point to that single year and emphasise what losses people sustained. What did Shedlock recommend to his own clients? To buy government bonds. But this is the worst year for government bonds!
What do you tell your clients?
Diversify – mainly, do not bet everything on a single card; do no stick to the dollar, buy foreign currencies and stock, buy precious metals. Everyone who abides by a similar recommendation – whether from me or someone else – had a very successful period from 2000 to 2007; has a bad 2008 behind himself, too, I do not hide that; but now is again experiencing a phenomenal period. If people proceeded in line with my advice and invested abroad this year, they are now much better off than those who invested in the US. Only in 2008 was it better to remain on “home ground” – but that was the only such year in the last decade.
OK, but you must have been wrong at some point.
Last year, primarily I guessed wrong about the sharp rise of the dollar. That was one of the main reasons why my clients were down in 2008. But the dollar has again lost a half of what it gained at that time. I think that by the end of this year, the dollar will be even lower than last year’s minimum. The losses from investments into foreign currencies that some of my clients noted will thus change into profits. I estimate that ninety percent of my clients who did poorly last year will be better off this year. And many of them significantly.
As you have said, you bet a lot on Asia. Some argue that the Asian boom, primarily that in China, is fed by the inflation of the amount of money and credit in the economy rather than by the increasing productivity of companies.
Yes, the cash supply in China is growing – because of the unwise “hanging” of the Chinese currency on the dollar; the Chinese are importing our financial policy with gritted teeth. But the fact is that, in spite of these crazy feats that the Chinese government performs, the Chinese are working hard, are productive, and are saving – that is, they are doing the right thing. The dynamism of the local market will outweigh the excesses that Beijing is committing.
And will the comrades see the light?
I think that in the end the government will realise that and discontinue its injudicious monetary policy, with its tie to the dollar. Then the economic environment of the entire South-East Asian region will be very favourable. Like in Japan. Companies supplying raw materials will do well, extraction companies, and so on.
That sounds almost unduly optimistic.
They say about me that I keep presenting only dark visions, but I am a great optimist as concerns the improvement of the quality of life and standard of living of those several billion people outside of the United States. I am a considerable pessimist when I think about what will happen to the three hundred million Americans. But now, if we take the right steps as a country, if we give something up now, if the government and central bank are reasonable, then I am very optimistic even as concerns the future of America. If we repeat mistakes, then I see it darkly.
An abbreviated version of this interview, obtained in New York, was published in Týden No. 33 on 17 September 2009.
