Martin Weiss Interviews Peter Schiff

When asked about Obama’s role in the economy, most Wall Street pundits are content to either cheer or jeer from the sidelines. They give you their opinion. They tell you what to buy or sell. And then they’re done.

Peter Schiff of Euro Pacific Capital is a rare exception. Not only was his massively best-selling book — Crash Proof: How to Profit from the Economic Collapse — dead right about the debt crisis and the Great Recession, but he has now taken this effort to the next level: A maverick campaign for Senate in the State of Connecticut.

Peter has been a contributor to Money and Markets since 2008 and a colleague for over a decade.

But his hotly contested primary is coming up this Tuesday, August 10 — just six days from today.

So I decided that the timing was right for this long-overdue interview with one of the few in our industry who not only has urgent advice to help protect investors in this crisis … but is also striving to DO something about it for his fellow citizens.

Martin Weiss: Peter, for the past decade and a half, we have seen massive blunders in monetary policy.

The Fed’s easy money in the mid-1990s spurred the tech stock boom, which led to the Tech Wreck in 2000.

The Fed then responded by pushing interest rates down to their lowest level since World War II, generating still another, even larger bubble and bust — this time in housing.

Next, in response to the housing bust, the Fed dropped rates to zero and embarked on the biggest money-pumping binge of all time, which, in turn, led us to the sovereign debt crisis.

So my opening question to you today is: In this Faustian nightmare of policy blunders, booms and busts, what’s next?

Peter Schiff: Let me first tell you what I think should have happened: A healthy cleansing of the economic system — an opportunity for the country to greatly reduce its huge debt burden. No matter how painful that might have been in the short term, it would have been the right thing for our country.

But the politicians didn’t want that to happen. Instead, they did whatever they could to postpone the pain; and in the process, they have now done far more damage to our country than we would have seen otherwise. They are continually acting in their own self-interests, but against the national interest.

Weiss: In each cycle, though, they claim to have saved us from a far deeper economic decline.

Schiff: Yes, the first recession of the past decade — in 2001 and 2002 — was shallow. But that was only because of the stimulus from the Fed and Congress. And as a direct result, we got the housing bubble, the housing bust, and a collapse in 2008 that was a lot worse than the 2001-2002 recession would have been had they just let it run its course.

Now, the politicians and central bankers have again intervened — this time with even bigger stimulus and bailouts, again preventing the recession from correcting the imbalances in our economy.

So going back to your original question — “what’s next?” — well, the sequence of events I’ve just given you implies the answer.

Weiss: Please be more specific.

Schiff: The government’s Herculean efforts to counter the collapse of 2008 merely postponed the inevitable and compounded the problem. Result: The next crisis is likely to be WORSE than the last crisis would have been had they simply allowed it to happen.

Weiss: I think you’re hitting the nail on the head. So let’s narrow this down very clearly: If President Bush had NOT signed the $700 billion TARP package … if President Obama had NOT given us the $800 billion stimulus … and if the Fed had NOT printed $1.5 trillion, how severe would the last recession have been?

Schiff: No one can say for sure.

Weiss: True, but imagine this scenario: Official unemployment at 16.5 percent — seven percentage points higher than today’s. Total job losses of 16.6 million — double the actual total so far. An implosion in the entire U.S. economy with an 11.1 percent decline in GDP, or more than four times worse than last year’s contraction.

But if this sounds like a doomsday science fiction to some people, I have news for them: In reality, it’s the scenario that was just painted by two of the nation’s most prominent economists, whose views are close to those of the Obama administration — Mark Zandi, chief economist at Moody’s Analytics, and Alan Blinder, the former vice chairman of the Federal Reserve.

Their agenda is to defend the government’s aggressive interventions in the economy — to show people how bad things would have been in the past if the administration, Congress and the Fed had not come to the rescue with the bailouts, the stimulus and the money printing.

Now here’s my question to you: If we continue on our current course, is this the scenario — official unemployment at 16.5 percent and GDP contracting by 11.1 percent — that we’re looking at down the road?

Schiff: We’re going to see a huge contraction in GDP regardless of what we do. Our economy is more than 70 percent consumption, and we’re consuming too much. That’s part of the problem.

We have to consume less so we can start saving more. We have to transition from (a) a bubble economy based on excessive consumer credit and spending to (b) a stable, vibrant economy based on under-consumption, savings, capital investment, and production.

That transition is going to necessitate a large, one-time downward adjustment in our GDP. Then we can right the ship. Then we can get out of this hole and start building the economy back up again. But the government refuses to allow this to happen, and therein lies our biggest problem.

Weiss: So you’re saying that, sooner or later, there’s really no way to avoid a big decline in GDP.

Schiff: The only way would be to create massive inflation. And then, of course, we’d merely be avoiding it in nominal terms. In real terms, especially in terms of gold, GDP is still going to plunge. Certainly in terms of our standard of living and quality of life, Americans are going to see a huge decline. No doubt about it! It’s the inevitable result of years of reckless indulgences that cannot be undone.

What’s worse is that, instead of transitioning to a more wholesome economy based on savings and investment, we seem to be transitioning from a market-based economy to a centrally-planned economy, and that’s a prescription for disaster.

Weiss: But do you agree with Mark Zandi and Alan Blinder? Do you agree that, in the absence of the Bush-Obama bailouts and stimulus, we would have seen an 11.1 percent drop in GDP — four times worse than what we saw last year?

Schiff: Yes. I am not sure about the precise magnitude, but the initial contraction would have been much greater had the government not intervened. Still, all the government really accomplished was to delay the pain. And I repeat: Precisely because of what the government has done, the ultimate decline in the economy is going to be MUCH worse than it would have been without the government’s “help.”

Weiss: If that’s the case, what do you think will be the NEW rabbit that the government pulls out of its hat to prevent a collapse next time around?

Schiff: There are no more new rabbits. Just more of the same old bunnies that they keep multiplying — like printing more money.  In fact, one of the last remaining hawks on the Federal Open Market Committee just came out yesterday and said the Fed needs to buy more Treasuries and more mortgages — more “quantitative easing.” That’s just a fancy way of saying they want more inflation … which, of course, we need like a hole in the head.

Weiss: They don’t get it, do they? High blood pressure is not the cure to low blood pressure; and high inflation is certainly not the solution to deflation. They’re too entirely different diseases. If inflation is added to our current witch’s brew of troubles, the last round of the debt crisis will feel like a picnic by comparison.

Schiff: Yes, but inflation is part and parcel of the “big government” solution. They think they have to keep interest rates artificially low, keep asset bubbles inflated, keep consumer prices rising and keep the government spending machine going full throttle. So they just keep printing money.

Weiss: Which means that …

Schiff: … the value of the dollar is going to implode. That is the next big bubble to burst — the U.S. dollar and U.S. government bonds. In other words, the next crisis will be a currency crisis and a sovereign debt crisis! It’s coming to the United States, and there’s no escaping it.

Weiss: You’re running for Senate in the State of Connecticut. You’re running on a platform that opposes these Herculean government efforts to try to postpone the day of reckoning.

My question is: To the degree that you and others of your persuasion gain more influence, won’t that build a wall of opposition that prevents the government from continuing on its current course?

Schiff: I hope so! That’s why I am running for Senate — to bring some sanity to Washington and put an end to this madness before it’s too late. I want to dramatically slash government spending — cutting the federal budget by more than 50 percent. It’s going to require courageous cutbacks. But it’s what we need.

Weiss: Regardless of the outcome of your political battle, the fact remains that the opposition to deficit spending is growing in Congress, even among Democrats. So don’t you believe that, going forward, it’s going to be more difficult for the Obama administration or for Congress to pursue massive deficit spending?

Schiff: I’m not sure about that. I think there’s still widespread agreement in Congress — although totally wrong — that we need MORE spending to grow the economy. But spending is the problem! The economy is sick because the government and consumers are spending too much.
 
Weiss: What do we need instead?

Schiff: Instead, we need savings. We need under-consumption.  We need capital investment and production. But every time consumers put their credit cards away and stop shopping, the politicians want to stimulate them more.

It’s as if every time a drunk stops drinking and starts to sober up, the politicians try to shove more alcohol down his throat. So I’m not confident there’s going to be much opposition to government stimulus from a bunch of people in Congress who don’t understand the first thing about economics, who have swallowed the Keynesian nonsense hook, line and sinker.

Weiss: Consider the latest quarterly report from SIGTARP — the section the Government Accountability Office that’s in charge of tracking all the TARP money. They added up all the TARP monies spent so far minus any paybacks. Then they added up all the other non-TARP government programs. And they also included the Fed’s purchases of mortgages plus other bonds.

Total money infusion since the beginning of the debt crisis through June 2010: $3.7 trillion.

That excludes trillions in government guarantees — it’s just the actual money that the Fed and Treasury have injected into the economy. So let me ask the question again: Do you believe that this crazy pace of government-infused capital will slow down because of the opposition?

Schiff: Well, it’s not capital. It’s just money that they create out of thin air.

Weiss: I agree I used word “capital” loosely. But do you think it will continue or slow down?

Schiff: I think it’s going to increase! I think the government’s going to continue to throw gasoline on the fire they lit. That’s all they know. They want to keep us spending. They want to keep asset prices from falling. They want to keep insolvent institutions afloat. And the only way to do that is to keep printing money because the politicians who are there don’t want to face the music. They don’t want to admit how severe the problems are — that they themselves are at the root of those problems, and that the solutions require less government.

Instead, they want to play Santa Claus. And they want to vilify the market, vilify capitalism, and vilify the greed on Wall Street. But that isn’t the cause of our problems — it’s the greed in Washington, the greed for power. It’s their subsidies and regulations that removed the fear and allowed private sector greed to run unchecked. And now they refuse to acknowledge the damage they’ve done to this economy.

Weiss: Can we bring this back to nonpolitical analysis? The latest news — on slowing GDP this past Friday, on sinking consumer confidence earlier in the week, on the housing market, the labor market — all indicate we’re headed into a double-dip recession. What’s your opinion?

Schiff: Forget about “double dip.” I do not believe the recession ever ended. In fact, I think we are in the early stages of a depression. True, GDP grew in the last few quarters, but none of that growth was real. It simply resulted from spending more borrowed money, which we now have to repay. If you net the debt out of the growth, we didn’t really grow at all. We simply dug ourselves into a deeper hole.

The most disturbing aspect of Friday’s GDP numbers was the ballooning trade deficit. In fact, the trade deficit subtracted more from GDP in the second quarter than in any equivalent period since the early 1980s.

And this is a time when our trade deficit should be shrinking! This is a time when we need to be exporting more and importing less. Instead, we’re continuing to charge even more consumption on our national “credit card,” and the entire country is going deeper into debt. The imbalances are getting wider, not narrower; we’re in deeper trouble than we were before.

Weiss: Still, politicians pat themselves on the back, claiming credit for a recovery. Did the economy recover or not?

Schiff: Sure, if you measure it superficially — purely in terms of GDP — we had a few quarters of so-called “growth.” A large part of that, however, is fluff. The government’s inflation measures aren’t really capturing the true loss of the value of our money or the true extent of inflation.

Moreover, any extra economic activity was an illusion — the spending of borrowed money. And because we spent so much money to inflate our GDP, the economy must contract by that much more in the future as we repay those debts with interest.

Weiss: Bottom line — despite the $3.7 trillion in bailouts and money printing, it’s not working.

Schiff: It was never really working. You can’t put out a fire with gasoline, and if you decide to pour on even more, it’s only going to give you a bigger fire. We are never going to have a sustainable recovery until we allow market forces to restructure our economy. And we can’t do that until the government stops stimulating. We can’t save money if we keep spending; we can’t be productive if the government continues undermining our productivity.

We need resources to invest in our future, but the government is taking them all. Plus, the government is encumbering the economy with more burdensome rules and regulations that prevent its restructuring and that make it less efficient.

So it doesn’t matter how much money they print — it’s just pieces of paper. Yes, we can spend it for a while, but only as long as China, Japan, Germany and others keep taking it.

Look. Last year, nobody was worried about Greece. They were just as indebted as they were this year, but nobody seemed to care. Then, suddenly the Greek crisis popped out of nowhere. Similarly, right now, it seems as though no one cares how much debt America has. But one day soon, they are going to care, and when they do, we’re going to know it — big time!

Weiss: How do you explain the big rally in government bond markets?

Schiff: The same way I explain the dot.com bubble of the late 1990s. Back then, people didn’t care that dot.coms had no earnings … until one day they woke up. They didn’t care that subprime borrowers couldn’t repay their mortgages … until one day it hit them. Bubbles go on for a while, and then, all of a sudden, they burst. People behave irrationally for while, but sooner or later reality always rears its head. And in this case, I think it will be a lot sooner than just about anyone thinks.
 
Weiss: Do you think the bond market is another giant bubble?

Schiff: Absolutely! It could be the mother of all bubbles — especially if you consider the Treasury bubble and the dollar bubble as one in the same. I do. Because, from my perspective, the only thing worse than owning a dollar is owning the promise to be paid a dollar 30 years in the future!

Weiss: OK. Let’s say you’re in Congress, representing the State of Connecticut. And let’s fast-forward into the future for a peek at what might happen:

Here’s the scenario: The mirage of the so-called recovery has vanished. The economy is back down where it was in March 2009. The stock market is hovering around those levels as well. The credit markets are freezing up just as they were back then. Our entire nation is again teetering at the edge of the same cliff. What will be Congress’s reaction? What will you be doing?

Schiff: I will mount a filibuster to block any further increase in the debt ceiling. If I’m successful, they will have no choice but to slash the size of government. And if I have my way, we will abolish entire agencies and departments, cutting spending everywhere we can.

Weiss: And if you’re not successful?

Schiff: They’re going to continue stimulating, and sooner or later the bottom’s going to drop out of the U.S. dollar. We could even begin to see a currency crisis before this year is out. Already, the dollar has now lost value for seven consecutive weeks.

We don’t know if its current downward momentum will accelerate or not. But right now, the dollar index is in the low 80s. If it cracks below 70, you can expect a free-fall. And when that happens, we’ll start to see big increases in prices for things like food and energy, which will hurt a lot of Americans — both employed and unemployed alike.

Worse, if the government prints more money — supposedly to help people better afford the higher prices — they will merely drive prices even higher. Or they might even impose price controls, which would create shortages and a different kind of disaster.

Weiss: You don’t know exactly how Washington will react. But you have reason to believe that their reaction will be irrational and out of desperation.

Schiff: Yes. They’re going to continue doing the same thing —trying to cure the disease by making it worse. When addicts quit taking drugs, they naturally suffer withdrawal symptoms. But our government sees those symptoms as the problem, and their answer is to give us more drugs to stop the withdrawal pains. 

Instead, we need to go cold turkey on deficit spending and money printing. Yes, it’s painful. But the longer we postpone it, the more painful it will be. So let’s get it over with! Let’s deal with it before we make it worse, before we turn this country into an economic wasteland.

When I’m on the campaign trail, people always ask me about the immigration problem, and I always turn it around.

My view: Unfortunately, if we continue at this rate, the immigration problem is going to solve itself — and for all the wrong reasons. Immigrants are going to leave this country because there are no more jobs! Even many natural-born American citizens are going to want to leave. Instead of immigration being the big issue, we’re going to have an emigration problem.

Weiss: We already see major U.S. corporations moving to Asia — not just subsidiaries or branch offices, mind you, but their actual headquarters! And we already see the first signs of a brain drain, including talented scientists seeking work overseas.

But I want to bring you back to the future of the economy. In your scenario, Washington continues to lead us through ever bigger booms and busts. When does that vicious cycle end?

Schiff: Think of it this way: They have built an economy that rests on the shaky foundation of low interest rates. They want interest rates to stay low indefinitely to prop up the housing market, to prop up the banks, and to prop up the federal government.

But what if interest rates were to rise? Then, real estate prices would plunge further, financial institutions that got bailed out would fail again, and the Federal government would have to default on its debt — overtly or through deliberately created inflation. So the Fed MUST keep interest rates low or the foundation caves in, and entire house-of-cards economy falls apart.

Weiss: This then raises a very simple question: What happens if inflation starts to pick up and the ONLY way to cope with it is higher interest rates?

Schiff: That is my point. The Fed’s in a box — it can’t raise rates and it can’t keep them down.

Weiss: What will they ultimately do?

Schiff: Ultimately, they’ll have no choice but to raise them to try to fight inflation.

Weiss: Result?

Schiff: A much bigger collapse than the one they’ve been trying to avoid! When Fed Chairman Paul Volcker had to break the back of inflation, save the dollar — and stop gold from going to Pluto — he kicked interest rates up to 20 percent.

But can we afford to swallow that kind of bitter tasting medicine today? Does anyone even believe that Helicopter Ben is going to let rates go that high and allow the inevitable carnage that would result?

Weiss: No. But what would you do with interest rates? You can’t control the Fed. But what would you like to see the Fed do?

Schiff: The Fed should raise rates. As a senator, I’d start by ending any new deficit spending and ending the huge bond offerings we’re asking them to monetize. That’s the main reason the Fed is printing so much money — to finance the huge budget deficits. Remove the motive and hopefully you won’t see repeat offenses.

In Congress, my priority would be to rein in the spending. I’d also like to pass legislation to make the Fed more independent, which is the way it was intended to be. That way, they can raise rates without political resistance.

Weiss: You’re not advocating that they raise rates to the level that Volcker did, are you?

Schiff: I don’t know how high they need to go. I’d like the market to determine that — not the Fed. We know one thing for certain, though: The zero percent is obviously too low.

Weiss: Elaborate on that, please.

Schiff: We have a shortage of savings in this country. Many of your readers want conservative investments with a decent yield. But there are none to be found. You can’t put your money in a bank and receive a decent return — let alone after inflation and taxes are taken into consideration. You can’t get better yields without exposing yourself to real dangers. How is anyone going to save money in this situation?

So we need an interest rate that will balance this out. We need to encourage savings and discourage borrowing. Instead, borrowing is being massively stimulated, particularly for consumption and speculation.

Weiss: How do you respond to voters who ask: “Well, Mr. Schiff, if you succeed in implementing your policy proposals, you’ll create the very same dire scenario you’re warning us about.”

Schiff: No. We already have that scenario. We are already in tremendous trouble. My solution is painful, but hopeful. Theirs is ultimately MORE painful AND hopeless!

Weiss: Are you saying our choices are strictly between “less bad” and “more bad”?

Schiff: Unfortunately, yes. That’s the reality. I didn’t deal the cards. I am just playing the hand we have. What we must not do is make it worse for political expediency.

Moreover, I’m the last person to want bad times. If you could give me a time machine, I’d gladly go back to earlier decades and do everything in my power to make today’s era a better time for us all.

But now it’s too late. Now your choices are: Do you want the government to just numb the pain again? Or do you want it to fix the problem this time? Suppose you’re a football player and you get a bad sprain in your ankle. Do you want a quick shot in the leg — so you can go back on the field and do deep, long-lasting damage to the bone? Or do you want a chance to diagnose the sprain, get appropriate treatment and come back another day?

Weiss: I think many voters can agree with your logic intellectually. But emotionally, they don’t see it that way. They want instant gratification — not austerity and sacrifice.

Schiff: Perhaps. But no matter what, we need to do the right thing. If I’m a dietician treating obesity, I could recommend more Twinkies, more couch time and more TV, and perhaps some patients might be happy with my advice — but they certainly won’t be happy with the results.

Instead, if I persuade them to improve their diet and to exercise, they might not like my advice at first, but they will be very pleased with the results. That’s reality, and we have to face it.

Weiss: For the sake of our children and grandchildren.

Schiff: Actually, it’s more for our own sake. I think many of our grandchildren will decide to leave. They will go to other countries. And I’d much prefer not to force them to emigrate the way my grandparents had to, coming to America in search of freedom.

I don’t want our descendants to have to go to Asia to find freedom. I’d rather have freedom here. But if we make it so inhospitable, if we regulate them and tax away their freedoms, if we try to stick them with all the bills, they will leave us with the tab. We will have to suffer the consequences of our own profligacy.

Weiss: It’s not something we can postpone to future generations.

Schiff: Twenty or 30 years ago, perhaps. But no more.

Weiss: We are the future generations.

Schiff: Yes, we are. I remember my father talking about the long-term consequences back in the 1970s. Well, those consequences are now here — the chickens are coming home to roost right now.

Weiss: And right now, you’re in a three-way Republican primary race for the Senate.

Schiff: Exactly. The primary election is this coming Tuesday, August 10. We have a direct-mail campaign that I just launched and already paid for. We’ve made over 100,000 phone calls to registered Republicans for volunteers over the last three weeks. The biggest challenge however, is the battle we’re waging in paid-for ads on TV and radio. We have an ad campaign that I just launched and we can’t win unless we can keep it going on the air.

So here are the two most important things you can do to help me win this campaign, even if you’re out of state: First, you can made donations to www.Schiffforsenate.com. All donations, large and small, add up, and I have over 20,000 donors to my campaign so far.

Second, you can also donate your time by phone banking. If you go to my home page, just click on the Liberty Bell, and it will tell you all about phone banking. There’s no cost to you for the phone calls. You do not even have to dial the phone numbers — the program will do that for you. There’s also a script you can follow, if you want to. Or you can just talk from the heart.

Weiss: … which is what I think you’ve done here today. Thank you so much for your courage to speak your mind. And congratulations on your successes so far! God bless!

Schiff: Thank you, Martin.

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