Peter Schiff
Written in late 2006, Crash Proof forecasts and anticipates the economic turmoil of 2008 that began visibly with the bankruptcy of Lehman Brothers and has perhaps yet to see its midpoint. Austrian School economist Peter Schiff’s clairvoyance has mostly been validated (and widely circulated by the 1.3 million-hit Youtube clip Peter Schiff Was Right) save for one fundamental prediction: the collapse of the US dollar.
The economic fundamentals outlined in this paradigm-shifting tome are based on sound money, free markets, the free flow of capital, and very limited regulation. Certainly John Maynard Keynes would have been the last person to write back-flap adulations. The theories of Schiff and like-minded economists are both extremely relevant and primarily dismissed today, as the intellectual debate behind economics faces a seminal moment regarding the causes of the current recession and the Obama stimulus plan.
Broadly, the former Ron Paul financial advisor argues that the recession is not the problem but the cure for the deep and systemic imbalances that exist in the American econ-omy. These imbalances include massive trade deficits, budget deficits, staggering federal and personal debt, a near-nil domestic savings rate, and an economy that has simply lived beyond its means for over thirty years. While many are blaming the free market for these imbalances, Schiff would vehemently disagree.
At the heart of our economic imbalances, he argues, is the Federal Reserve, a semi-public-private central bank that has the ability to effectively manipulate interest rates and money supply. Without the discipline of a gold standard (abandoned in 1971) the United States has seen a steady and significant devaluation of its currency as more is printed to prop an unsustainable “phony economy”, he says. The author argues that by slashing interest rates and not allowing a recession to take place in 2000 following the NASDAQ collapse, Former Federal Reserve Chairman Alan Greenspan simply kicked the can down the road, both delaying our economic day of reckoning and compounding it. Based on Schiff’s analysis, the actions taken and planned by the White House are akin to a miracle weight loss program that actually does more harm than good to the economy.
The primary criticism leveled against Schiff and his investment strategy is that his prediction of a US dollar collapse has not panned out as expected. Rather, we have seen a short-term rallying behind the dollar since October 2008. In fact, most of Schiff’s clients have seen their portfolios diminish in value (to varying degrees) as a result of this currency appreciation.
Schiff has responded by arguing that this is a short-term rally that has nothing to do with economic fundamentals. Rather, he says, it is the result of a massive global deleveraging from risky stocks into what have been seen as a low-yield safe investment, US Treasury Bills. Schiff says that investors are waking up from this mindset and that once it gets in motion, a significant dollar decline will follow as Ber-nanke attempts to create wealth out of a printing press. Perhaps consistent with Schiff’s argument, Chinese Premier Wen Jiabao ex-pressed his trepidation over the safety of China’s US debt just last week.
Peter Schiff and those who subscribe to the Austrian School of Economics are certainly out of the mainstream and perhaps ahead of the curve. Paul Krugman literally wrote the textbook for my microeconomics class and it’s clear that Keynesianism remains the bedrock of economics in universities today. However, like all social sciences, economics is a dynamic field. In the 1970s most economics professors at my alma mater, McGill University, actually subscribed to Marxism as their economic paradigm.
To the extent that intellectual rigor re-quires intellectual diversity, this book is a must-read not only for economists but for anyone who craves a comprehensive understanding of how we got into this mess. And to the extent that good journalism requires compet-ing viewpoints, the views of economists who accurately forecasted this crisis should be part of the conversation.