Ever since I had my epiphany and realized that Peter Schiff had been right about the imminent collapse of the U.S. dollar, I’ve been meaning to write a review of his book. When the stock market became increasingly volatile, I thought, "I’d really better write that review soon!" But the final straw came today, when I read that wholesale prices in November rose at the fastest rate in 34 years. LRC readers need to learn how to protect their wealth, while they still have some left.
Schiff is president of Euro Pacific Capital, a broker-dealer specializing in foreign markets. He is very well read in Austrian economics, and his pessimistic analyses on CNBC and other outlets have earned him the nickname "Dr. Doom." You might say that the maverick Schiff is the Ron Paul of investment analysts.
Just as the presidential candidate, Schiff is a staunch proponent of honest commodity money. He believes that the US dollar is poised for a significant fall versus other currencies but in particular against real goods and services. Since closing the gold window in 1971, the Fed’s inflation of the money supply has been tempered somewhat by the unique position of the United States; foreigners, especially other governments, were willing to accumulate large reserves of dollar-denominated assets. But once the illusion is broken, the game will be over. The only thing that buoys a fiat currency’s market value is the widespread belief in its future market value. Once that belief is questioned, the green pieces of paper can become worthless. As Schiff puts it in one of his clever analogies:
Remember when Iron Mike Tyson wore the heavyweight crown, was knocking out everybody in sight, and was so fearsome it seemed inconceivable he could lose? Well, as always happens eventually, he finally met his match. Buster Douglas beat him, and after that he just kept getting beaten. It was the same Mike Tyson, but Buster had broken a psychological barrier.
Any reality check that pierces the myth that the American economy is too big to fail could begin the process of unraveling. (pp. 5—6)
Schiff then goes on to give his own knockout prediction:
Our days as the dominant economic power are numbered. The dollar is going to collapse, and Americans are going to experience stagflation on an unprecedented scale in the form of recession and hyperinflation. Those of you who act smartly and quickly by taking measures I outline later in this book not only will avoid loss of wealth but also will have positioned yourselves to prosper while your neighbors suffer a painful period of reconstruction and reform. (p. 6, italics original)
Although Schiff is remarkably well-versed in Austrian theory for someone who is not a professional economist, I do have a few quibbles with his presentation on the trade deficit. However, as Schiff himself remarked after reading my critique, my objections are akin to medieval scholars debating how many angels could dance on the point of a needle. The important thing is that the US transformation from the largest creditor to the largest debtor nation is the result of our fiat money system, and is not at all a sign of economic strength.
So even though I wouldn’t recommend Schiff’s book as a primer on international trade, that’s not a huge objection, because his ultimate purpose is to guide investors through the storm. This is really where Schiff shines. Of course he recommends getting out of dollar-denominated assets. But Schiff goes much further. He takes the reader step-by-step through the process of selecting foreign assets, and also gives pointers on buying gold.
I don’t want to hurt his sales, so I won’t reveal all of the secrets. But let me give a great example that illustrates the sophistication of his analysis. It’s really a lot more than simply, "The US is going to hell in a handbasket!" In a section entitled "SHORT THE MARKET?" Schiff writes:
It’s not everybody’s cup of tea, but an investor of above-average sophistication might reasonably ask, "If the U.S. stock market is a train wreck waiting to happen, why not just sell it short?"…
Here’s why I would recommend against doing this.
Retail brokers normally require investors to hold any short-sale proceeds in U.S. dollars usually earning no interest. The dollar, seen through my famously jaundiced eye, could lose more purchasing power than the security you sold short lost value…
I’ve got a much better idea, which is to borrow dollars and spend them to acquire foreign income-producing assets, using the income to pay the interest. Short selling accomplishes the opposite, as you end up borrowing assets, which will probably have some intrinsic value, and acquiring dollars, which may have none. (pp. 112—113)
Beyond his diagnosis of the American economy, and the nuts and bolts of how to ride out the storm, Schiff’s book is filled with all sorts of interesting tidbits. For example, he says that China’s advantage is that it is not a democracy, and this is precisely why it will be so successful in the coming decades (p. 177). On the matter of supposedly communist China, Schiff asks if the reader remembers seeing "MADE IN THE USSR" on all sorts of products during the Cold War? Of course not. Schiff’s conclusion is that "in u2018communist China’ entrepreneurs have more freedom than they do in America. It is far easier to go into business there than here." (p. 176)
Another interesting part of the book is Schiff’s graph of the Dow Jones Industrial Average divided by the gold price. After peaking in both 1929 and 1966, this ratio returned both times to about 1 to 1. If that were to happen today, it would mean a tremendous fall in the stock market and a huge rise in gold. Even if the ratio returned only to 2 to 1 or even 3 to 1, it would still spell a large fall for stocks and a large upswing in gold. (Schiff pp. 220—222)
Finally, to give a taste of the passion in the book, I will close with Schiff’s chilling warning of the looming choice that Americans will face:
For years the United States has been traveling a course the Nobel Prize-winning Austrian economist Friedrich von Hayek set forth in a book self-descriptively titled The Road to Serfdom. The coming economic collapse may finally bring Americans to that grim destination. But it is also possible that the same dire economic conditions will inspire a return to the country’s constitutional traditions of sound money and limited government, the foundation upon which a viable economy can be rebuilt. There is a fork in the road to serfdom. One choice leads back to freedom, and it is my fervent hope that Americans will take it. (p. 259)