The Real Crash: America’s Coming Bankruptcy-How To Save Yourself And Your Country by Peter Schiff shows ways to guide the global economy and the United States in particular out of the current cycle of real estate and debt bubbles, which have grown over the past decades.
Schiff points toward local problems like California’s growing budget deficit, occasioned by things like paying the City Manager a salary of nearly a million dollars per year. In addition, the author points to the fact that the U.S. is not manufacturing consumer goods as in the past. There is too much consumption from imports and this is being done on borrowed money.
In an unusual statement, he says that wages must fall to reduce unemployment materially. This statement is followed up with a call to reduce hyperinterventionism and the numerous overseas military bases, which are costly and unnecessary. The author has a point here because the dual wars in Iraq and Afghanistan occasioned huge budget deficits (in large part), which could take a decade to balance.
Schiff provides plenty of cures to make things right again. The U.S. needs to boost exports by 30% just to balance the trade deficit. The current Administration has projected a tremendous gain in exports by 2014.
Schiff believes that the money supply should be tightened, allowing interest rates to rise. At the same time, government budgets should be slashed to bring the budget into balance. Schiff believes that the government should buy gold and that Americans should invest in strong currencies like the Swiss Franc and Aussie Dollar.
The U.S. already has 400 or more years stock of coal, as well as natural gas and other valuable commodities and minerals. Our stock of patents and intellectual property is the envy of the world. These facts are not emphasized by Schiff in his analysis.
The Federal Reserve has pursued a low interest rate policy in recent years. This policy is criticized by Schiff. However, raising rates could restrict the growth in consumer spending, which is just beginning to show signs of increasing after the Great Recession.
The author goes on to state that President Hoover made a mistake in not allowing the free market to function. President Roosevelt compounded this error and the Great Depression grew more out of control than it needed to be.
Schiff believes that the payroll tax should be ended to put more money into the hands of consumers. Assuming that this could be accomplished, what stops people from making bad investments like the recent real estate bubble? In addition, private companies don’t always honor their pension obligations and many employees never see any pension vesting whatsoever despite years of service.
Schiff believes that all regulation kills jobs; however, economists like Dr. Milton Friedman admit to the need for some regulation. In Free To Choose, Milton Friedman stated:
“Self love will lead sellers to deceive their consumers. They will take advantage of their customers’ innocence and ignorance to overcharge them and pass off on them shoddy products. They will cajole customers to buy goods they do not want. In addition, the critics have pointed out, if you leave it to the market, the outcome may affect people other than those directly involved. It may affect the air we breathe, the water we drink, the safety of the foods we eat. The market must, it is said, be supplemented by other arrangements in order to protect the consumer from himself and from avaricious sellers, and to protect all of us from the spillover neighborhood effects of market transactions.”
In the current environment, margin requirements are badly needed for financial products like derivatives. The author ignores this regulatory need. Schiff doesn’t like the Federal Reserve; however, he has admitted that an independent central bank is preferable over a purely political control of central banking or even foreign bourses.
Schiff would like to abolish the income tax and replace it with a consumption tax. Taxpayers and businesses spend 6 billion hours on tax compliance and $430 billion dollars a year on tax filing. The author has a point here because consumption taxes would penalize waste more stringently in favor of conservation. In addition, a consumption tax would draw a contribution from the underground economy which pays virtually no taxes at all.
Schiff believes that higher education in elite private schools is worth the expenditure. He believes that parents should not push students to go to college because the opportunity costs of foregoing work opportunities are considerable. The author fails to discuss trade education in any great depth.
There is disagreement here because a college education produces higher earnings over a high school degree during the course of a career. In addition, many employers still believe that college is valuable for entering employees. At some point, the baby boomers will be retiring and thousands of professionals in every field will be needed immediately. Training professional licensees for public practice can take up to a decade or more.
Schiff believes that investors should invest in Aussie, Singapore, Hong Kong, New Zealand, Switzerland, Netherlands and Canadian stocks. He points out that gold purchased in the year 2000 appreciated 550% in price.
The Real Crash by Peter Schiff has value in beginning a very necessary conversation on ways to balance the budget deficits and bring prosperity back to the United States and indeed the world economy. The presentation warrants discussion by intellectuals in virtually every discipline, as well as the general public.