Peter Schiff on Why the American Economy Is Broken and What to Do About It

The Daily Bell is pleased to present an exclusive interview by Peter Schiff. 

Introduction: Peter Schiff is CEO of Euro Pacific Capital, a full-service registered broker/dealer, member FINRA/SIPC, which specializes in foreign securities. He is recognized for his knowledge of the foreign securities markets as well as the currency and gold markets. Mr. Schiff delivers lectures at major economic and investment conferences, and is quoted often in the print media, including the Wall Street Journal, New York Times, L.A. Times, Barron's, BusinessWeek, Time, and Fortune. His broadcast credits include regular guest appearances on CNBC, Fox Business, CNN, MSNBC, and Fox News Channel, as well as hosting the daily Peter Schiff Show on radio. As an author, he has written five bestselling books, including the recent: "Crash Proof 2.0: How to Profit from the Economic Collapse" and "How an Economy Grows and Why It Crashes."

Daily Bell: Peter, we thank you for sitting down with us today. Tell us how you came to your libertarian, free-market convictions.

Peter Schiff: I had a father who was well versed in economics; he believed in free markets and the Constitution and was a free-market, "Austrian" economic thinker. He educated us in this light. I can remember back to elementary school and junior high school, arguing with some of my peers – whether it was in social studies, history, economics, or government. I have had these views as far back as I can remember, but they certainly evolved as I got older and learned more.

Daily Bell: Tells us a little more about your father, Irwin – who is now in jail as a tax protestor.

Peter Schiff: I think my dad had a big impact on me. He introduced me to economics and taught me from a free-market perspective. He educated me on understanding law and the role of the Constitution and the role of government. He supplied me with a great foundation and ideology in economics. I can look at an idea and assess it very quickly based on my education. When the government says it's going to do something, I know all the ways that measure will hurt the economy. I can see all the intended consequences very quickly and clearly in my mind.

For example, the US Postal Service today announced they are only going to sell forever stamps, which don't have a value printed on them. Immediately I know this is a scam – the post office is going to lose a fortune because they are selling all these stamps, collecting all this revenue, and spending it now on current expenditures like salaries and rent and their gasoline costs.

But their costs are going up because of inflation, and they are going to have to deliver all this mail and collect no money. Which means the post office is going to be bankrupt. Which means the post office is going to need a huge government bailout. And even if they get approval to raise postage prices, it won't matter because they have already sold the stamps. No one is going to buy the higher priced stamps because they have already bought them! So, I can see right away that here's a future disaster in the making. Many people won't think about it like that; they will think, "Oh, here's the post office selling these forever stamps. Isn't that convenient." They won't see the real problem down the road. So this is a free-market way of thinking.

Daily Bell: When did you found Euro Pacific Capital Inc. [a broker/dealer based in Westport, Connecticut], and why has it been so successful?

Peter Schiff: I bought it in 1996. It was a shell when I bought it: it had no customers and no assets. I transferred my book of business into it, which might have been about $10 or 20 million, not very much, and now we have about $3 billion worth of customer assets. It's still small compared to, say, Merrill Lynch, but it's competitive.

Daily Bell: What are The Peter Schiff Show and Wall Street Unspun?

Peter Schiff: Wall Street Unspun was a weekly show that I did on the Internet and on shortwave radio once a week. I have a lot of clients, so this was a way to speak to all of my clients once a week. I would speak about the markets and the economy, and then clients could call in and ask questions. What happened, though, was that the show started to get very popular and many people were listening who were not my clients. Then, I thought I should have a daily show and become syndicated. So I stopped Wall Street Unspun and started the Peter Schiff Show, which broadcasts on AM radio in my home state of Connecticut and online at schiffradio.com.

I'm now on five days a week for two hours, instead of one day a week for an hour. It's still a call in show, and it's still a way for me to share my thoughts with clients. Unfortunately, with all the government regulations, we are limited as to the types of things that I can say. I don't really have the First Amendment rights a normal person would have because I work in financial services. It's not as good for the clients, but I can still talk about economics and the market in broad generalities; I just can't give any specific investment advice. There are some people who have investment shows where people call in and they give advice, but they are not stockbrokers. Since I am a licensed stockbroker, I am not allowed to give advice on the radio. I think it is terrible and a violation of the constitution. Unfortunately, we now live in a country with very little individual liberties because we have a very powerful federal government.

Daily Bell: Are you still bearish on the dollar and bullish on investment in tangible assets and well as foreign stocks and currencies?

Peter Schiff: Yes, very bearish on the dollar. Based on what the government is doing, there's no way to be bullish on the dollar. I still like hard assets and certain foreign markets as alternatives.

Daily Bell: How big is Euro Pacific Capital now?

Peter Schiff: Well, I have six regional offices and over a 100 employees. We offer retail brokerage services as well as investment banking. We have done a couple hundred million dollars in deals in the last year, so that's been very good. I also have Euro Pacific Asset Management, which started a little over a year ago and is now managing $400 million. I have a mutual fund family that's growing. We have four funds now and more funds that are going to be launched this year.

I also have a separate business called Euro Pacific Precious Metals, which we started last year and is very exciting. That company just sells gold and silver bullion coins at low markups. I have been selling precious metals through Euro Pacific Capital since 2001 through the Perth Mint program, but I decided the time was right to launch a separate company just for selling physical metals.

I opened a brokerage firm in Canada last month, called Euro Pacific Canada. It's a separate company, partially owned by me, which provides my philosophy and investment strategies to my followers in Canada. Because of the securities regulations, the only way to work with Canadian clients is at a Canadian firm. Before, we had to turn them away. Euro Pacific Canada is structured like a franchise, which finally gives them access to my investment approach.

Daily Bell: Tell us about your new book, Crash Proof 2.0. What is the thesis?

Peter Schiff: Crash Proof 2.0 is basically an updated version of the original book, Crash Proof. I decided to update it based on the events that followed the crash of 2008, which I accurately predicted in the original book. When I predicted it, I laid exactly what was going to happen and why. I described how the government created this huge problem, it was all described in detail and turned out to be 100% right.

The people who didn't see the crisis coming have blamed it on capitalism. This book was meant to clear up some of the misconceptions that were circulating around the media in the aftermath. Since then I have written another book called, How the Economy Grows and How it Crashes. An expanded version of a book my father wrote called, How an Economy Grows and Why It Doesn't. That came out in February. It's an illustrated form, like an allegory and it explains our problems in a fictional tale but the characters are modeled after America.

Daily Bell: How did your father know about Austrian Economics?

Peter Schiff: He just learned himself and came about it on his own. He grew up a Democrat, his father was a Roosevelt Democrat, so he started out as a liberal when he was in high school and a young kid. Eventually he saw the light.

Daily Bell: Can anything help the US economy at this point?

Peter Schiff: Of course, increased savings and production would help, but unfortunately we're not getting that. We aren't going to get that until we have less government spending and higher interest rates and until we have fewer regulations. Just like if you are obese and you want to get healthy, there is a way to do it – through exercise and diet. We have to stop buying things that we can't afford. We can't keep promising benefits to government workers that expect lucrative retirement and pay for health care. We can't provide all these goodies because we don't have the money.

There are a lot of government workers who are really being paid two or three times what they should and so if we have to cut the salary of government workers, that's an immediate loss to those government workers but it's an immediate gain to all the taxpayers who are footing the bill. But the politicians are afraid of doing that because the people who are going to lose are very organized and will express their displeasure at the ballot box.

Daily Bell: Is the US turning into an authoritarian state?

Peter Schiff: Well, certainly, the US government is gaining more and more power. Individuals are surrendering more and more of their freedoms and their liberties. You know, in my business my boss is the government. The government hasn't let me hire any brokers in two years. I say the government but it's the regulators acting with government authority. They haven't let me open any new offices in two years. They tell me how I have to monitor my customers; because of the government I have to impose minimum account sizes, all sorts of things I have to do.

The regulations cost me a fortune. I have maybe eight people that I employ, just to help me comply with rules and regulations. The number of regulations has increased so much in my industry I never could have started my business back in 1996 if we had the regulations we have today. I could not have started my own firm because I would not been able to afford the cost of the regulations.

Daily Bell: You predicted in a 2002 interview with Southland Today, an economic downturn triggered by the bursting of the stock market bubble that would lead to a bear market likely to last another 5 to 10 years. How did you know?

Peter Schiff: When the stock market bubble burst, at the time when I did that interview, I did not know the government was going to act so recklessly. I later modified my forecast because I saw we were going to have a worse collapse. The Fed began inflating a larger bubble than the one that had just burst, thus sowing seeds for a much greater economic collapse. I really started warning about that collapse in 2004/2005 when it appeared obvious to me that the Fed had created a monster and it was going to turn on us, which ultimately it did. And then we saw a bigger collapse in 2008 and once again the Fed did the wrong thing and postponed the pain yet again until maybe 2011 or 2012. Now a far greater collapse is coming because of the continual reflation and quantitative easing.

Daily Bell: Why are you so critical of the Fed?

Peter Schiff: I am critical because there is much to criticize; they are doing a lot of bad things. They blew up the stock market bubble; they blew up the housing bubble, which brought the US economy to its knees. It has enabled the government to grow like a cancer. Instead of taking away the punch bowl, the Fed has been spiking it. The Fed has betrayed American citizens and those that run it should be put on trial. They have damaged the country more than any WikiLeaks cable. This is serious stuff what they are doing.

Daily Bell: Will there be hyperinflation?

Peter Schiff: I hope not, but there is going to be high inflation because of what the Fed has done. Hyperinflation will depend on whether the Fed continues to do what it is doing – pumping more paper money into the economy – or whether it ultimately admits it's errors and changes policy. The longer it takes, the worse it will be.

Daily Bell: Should the US get rid of the Fed? How would it be possible?

Peter Schiff: Well depends on what replaces it. We can go back to the pre-Fed monetary system, and that would be best. But if we replace it with something worse – then no.

Daily Bell: Should the world go back on a gold standard?

Peter Schiff: Absolutely. It will anyway. The question is whether the governments adopt the gold standard voluntarily or whether the public forces them into it. It definitely would be better if the government would do it on their own rather than waiting for crisis but you know how it goes.

Daily Bell: Do you believe in free-banking and private fractional reserve – letting the market itself decide on the kind and style of banking available?

Peter Schiff: Sure.

Daily Bell: Should the Fed's functions be taken over by the Treasury? Would that work better?

Peter Schiff: No. I would like to strip the Fed of their powers but not transfer them to the Treasury.

Daily Bell: You received criticism due to the performance of some of client's accounts in 2008, as well as controversies over the predictions themselves. Was this fair?

Peter Schiff: In most cases, no. I don't think the people criticizing were being fair at all. They were taking one portion of my investment strategy and examining it for a brief period of time. (Q4, 2008). My strategy and investment recommendations have been in the works for a decade, and you can't selectively pull out one quarter and then only look at part of my portfolio.

I recommended that investors do three things: keep some money in foreign dividend-paying stocks, keep some money in physical precious metals, and keep some money in cash, which would be in dollars and foreign currencies. And one of the reasons that I specifically suggest cash is so you can take advantage of any declines that you might get in stocks or precious metals – and you certainly had that opportunity in 2008. We had substantial declines in foreign stocks and those of my clients who didn't sell during those declines had the opportunity to benefit from those declines.

Daily Bell: How have your clients fared in the 2009 and 2010?

Peter Schiff: Well again, I can't really say because of the regulations, I can't even talk about averages, but I can tell you that 2009 was the best year that we had in the history of the brokerage firm. So 2009 was our best year and 2008 was our worst year.

I didn't get credit for a hedge fund we put together in 2007 that shorted sub-prime mortgages. The Wall Street Journal did a story about clients of mine who lost money. They deliberately skewed the sample. So at the end of 2009 I called them and said 2009 was our best year ever – do you want to do an article on how fantastic 2009 was and what a difference a year makes? Back came the answer, "No, we don't want to write that story." The WSJ never wants to write a story giving me credit, because I have had many, many good years but they only wanted to write about me in Q4:08.

The regulators don't make it any easier to talk about your business either. They don't want you comparing your results to, say, Merrill Lynch's – because if you know what you are doing and respect the free-market, you are probably doing better. They make it illegal to advertise that your clients are doing well, so no one realizes the alternatives to Wall Street. All the rules are written to protect the large firms from competition from the small firms. Every other industry can have testimonials, you can go to the website and have clients taking about this is a great firm, I made a lot of money, you can't do that in this business. No one can say ‘I like this firm' because it's illegal to do that.

Daily Bell: Is gold going to US $5,000?

Peter Schiff: I think it's going to $5,000 before the bull market ends but I don't know when exactly that will be. Timing is a very difficult thing.

Daily Bell: Is China's inflation out of control?

Peter Schiff: Well, it's not out of control, but it's getting worse. All the leadership has to do is stop printing money. But they don't want to do that because they want to keep their currency even more debased than the dollar in order to make exports cheaper – so they print money. They have to decide what they want. Do they want a debased currency and price-inflation or do they want lower price-inflation and less debased currency? You can't have both.

Daily Bell: Jumping over to Europe, Is the EU going to split? What will happen to the euro?

Peter Schiff: I don't know. I don't think it will survive in its current form, but I don't know how many years will pass before there's a major change with the euro. I don't think the euro is viable given the politics, but I do think the European politicians will be able to placate the markets for a while longer and convince people that the euro is viable.

Daily Bell: Are you still a supporter of Ron Paul?

Peter Schiff: Yes, I support him as a Congressman, and I supported his son in his election to the US Senate. If Ron Paul decides to run for President, I would likely support him, although there are some other candidates that are potentially running I would like to support as well. I don't know whether he will run in 2012.

Daily Bell: Ron Paul of course is anti-regulation and pro free-market. Is the US financial industry overregulated? Is it overbanked? Does regulation work?

Peter Schiff: Of course it's over regulated, dramatically so. If the government wasn't in there regulating, we would have a much healthier, more competitive market. I think the financial services sector overall would be a smaller part of our economy. The resources that used to grow manufacturing are now being diverted to grow the financial business.

Daily Bell: You say that the current economic crisis provides an opportunity to transition from borrowing and spending to saving and producing. Can you explain more?

Peter Schiff: Well, that is what ultimately has to happen in America but is not happening now, nor will it happen as long as the current monetary fiscal policies are maintained. Right now you have to be an idiot to save money in US dollars, so nobody is going to do it. Therefore, we're not going to get the capital that we need to rebuild our economy. Production will continue to lag and jobs will continue to disappear.

Daily Bell: Compelling points. In fact, you received over 10,000 donations and much e-mail from around the world during your run for Senate. Were you unhappy with the way your candidacy turned out?

Peter Schiff: I think I got donations from 20,000 people, which was great, but I wasn't happy the way it turned out. I lost, and the whole idea is to win. I was disappointed that I didn't get more media coverage for my campaign, I didn't get more donations from any kind of conservative organizations; I didn't get any other support in the news. I had hoped FOX News would have covered my campaign, but they completely ignored me. I couldn't get on O'Reilly or Hannity or any of these shows, and couldn't get them to even discuss my campaign with me even though they talked about the Tea Party and the Tea Party endorsed me. I had no press coverage; I think that really undermined my campaign because people decided I wasn't a viable candidate. When the press decides not to cover you, it's really hard to overcome.

Daily Bell: OK, you lost the Republican primary. Should you have run as a libertarian?

Peter Schiff: I definitely would not have run as a libertarian, I would have had no press coverage there either. I don't think I choose the wrong party. I just didn't have the money to run a successful campaign. In the primary Linda McMahon spent $30M; we only spent about $3M. She outspent me 10-1 but she only got twice as many votes as me, it's not like she got 10-times as many votes as me. My votes were a lot less expensive than hers.

Daily Bell: Will you run again?

Peter Schiff: I will probably run again for something in the future. Will I run in 2012? Probably not.

Daily Bell: You've raised your profile tremendously by using the Internet to spread your views. Is the Internet generally an important force in spreading the word about free-market thinking?

Peter Schiff: I think without the Internet I would not have as large an audience. People can easily search for me or any other subject. Social media is huge and it's so easy to get the word out through these platforms.

Daily Bell: Is there a small group of banking families behind a lot of the growing authoritarianism in the world? Is the Internet exposing them?

Peter Schiff: I doubt that. I don't think there's any kind of banking conspiracy but bankers certainly act in their own self-interest. They make a lot of money based on the status quo and they donate a lot of money to politicians who help them make money – but I don't think there is a conspiracy. I think it's corruption in government and the way politics work and that is the problem.

Daily Bell: Where do you go from here?

Peter Schiff: Right now, I'm going to continue with my business and expand overseas. I'm working on a new book. I will try to spread the word and encourage more people to protect their wealth through the proper, free-market oriented investments.

Daily Bell: Would you like to recommend any books and articles that are especially valuable?

Peter Schiff: My books, Crash Proof and How the Economy Grows. I have a recommended reading list on my website. I have also been doing my radio show everyday, Monday through Friday, Peter Schiff Show. Every Monday to Friday, 6-8pm, Schiffradio.com

Daily Bell: Thank you for your time. Good luck with your firm and your political career.

Peter Schiff is certainly a success story. An intensely idiosyncratic individual – someone who prefers to think for himself just as his father does – Peter Schiff has succeeded on the business side and doubtless will succeed politically as well sooner or later. This interview touches on a wide variety of bases and shows how he built his enterprise piece by piece. Nobody helped Peter. He took the risks on his own and was not worried about making high profile predictions throughout the 2000s regarding the economy.

Several things are clear from his background and current situation. Peter Schiff had a vision of the world and stuck to it. He didn't conform to someone else's vision of How the World Works. He stuck to his vision because he believed in it; and gradually others have seen the rightness of what he perceived long ago. One of our elves once asked him if the "best" way to analyze investments was through a free-market economic approach. Somewhat baffled, he replied "What other kind of economics is there?"

It is this ability to cut through to the heart of the issue that has served him well in our view. He is not a complicated man in this regard, but he has the same quality as Congressman Ron Paul; he is someone who has a hard time fooling himself and seems to have a hard time lying to himself on fundamental issues, generally. Of course, this may not serve him well when it comes to politics, which is generally the art of lying for votes.

However, having observed Mr. Schiff for years, we would make the prediction that he may even turn politics upside down eventually, much as Ron Paul has. There is a great thirst for truth in the United States, indeed in the Western world, and courageous people like Mr. Schiff help fill that need – through business and investing in his case; and perhaps through running for office and offering people real solutions in the future. (Though it is true that change may actually come OUTSIDE of politics and beyond the system ...)

Peter Schiff was right about collapsing Western economies through the 2000s, even when he was mocked and pilloried by the mainstream media. When his predictions proved true, the media – controlled by the power elite in our view – simply ignored his correct calls and went in search of mainstream economists who had come around to his views much later.

Of course now, with his investment firm blossoming and money available for other projects, he has the opportunity to prove on his own what the mainstream media denies him. It is the truth-telling of the Internet in our view that has allowed people like Peter Schiff to propagate their courageous and non-mainstream visions. There is no going back now. There is little hope that the powers-that-be can control people such as Schiff – anymore than they could control his father. He is in the vanguard of a new consensus about free-markets and freedom generally. There are more every day who think like him and look up to him. We are admirers too.