Introduction: Peter Schiff is CEO of Euro Pacific Capital and Euro Pacific Asset Management, and Chairman of SchiffGold (formerly Euro Pacific Precious Metals) and Euro Pacific Bank, his international bank and brokerage firm. He is an internationally recognized economist specializing in the foreign equity, currency and gold markets. Peter hosts a podcast, The Peter Schiff Show, available online at Schiffradio.com. Mr. Schiff is also the author of several bestselling books, including: Crash Proof 2.0: How to Profit from the Economic Collapse and his updated illustrated parable classic, How an Economy Grows and Why It Crashes – The Collector's Edition. His latest bestseller, The Real Crash: America's Coming Bankruptcy − How to Save Yourself and Your Country, which he fully revised and updated, was released in April 2014.
This week, we present the conclusion of our interview with Peter Schiff conducted the week of April 13th. Part 1 is available here.
Anthony Wile: Before we continue, give us a very brief synopsis of your latest book, The Real Crash: America's Coming Bankruptcy—and How to Save Yourself and Your Country? for those who haven't read it. It goes into detail on many of the topics we've been discussing today.
Peter Schiff: In a nutshell, people think the financial crisis is in our past. It is not. It is in our future. That was the overture to the opera, the beginning. This thing is far from over. It is the people who didn't understand that crisis that are the ones who think we have solved the problem. They never understood the problem in the first place, which is why they were so blindsided by the '08 financial crisis. I understood the problem. That is why I was warning about it for years and that is why I understand that the problem has only been made worse by the very people and institutions that caused it in the first place.
Anthony Wile: Thanks. Let's turn to Europe for a minute. Is Greece going to leave the EU? Is the drachma coming back?
Peter Schiff: Well, I hope for the sake of Greeks that the drachma does not come back. It did not serve them well in the past but what it shows you is the degree to which politicians will avoid telling the truth. The Greek politicians don't want to level with Greek voters that they can't pay the pensions and they can't pay these inflated salaries and benefits that they promised, so they want to pay them in drachma. But the drachmas aren't going to buy much.
Greece would probably be better served to stick with the euro and to actually implement the reforms – real austerity on the part of the government. They need less government not just trying to get more taxes from the Greek workers. They just need fewer people living off those Greek taxpayers. They need less government in Greece. I would be all for Greece leaving the eurozone if they wanted to establish a free-market paradise, if they were going to become like a Hong Kong or a Singapore in Europe, if they were going to just say, 'Yeah, we want to be out of the eurozone so we can have sound monetary policy, limited government, low taxes.' But instead, they are promising even more socialism. They say, 'We need to leave the eurozone so we can have even more socialism than we have now,' which obviously is not going to work.
Anthony Wile: What should the Greek government have done, then, and what should be done now?
Peter Schiff: I do think that it would have been better had there been an acknowledgment that these loans cannot be repaid and just write them off. The people who own those Greek bonds should have been allowed to lose their money. The banks that held them, the investors that held them, should have been allowed to lose.
The message and the opportunity that was squandered in Europe years ago was one of sovereign risk. Spain, Portugal, Greece are not Germany and when you buy Spanish government bonds you don't have the full faith in credit of the German taxpayer. If you buy bonds of a nation that has too much debt, they might not pay you back.
The moral hazard of the eurozone is that you had convergence because the markets began to sense that any sovereign was too big to fail and so all these overly indebted countries got to keep on borrowing money at low rates of interest. Had the eurozone never been created and Greece was trying to borrow in drachma they could not have accumulated all that debt because nobody would have loaned them the money. But there was this moral hazard that should have diffused earlier. Instead, they are feeding it by trying to keep it and make it so that nobody defaults and that is a mistake.
We are doing the same thing here. We bailed everyone out. We prevented a lot of defaults that should have been allowed to occur. We have even more moral hazards than they have in Europe. We've got all sorts of people who have borrowed money who are never going to pay it back. We have all these students that have debt, we have mortgages and credit cards and, of course, the federal government can never repay its debts, either. So in that respect we are no different than Greece.
Anthony Wile: Bottom line, then, your take is it's highly unlikely that Greece will exit the eurozone now or in the future.
Peter Schiff: I don't think so. I think the politicians in Greece have to talk in a certain way to get elected – 'We are going to take a tough line against the Europeans' – and that is how they appeal to the masses and they get votes. But at the end of the day, once they are in power again they are lot more pragmatic and they are going to actually look at the situation. If they actually leave the eurozone, then what are they going to do? Then the country is going to implode, the currency is going to collapse, and now they are going to have to impose austerity on themselves. At least now they can always blame it on Germany or Brussels. If they actually leave the eurozone then who do they have to blame? They are going to have to stew in their own brew.
Everybody thinks that it is going to be terrible for Europe if Greece leaves. Look, it could be the best thing for the eurozone to have a sacrificial lamb, to let Portugal or Spain or somebody else have a good look at life after the euro and then maybe they will be shocked into making some reforms, kind of like scared straight, and say, 'Hey, look. I don't want to end up like Greece so let's start cutting back on government spending now so that we don't have to leave or get kicked out.'
You can't have Greece holding everybody else hostage by saying, 'We are going to leave unless you keep giving us more and more money.' That is an even greater moral hazard because that sends a message to other countries to do the same thing if there are no consequences to being reckless and there is no reward for being frugal or prudent. They just can't cave in to Greece's demands.
But I feel bad for Greece in that it was government moral hazard that enabled the Greek government to get so indebted in the first place. It's just like what we have done in the US. We did the same thing. Look at all the money Puerto Rico owes, the debt crisis there. Why does Puerto Rico owe so much money, and why were they able to borrow so much money in the first place? It's because the US government made Puerto Rican debt tax free in all 50 states and so muni bond funds were eager to gobble. Plus, by keeping interest rates so low everybody was chasing yield, and they found it in Puerto Rican bonds. Puerto Rican politicians then took advantage of all that demand by borrowing money at artificially low rates and using it to buy votes.
Now they are in trouble, but they would not be so highly indebted but for our tax code and the Fed. Politicians just do what politicians do. They are always looking for a handout. That's how they get votes. They promise something for nothing and cheap money allows them to deliver on that promise until the bill comes due. And it always comes due, whether it is Greece or the United States. We have been throwing this party a lot longer then they have and we are in much worse shape. When interest rates go up the real Greek tragedy will play out in America.
Anthony Wile: Is China on the verge of recession?
Peter Schiff: I don't know that they are going to have a recession in that the economy is going to contract. The recession in China is when the economy is growing at 7% instead of like 9%, but I don't think they are going to have a recession the way we measure it. I do think that there are misallocations in the Chinese economy that are the result of their monetary policy being too loose, their interest rates being to low. They have printed too much money but all that has been to prop up our economy and to prop up the US dollar. I think it has been China's effort to prop up the US economy that has been undermining their own economy. What they need to do is stop buying treasuries, let their own currency rise so that their own people can consume more of what they produce and stop lending money to Americans to buy things that we cannot afford.
Anthony Wile: A couple more questions then about investing. Why should North Americans invest internationally?
Peter Schiff: They should do it for a number of reasons. One is to get out of the US dollar, which I think is doomed. Also, there are political problems here that make investing here very risky and I think there is a good chance that our very high corporate tax rates could go much higher. They could become even more confiscatory, depending on the political regime that is in power. If there is a real crisis government may blame corporations, blame profits, try to nationalize those profits through windfall profit taxes or things like that. I think the tax environment could become much more hostile as class warfare heats up and so there is risk there.
US stocks are expensive, too, relative to a lot of foreign stocks, what you pay to buy a dollar's worth of earnings. I see a lot more value in key foreign markets, better earnings and more favorable tax treatment.
There are certain countries that I think are going to prosper in the aftermath of a collapsed US economy. I think that people really misunderstand America's role in the global economy. They look at us as the engine and I kind of look at us as the caboose in that the world doesn't produce because we consume. We consume because the world produces and we are not doing the world a favor by consuming its production. We are not paying for what we pretend to buy; we are just consuming without producing and exchanging worthless IOUs for real goods. We are borrowing but not saving, so the world is doing all the heavy lifting and we are just being carried around.
I think that when the dollar collapses and Americans are basically taken out of the picture when it comes to consumption and borrowing that's just going to free up resources, production and savings for everybody else. For people around the world who have been going without things because they have not been able to afford it because Americans have been buying those things instead, all of a sudden things are going to become affordable and I think you are going to see big increases in living standards in other parts of the world. I think asset prices in other parts of the world will rise sharply in line with increased wealth and standards of living so I think you want to own assets, which includes companies, plant equipment and businesses in countries that are becoming more prosperous.
It is just like investing in the United States in the 19th century, or in Britain in the 18th. You want to go where wealth is being accumulated. So it is a good opportunity to be investing abroad right now, especially in some of these emerging markets, China or places like that. Certainly from my perspective there are plenty of mistakes being made in China, but they are going to dominate the 21st century. That is just the reality and so fortunes will be made. A lot of money is going to be made by people who are invested there and in other parts of the world that will benefit as this change unfolds.
Now, that could change if we get a President Rand Paul and we get a Congress that is sympathetic and we do the right things. Nothing is a sure thing. America could rise to the top again but it is going to require a huge sea change in the way we approach government and our attitudes, because what grows an economy is the absence of government. It is freedom that creates prosperity and wealth and we don't have that anymore. We have government, we have regulation, taxation and subsidies and all kinds of things that need to change.
Will it change? I hope so but I am not betting on it right now. I am betting on the countries that are already moving in that direction as the pendulum will likely continue to swing in that direction. It is harder today to look at America and say that we are about to turn on a dime, do a 180, because the momentum right now is going in the other direction and it is hard to fight that.
Anthony Wile: Let's wrap it up with a two-part question, following on what you just said, that you think people should be positioned for difficult times. First, what should I do internationally if safety is my number one concern; secondly, what should I do internationally if profit is my number one concern?
Peter Schiff: Regarding safety, first you have to understand what you are guarding against. When you are trying to be safe, what is the main risk to your safety? I think the main risk is the collapse of the dollar. It is the loss of purchasing power of the US dollar – inflation, whatever you want to call it. That is the biggest threat to most Americans and so they need to guard themselves against that threat.
I prefer to do that with conservative dividend paying foreign stocks – utilities, telecommunications, property trusts, basic businesses with good yields, dependable yields but where that income is coming to you in Swiss francs or New Zealand dollars or Singapore dollars, currencies that are likely to gain in value relative to the dollar. That is number one.
You are also going to get profits that way but if you are looking more for growth than just preservation of purchasing power, you could invest in more growth oriented companies that don't necessarily focus as much on dividend yields. We put together a booklet about that called The Collapsing Dollar – The Powerful Case for Investing in Foreign Equities. It contains information on dividend paying foreign stocks and my strategy, and can be downloaded for free from Euro Pacific Capital, here.
You can also look at the resources, the precious metals, the mining companies. There are some real potentials for tremendous capital gains in some of these sectors.
The traditional roadmap for safety that most people follow, the standard cookie-cutter approach of US treasuries, corporate bonds, annuities, fixed income products – there is no safety there anymore. These are just nothing but land mines. You've got very, very low yields and you are getting paid in the currency that could collapse in value and so these income streams may be of very little significance to people. The dollar is just worth what somebody is willing to give you for it and it is all a function of confidence and the Fed's willingness to limit the quantity of money it prints. But they have expressed no willingness to diminish that and the only way the Fed is going to stop the dollar from collapsing is going to be to raise interest rates significantly, which would result in massive defaults on US dollar obligations.
These are basically your choices. You could hold US treasuries and get paid back in near-worthless money or you can hold US treasuries and not get paid back because the government defaults. You might get back something, but it wil not be 100 cents on the dollar. You will take some kind of hair cut, which may well end up looking more like a crew cut. If interest rates go up the government can't pay but if the Fed doesn't raise interest rates because it does not want to force the government into default, then what they pay you won't have much value. That is the only way this can end.
You see, if the government borrows more than it can afford to repay, or commits to paying benefits that it cannot afford, its only option is default. Legitimate repayment is not even an option. But what it can do is choose the method by which it defaults. It can either do so honestly by paying less money than it promised, or it can do it dishonestly by printing the money it needs to pay in full.
History suggests that the latter is the course that they are on. That's why people need to protect themselves because when the government defaults on its liabilities with inflation, it also wipes out everybody else's assets at the same time and if you don't want your assets to be wiped out, you've got to protect yourself. The irony is that creditors actually lose more in terms of purchasing power when the government chooses inflation over default.
This is the biggest tax that most Americans are going to be hit with, the inflation tax. It is going to be the government robbing the value of their savings and their investments in order to repudiate its own liabilities. Fortunately, you can still legally avoid that tax by getting rid of your dollars now before they have lost all that value and accumulating real assets around the world, especially now. In fact, we produced a report about that called "Taxed By Debt." It can be downloaded free from TaxedByDebt.com.
We have got this big rally in the dollar based on speculators bidding up the dollar because they are under the false impression that the US has a legitimate economic recovery and that the Fed is going to raise rates. They have no idea this is a big bubble and if they raise rates, they will prick it so they are actually getting ready to launch QE4. When the speculators get hit with reality and they have to unwind these trades, the dollar is going to plunge, but before that happens, investors should take advantage of those bad bets that the speculators are making by using those overpriced dollars to buy foreign assets on sale.
Anthony WWileile: What about physical safety? Are you still looking at Puerto Rico, personally?
Peter Schiff: My desire to eventually move to Puerto Rico (I have already moved one of my businesses there, and I purchased a condo on a beach) is motivated by tax savings and lifestyle rather than safety considerations.
The tax environment now that has been created in Puerto Rico is the best deal that an American can get without renouncing his citizenship. Right now the best place that you can live as an American if you want to minimize your taxes is in Puerto Rico, so I want to take advantage of that.
But I also am making a bet on Puerto Rico that given its unique advantage, as long as they can keep it, Puerto Rico is going to turn around. Even though I have mentioned they have a lot of debt right now and they have a lot of problems, what is going on in Puerto Rico beneath the surface is very, very positive. There are a lot of people moving to Puerto Rico, a lot of dynamic businessmen, a lot of people who are going to be investing there, starting companies there, employing people there. This comparative advantage in taxation is very huge and there is a big advantage. It is unique to Puerto Rico and it is a little snowball right now but it is going to gather momentum as it rolls down this hill. I think I am there early so it could end up being a good place to be investment-wise. I am planning on being there. Instead of retiring to Florida like I probably might have I am going to be in Puerto Rico.
I helped produce a half-hour free video that's online at ustaxfreezone.com. Readers who are interested can just watch the video. It provides some other information if people want to learn more about how to qualify and how to move to Puerto Rico.
Anthony Wile: Thanks for joining us again.
Peter Schiff: Thank you. Take care.