Interview conducted by Olly Ludwig
Peter Schiff, president and chief global strategist of Euro Pacific Capital, is more than a little bit concerned about President Obama’s re-election.
Ever the provocateur, Schiff believes that the president is a socialist who was essentially elected by people who want free things—the perfect bedfellows for a Federal Reserve he argues is bent on debasing the dollar.
What does it all point to? Looking at earlier predictions of his that gold could reach as high as $5,000 a troy ounce from a dollar perspective, Schiff says it’s time to pay the piper, and said the greenback will almost surely collapse during Obama’s second term, as a whole lot of bad economic policy comes to a head.
Ludwig: Before getting too deeply into the implications of Obama’s re-election, did you see any difference between what a Romney presidency would have meant to the U.S. economy vs. another four years of Obama?
Schiff: Well, if Romney had won, we’d still have a lot of troubles. But it certainly would have been an improvement to have had Romney in office. But we still have a huge crisis coming, and I don’t think Romney being in office would have prevented that. But it would have given me a little bit more hope that we would come out of this a little bit better—that we might have tried more effective market-oriented solutions to these problems.
Ludwig: The gold market had a bit more of a bid in it since it started to seem more clear that Obama would probably win. Do you take that move seriously, or do you think that, at the end of the day, we’d see the same kind of monetary easing in either an Obama or a Romney scenario?
Schiff: The dollar was going to go down and gold was going to go up regardless. The re-election of Obama and the politics behind it just really shows the trouble America is in as a nation and as a society. The types of leaders we’re likely to elect, and the types of policies we’re likely to pursue are going to substantially undermine the economy. It’s almost like a self-perpetuating prophesy, because the more the government interferes in the economy, the more regulations we have; the more government spending we have, the more taxes we have—particularly on those with upper income—the worse the economy is going to get, the lower our living standard is going to go and the more good job opportunities are going to be diminished.
And that’s very fertile ground for politicians to promise relief in the form of more government. And, more government creates the need for more government; because the more government we have, the more poverty we have. We’re in that spiral right now; this is how democracies die. We’re in a situation, votingwise, where we have more people in the wagon than we have pulling it. The way you get elected is you promise to people who are riding in the wagon more free stuff, an easier ride; and you also promise to whip the people pulling the wagon a little harder and make them do a little bit more.
And as you do that, there are always people pulling the wagon who decide they are tired of pulling the wagon, and they want to jump in with everyone else. So you get even more people looking for something from government and you have fewer people to pay the bills. And this is where we are—a disintegrating nation.
Ludwig: The financial markets this week moved right past the election and started focusing on the "fiscal cliff." What thoughts do you have about that?
Schiff: Everybody is saying we have to avoid the fiscal cliff, but eventually we’re going to go over a much bigger fiscal cliff, because this one is really a pothole. In the current case, we’re talking about cuts in government spending which are trivial relative to the types of cuts we actually need to solve the problem. People are panicking because we might have small cuts in government spending. We actually need enormous cuts in government spending, the problem is we’re not getting them.
And yes, there will be tax increases. It’s worse for the economy not to have the taxes, because if we don’t have the taxes, we’re still spending the money, so we’re just paying for it by creating inflation and going into debt. It’s the deficits that do more damage to the economy that the taxes.
Ludwig: To be clear, you’re not cooking up an argument for taxation per se, are you?
Schiff: No. I think the best thing to do is cut government spending. But I do believe that if the government is going to spend a lot of money, you should pay for it with taxes because that will do less damage to the economy than paying for it with debt and inflation. But if you’re going to raise taxes, the tax hikes shouldn’t be higher marginal taxes on upper-income earners who are already overtaxed, because that might backfire on you and you might end up slowing the economy and end up getting even less tax revenue.
If you do want to raise taxes, the best way to do it is through a consumption tax. If you’re going to increase taxes, don’t increase the marginal rate; just increase it on people who spend money, not on people who save and invest it.
Ludwig: As you take in this Obama victory, is there any asset allocation shift you think might be more sensible now than, say, before it was clear the president would win re-election?
Schiff: I think it’s the same asset allocation as before: You want to avoid the dollar; you want to avoid bonds; you want to be in precious metals; you want to be in resources; you want to invest abroad.
But the problem with the Obama victory is that he’s obviously the worse of the two candidates—the reason Obama was elected is because he’s promising free stuff. The fact that we would re-elect Obama, despite the fact that the economy is bad and getting worse, just shows how hopeless the situation is as far as America ever doing the right thing.
Ludwig: So you don’t see any chance that he might back, say, some more "trickle down" approaches to managing the economy and come up with some sort of right-wing surprise that might anger his supporters on the left?
Schiff: No. He’s a socialist, and he doesn’t believe in that. He does believe in "trickle-up" government—and I coined that before Romney did! So no, I don’t think we’re going to get any solutions out of Obama; the question is, Can we survive another four years?
I think he’s going to leave office in a bigger economic crisis than when he came in.
Ludwig: So you think a major crisis is going to happen in the next four years?
Schiff: Will there be a crisis? Oh yes! We’re going to have a currency crisis and/or a sovereign debt crisis during his term and it’s "going to hit the fan."
Ludwig: So you see Treasury auctions starting to go poorly? What are we talking about here?
Schiff: That, or the Federal Reserve is going to be the only buyer for Treasurys. But there will be a precipitous drop in the value of the dollar; prices are going to skyrocket for pretty much everything; and maybe the government will impose price controls on food products and energy, and everybody is going to be standing in long lines just to get the basic necessities of life.
Take a look at Greece today. Look at all the government employees protesting. It will look like that, except not as civil.
Ludwig: If the you-know-what hits the fan—as you say it will—do you think the government has any role in alleviating some of the dislocations, the joblessness, the homelessness?
Schiff: The government can’t alleviate it; the government is the cause of it. The only thing the government can do to alleviate it is to get out of the way. But the more it’s involved, the worse it’s going to be.
It’s not a good thing that our currency is going to implode in value and that Americans are going to be impoverished. That’s not a good thing, but it’s a consequence of all the bad policies that have been pursued. It’s time to pay the piper.