Peter Schiff: The Government Chose Wrong

Nov.12.09 | About: WisdomTree Continuous (GCC)

At last week's "Inside Commodities" conference, the conversation returned again and again to one dominant theme: inflation vs. deflation. Some, like Nouriel Roubini, predicted the U.S. is set for a deflationary crash. But other speakers forecasted runaway inflation—including Peter Schiff, president of Euro Pacific Capital.

Author of 2007's "Crash Proof: How to Profit from the Coming Economic Collapse," Peter Schiff is an investment adviser, blogger and frequent commentator for dozens of financial print and television media outlets. Mr. Schiff served as an economic adviser to Rep. Ron Paul (R-TX) during his 2008 presidential campaign, and he is currently running for U.S. Senate, opposite incumbent Sen. Chris Dodd (D-CT).

While at the conference, HAI Associate Editor Lara Crigger grabbed a few minutes with Mr. Schiff to take his pulse on the global economic markets, including his thoughts on runaway inflation, the dollar's future as a reserve currency and the possible return of the gold standard.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Earlier today at the "Commodities 2010: The Road Ahead" panel, you said you think the U.S. is headed for runaway inflation, rather than deflation. Why?

Peter Schiff, president, Euro Pacific Capital (Schiff): We're headed that way because we're creating too much money. Interest rates are too low. The Federal Reserve continues to expand its balance sheet. It continues to buy up assets that it shouldn't be buying. That is basically the poison that the government has decided to swallow.

We have a choice between allowing a deflationary bust, allowing asset prices to collapse, allowing businesses to fail and allowing the recession to worsen in the short run; or we can try and postpone some of that pain by creating inflation, and deal with the inflation pain down the line. The latter is what the government has chosen. Unfortunately, they chose wrong, from the point of view of the American consumer, the American worker, the American saver. The American economy is going to pay dearly for the price of re-electing some of these incumbent politicians.

Crigger: On that same panel, you also said you thought the dollar would eventually lose its status as the world's reserve currency. What do you think it will be replaced with?

Schiff: I don't know. Hopefully nothing. I don't think we should have a reserve currency.

Crigger: Why not?

Schiff: Well, it's led to a lot of problems in the global economy. When the dollar was backed by gold, and was redeemable by gold, it being the reserve currency was OK. But at the moment, there are no currencies backed by gold. So I think that foreign central banks should hold gold as their key reserve, and not another currency. They can also have some foreign currencies as part of their overall reserves, but I think that gold should play a much bigger role in giving value to currency.

Because remember, you can't have a monetary system without money. And money is gold. Just printing paper—there's nothing behind that. There's nothing intrinsic there. It always leads to chaos. If you can just print money at will, it has no scarcity. Then you have inflation; you have these asset bubbles; and you don't have a well-functioning global economy. Hopefully we don't anoint another reserve currency.

Crigger: But what about a basket of currencies?

Schiff: Well, foreign governments can hold baskets of currencies, but I wouldn't want something run through the IMF, where they're creating baskets and so on. I don't want to interject the IMF in there.

But certainly, the only other aspect would be how you price certain key commodities. Just because oil is priced in dollars doesn't mean that currency is or should be a reserve currency. It just means that's the currency they're looking to price in. But they can also price in gold bullion.

I think pricing in the dollar is going to change, because as the dollar becomes an increasingly weak currency, if you're going to price things in dollars, that means you're going to have to constantly raise your prices in order to retain your value. It might be better for countries like OPEC nations to pick a currency that's more stable, so that they have more transparency in their pricing. I think that will happen across the board for other commodities; those that are now priced in dollars might end up being traded in other currencies with a more stable value.

Crigger: Does this mean you're advocating a return to the gold standard?

Schiff: Well, the gold standard works. What we have now does not. Our founding fathers put us on a gold standard for a good reason, because paper currency existed around that time. It had existed in the past. And they were familiar with how miserably it had failed. So they wanted to set us on a gold standard. And we became the world's wealthiest nation while on the gold standard. We were on the gold standard for all of the 19th century, which was our fastest-growing century (more so than the 20th century). We had the Industrial Revolution; we built up our arsenals and our democracy—we won World War II on the gold standard. We were actually on the gold standard up until Richard Nixon ended it in 1971. So to say that the gold standard is somehow arcane, or that you can't have economic growth on the gold standard—that's all nonsense.

It's the politicians who don't like gold, because gold imposes discipline on politicians. It keeps them honest, and politicians don't want to be honest. They want to get elected.

Crigger: So which commodities do you think will do well in 2010?

Schiff: Gold!

Crigger: Gold, of course. Anything else, though?

Schiff: I like them all. Agriculture. Silver. Silver will probably do better than gold, actually.

Crigger: Because of its industrial applications?

Schiff: Yeah, and I think it has some interesting factors. Usually in bull markets for precious metals, you should look at the ratio of gold to silver. At the moment, silver looks cheap to me.

Crigger: Thank you very much for your time! Enjoy the conference.