Are We Doomed? Norman and Schiff Debate on America's Future

Mike Norman, anchor, HardAssetsInvestor.com (HAI) Hello everyone, I'm Mike Norman, founder of the Economic Contrarian. I'm here with Peter Schiff, author of Crash Proof: How to Profit from the Coming Economic Collapse. We will be debating on commodities, currencies and all of the global financial markets.

Peter, one of the things you have been very vocal about has been the weakness of the U.S. dollar. You keep characterizing it as "a collapse in the dollar," when in fact, if you look at the dollar against a broad basket of currencies that includes not only the euro or the yen but also the Canadian, Mexican, Chinese, Singaporean, Taiwanese, Brazilian, Saudi Arabian and Russian currencies – a lot of the countries we do business with – the dollar has only come down modestly maybe 25% in the last five years. However, since the early 1970s, the dollar has appreciated over 400% against those currencies. Don't you think it's an exaggeration to say that the dollar is "collapsing?"

Peter Schiff, author, Crash Proof: How to Profit from the Coming Economic Collapse: The collapse hasn't happened yet, you're right. The dollar has declined. The collapse is still in front of us.

Basically what happened from 2002–2007 was that we simply retraced the gains the dollar made in 1995–2000. But what we did do is we significantly broke through major support of the U.S. Dollar Index at around 80. We're right now trading at around 72.

What has been happening, and what I think is going to change, is countries like Saudi Arabia and China have been spending billions to prop up the dollar to maintain their currency pegs. That's why they have these massive sovereign wealth funds now. They have to try to find a way to get rid of all the dollars they accumulated through intervention. Meanwhile, these policies are causing huge inflationary problems in places like Saudi Arabia and China. They're rioting in the streets. The governments cannot maintain these price supports for the dollar. So I think all these countries around the world who are pegging to the dollar are going to float their currencies. They're either going to peg to something else or just let them be freely floating. The dollar is going to tank. The collapse is still coming, Mike.

Norman: A lot of guys like you with your bearish arguments for the dollar, you say, "the trade deficit is huge" and "the current account deficit is huge." Actually in the last two years, since 2006, when the current account deficit peaked at negative $875 billion, it's down to negative $650 billion. Now that's still a big number, but it is still a 30% improvement! If you took oil out of the equation, it would be a manageable number.

Schiff: But you can't take oil out of the equation, because we're importing all that oil. Right now we're benefiting from low interest rates. At some point the bubble in the Treasury market is going to burst, interest rates are going to skyrocket, and then the current account deficit is going to skyrocket also, because the cost of servicing trillions of dollars of liabilities held by the rest of the world is going to go up. What is really going to implode the dollar right now is the socialization of the losses in a securitized debt market with the Federal Reserve buying up all these mortgage-backed securities. They're going to buy a lot more. They're going to be buying credit card debt, auto loans… This is a huge bailout, but we're not financing it like we did with the Resolution Trust Corporation.1

The Treasury is not doing it; the Fed is doing it and they're paying for it by printing money. The dollar is going to fall through the floor.

Norman: You know, Peter, we didn't save up to pay for World War II. We were involved in a war that cost us billions and billions of dollars. At that time, our deficit skyrocketed. And guess what? We came out of the whole thing with hardly even a blip in inflation. The country was wonderful. Why are you construing all of these remedies, designed to prevent implosion, as negative?

Schiff: What happened during the Second World War is that we paid for that ourselves. The government borrowed money from its American citizens. During the Second World War, we rationed consumer goods. People really sacrificed. Women, who didn't work, came into the workforce to produce and work in the factories. We all came together and we sacrificed. How are we paying for the war now? Nobody is being asked to sacrifice. We're borrowing money from the Chinese and we're buying it from the Saudis. This is not the same thing.

Norman: Peter, our deficit is something like 1.5% of GDP and we're fighting two wars. How are we paying for it? It's virtually paid for! The women went to work because most of the men in the Second World War were over there fighting the war. We don't have that situation today.

Schiff: No, because women are already in the workforce in peacetime because we're so broke. You have to look at these GDP numbers. You're saying the deficit is small in relation to our GDP. These GDP numbers are inflated. It's all fluff and services. Look at the wealth-producing components of our GDP. Look at our manufacturing. The deficit is huge compared to that.

Norman: Why is it important for you that we, as Americans, must assemble a refrigerator on an assembly line? Why is that more important then the services we produce and provide and the information services and technology? That is the sign of a modern economy. Is it your vision to go back to assembly lines?

Schiff: If Americans want refrigerators, we either have to make them ourselves or we have to make something that we can export to pay to import them. We just can't export IOUs.

Norman: Well, we do; we export pieces of paper.

Schiff: Yes, that's the problem. We just can't get away with that.

Norman: That's not a problem. Don't you buy your food from a supermarket? You get your clothes from a clothing store. You get your electricity from an electricity provider; you get the idea. You don't make and produce all these things yourself. Why? Because it is more cost-effective to do it that way.

Schiff: But we can't just exchange paper that we print for the goods everyone produces. We have to give the rest of the world something for their effort. They have to earn something.

Norman: The rest of the world is waking up every single morning and it is their modus operandi to get that dollar's worth of exchange value.

Schiff: No, it's the opposite now. Look at the dollar on life support. People are realizing they bought a bill of goods here. We're like Tom Sawyer and we convinced the world to paint our fence. You know what? They don't want to paint our fence anymore. They have their own fences now and when they come to that realization, the dollar crashes. We're going to have to start living within our means again. We can't consume unless we produce. If we want to have an information technology economy, fine. We better export that information if we're going to want to consume other goods.

Norman: Thanks Peter. It's always a pleasure talking with you.

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Footnote

1 The government-created entity that liquidated assets of failed savings & loan institutions. The RTC created so-called "equity partnerships," where a private sector partner acquired a partial interest in a pool of assets and then directed their sale, making distributions to the RTC to reflect its position.
Be sure to check out Part I of the interview with Peter Schiff.

Comments

[Ames Tiedeman]

It is the trade deficit and one cannot take oil out of the equation and it is NOT a manageable number. We have not had a trade surplus since 1974.
The long term viability of the U.S. and the dollar is at stake here.

[sorgmot]

Doomed is suggestive of the end of something. Could it be the end of USA financial follies brought on by it's current day political parties as they pursue the perfect utopia by printing money, enriching domestic cartels, and placing the populace in a net negative real asset position?

Any entity which slips deeper and deeper into debt will be charged higher and higher interest rates by its creditors. That means that the debtor's IOU's (US dollar notes held by non USA entities) will be discounted further and further in non USA currencies At some point the creditors will come around and collect the debtor entities assets.

Yes the USA currency will fall relative to its creditors' currencies until the debts are paid off or washed out by a collapse in USA currency value.




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[Badgolfer]

What makes us different is that under this duress,at the maximum stage where most citizens understand,leadership will emerge reflecting our culture.Europe is moribund population-wise and has much less of this ability.Asia is not as stable under real stress.

[iThinkBig]

It appears the dollar may collapse but not for awhile. Beyond printing money, much of the burden will also fall on the U.S. taxpayer. Between inflation and tax cuts expiring it 2010, to new taxes this year and in 2011, the U.S. consumer will remain pinched. We'll see what this Administration or the new one will do about a massive, energy reform. While a collapse may or may not be avoided, such a policy would create millions of jobs and deflate a lot of the commodities bubble. If the U.S. collapses, I would assume it would occur in late 2010, or early 2011. What's the worst case? Americans eat government wheat pasta and cheese and we all get busy as one country on energy, first satisfying our own needs, then exporting globally.

I simply feel that in between, housing must bottom and new jobs must be created in providing what the global consumer needs, this is food and energy. America has plenty of both, but energy policy as a crisis must be announced and a global investment opportunity created and the funds must be supplied by Treasury (We the People) for investors to have confidence in the opportunity.

Beyond this half of the year, a recovery will take years this time. It was a paradigm shift running America as bubble economies, fueled by easy credit. It will require paradigm changes to bring the country back to doing business based on fundamentals. During this time, businesses and consumers will both continue to cut spending. Without an energy crisis declared and Apollo style program implemented as a national security priority, numbers show a -20 GDP over a three to four year span. Some call this a depression.