In a Q&A with GoldSilverWorlds, Peter Schiff, CEO and Chief Global Strategist of Euro Pacific Capital, explained why the mother of all collapses is still in front of us and shared his top tips on how to protect financially.
Peter Schiff has an outspoken libertarian view on the world and economics. It is no coincidence he will be one of the keynote speakers at the first Liberty Forum Conference 2013 on December 4 to 8. His libertarian view was mainly influenced by his father, more so than any of the books he has read. From a young age, he discussed with his father topics related to government, economics, the Constitution, and history of the US. His personal view and the free market oriented perspective were a perfect fit even if these ideas were in contrast with the majority of economic experts and governments. According to Schiff “many people just buy the establishment; they accept a lot of nonsense.”
Looking at the course of the economy and the markets, Schiff sees a confirmation of the outlook he presented in his books (The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country, How An Economy Grows and Crashes and Crash Proof 2.0: How To Profit From The Coming Economic Collapse, learn more about these books). The collapse of the dollar is unavoidable and will be the worst of all crises.
Why the collapse of the dollar is unavoidable
The current economic problems in the Western world are shared by most countries. It mostly boils down to excessive debt levels and too many promises by governments in untenable social welfare states. However, the US is suffering the most from this disease. One could compare it with cancer that is more advanced in some specific places. The US has taken debt to a level unparalleled, beyond anything the government had promised.
Even Japan, with the highest debt to GDP ratio in the developed world, is in a better situation than the US. If a crisis in Japan hits before the collapse of the dollar, it might postpone the dollar crisis simply because money would flow into the dollar. For all the debt that Japan has, the country is not nearly in as bad a shape as the US. “They have been trying to keep the Yen weak in order to export to America, which is a foolish strategy,” according to Schiff. The Japanese have more than a trillion dollars of Treasuries. “They could sell part of their Treasuries to cover at least a part of their debts. It would hurt the US if they started selling.”
Because of the privilege of the US having the dollar as the world reserve currency, the US economy has been able to evolve in a way that no other nation could. Like no other country in the world, the US is dependent on debt, cheap money, artificially low interest rates, and imports. Schiff explains: “When all this comes to an end, the US economy will suffer like no other. Maybe it will be a wake-up call to other countries in what the US did wrong in terms of the destruction of the country.”
When the dollar became the world reserve currency [in 1944], it was a fundamentally different country than it is today. At that time, the dollar was backed by gold. Everyone holding dollars could exchange it for gold at a pre-set rate. Gold was available on demand, so the dollar was as good as gold. In that period of time, the US was the world’s biggest creditor nation. It had a huge trade surplus which it invested in the rest of the world.
The fact that the US once was so great does not mean it still is. None of the attributes that made the US so great, and deserving of the world’s reserve currency, exist today.
“America is now its mirror image of its former self. We are the world’s biggest debtor, with the biggest trade deficit, and the dollar is backed by nothing. We have mountains of debt. If the US dollar was not the reserve currency today, nobody would accept it to become the reserve currency.”
Only an implosion will impose discipline among politicians
Schiff’s fundamental concerns are related to politicians who are not doing the right thing. He says:
“Looking at the fiasco of the debt ceiling, we are not doing the right thing. For the time being, the right thing is wrongly considered to be more debt and reckless spending. Any restraint on debt is seen as a problem. The type of ‘problem’ the US is solving currently is the limitation on debt, not the decrease of debt levels.
The conventional wisdom, mainly in Washington, is so wrong that only a complete implosion can impose discipline. An externally driven crisis will finally force the government to take the right action. It will be a currency crisis.”
Right now, the dollar is weakening somewhat, but that is nothing compared to what is coming, according to Schiff. As the dollar starts to collapse, Americans will protect what is left of their savings. Only then will the government exercise options to acquire foreign assets, foreign exchange, and precious metals.
Schiff points to a risk related to such a crisis. Although incorrectly, the current image of America is one of a totally free market economy. When the dollar crisis hits, politicians will typically abuse the free market perception by stating that the US simply had too much capitalism and freedom. Invariably, it will lead to even more government regulation.
A new world reserve currency: gold
What would the dollar be replaced with once it falls? Schiff believes the world cannot use the euro or the yen as the world reserve currency because they are nearly as bad as the dollar. At the end of the day, those are all fiat currencies backed by nothing but promises.
When countries (other than the US) have a confidence problem with their currency, what is the way to restore confidence? They link it to the dollar with the aim to impose discipline. But when the dollar collapses, what could countries peg their currency to? The only thing that would make sense to stabilize the dollar and recreate confidence is gold. Gold is the main reserve of the US. The US has 90% of its reserves in gold and no foreign reserves.
Gold was the international reserve before the dollar hegemony. Going back to the gold standard would result in one of the two things: either the price of gold goes up or the price of everything else goes down. Schiff believes that it is much easier to adjust the price of one thing up instead of the price of every other asset down. His expectation is that the gold price will go much higher from here.
Tips for financial protection
With the outlook of financial repression which will ultimately lead to a severe dollar crisis, financial protection becomes mandatory. But what are the best ways to protect?
The most obvious hedge against a currency crisis is physical precious metals ownership, ideally outside of the banking system.
But one should still hold money in a bank account, even if traditional bank accounts are inherently at risk. In that respect, the latest shocking news was the IMF publicly discussing a super tax of 10% on all savings accounts.
That is why Peter Schiff proposes to consider an offshore bank account. Euro Pacific Bank, founded by Schiff himself, was the answer to the leveraged banking industry for non-US residents. A Euro Pacific Bank account combines the benefits of an offshore location with the safety of a reserve bank (which means that the bank is making no loans at all). As such, all deposits are immediately available to deposit holders. The bank account has a double function: it serves as a savings and checking account; hence it is suitable for every type of financial transaction. Optionally, the bank account comes with a debit card in gold or silver: account owners can opt to convert their money into gold to preserve the purchasing power of their currency.
“No government can confiscate these bank accounts. That is important as governments can always tax a domestic bank account, not necessarily by direct taxation but by the creation of additional fiat money [through money printing, which is monetary inflation].”
The Liberty Forum Conference will provide many more tips and hands-on support to protect against the coming economic winter. From December 4 to 8, attendees will not only receive valuable insights through presentations, but can also implement actionable plans, including the creation of a second passport, preparation of an offshore company, personal advice on international and expatriation tax planning, configuration of an offshore real estate portfolio, safe investment in precious metals outside the banking system, and much, much more. Read more about the Liberty Forum Conference 2013.
Follow Peter Schiff on Schiffradio.com (live between 10 AM till 12 AM EST, all recordings are accessible on demand) or Schiffreport on Youtube. For more info on Euro Pacific Bank, visit www.europacbank.com.