'The Real Crash' Book Review

Why the free-market evangelist Peter Schiff is preparing for the decline of the American Empire

30th of July 2017

Today we are in the midst of a trend towards populism, where the concerns of ordinary folk are preferenced over the privileged elite. There have been numerous examples of this recently: the occupy Wall Street movement (the 99% against the 1%), the shock "Brexit" result (which saw the UK leave the European Union), and the rise of the anti-establishmentism sentiment in politics, such as the anti-immigration movement in many Western countries and the rise of the American president Donald Trump. Why has this happened?

In my mind there are several concurrent events occurring simultaneously that is causing this:

  • The indebtedness of the West - debt is the easier option over tax increases, but debt becomes a vicious cycle as interest payments take up a larger and larger component of personal, business and government incomes.
  • The change of consumer preferences - the digital economy requires less human labor, for example consuming movies and music via streaming services and many other on-demand digital platforms.
  • The rise of automation - the demand for human labor will fall as we use technology to work efficiently and do more with less resources.
  • The rise of social welfare - A noble goal of helping the less fortunate; however as the number of people depending on these programs grow the burden on state finance grows and dependency breeds complacency.
  • Falling living standards - The simple and repetitive jobs are being automated, causing the poor to become poorer. As machine learning and artificial intelligence capabilities increase more people's jobs will be at risk.
  • Rising inequality - The taxation system has not been able to keep pace with the digital revolution, allowing those to own capital to become wealthy at the expense of people and businesses who are displaced by the technology revolution.
  • Globalization - The West is becoming deindustrialized as the emerging countries go through the developing cycle of industrialization. The West's competitive advantages are less pronounce as emerging countries catch up.

With all these things in mind it should be clear to you by now that the 2008 financial crisis was simply a microcosm for things to come. Peter Schiff's book "The Real Crash" published in 2014 is subtitled "America's Coming Bankruptcy - How to Save Yourself and Your Country", which I think will be prophetic and poignant for things to come.

About Peter Schiff

Peter Schiff was born in 1963 and is a financial commentator and businessman [2]. In my opinion, Peter Schiff is a free-market evangelist who is not afraid to speak his mind. He comes across a little brash at times but he has logical and well-researched arguments so he has a sense of credibility. Schiff has a major in finance and accounting from Berkeley, and had worked at Shearson Lehman Brothers before purchasing and renaming his brokerage firm Euro Pacific Capital [2]. He regularly publishes videos on his Youtube channel, which also includes his regular podcast. One of the reasons that Schiff has risen to notoriety recently is because of his accurate prediction of the American housing bubble bursting.

  • The Real Crash Book Cover
    The Real Crash - America's Coming Bankruptcy - How to Save Yourself and Your Country

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The Problem

The central problem that America has, according to the book, is the indebtedness of the people and government. The fact that the American dollar is the quasi-World reserve currency means that there is global demand for American dollars for global trade and investment. This status artificially raises the purchasing power of this currency, relative to other national currencies. Also, America has a reputation of "always paying its bills" means that its borrowing costs from abroad is relatively low. So in essence, Americans have a currency which they can borrow cheaply from and is has a relatively high purchasing power. Hence, the American consumer and government are inclined to over-borrow and overspend, which is the predicament that it finds itself in today. Schiff argues that it would be prudent to admit level of indebtedness is excessive and go through an orderly default. However, "the real crash" will come about if this warning is not heeded, where creditors lose faith in repayment of debts and interest rates rise to compensate for additional risk to creditors. Therein lies a viscous cycle which presumably likely be solved by excessive money printing and hyperinflation.

Capitalism is dead in America

America is synonymous with free-market capitalism. However, as Schiff sees it, America was capitalist during previous, more prosperous times but it has gradually turned its back on capitalism. Therefore, peoples discontent with the current state of affairs in America is misplaced. Savings and investment in America has been replaced with borrowing and consumption. Schiff says this consumerism is unsustainable and that government policy encourages this behavior.

Government intervention and its perverse effects

Schiff believes that government intervention is the source of many economic problems with America. In the late 90s, early 2000s, we had an Asian financial crisis, a tech bubble in the 2000s, and September 11. In order to stimulate the economy the government the government intervened to try to prop up the economy. Firstly, the Federal Reserve chairman Alan Greenspan lowered interest rates too low. The government through its policies encouraged a housing bubble to develop. In both cases, the results were disastrous, as evidence by the 2008 financial crisis and subsequent bailouts. Since the crisis, Schiff argues we have learnt nothing from the crisis and simply kicked the can down the road.

Jobs - Government versus Private

Schiff is particularly scathing of government job creation as the cost per job is very high and the productivity is very low, relative to the private sector. The government has policies, such as the "hiring penalty" of federal and state laws and regulations and the "hiring tax" (the payroll tax). Schiff argues that unemployment would not be as high as it is if wages were allowed to fall. For some people, the government should abolish the minimum wage, as he argues some entry level jobs would not make it worthwhile for the employer to hire at the minimum wage.

Financial regulation is not the solution

In response to the 2008 financial crisis, the financial industry became more regulated. This was in essence because private sector did not identify nor manage risk well enough to withstand the housing bubble popping. However, Schiff argues deposit the Federal Deposit Insurance Corporation (FDIC) and the deposit insurance creates moral hazard, as people do not take personal responsibility on researching the solvency of the bank they have their saving account with. Schiff provides some personal experiences of regulations which he argues "don't actually improve consumer experience or financial security" [1].

Sound money

The current monetary system relies on a central bank to set interest rates and endlessly inflate the currency. The fiat currency gives advantages to those who create new currency, the banks and governments. They get to spend the newly minted currency before it has had a chance to devalue the money supply. Schiff argues that the gold standard would bring back stability to the value of currency.

People think of it as an alternative to gold because it supposedly liberates its users from the whims of government and central banks.
Peter Schiff [1], in reference to Bitcoin

Taxation reform

Schiff's tax reform ideas make a lot of sense. Firstly, he believes that a consumption tax would be better as this would not be taxing savings, investment or productive labor. Next, he thinks revenue raising tariffs could be a easy source of revenue, with the caveat it does not target specific goods or countries. This is quite the back flip for someone who is in support of free-markets. He is particularly passionate about abolishing the income tax, and if it had to stay then a simple flat income tax rate would be preferable to a progressive tax rate. By simplifying the tax system the administration burden from the Internal Revenue Service will also be diminished.

Social Security and Medicare Ponzi Scheme

In the coming years the revenue on Social Security, Medicare, and Medicaid will be dwarfed by the cost. This unsustainable expenditure means that people should not rely on it into the future.

Do not go to college

Lots of jobs these days require a "piece of paper", indicating that the employee is suitably qualified. However, Schiff thinks that their are cultural biases (pushed by schools and parents) and employer biases (who demand college educated employees as part of a screening process) that pressure people into college education. Schiff believes this is a waste of time and money, particularly for dubious qualifications which are unlikely to make economic sense. The government subsidizing higher education has made it so expensive requiring large student loans that people should think twice about whether it will be worth it to go to college. Also the opportunity cost of not just getting a job and learning practical skills also should be considered.

Healthcare ripoff

The health insurance system in America is tax deductible. This encourages people to overspend on health insurance which in turn makes them price insensitive to costs. Since the health insurance company picks up the tab for health costs, this means doctors are inclined to overspend on diagnoses and treatment (to avoid litigation).

Why do you care what fees I'm charging you? Someone else is picking up the tab!
Peter Schiff [1]

Shrinking government

Paradoxically Schiff is in favor of localizing government arguing that this gives citizens a choice to move between jurisdictions if they are unhappy with local regulations. I say this because this is in stark contrast to him complaining about regulatory burden of financial regulation between states. He believes that many federal government agencies and departments could be abolished. He thinks that military spending is one of the few legitimate expenditures of federal government, however the budget is excessive and they have too many bases around the World. He seems to be supporting legalizing things like gambling, drugs and prostitution, not on the absence of moral grounds but because prohibition has unintended consequences.

The Real Crash

The book is broken into two parts and concludes with an epilogue [4].

Part 1: The Problem
  1. Where We Are and Where We Are Headed
  2. How We Got Here: Government Is The Problem
  3. The Problem 2.0: We've Learned Nothing and Things Are Getting Worse.
Part 2: The Solutions
  1. Jobs, Jobs, Jobs: Government Can Improve Employment Only By Getting Out of the Way
  2. How to Fix the Financial Industry: Deregulate
  3. Sound Money: Return to the Gold Standard
  4. Tax Reform: For Starters, End the Income Tax
  5. Tear Up The "Third Rails": End Social Security and Medicare Entitlement Reform 2.0
  6. Fixing Higher Ed: Time to Drop out of College?
  7. Health Care: Repealing ObamaCare Is Just the Beginning
  8. Putting Government in Its Place
  9. America is Bankrupt: Time to Admit It
  10. Investing for the Crash

Concluding thoughts

Overall, I though Peter Schiff's book The Real Crash was an warning about the economic implications of the falling American empire. He covers a diverse range of topics which means that each topic is fairly light which keeps things interesting and therein have broad appeal. I particularly enjoyed reading the historical inferences of government policy and the corruption of the free-market in America. This book would appeal more to Americans, as it solely references America; however, not living in America, I did enjoy comparing and contrasting the book against the country I live in. This book revolves around two central themes. The first theme is that America (and the West in general) cannot sustain this level of consumption and debt. Without reform, the country will likely suffer from one of two evils: one, a serious economic recession, or two a rapidly depreciating currency (hyperinflation). The second theme is that government has grown too big relative to the size of the economy. Government policy often has unintended consequences which have either been neglected altogether or poorly perceiving them. Often the government policy is noble and altruistic and works sufficiently well in the beginning. However, over time the economic distortions that they create mean that industry become reliant on this policy and therein they become less efficient. Classic examples of this are college education and healthcare, both of which became accessible to the masses but extremely expensive. One reason for this is because private enterprise is much faster at reacting to government policy than government is at enacting it. Therefore there is always a cat and mouse going on between government and private enterprise. In other words, sometimes it is better for government to not try to solve all problems and give the private sector time to sort out its own issues. Today it is 2017, and the book was published in 2014, we have not seen a economic crash yet, however it is never too early heed Schiff's warning and hope for the best and prepare for the worst.

  • The Real Crash Book Cover
    The Real Crash - America's Coming Bankruptcy - How to Save Yourself and Your Country

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Reference

[1] P.D.Schiff, The Real Crash - America's Coming Bankruptcy - How to Save Yourself and Your Country. 2014.

[2] Wikipedia.com, Peter Schiff. 2017. Available on-line.