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:
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.
Peter Schiff was born in 1963 and is a financial commentator and businessman . 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 . 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 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.
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.
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.
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.
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" .
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.
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.
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.
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.
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!
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 book is broken into two parts and concludes with an epilogue .
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.
 P.D.Schiff, The Real Crash - America's Coming Bankruptcy - How to Save Yourself and Your Country. 2014.
 Wikipedia.com, Peter Schiff. 2017. Available on-line.