Table of Contents
- a. The Financial Crash of 2008
- a. Government Debt
- b. The Danger of Growing Debt
- a. Government Stimulus Can’t Save the Country
- b. The Government Should Declare Bankruptcy
- a. K-12
- b. Higher Education
- a. The Financial Industry
- b. Broad Regulations: Minimum Wage and Anti-Discrimination Laws
- a. A Short History of the Federal Reserve
Since the housing and financial crash of 2008, America’s recovery has been tepid at best. Unemployment has remained high; manufacturing has not returned; personal savings are as low as they’ve ever been, and personal debt as high; housing is still a mess, and banking not much better; and, to top it all off, government debt is awe-inspiring and seems completely insoluble. According to financial investor, commentator and author Peter Schiff, while all of this is certainly disheartening, it should not come as much of a surprise. Indeed, Schiff argues that all of this economic slumping is a natural result of America’s misguided economic policies; including especially the Federal Reserve’s manipulation of interest rates, the government’s uncontrollable borrowing, and, in connection with this, the maintaining (and even expansion) of unsustainable social programs . For Schiff, these same policies led directly to the crash of ’08 (which he correctly and very famously predicted), and are leading the U.S. directly into an even worse crash now. In his new book The Real Crash: America’s Coming Bankruptcy—how to Save Yourself and Your Country Schiff outlines how America got itself into this mess in the first place, what the end game is likely to be, and what the nation and its citizens should do to make the coming unpleasantness the least unpleasant as possible.
The main problem—and where most of the other problems begin—according to Schiff, is the Fed’s manipulation of interest rates. By interfering with the free market value of money, and making it cheaper than the market would dictate, the Fed encourages financial bubbles that then necessarily pop. When a bubble pops, the market needs to correct itself; however, over the past 20 years, the Fed has not really allowed this correction to take place, as every time a bubble pops the Fed has lowered the interest rate even further, causing more money to enter the system and a new bubble to form. First it was dot-com stocks, then it was housing, and now it is government spending.
As a matter of fact, while government spending has reached new and mind-boggling heights in the recent past, it has actually been ballooning in this direction for years, spurred on largely by the low-interest rates that the Fed has provided. The government has used this borrowed money to establish social programs (such as Social Security and Medicare), and, more recently, bailout packages for failing businesses and entire industries. All the while, the government has been going deeper and deeper into debt. A big part of what has allowed the American government to borrow as much as it has (and to keep on borrowing now) is the fact that the American dollar is the world’s reserve currency, which means it is always in demand, and hence people and organizations have been willing to act as creditors in order to get it. For Schiff, though, the sheer size of the debt, and the fact that it is running away faster and faster everyday (and has no realistic chance of ever being repaid) will sooner or later turn investors away from considering the American dollar a valuable reserve—at which point it will lose its status as the world’s reserve, and investors will stop investing in it.
At this point, the American government will have but two options. It can either declare bankruptcy, or it can print the money it needs to pay its debt. In either case, an enormous crash will result, for in the first case, an astronomical sum of money that the economy had assumed existed will suddenly be wiped away, and in the latter case hyperinflation will set in, and the American dollar will be whittled down to worthless.
At this point, the country will be forced to start over. For Schiff, this may not be such a bad thing, for, according to him, the nation has simply put itself in an unsustainable position, and the sooner it starts over the better. At that time, Schiff argues, America can finally get back to the small government and free-market forces that the country’s founding fathers designed the nation around. While much of the book is focused on how the country can do this now, before the crash hits (in such areas as banking & finance, taxation, healthcare, education, the military, et. al.), Schiff very much believes that nothing can actually prevent the crash from coming, and that therefore, most of the rebuilding will have to be done after The Real Crash.
Here is Peter Schiff speaking about his new book:
What follows is a full executive summary of The Real Crash: America’s Coming Bankruptcy—how to Save Yourself and Your Country by Peter Schiff. (Just a word of warning: in the book, Schiff does occasionally give the reader general investment advice based on his analysis and prognostications. However, this is very much a secondary concern of his, and therefore, I have not included it here. If you wish to learn more about Schiff’s investment advice you may wish to peruse his website here: http://www.europac.net/ or consult his investment firm directly).
PART I: THE PROBLEM
1. Big Government Is the Problem, Not the Solution
In essence, the solutions that Schiff prescribes to help solve America’s economic problems involve shrinking government as much as possible. For Schiff, this boils down to two principles: “1. Government shouldn’t do anything that individuals or the private sector can do; 2. If government involvement is needed, the involvement should be as local as possible” (loc. 4743). Now, Schiff is fully aware that this is precisely the opposite approach that is advocated by most elements of the mainstream media and political community. Indeed, the author repeatedly points out that every time something goes wrong with the economy, journalists and politicians alike tend to blame the free market, and propose more government as the solution (loc. 1533). For Schiff, though, what the pundits consistently fail to appreciate is that the American system contains a mix of free-market principles and government interference, and, more often than not, it is the latter that is causing the country’s problems.
a. The Financial Crash of 2008
Take the financial crash of 2008, for instance. As Schiff reminds us, “journalists and politicians agreed that ‘unfettered free markets’ caused the crash and the ensuing suffering. This became an excuse for more laws and regulations, meaning more power for politicians, bureaucrats, and central bankers. Regulation, we were told, would make the economy safe” (loc. 595). In this particular instance, many experts agreed that a major contributing factor to the crash was the Gramm-Leach-Biley Act of 1999, which had repealed a government regulation (known as Glass-Steagall) that had prevented commercial banks from acting as investment banks (loc. 1694). In other words, people blamed the freeing up of the market for the problem. For Schiff, though, this explanation fails to take into account the whole story.
To begin with, Schiff points out that the Glass-Steagall regulation mentioned above was only a part of the government bill known as the Glass-Steagall Act (named after the two senators, Carter Glass and Henry Steagall, who proposed it) that was enacted in 1933 (loc. 1694). In fact, the regulation in question was only a secondary aspect of the bill. The main proviso of the bill stipulated that the government would insure the holdings of depositors in commercial banks up to a certain point—under the aegis of the Federal Deposit Insurance Corporation (FDIC) (loc. 1569, 1594). The FDIC was meant to re-instill confidence in banks, which confidence had been rocked after the bank runs at the beginning of the Great Depression in the previous years (loc. 1569). As Schiff explains, the lawmakers knew that the government’s insuring deposits would open up the possibility that the banks would become overly risky with these deposits (since if they knew that they would be bailed out, there would be less incentive to avoid risk) (loc. 1702). In order to protect against this, the legislators included the restriction against how banks could operate. When Glass-Steagall was repealed by the Clinton administration in 1999, the restriction against banks was removed, but the government’s insurance of deposits was preserved (loc. 1702). In other words, the moral hazard caused by one aspect of the bill was preserved, while the check on this moral hazard was removed. For Schiff, then, it was not the removal of a government restriction that caused the problem, but the fact that another government regulation was left to skew the system unchecked.
Of course, this just pushes the argument back to the government regulation on insuring depositors’ holdings. While many would argue that this regulation is ultimately beneficial, Schiff denies that this is the case. According to him, the behaviour of banks would in fact be kept in check much better by the forces at work in a truly free market (loc. 1715-40). For one thing, Schiff argues, banking insurance would not vanish, but would simply be taken over by the private sector, which, according to the author, would be able to handle it much more efficiently: “without the FDIC, bank deposit insurance would not disappear, but risk would still bear a cost. Private deposit insurers would arise, and risk become more accurately priced” (loc. 1714).
2. The Federal Reserve, and the Manipulation of the Interest Rate
Now, for Schiff, while the FDIC certainly played a large part in the financial crash of 2008, there is another way that the government interferes in the economy which played an even larger part, and that is the Federal Reserve’s manipulation of the interest rate. Indeed, while Schiff maintains that less government regulation is generally the right approach for most of our economic problems, he does hold that there are certain areas where government interference is more harmful than others, and top of the list here is the Federal Reserve’s manipulation of the interest rate.
*For prospective buyers: To get a good indication of how this (and other) articles look before purchasing, I’ve made several of my past articles available for free. Each of my articles follows the same form and is similar in length (15-20 pages). The free articles are available here: Free Articles