Fed News Friday: Peter Schiff says the government’s cure is worse than the disease.

I am not in the habit of admiring financial experts, which you might think is strange considering how much I enjoy economics. But it has always seemed to me that to diagnose a fundamentally broken system, and then devise ways to benefit from its predictable decline, rather than seeking to repair it, and even profit from repairing it, was sort of despicable. None the less Peter Schiff earned my grudging respect when he spoke at the 2012 New Hampshire Liberty Forum. He wasn’t quite as principled as I would like, but he pointed something out that I’d never heard before. The financial solutions we’ve been waiting for are not available because the US Government prevents them from happening. He explained that foreign companies that he works with won’t take on American clients because the US Tax code makes us too difficult to do business with. And he described credit card like accounts that are tied directly to a person’s precious metal holdings so you can literally use gold and silver as readily as you use Visa and Mastercard. Why don’t we have such innovations here? Because the government says, “No.” It was then that I understood that unlike so many in his field Peter Schiff was not merely looting before he abandoned ship, he was also engaged in a campaign of financial education, to warn people of the collapse to come and guide them toward potential solutions. So, when he warns of coming catastrophic crash, I thought I should pay attention.

Peter’s book Crash Proof was released in early 2007 was scoffed at when the conventional wisdom among market analysts was that there was no ceiling on the housing market and the economy was bulletproof. But just two short years later he was catapulted into prominence as some kind of financial soothsayer. Still, some detractors say that the severity of the crash fell short of his predictions. These are the same “experts” who celebrate 2% growth as a recovery, and eagerly return to unsustainable borrowing, which is essentially like a fatty on a crash diet seeing he’s lost 2 pounds and taking that as a signal to binge on cheesecake. Economic recovery requires a lifestyle change, not a race back to business as usual. You have to actually learn from your mistakes if you hope to avoid repeating them.

But Peter is still predicting the larger crash is on the horizon. The housing bubble was just part of it. He writes:

“The crash that most concerned me was the one that would result from the government’s response to the initial crisis. My concern was not that our economy would succumb to the disease that I had diagnosed, but instead would be taken down by the ‘cure’ that the government unleashed to combat it.”

The government hopes to delay the crash by borrowing and printing money. In other words, they hope to sooth the pain of obesity with cheesecake. Come to think of it, the metaphor fits better than I’d first imagined. When the fatty eats his cheesecake he creates a debt. In the future he’s going to have to work off those calories. But here’s the catch, the more cheesecake he eats, the harder it becomes to move, until getting the necessary exercise becomes untenable. Similarly, when the government prints money it creates a debt. In the future it must tax the public to pay off that debt. But the more money it prints, the harder it becomes for the economy to move, and they can’t collect taxes on a paralyzed economy. When that happens Peter predicts interest rates and consumer prices will soar, the dollar will collapse, and the US economy will implode. That’s the crash he’s warning about.

His new book The Real Crash: America’s Coming Bankruptcy, How to Save Yourself and Your Country describes exactly that, and he says:

“For now it is just a prophecy but as with my first book, it soon may be regarded as history. Unfortunately, the policies of both the Bush and Obama administrations, and the Ben Bernanke led Federal Reserve, have vastly raised the chances that my catastrophic view will come to pass.”

Fortunately, a significant portion of his new book is devoted to solutions. And that’s what makes Peter Schiff different. And if his , Stephan Molyneux are any indication, he seems open to the more principled position, which could only make a better financial prognosticator.

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