Transcript lezing Peter Schiff

Het volgende is een transcript van een lezing gehouden door Peter Schiff op initiatief van Ron Paul voor een publiek van staffers van leden van het US Congress (link)

Lecture 3/3 

What About Money Causes Economic Crises?

Presentation: Good afternoon ladies and gentlemen. I'm Lydia Mashburn, Policy Director for Chairman Ron Paul's Subcommittee on Domestic Monetary Policy. On behalf of the Congressman and his office I'd like to thank you all for coming to our concluding lecture in our afternoon tea series on the basic principles of money. Today's question is going to be What About Money Causes Economic Crises? It's sort of the culmination of what our other lectures have led to. Our first lecture was What Is Money? And then our second lecture was What Is Constitutional Money? In those two lectures our first lecture Dr Salerno very nicely laid out for us what money is, that money is a commodity. It is a market-chosen commodity that serves the role of money. And what the market needs money to do is, it needs it to be recognizable: then you know that this is the same thing that they're able to trade in future. They need to be able to divide it, so that they can purchase large or small things. They need it to be portable: they need to take it with them. Cattle as money didn't work very well, it's a little difficult to move them from one place to another. And then one of the pinnacle faculties of money is that it has a stable value. You need it to maintain value for [that] which you exchanged it for. Which then brought us to our second lecture where Dr Vieira talked to us about constitutional money. The Founding Fathers wanted us to understand... or wanted us to keep stable money. And it had turned out that the market had chosen gold and silver to fulfill money because it filled all those properties of divisibility, portability, recognition and stable value. So they set up in the constitution certain provisions to maintain what the market had chosen as money. Because they had already experienced through the Revolutionary War and then under the Articles of Confederation some terrible experiments with paper money where it did not retain its value because you could increase it at whim. Dr Vieira sort of took us through I think roughly 200 years or more of history and showed how over time that stable value of money has eroded, legally and got us to the point where we are today where we are now able to talk about what happens when your money loses its value. So, while it's terrible that over time your money does lose its value, what's even worse – I don't know if it's even worse, but it's not good – it also can cause booms and busts in an economy. It causes economic crises. That's what brings us to today's question: what about money causes economic crises? Which is why I am delighted to say that we have Peter Schiff to answer this question for us. He is CEO and president of Euro Pacific Capital. He is a financial analyst. He is an author. And most importantly though – at least to me – he was one of the few financial analysts to predict the collapse of the housing bubble. Everyone else was like “Housing prices have gone up! They just keep going up. They've never historically dropped.” And he said: “Look, it's going to collapse, because it's not sustainable.” Because he understood what it was about money that caused these bubbles in the economy. And he knew it was going to collapse. Analysts running the gambit laughed at his face. And when he was proven correct, [they] were now left picking up the pieces. But unfortunately we still are not understanding what it is that caused the crisis to begin with. So our policy prescriptions are kind of off base in terms of dealing with the aftermath. I'm delighted to welcome and I hope you'll join me in welcoming Peter Schiff.

Peter Schiff: (00:04:00)Thanks everybody for coming. Hopefully most of you are not just here for the free desserts... Let me just talk a little bit about money. [Proceeds to switch off his cell phone.]

Savings

One of the roles of money – that you have just alluded to – is that money needs to represent a store of value. The reason that that is so important is because it facilitates savings. You are not going to save money if you anticipate that its value is going to erode over time. So you need something that has a store of value.

The reason savings are so important in a market economy is because – contrary to the conventional wisdom – spending is not what grows the economy. People who believe that are basically putting the cart before the horse. What actually grows an economy is the opposite of spending, it's underconsumption, it's savings. It's the money that we don't spend that makes the economy grow. Because when we don't spend it and it's saved, that money is available to finance capital investments, business expansion, job creation. All the things that grow the economy flow through from savings. You know, popular refrain, the occupy-wall street crowd when they say “The businesses don't create the jobs.” “So,” you say, “we're gonna tax the job creators”, they say, “Nonono, the job creators are the consumers, because they're the ones that are spending the money”, and they say “if there were no customers, there'd be no businesses”. Of course, what that theory overlooks is, where do consumers get the money? They get it from their jobs. So you can't say that the consumers create jobs when you need jobs to have consumers. So, it's the other way around. And what gives the consumer purchasing power is his productivity. If everybody just had a job from the government and the government printed money and gave it to people, there'd be no demand because there'd be no supply. There'd be nothing to buy, because nobody would be working. What creates the purchasing power is the production. And the production comes from productivity. And what makes workers productive is capital. It's the tools and the equipment that they have. If they were simply using their hands, they couldn't produce nearly as much. And all of that capital and all of those tools are only here because of savings. So savings are very important. 

Interest

And also, savings help determine the rate of interest. Because interest rates are a very important aspect of money. Because interest rates represent a price. And like all prices they are determined by supply and demand. The supply is all the savings. The demand is all the people that want to borrow money. Whether it's businesses, whether it's college students, someone who wants to buy a car, the government. Everybody borrowing money is competing for this store of savings. Because for every dollar borrowed, someone had to save that dollar. Somebody had to not consume and put that dollar in savings so somebody else could spend it or invest it. And so, if you have a lot of savings, then you're going to have lower interest rates, because the supply is going to be greater. And what does that mean, if there is a lot of savings, what economic signals is that sending to the market? If people are saving a lot of money, what that says is that people prefer future consumption to current consumption. Because after all, while you're saving money, you're just deferring consumption. Every dollar you save is going to be spent eventually. Except you're not going to spend it today, you want to spend it tomorrow. And hopefully you'll spend the dollar tomorrow plus all the interest that you earned over time. So, it sends out signals, that there's, if there's a lot of savings, that there is low interest rates. And then, of course, the economy will react, investments will be made, based on the fact that consumption has been deferred to the future.

Inflation

Also, one of the reasons that people might save in a free market economy is, in a free market economy – contrary again to conventional wisdom – prices go down. The natural tendency in a free market is deflation. Prices go down. Prices went down for almost the entire history of the United States, until the Federal Reserve. Our grandparents would tell us stories about how cheap things were when they were a kid. Well, their grandparents, or their grandparents' grandparents told the opposite stories. How expensive things were when they were a kid and how much cheaper they are now.

The politicians try to tell us “No no, inflation is a good thing”, and “Money losing value is a good thing, because the economy would collapse if prices weren't rising”. They try to make us feel that falling prices would be a disaster, when, of course, it is the opposite. Falling prices are a reward for capitalism. They make wages more valuable, they make savings more valuable. The argument is, if prices are falling, nobody is going to buy anything. We'd all just be waiting for lower prices. And of course that's absurd. We all have cell phones, we all have laptop computers, we all have plasma TV's. The prices for those items are falling all the time. That doesn't stop people from buying them. In fact, it encourages people to buy them. If cell phones were still as expensive as they were when they first came out, nobody in this room would have one. The reason that we buy them is that the prices are coming down. So, it's the exact opposite. Falling prices create demand. It's not the other way around.

But that's another reason that people save. If you save your money and money gains value, you can buy more stuff in the future, not only because you earned interest, but because things got cheaper, the money became more valuable. So, if you have lot of savings, you can have low interest rates. If you don't have a lot of savings, well, you're going to have high interest rates.

And the beauty of this is, let's assume there's not a lot of people saving money, and a lot of people who want to borrow money. You have a very limited supply, you have a lot of demand, what happens to the price? The price goes up. (00:10:00) Interest rates go up. Higher interest rates discourage people from borrowing because it's more expensive, and they encourage people to save. And ultimately the market is going to create an equilibrium between savings and debt, and you're going to have a market rate of interest. And investments are going to be made, capital projects are going to be made that can be adequately financed.

The Business Cycle

Now, the problem comes in – now that we don't have real money and you don't know what that is – now that we have fiat money or a money substitute, the Fed can create money out of thin air. And they create money, they don't actually create any real value, they're just printing money. So they diminish the value of the money that already exists, but also, when the Fed creates money they do it in a way where they buy up Treasuries and they also control short term interest rates raising the cost of money to banks. And when they do that the Federal Reserve can bring down interest rates. That has the effect of sending the same types of signals to the market that there's more savings. Because interest rates are low. But people aren't really saving their money. There is no real change in time preference for money. It's the same, and so you send out this false signal to the market and as a result of that false economic signal a lot of investments are made that really should not be made. There's no real viability there. But they are made because of these false signals.

And I often joke, you know, when the housing bubble burst and one of the things that president Bush said at the time was, he blamed everything on Wall street, and he said, well, Wall street was drunk and they did a bunch of stupid things. And, well of course yeah, Wall street was drunk, but he never asked the question why. Where did they get all that alcohol? Why were they drunk? They were drunk because the Fed liquored them up. Alan Greenspan kept interest rates very, very low for a very long period of time. And just like anybody, if you're drunk you're going to do some stupid things while you're drunk. You don't realize it until you sober up the following morning. So, this is what causes the business cycle. People think that the business cycle is just some flaw in capitalism. Just for some reason we have these booms and busts. And that's not the case. These booms are caused by malinvestments that are created in response to the Fed intervening in the money supply, where you have the Fed price fixing interest rates, creating too much money and fueling these bubbles. And one thing all these bubbles have in common is debt. A lot of them are financed by borrowing money.

The Housing Bubble

Particularly the housing market. I mean, obviously, what made it possible for people to buy houses they couldn't afford other than Freddie and Fannie or the FHA that might have been guaranteeing the mortgages was the fact that the interest rates were so low. When people buy houses in America they buy them based on the monthly payment. And the monthly payments were a function of the mortgage rate. And especially when you got an interest-only payment, when the only thing you're paying is the interest, then the low interest rates really made it cheaper. And when you had the Fed with interest rates at one percent and the banks were offering teaser rates based on those temporarily low interest rates, people could really get in over their head. So, this was a function of money being too cheap. In stead of the market setting interest rates, you had central government planners at the Fed picking an interest rate. And why did they pick one that was so low? Well, the reason is the politicians like the boom. They like it when people feel good, when voters feel good, because they are more likely to reelect the people  who are in office if they feel good. If they think they're getting rich in housing, if they think they can get rich without working, they're going to be happy, especially if you're taxing them so much on what they earn, if you can create the illusion that they are making money in the real estate market, well, then they are not going to be so upset at the taxes they have to pay. So the politicians like the boom. In fact, everybody thinks that the boom is what's good and then the minute you have a recession, what does Congress, what does the President want to do? “We need a stimulus! We can't have this recession. We need to stimulate the economy.” What they don't understand is the stimulus is why we have a recession. The stimulus is what caused the boom. But the boom is the problem. The boom is where all the mistakes are made. The recession is where the mistakes are corrected. That's where the cure takes place. So, we need the recession. Now, when I try to say “we need the recession”, people say “oh, you're heartless. You're happy that people are suffering”. But it doesn't mean we're happy about it, it just means it's necessary. It's just like when somebody checks into rehab because they're a drug addict and then they're going through withdrawal, that doesn't mean that the rehab center is happy that the people are suffering through withdrawal. They just know that if the person is going to get healthy and kick the habit, he's going to go through withdrawal. That's just part of the cure. If you checked into rehab and every time you get withdrawal symptoms they gave you drugs, you're not going to get cured. You might be popular, you might be a popular rehab center if you're giving out drugs to everybody, but not because you're curing anybody.

And so what happens is, the minute the narcotic of the cheap money begins to wears off, we realize the mistakes that we made and people say “I can't believe I bought that condo” or “How did I buy that Internet stock”. You don't see that during the mania. So, interest rates eventually rise and – the mistakes – and what happens during the recession is the market tries to correct all these imbalances. Because during the boom resources are misallocated. Capital, labor, is misallocated. In the housing bubble too much capital went into building homes, remodeling homes. Too many people were buying all kinds of furnishings for their homes, buying cars based on home equity loans, too many people were working in the mortgage industry, in the finance industry. People had jobs where they shouldn't have gone.

The Production Factors

Because the whole idea of an economy is to allocate resources, which include labor, but [also] capital and land, in a way to maximize productivity, to maximize our enjoyment, our utility from these resources, so that we can have a rising standard of living. But if labor, capital or land are not where they're supposed to be, you have to correct that. Well, what does that mean? People that have made bad investments, they lose money. People with jobs that they shouldn't have, they have to lose those jobs, so that they can get other jobs. You see, a lot of times in Washington, people don't differentiate between jobs. They just think that as long as people have jobs, it's OK. If someone has a job digging a ditch, and someone else has a job filling it back up, as far as Washington is concerned, they are both employed. But, they're employed doing what? What do you have to show for the labor? Nothing. You filled a hole in the ground, you have exactly what you had before they started. We don't want jobs because we want jobs – jobs are not an end, they're a means. What people want when they have a job is all the things they can buy with their paychecks. But you can only buy stuff as something is produced. So people have to be employed productively. That's the key.

In the old Soviet Union before it collapsed, one of the things they used to brag about is that they had no unemployment. They would tell their citizens, “Look at these Americans, they have all this unemployment, but nobody in Russia is unemployed.” And of course, everybody worked for the government. Everybody had a job. But they had to wait in line for six hours to buy some bread, or whatever. Because nobody was baking bread, everybody was working for the government. And so, if no one is producing anything, your salary doesn't have any value. It's just money, you can print all you want. That's not the solution. A lot of people now talk about how we don't have enough demand. You hear all the Keynesians saying “The problem with the economy is that Americans are broke. They have big mortgage debt. They have car loans. They have student loans. They don't have any money. So the government needs to print money, so we can have more spending.” But if you're broke, just adding money isn't going to change the circumstances. Because money in and of itself doesn't have any value at all. It's just a little piece of paper. They're broke, because they're loaded up with debt and they're not productive. And more money isn't going to change that. Or if the government – they'll say “Well the people are broke, so the government has to spend.” Spend what? If the people are broke the government is broke. Where does the government get the money? It doesn't get it from the Moon. It gets it from the people. So if the people are too broke to spend, the government is too broke to spend. Because the government has to tax them to get the money.

Money Printing

But one of the problems with the monetary system we have now is that people think that “We don't have to tax them to get the money. We can just print it. And then we can spend that.” As if there are no adverse consequences to printing money. Because that's a tax like anything else, except in stead of taking your money away from you, what that does is take the purchasing power away from your money. So you don't necessarily see the tax, but you feel the tax. But if you go to the supermarket and groceries are more expensive, or go to the gas station and gasoline costs more money, a lot of people don't see the connection. They don't see that that's a tax. Especially when you have the government, or the economists blame the high prices on a greedy oil company or on OPEC or on natural disasters, or bad weather or a flood. So they tell us it's not the governments fault. And then you have the economists saying “Look, it's a good thing that the prices are going up (00:20:00), because otherwise we might have deflation. So this is the price that you have to pay to avoid deflation as you've got to pay higher prices.” So they don't make the connection and it lets the politicians off the hook. Because the public doesn't understand how all these benefits are being financed.

The Dollar and the Gold Exchange Standard

Now, the other source of this big bubble, the other big problem has to do with the role of the dollar as the world's reserve currency.

Up until the Second World War all the countries were using gold. Everybody was on a gold standard, including the United States. After the Second World War America had pretty much all of the world's gold, or ninety percent or more of the world's gold was owned by the US government. Where did we get all that gold? We didn't mine it all. We got it because people used it to buy the products that we produced. And how did we produce all these products? We produced them because we were the freest country in the world. We had more capitalism and more freedom, and as a result we were more productive. The world wanted the stuff that we produced yet they weren't productive enough to produce stuff for us, so they had to give us their gold. So we had all this gold.

We went around to all the other countries and basically proposed a new monetary system. And this was going to be where instead of foreign central banks backing up their currencies with gold, they would back them up with the dollar. The dollar though was backed up by gold. Of course, that's the only reason it made sense. If the dollar was backed by nothing, then we couldn't have conned the world in signing up for this arrangement. But everybody knew the dollar was as good as gold and if you had $35 you get one ounce of gold. That was the deal we made with the world. And what was in it for the world was if they held dollars they got interest. If they held gold they got storage costs. So, it made sense: Hold the dollars, run a dollar standard, the dollar is the reserve currency, the dollar is backed by gold, America is the world's richest country, they have biggest trade surplus, they're the biggest creditor nation, they've got all the gold. Good deal!

The US Go off the Gold Standard

Well, it was a great deal for us, because the minute we got that privilege we abused it. Because now all of a sudden, we could pay for our imports by printing money. Technically we were supposed to have the gold to back it up, but that didn't stop the government. They just lied, they just wrote checks that they couldn't really cash, assuming that people would just not care or not notice. After the 1960s when we had the guns 'n butter economy, the war on poverty, the Great Society, we went to the Moon, Vietnam, all this stuff, we were running big deficits. And some of our creditors began to notice this and realized that we couldn't possibly have enough gold to back up these IOU's, which is what these Federal Reserve notes were. They were promises to pay real money. The real money was the gold that the Fed had in its vaults. So, rather than acting responsibly, rather than devaluing the dollar and allowing a deflation to occur, cutting government spending and doing the right thing, the politicians did the expedient thing, an almost unthinkable thing. They defaulted! Nixon basically told our creditors “We promised to give you gold for your Federal Reserve notes, we're now going to give you nothing. You can hold on to them if you want, but you're not going to get any gold.” The world should have gone back on a gold standard at that point. But they didn't. Now, they marked the dollar down, rather dramatically. The dollar was marked down by about two thirds, during the 1970s. When the 1970s began you could buy four deutschmarks for the dollar, at the end you could get about one and a half. The swiss frank went from like 23 cents to 75 cents. The yen, you used to get 360 yen for the dollar, later in the decade is was down like 150. Of course it's much lower now, but that was a big drop during the 1970s. Oil prices went from $3 a barrel to $30 a barrel. I mean, that's why the oil prices went up. It wasn't because of the Arabs, it was because of Nixon, it was because of what the government did, it was all the money we printed. Money lost value. Oil prices didn't go up at all. But in terms of the depreciated dollar oil went from $3 a barrel to $30 a barrel. And gold prices went up from $35 to over $800.

Effects on the Standard of Living

Another thing happened too during the 1970s. A lot of women came into the workforce and it wasn't because they were liberated. In fact they were liberated before. But as a result of all this inflation and all these taxes, their husbands could no longer afford to support them. So they had to start working. You know, our standard of living declined dramatically with the loss of the purchasing power of the dollar. And in fact, I mentioned oil, I often use as an example – I think I even used it in that congressional testimony – when people say “Oh, gasoline prices are so high now, we're paying almost $4 a gallon. These are record high prices.” I say “They're not! They're actually lower than they were in the 1950s.” “How do you mean they're lower?” “Well, back in the 1950s you could buy a gallon of gasoline for a quarter. That's all it cost: 25 cents. If you have a 1957 Chevy and if you scoop around in the seat cushions and find a [silver] quarter that was dropped there in 1957, you could still buy a gallon of gas for that quarter. You get change, too.” Because it doesn't cost that much, it costs less. Real money held its value. The only reason oil is more expensive is because we're paying for it with depreciated dollars. That is the problem. [Peter has to regain his train of thought]

So, the standard of living declined dramatically during the 1970s, but even though the world marked down the dollar, after it collapsed, it stabilized. It stabilized when Paul Volcker came in and interest rates went up to 20 percent. Ronald Reagan came in promising to reduce government and lower regulations and cut government spending. And that created some confidence in the dollar. It kind of stopped the hemorrhaging. The world then continued to function. The dollar was still the reserve currency, even though it was backed by nothing. And that was the problem. Because the whole idea was that if the deutschmark wasn't backed by gold, it was backed by the dollar that was backed by gold. But if the deutschmark is backed by the dollar that is backed by nothing, then the deutschmark is backed by nothing.

Fiat Money

So that's when basically we embarked on this giant experiment – that has failed every time it's ever been tried – in fiat money. The whole world is on this fiat money system. But of course, once the world knew the dollar was backed by nothing, now it was so much easier for the government to run deficits. Much easier than when the they had to pretend it was backed by gold. At least back then, when Lyndon Johnson was doing this, he had to worry that somebody might figure out what was going on. But when we basically told the world “You're going to get nothing for your dollars”, there was no limit to how much we could print. And that's when the US economy began this massive transformation from the world's biggest creditor to the word's biggest debtor, from the world's best, biggest manufacturer of low cost, high quality stuff … I mean all the low cost merchandise was made in America. Everything. Even though we paid the highest wages in the world. If something was imported, it meant it was expensive. People used to brag about the fact that they could afford to buy imports. If you bought imported products that meant you were rich, because everything that was imported was expensive. All the bargain basement stuff was made here. And it wasn't because we had low labor costs, we had the highest labor costs in the world. But our workers were the most productive, because they had the most capital. They had the most tools and the most equipment. Our businesses had the fewest regulations. So it was freedom that made us prosperous.

China

But all that changed and we began to live off the printing press. Because when the dollar was just printed out of thin air and the world was going to take it, we could buy all these products from our trading partners for nothing. When the Chinese are making things for Americans, they need land, labor and capital, and people have to work hard in factories. What are do we give them in return? Just some money that ran off a printing press. And what do they do with it? Nothing. They can't even spend it. All they can do is loan it back to us and buy Treasuries. And then, what are Treasuries? Just more dollars. And again, a lot of people confuse us. They think the Chinese are benefiting from this relationship. They're not gaining at all, we're benefiting, right? We get all the stuff and they get all the work. Well, what good is the work without the stuff? See, we're trying to say “They get jobs”. So what? The slaves had jobs. Wasn't a good deal for the slaves. These jobs are not a good deal for the Chinese if we get all the stuff that they produce. They're working. The whole idea about exporting is not to create jobs. It's really to eliminate jobs. I mean, the reason you export is to import something else. Because you want to consume. How do you consume as much as possible? Well, if there is something that you can do really well, that you can make more efficiently than somebody else, rather than try to make everything, you just make the things you make best and then trade for the things that other people make better than you. But, the whole reason to export something is so you can buy something else. You don't export something just so you can have a job, you'd just be wasting your labor. Well, what happens when we trade with the world is they send us stuff and what we basically say is “I got nothing for you. But I've got an IOU – dollars – will you take the IOU?” And they take it, (00:30:00) because, you know, it's the reserve currency. And maybe in the back of their mind, or I guess in the front of their mind, they figure that one day they can use it to buy something. But meanwhile, what are they going to buy? What are we making? Every year we're making less and less stuff that they want. The stuff that the Chinese want to buy is all made in China. That's where the stuff that we want to buy is.

A Phony Economy

This whole thing is maintained. We now have this entire bubble, we have this entire phony economy that is now predicated on Americans borrowing money they didn't save to buy products that they can't afford and didn't make. This whole thing is phony. And all of our economic policy is designed to sustain this. Nobody wants to allow it to be corrected. Because the correction happens in a recession. We have a lot of problems. The biggest problem in the US economy is that interest rates are too low. Interest rates have to go up. We're never going to have a recovery, we're never going to have real economic growth, we're never going to create productive jobs, unless interest rates go up. But that's going to be very painful, because we're so overly indebted.

What's going to happen when interest rates go up? Banks are going to fail, and next time we're not going to be able to bail them out. What's going to happen to the housing market? It's going to go down more. It needs to go down more, that's part of the correction. Prices are too high, they're still too high. What about the government? What's going to happen when interest rates go up? The government is going to have to dramatically reduce spending. In fact they may have to default on the bonds they've already sold. Because the only reason the government can pay the interest on the debt is because the rates are really, really low. Well, what happens if interest rates go up? Then we can no more afford to pay our bonds back than the Greeks can. For a while interest rates in Greece were at record lows and the Greeks had no problem. But then interest rates went up and now you have a crisis. The same thing is going to happen here. Now, there are people who think that that will never happen here because interest rates are never going to rise. But that's just impossible. They have to rise.

The Coming Crisis

What is the consequence of keeping interest rates artificially low? We continue to screw up our economy. In stead of allowing market forces to correct the imbalances, we make the imbalances bigger. The more we stimulate the economy with this toxin – because that's what the stimulus is, it's a toxic sedative and eventually you overdose on it. What is happening if we keep interest rates low? Nobody is going to save. Who's going to save money that's depreciating in value? You're going to destroy your savings. You're going to destroy the ability of the economy to generate capital, to generate growth, or production. You're going to create massive inflation. Now, the government can lie about inflation for a while. They can hide it for a while behind these doctored-up CPI numbers that are mechanized, or so manipulated – not that there's a conspiracy, but the formulas they use to calculate prices going up are flawed. They're deliberately engineered to get a low number. That's why they're there. But of course, when they're measuring prices they're not even measuring inflation, they're measuring an effect of inflation. But at some point, inflation is going to be so pronounced, and its effect on prices is going to be so great that the government is not going to be able to pretend that it doesn't exist. And then at that point interest rates are really going to have to rise and then it's all going to hit the fan. And as I said, that's when the banks are going to fail. And next time the banks fail: if the Fed is doing the right thing – raising interest rates, then that means not only do the banks fail, not only do the bondholders lose money, but the depositors lose money. Because if the government is having trouble paying its own debts, how is it going to bail out the FDIC? Where is it going to get that money?

The Government Spent All of the Borrowed Money

So, there are tremendous losses and all we're doing now and all of our policy is designed to postpone the day of reckoning beyond the next election. That's all Congress cares about. “How can we get through 2012 without it hitting the fan?” And they don't care that the policies they're pursuing are making all the problems worse. And when we look at the economy, people say “Oh the economy is growing. Look at the GDP”. The economy is not growing: we're spending more borrowed money. That's not economic growth. Look at the debt! In the last few years, since Obama has been President, look at how the debt has skyrocketed. It's grown by much more than the GDP. So, all this consumption has been financed with debt. It's not real prosperity. It's phony. It's like looking at half of a balance sheet. You're looking at the assets and you're ignoring all the liabilities. Or on an income statement. You look at the income but not at the expenses. We're not better off because the GDP went up, we're worse off. Where did the money come from? We borrowed it. And what do we do with it? We spent it on consumption. We didn't invest it. We don't have more plants and equipment. We blew it. The government spent it.

The bubble that we had as a result of the cheap money that the Fed created in the 1990s, that inflated a stock market bubble. When that bubble burst, instead of letting the market correct the problem, we deliberately gave us more stimulus and that created the housing bubble. When that bubble burst, again, instead of sucking it up - “Gee, we really screwed up after the last bubble. Let's do the right thing now. Let's let the market run its course.” Instead of doing that and taking a more painful recession, which was now necessary, because we didn't take our medicine the first time, they did the same mistake and now they're inflating a government bubble. The government bubble is bigger than the housing bubble. It is bigger than the stock market bubble. It's going to burst. It's no more sustainable than the previous bubbles and you can see it in the bond market, you can see it in the currency market. But the real crisis that's coming as a result of the fact that we no longer have sound money, that we've been printing all this money and that we've created all these huge imbalances, is a sovereign debt crisis, a collapse of the US government bond market, a collapse in the dollar on a much grander scale than we now see playing out in Europe. And if you remember when the housing market first began to crack, when the signs first showed up in the sub-prime market, everybody, all the experts, from the Administration down to Wall street, was on television reassuring everybody not to worry, that it was all contained, that it was just a sub-prime problem, “Tiny little problem. Don't worry about it. The market is sound.” Of course, at the time I was saying “That's not true. It's not a sub-prime problem.” It was a mortgage problem. That we were just seeing the symptoms first in sub-prime. But the symptoms were there. And it wasn't even about contagion, about spreading. Everybody was already sick. It was just a matter of time before the symptoms showed up. Well, the thing is happening with sovereigns. This is not an Italian problem, or a Greek problem, or an Irish problem. It's a debt problem. And we've got more debt than Europe. Just because we can print money and we have the world's reserve currency doesn't mean that we're immune from these laws. Right now, I think, is when this is the time in history when the sovereigns are being held accountable. Just like the Italians or the Greeks have borrowed more money than their citizens can repay, the American government has borrowed more money than Americans can possibly repay. And we're not going to pay off the debts by raising taxes on the 1 percent. We can't even do to it by raising taxes on the 99 percent. As if we can even extract all that revenue. It's going to have to come through a restructuring, it's going to have to come through a default, one way or another. And there's two ways that that can happen. We can legitimately default: Congress can level with its creditors and say “We're not going to pay you a hundred cents on the dollar on these Treasuries.” It can level with people who expect a government pension or a Social Security check and say “Look, the money's not there. We can't pay you everything that was promised.” They'll come up with some way of means testing, they'll come up with something so we can make do with less. Or we're going to inflate the currency into oblivion. And it won't just be “not worth a Continental”, it'll be not worth a Federal Reserve note. Because one way or another, the people who loaned money to Americans are going to lose. The savers are going to lose, the creditors are going to lose. Either they're not going to get their money back, or the money they get back isn't going to have much value. But the problem is, the longer we wait the worse it's going to be for everybody and the more damage we're doing to our underlying economy. Because, the longer we allow these malinvestments to build up, the bigger the impact when they collapse and the harder it is to restore balance. And part of that would be going back to sound money, going back to a gold standard. I'm confident that the world is going to go back on a gold standard. The question is how much longer is it going to take and how high is the price of gold going to be when that happens. But if we go back on a gold standard we'll have discipline again in Congress. Because Congress won't be able to spend money unless they can extract it from the taxpayer. They're not going to be able to print money. They're not going to be able to run all these trade deficits. If we want to import, we're going to have to export. If not then we're going to have to settle our accounts with gold and if we can't mine the gold then – and so that's going to bring everything back into balance. And the longer we wait to do it, the more mistakes we make in the interim, the harder it's going to be.

The Threat to Liberty

And the real threat to our liberty is that this real crisis that's coming and the economic collapse that's coming, the financial crisis is going to be much worse than 2008. The problem is, all these problems result from government. They result from government meddling in the economy. All these distortions that the regulations, the subsidies and the money printing create. But the government is very successful in blaming capitalism for the problems it creates. It mixes capitalism with socialism and then it causes a problem and they say “You see, capitalism doesn't work, we need more government.” And then you get more government and then you get more problems. Well, this is such an enormous problem that we might end up with total government and completely change the fabric of our country. So I think it's very important that as many people in Congress as possible – and that's where you guys can come in – understand the root cause of this problem. It's not that we have too much freedom and too much capitalism (00:40:00) but the reverse. Capitalism doesn't work when government distorts it and interferes with it, tries to micromanage it. That's where all the problems come from. The solutions are going to be in the market. It's not going to be more government, it's less government. It's rolling back all these rules and regulations that are distorting the market and returning to sound money. And if we do that we're going to have real economic growth, we're going to have real prosperity. We might have to suck it up and bear some pain. Just like you can swallow some bitter tasting medicine. It might not taste good, but if it works you've got to do it. But denying that you're sick or covering up the symptoms while you get sicker is not the way to go. But that, unfortunately, is what we're doing now. (00:40:45)

Questions and Answers:

First question: Can you talk a little bit about your views on the problems of unemployment entrapment(?). If the structure of our communal work forces are changing? On cyclical and structural unemployment...

Peter Schiff:(00:41:04) Obviously there's an economic truism that you're going to get more of what you subsidize and you're going to get less of what you tax. I mean, if you pay people not to work, people are going to take you up on it. I mean, I did it myself. I remember the one time in my life I collected unemployment benefits, I did not look for a job until I exhausted my benefits. I was in my twenties and I was living in Southern California and the weather was great and I liked the beach and I liked that better than working. And if I can get paid for lying on the beach – as long as I had enough money for gas and booze it was fine with me. There are a lot of people today who are doing the same thing. I mean, it's not wrong, it's human nature! And if you can collect unemployment for two years, man, that's a lot of time on the beach.

People forget that leisure has value. People would rather not work. People save up so they can retire. Well, you can retire now on unemployment. A lot of people say “That's ridiculous. It's only $300 or $350 a week.” True. If somebody offered an unemployed person a $100,000 a year job, they'd probably take it. But what if the only job they're offered is only $400 or $500 a week? They probably won't take it. They'd rather have unemployment. Because it's like a huge tax on getting a job. The highest marginal tax bracket is faced by someone who's collecting unemployment. Because, not only does he have to pay taxes on what he earns, he loses all of his unemployment benefits. So the tax rate is enormous. And what people forget is when you get a job, you don't get to keep all of your income. There's a lot of expenses that the IRS won't want you to deduct. What if the job that you get offered is 45 minutes from your house? What's it going to cost you in gas money to get there and back? And maybe you have to eat in a restaurant, maybe you have to wear a suit, maybe you have to go to a dry cleaner. What if you have a kid? What if you have to put your kid in day care? How much is that going to cost? So, it's so much easier just not to work. The more lucrative we're going to make it, the more people aren't going to work. I've talked to plenty of people, small businessmen, who've told me they can't find people to work. And if they find anybody, they're only willing to work if you pay them under the table. Why? Because they don't want to give up their unemployment benefits. There are people in my family, right now, who've told me – in my family! – that are collecting unemployment. That's their job. And when I did it, when I had to do it, I actually had to go down to the unemployment office and pretend I was looking for work. And I remember, I used to actually go, because I was afraid that the government might catch me. So I actually went and met with ... I dropped off some resumes, I made a little log, so I could at least look like I was looking for a job. But I didn't want one. I just wanted the unemployment benefits. But I at least had to pretend that was looking. Today you don't even have to do that, today you don't even have to look someone in the eye and lie. You do it all on line. You can just be in South America collecting those unemployment benefits. Because they go a lot further if you go down to Costa Rica. The money is going to go a lot further if you're lying on a beach down there.

So, yeah, I mean, it's a racket. But the politicians love it. The unemployed [say] “Yeah, extend those benefits” because they'll vote for whoever extends them. And of course part of the problem is we've got all these illegal immigrants coming in. Who's going to take those jobs if they can get unemployment benefits? I mean, we shouldn't even have mandated unemployment insurance. If someone wants unemployment insurance let them buy it. I mean, you buy car insurance, you buy health insurance, you buy fire insurance. If you want insurance against losing your job, just go and buy it in the private sector. It'd be there if the government didn't provide it. At least then it would make more sense, you'd have market setting premiums and people who wanted it could buy it. It would have different incentives, it would probably pay off in a lump sum if you lost your job.

But now we give people all kinds of incentives not to work. We pass laws that make it illegal for people to work. Probably the dumbest law we've passed is the minimum wage law. But everybody in Congress just loves it, because they can pretend “Oh, it's terrible! Nobody should have to work for $5 an hour, so let's make the minimum wage $7.50”. But what does that mean? It means if you're not worth $7.50, it's actually illegal for you to get a job. And it's not just $7.50. Actually, you have to cover all your payroll taxes, other fees, mandates. And of course, there's a lot of legal liability that comes with being an employer. So an employer has to assign that value. Because the minute you hire somebody there are a million ways you can be fined or sued. If the government doesn't like the way you're hiring people they'll sue you. If they don't like the way you're firing people you can be sued. So it's very risky, the government has made it very risky to hire somebody. So a lot of people have made a rational decision not to hire people. Or to hire as few people as possible. Or if you have to hire somebody, hire in another country, where you don't have all these liabilities. So, if we got rid of that minimum wage law and also got rid of all these unemployment benefits, a lot more Americans would have jobs. 

How can it be? Look at all the stuff that we're importing. Yet we have all these unemployed people. One of the statistics I [saw] – this is ridiculous – [said] we import 90 percent of our seafood, 90 percent of it. We're surrounded by oceans, we've got all these lakes and we got all these unemployed people. You don't think they can fish? Just pick up a rod! But why aren't they doing it? They don't have to.

So, we have to get rid of all these rules and regulations, that are making it illegal to work, that are making it expensive to hire people. Because people forget where jobs come from. I hired a lot of people. Why did I do that? Is it because I'm a humanitarian and I just want create jobs? No, I want to make as much money as possible and I figure I can make more money if I hire people. That's the reason jobs are there, because someone wanted to make money. And they hire somebody to make money. But the more difficult and expensive the government makes it to hire people the less likely it is that somebody is going to do it. If I'm going to hire people and I'm going to lose money, obviously I'm not going to do it. So, you have to have more profit, more opportunity.

And, of course, the other thing you need is capital. I can't hire workers if I don't have any tools to give them, if I don't have any equipment to give them. Where is that all coming from? That comes from savings, that comes from underconsumption. The government keeps talking about “We have to raise taxes. We have to raise taxes on the wealthy. Because they're not the ones spending money. If we just raise taxes on the wealthy, they'll just have less money to save.” Yeah! Which means they'll have less money to invest, which means they'll create fewer jobs and we'll have a lower standard of living. So if the politicians that are saying “We need more jobs”, if they really understood where jobs come from, they would understand that they need to reduce the regulations and that they need to reduce the taxes on the people that create those jobs.

Second question: One argument that I've heard over and over again about the gold standard is that there's not enough gold for the money that we've printed. Do you have a rebuttal for that?

Peter Schiff:(00:48:12) Well, not at this price, there's not. The gold price will just have to go up, that's all.

But the idea that there's not enough gold in the world is ludicrous. It doesn't matter how much gold there is in the world. Prices are just going to adjust to the gold that exists. Money needs to be scarce, that makes it valuable. If it was plentiful, if there was all the gold that we needed, then it would have no value. What makes it rare and valuable is that it's scarce. And if you look historically, the gold supply increases by maybe one or two percent a year. That's it. That's pretty predictable, pretty consistent. And it works great. I mean, we had the industrial revolution on a gold standard. People that say “The economy can't grow on a gold standard” – our economy grew more on a gold standard than since we left it. If you look at the standard of living of the average American from, let's say 1800 to 1900, and compare the way the average American lived and the way he lived at the end of that century, and then compare that to the changes we made since we've been on the fiat standard, it's a much bigger difference. The standard of living grew a lot faster. Imagine how much wealthier society would be, how much less we would all be working, how much more prosperity and leisure we would all enjoy, if we would have continued on the gold standard for the twentieth century. Instead we went off it and we sacrificed a lot of economic growth in the process.

Third question: If you operate on the assumption that Washington writ large basically keeps doing what it's been doing, rather than do the right thing and just keeps progressing the way they've continued to progress, how do you see events unfolding? Obviously, you alluded to (00:50:00) larger financial prices, but how does that manifest itself in a world with a Ben Bernancke and members of Congress determined to do their best not to let nature take its course?

Peter Schiff:(00:50:14) Eventually it just has to happen, because the numbers are just so large. Just like the people who were buying houses using a teaser rate on their sub-prime mortgage. The problem was, the teaser rates expired and they couldn't afford the higher payments. Well, we've got the same thing. I think, about 40 percent of the national debt matures in the next year. That's a lot of money. That's six trillion dollars – I don't know the exact amount – but it's two to three times what the government collects in taxes. How can we possibly pay that off? Well, we can't! And the idea is that we don't have to, because we'll just borrow the money. Well that's the same idea that Bernie Madoff had. And it worked for a while for Bernie, but it didn't work forever.

We're not going to be able to constantly roll this debt over. Not at near zero percent interest. Eventually our creditors will want to get paid. And we can't pay. And then, we're not going to have a crisis until it's forced ... – we're not going to do the right thing until there is a crisis. So we're not going to preempt it. But we had this phony crisis with the debt ceiling crisis, when we refused to raise the debt ceiling. The real crisis is when the lenders won't raise the lending ceiling. And in fact, we actually admitted to our creditors in how much trouble we're in. We said: “If we don't raise the debt ceiling, we're going to default”. That's what we told them. We told them we were running a ponzi scheme. We didn't say that if we don't raise the debt ceiling, we're going to raise taxes so we can pay our debt. Or that we're going to cut Social Security spending or military spending so that we can honor our commitments. We said: “If we can't raise the debt ceiling and borrow more money, we're not going to pay off the people we borrowed money from”. So we told our creditors that they're the little man on the totem pole. So they already know this, but at some point they're no longer going to be buying this debt. The Chinese are going to wake up. They're going to stop buying this. People think that the Chinese are going to throw good money after bad indefinitely, that they've got two trillion in Treasuries that they can't afford to lose, so they're going to keep on buying. Well, pretty soon they're not going to be thinking of the two trillion they have, but five or ten trillion they're going to buy if they don't stop. Might as well lose money on two trillion than on ten. So they are going to wake up. And their economy is going to boom the minute they stop doing this, that is the biggest irony. You have American politicians beating up on China for manipulating their currency, but the benefactors of that policy are not the Chinese, it's the Americans! We get to buy stuff for cheap. We have all this stuff that the Chinese are sacrificing. If the RMB went up the Chinese would be buying all this stuff, not us. They would have the fruits of their labor, in stead of just the labor, and we get the fruits.

Now, long term the Chinese aren't doing us a favor, because they're helping to undermine our economy. But in short run we have a higher standard of living, because it's financed on the backs of people in China working in factories and not getting the full benefit of what they produce. But, the way the crisis is going to come: we can't borrow any more money and the Federal Reserve has to print, they have to do QE3 or QE4, or maybe they won't call it anything, they'll just do it. And then prices will really start to rise much faster. I know prices are rising, for food, for energy. Look, I just got my health insurance premiums from last year and my initial increase was 19 percent. Now I had to shop it around to get my increase down to 12 percent, but that's just in one year for the same coverage. But it's health care, it's college tuitions are going up; prices are going up. The only place they're not going up is in the CPI. I wish I could buy the CPI. But unfortunately I have to buy real things and they're getting more expensive. But at some point they'll get a lot more expensive and the government is not going to be able to pretend it doesn't exist. The dollar is just going to collapse. Right now, Europe is temporarily buying us some time, but it's going to be very expensive time because it's enabling us to go deeper and deeper into debt.

But again, where is this debt going? It's going to finance more government. The government bubble is worse than the housing bubble, it's worse than the dot-com bubble. Because at least, in the dot-com bubble we got a couple of companies that had value. At least in the housing bubble we got houses. We might have spent too much money on it, but they're there. The crazy thing is guys like Alan Greenspan who argued for burning them. He wanted to destroy them so we would have no benefit whatsoever from the housing bubble. At least we got houses. But what are we getting from the government bubble? We're not getting anything. More bureaucrats. We're getting more consumption, more spending. So this the biggest bubble of them all. And it is going to unravel.

The question is what is going to happen when the dollar really starts to collapse and prices start spiraling out of control. What are we going to do? Are we going to do what Nixon did and put in wage and price controls? We probably won't need wage controls because wages probably aren't going up. That's the one price that probably won't rise. But the price of everything else is going up, which is going to be particularly problematic. You know, a lot of economists make the incorrect assumption that you can't have inflation without rising wages. Oh yes you can. It's just a lot more painful when the wages don't go up. But employment costs go up. Maybe not wages, but other costs associated with employment. But, people working doesn't create inflation. In fact, people working helps bring prices down. It's people not working that makes prices go up. Because prices are a function not just of demand, but of supply. People working creates supply. When they're not working you have less supply. And also, what happens is, when the dollar crashes the supply of goods in America goes down because we can't afford to import. In addition, we export less. So, what happens is, capacity comes down. You can see that now in the airlines. The airlines are raising prices even though fewer people are flying. How are they doing that? Because they're reducing capacity and they're going to have to reduce it a lot more and air prices are going rise dramatically in the next few years, even though fewer people are going to fly. Fewer people are going to fly, but they'll pay a lot more. The same thing is going to happen as we're starting to export more refined gasoline now. That's more and more of that that's going to happen. So even as Americans are using less and less gas, they'll pay a lot more for the gas they use. Because the supply is going to be less, because a lot of the gas that used to be here is filling up a car in China. And that's going to be even more dramatic once the Chinese RMB goes up. Once the Chinese let their currency go up, everything goes on sale in China. So the Chinese will buy more of everything. Well, where are they getting all that stuff? It's the stuff that we used to buy, but that we can't afford anymore. Because, if the prices go down for the Chinese, they go up for Americans.

So, this whole collapse is coming. And if we want to do anything about it, we have to recognize what the fault is and then we have to start dealing with the real cause of the problem. Which is Big Government. All the regulations, all the taxes, all the spending. And we can't just talk about cutting taxes, we've got to cut spending. That's the tax. The cost of government is measured by what it spends, not what it taxes. Because all government spending has to be paid for, one way or another. And either they're going to pay for it through taxation, or through inflation. Now, temporarily they can borrow, but that either means that they're going to have to raise taxes in the future or raise inflation in the future. So ultimately, they can either tax or inflate, but that's it. So that's the cause. But when people talk about “Hey, we've cut your taxes”, but they have these huge deficits, they haven't cut our taxes at all. If government is more expensive, we're paying more to support it, one way or another. The politicians can lie about it when they run the deficits, but ultimately we're going to have to pay. So we have to shrink the government dramatically if we're ever going to get out from under this mess. The only reason this phony economy works now is because we can borrow the money to sustain it, because the world will take our paper for their stuff. But when that stops we cannot function, this economy cannot function with this level of bureaucracy. We're going to have to make some deep rooted changes. And they're obviously going to have to come from here. [The lecture was held on Capitol Hill for congressional staff.]

Fourth question: Kind of a two-part question. First, it's good that the Austrian School is starting to get more attention nowadays, but for a long time it was more in the publics' view sort of an intellectual battle between Keynesians and the Chicago School. So, what do you say to the suggestion that the Chicago School could be very, very dangerous, because they essentially preach the free market except when it comes to currency and debt, and then, when something goes wrong, the Keynesians say “look, the free market doesn't work.”

Peter Schiff:(00:59:16) Yeah, I mean, it's a bad comparison. You give capitalism a bad name when you preach it but don't really practice it. That's what happened. I think you really have to start to look at the Austrians who have a much better explanation for what's happened, and a much better understanding. But the problem – and the reason why Keynesianism is so popular here on the Hill – is it's exactly what the politicians want. Keynes gives them a reason to do what they wanted to do anyway. Because it's so easy to just spend government money and if you can argue that it's going to grow the economy... And where you can often destroy their arguments: Like, they're saying we have to extend unemployment benefits, because it's going to help the economy. (01:00:00) How is it going to help the economy? “Well,” they say, “because the unemployed are going to spend the money.” Well, if just printing up money and giving it people to spend grew the economy, why just limit it to the unemployed? Why not give the benefits to everybody? Then we'd have even more growth. And why not double the benefits? Then we'd get double the growth. Why not triple them, quadruple them? Why not give everybody a million dollars? Then, at some point they're going to say, “Well, that's too much.” “Well then, what if we do a dollar less. Is that too much?” You see, it never works, because whatever the government gives the unemployed, it has to take it from some place else. The government has nothing, All it does is redistribute. So it's not going to help the economy, it's going to hurt the economy. Apart from the fact that it subsidizes people not to work, so the economy is deprived of the labor and the output that would have otherwise accompanied that work – instead somebody is idle – but when you transfer money around, you're lessening economic growth. The deficits that we create to pay for those unemployment benefits are going to do more damage to the economy than whatever benefits you get from spending those unemployment checks.

So, it's easy to critique that, but the Keynesian view is the more politically popular. And that is the problem. Everything we need to do that are good for the economy, are bad politics, and everything that's bad for the economy is good politics. Among the people who understand that government is the problem, a lot of them still want their Social Security benefits. They want a lot of stuff from the government and they don't realize that the government doesn't have the money.

Fifth question: So when this collapse does occur, is there any country around the world that will fare better? Or how will America fare relative to other countries?

Peter Schiff:(01:02:10) I think the countries that have the most to gain are the countries that are bearing the lion's share of the burden of supporting us. So, if you look at the countries that are amassing enormous foreign exchanges reserves, particularly in dollars – countries that have these huge sovereign wealth funds – these are the countries that have the most to gain, because they are paying the lion's share of the subsidy. America gets a huge subsidy. A lot of people will be able to conceive that Americans live beyond their means. We buy a lot of things that we didn't produce, we borrow and we spend. So, we live beyond our means. Well, that's only possible because other people are content to live beneath their means. Well, the people who've been living beneath their means, when they don't do that anymore, they're going to see big gains. The Chinese for example, when they allow their currency to rise, all of a sudden the Chinese are going to be able to afford a lot of things that today are out of their price range. And so the Chinese are going to see a big increase in their standard of living. At the same time we're going to see a corresponding decline in ours, because now we're not going to have these things. And if an American wants to buy something made in China, maybe he's going to have to pay three or four or five times as much money.

Same questioner: And then, as an individual, is there anything you can do to lessen the blow for yourself in this situation?

Peter Schiff:(01:03:26) Well yeah, as an individual, you can recognize that the dollar is going to lose value and so you don't save dollars. And that's part of the problem. We need savings to grow the economy, yet you'd have to be a fool to save dollars. So we can't get the savings that we need if we're chasing capital out of the country. But you can buy gold, you can buy silver, you can invest oversees, you can have foreign currencies, you can have stocks abroad, in economies that are going to improve when this dollar at the center of the global monetary system comes to an end. This is the problem. We have polluted the entire global economy. We export our bad monetary policy. Because the dollar is reserve currency, everybody is trying to maintain a parity in relationship with the dollar. But instead of being a force for good and stability, we're a force for instability and recklessness. Because it's a race to the bottom. We're disrupting the entire global economy. We are at the epicenter of these massive global imbalances that are the real root causes of the problems and the booms and the busts. But when that ends, the world can collectively breathe a sigh of relief. But it's going to be difficult in America to get used to actually having to live within our means. Because then we'll have to acknowledge how dramatically our means have been diminished, over the years. And as I said earlier, if we're going to restore our economy, we can't do it with all this government. We never could've produced the wealth we once had if we had all this government. It's the absence of government that allows us to be productive, it's freedom. That's what we need. If we want to help people we need to give them more opportunity, more freedom. And we don't get that by passing laws, we get that by repealing laws.

Sixth question: I had a question about convertibility, because the American history textbook explanation for us leaving the gold standard is that other countries, particularly France, converted en masse our debt into gold. Can the United States, if we go through an organized default rather than letting the markets tear us apart, be the only economy that switches back to a gold standard if there's that risk of convertibility? Or, if the dollar skyrockets, how will we export?

Peter Schiff:(01:05:49) Well, the way we exported before. Just because you have a strong currency doesn't mean you can't export. In fact, if you have a strong currency, it diminishes your capital costs, you have more savings, you have more investment, it diminishes your raw material costs, it makes imported components less expensive. It means you don't have to [spend as much on] wages, because your workers are getting wages in a higher purchasing power. They don't need a nominal .... So there are a lot of benefits.

But yeah, if we were to be proactive and admit right now, “OK, the country is broke. Let's restructure on our own terms. Let's figure out what we have to do.” Because as I said, we need higher interest rates. That is the only way we're going to solve the problem. But we have to acknowledge that if interest rates go up, this whole phony thing collapses. Which is, of course, a good thing, because the sooner this economy collapses, the sooner we can build something real in its place. But everybody is so afraid of the short term consequences, that they want to postpone it as long as possible. Which means, it's not going to be on our own terms. It's going to be a crisis that hits us from abroad. If we do it ourselves, if we preempt, it still is going to be painful, but it is not going to be as painful. It'll be a lot better. And, of course, a lot of the pain is not going to be uniform. The pain is going to be felt principally on people who are living off the government. The people who are getting checks from the government will be getting smaller checks. Or in some cases, no checks at all. We're going to remove the burden off of the backs of the American public. So it's not like I'm going to talk about austerity. Austerity for who? Not the people paying the bills. The people riding in the wagon are getting austerity, not the people pulling it. They're going to get some relief. Which is what they need.

But, some of the things that we can do, as far as getting government out of the way, will have immediate benefits. If we got the government out of education and out of stupid loans, tuitions would plummet. All of a sudden, college wouldn't be such an insurmountable expense. Families wouldn't have to worry about saving for college, because it wouldn't be so expensive. And maybe not all their kids would go. I mean, now everybody goes to college, even when you've got no aptitude for it whatsoever. What's the point? What the point of sending a kid to college so he can party it up for five years and get drunk, and then graduate with a lot of debt and no skills, no knowledge? What if we got government out of health care and all of a sudden medical costs would collapse. Isn't that a good thing if it doesn't cost so much to go to the doctor, if it doesn't cost so much if you get sick? So, there are a lot of things where, if you just get government out of the way and you get free market efficiencies in, you get an immediate benefit. Now, who does that hurt? Well, someone's going to hurt. If tuitions come down, some overpaid administrators at universities are going to earn less money. Oh well. And some people working at universities are going to lose their jobs. OK, then they didn't need those jobs and they'll have to do something productive. And if they do something productive, we'll all going to benefit. The more people are employed productively – everybody benefits from that productivity. The more people that are doing things that they shouldn't be doing because of some government subsidy, we're all made poorer as a result. So, it's not going to take that long, if we do all the right things. It's like ripping off a band-aid. If you just rip it off it doesn't really hurt that much. But if you peel it off slowly, then it hurts. So, if we just get rid of all this government, and bring back freedom, there is not going to be that much suffering, [at least] not long. Some people, sure. People who thought they were going to retire on Social Security, OK, they're going to find out that that's not going to happen. They have to work, they have to save their money. But, they're not going to get Social Security anyway. So, let's deal with it now, instead of paying them off in worthless money. What good is that going to be? Because that's the end result. But, not only don't the politicians have the integrity to do the right thing, most of them don't know what the right thing is. Hopefully we can educate people. There's got to be somebody in Congress, other then Ron Paul, that actually cares about the country. And a lot of times when the congressmen think, “Well, I can't do that, that's too big of a risk.” “Well, what's the risk? That you don't get reelected? What's so terrible about that? There are people that risk their lives on a battlefield for their country. You can't risk not getting reelected? Big deal!” So people have to understand. And this is a very pivotal point in our history.

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