Peter Schiff

From Chapter 1 of Crash Proof: How to Profit From the Coming Economic Collapse

WHY THE GLOOM? THE GOVERNMENT SAYS THE ECONOMY’S FINE

If you’re wondering why you keep reading and hearing that the economy is doing just fine, don’t think you’re hallucinating or that I am. Modern politics is premised on the high expectations ofAmerican consumers, and the government has mastered the art of making bad economic news look like good economic news, thereby keeping the public happy and the politicians in office.

(The midterm elections of 2006 that changed the leadership of the House and Senate might indicate the public is waking up.) Government officials—aided by an accommodative Federal Reserve empowered to create credit—manipulate economic data routinely to simultaneously maintain the domestic consumer confidence and foreign lender confidence required to keep the party going.

But with every bit of time they buy, the basic problems worsen. For their part, the foreign central banks continue to use accumulated dollars to buy our Treasury and mortgage-backed securities, helping finance our growing deficits and keeping our housing market propped up (see Figure 1.3). They get the same sunny economic news we do, and they also have the naive belief, although there are signs that this belief is beginning to waver, that the U.S. economy is too big to fail. If they woke up to what’s actually happening and stopped buying our Treasury securities, our choice would be to further tax an already overburdened citizenry or default like Russia did in the later 1990s. We are in a real mess.

That brings me back to my prizefighter analogy. Remember when Iron Mike Tyson wore the heavyweight crown, was knocking out everybody in sight, and was so fearsome it seemed inconceivable he could lose? Well, as always happens eventually, he finally met his match. Buster Douglas beat him, and after that he just kept getting beaten. It was the same Mike Tyson, but Buster had broken a psychological barrier.

Any reality check that pierces the myth that the American economy is too big to fail could begin the process of unraveling.

 Our days as the dominant economic power are numbered. The dollar is going to collapse, and Americans are going to experience stagflation on an unprecedented scale in the form of recession and hyperinflation. Those of you who act smartly and quickly by taking measures I outline later in this book not only will avoid loss of wealth but also will have positioned yourselves to prosper while your neighbors suffer a painful period of reconstruction and reform.

It is important to remember that in market economies living standards rise as a result of capital accumulation, which allows labor to be more productive, which in turn results in greater output per worker, allowing for increased consumption and leisure. However, capital investment can be increased only if adequate savings are available to finance it. Savings, of course, can come into existence only as a result of underconsumption and self-sacrifice (see Figure 1.4).

The fatal flaw in the modern economy is that any attempt to save and under consume, which would surely bring about a badly needed recession, is resisted by government policy, the sole purpose of which is to postpone the inevitable day of reckoning.

In their selfish attempt to secure reelection, American politicians have persuaded their constituents that they should indulge their every whim and that self-sacrifice or underconsumption are somehow un-American, a character flaw uniquely Asian.