American Economic Power Is Just an Illusion (Video)

A couple weeks ago, we shared a segment of Peter Schiff’s recent interview with Reason TV. Here is the full interview with Reason’s Matt Welch from FreedomFest 2015. They discuss the future of the United States economy, the upcoming presidential election, and China’s relationship to the US.

Things change quickly when they change. This idea that America is an all-powerful nation is just an idea. It’s based on a myth. At one time that was true. We were a mighty nation. We did manufacture the goods that everyone wanted to buy. We were the lowest cost producer of manufactured goods. We had the most economic freedom. We had the lowest rates of taxes, the fewest regulations. We were a very free society… We built an incredible country based on those principles. We’ve abandoned those principles, and the wealth has been abandoned as well.”

Highlights from the interview:

Matt Welch: We’ve been at zero interest rates now for seven years. Anything that happens for seven years, does it not, almost by definition – especially if it’s a historically unusual thing – doesn’t that automatically create a bubble?

Peter: It has created a bubble. In fact, I think it is an enormous bubble. The reason interest rates have been at zero for so long, is because I think the Fed is cognizant of this, even though they don’t admit it publicly. Which is why they’re so reluctant to raise rates – even to a quarter of a percent, or half a percent… If you can go back and recognize how much damage Alan Greenspan did by keeping rates at one percent for about a year and a half and then slowly raising them back up to five and a quarter over a year and a half period – that’s what really inflated the housing bubble and lead to the financial crisis of 2008, trying to resolve the malinvestments that were the by-products of that monetary policy. Think about how that bad was. Now imagine how much worse it’s going to be, because the problems that Greenspan created will pale in comparison to the ones that Bernanke and Yellen have created. When this bubble bursts, the fallout is going to be much bigger.

Matt: Where do you see the bubbles as a result in the market right now?

Peter: The bubbles are pretty much everywhere. They’re in all financial assets. They’re in the stock market, they’re in the bond market, they’re in the real estate market, they’re in the US dollar. That could be the mother of all bubbles, and that might be the first one to pop. In order to keep all the other bubbles full of air, the Fed has to keep interest rates at zero. I think they’re about to launch a fourth round of quantitative easing. Everybody just assumes the Fed is going to raise rates. That’s not going to happen…

What the Fed should do is let these bubbles pop. They should raise interest rates substantially and let the chips fall where they may. We need to restructure this economy. We need to go from a borrow-and-spend economy to a save-and-produce economy. We have to acknowledge that the debt is unplayable, just like Puerto Rico did. It has to be restructured. We have to build a recovery out of a sound foundation. We can’t just build it on a bigger bubble than the one that just popped.

Matt: Do you see anyone running for president – even the fiscal hawks, like Rand Paul or Ted Cruz – do you see them saying, ‘Yeah, what we need to do here is raise interest rates so much that our debt service is going to quadruple over night.’

Peter: That is not a winning campaign message: ‘Let’s swallow this bitter tasting medicine, because it will actually work.’ What the voters want is snake oil. They want something that makes them feel good. If Rand wants to win, he can’t necessarily lead with this message. But I support Rand, and I think Rand really understands the severity of these problems. If it hits the fan on his watch, I feel more comfortable that we might actually do something constructive about the problems, instead of trying to paper them over with more stimulus that is only going to make them worse?

Matt: What are we failing to imagine right now as a thing that could happen, resulting as a consequence of these actions?

Peter: The people who think that everything is great. The people who think that the Fed monetary policy has succeeded and that the US economic recovery is legitimate, these are the same people that had no idea there was a financial crisis coming. These are the same people in 2008 who thought everything was great, including Ben Bernanke and Janet Yellen. They didn’t even know a recession was coming, even though one started seven months earlier. These guys were still blind to the greatest financial crisis since the great depression. It was around the corner and they couldn’t see it. These are the same people who were buying the dot-com stocks and didn’t realize that was a bubble. The mainstream, the investors, the government, central banks – they never see a crisis until after the fact. Then they go back and say, ‘Well, nobody could have possibly predicted this. This was a complete random occurrence that had nothing to do with our policy.’ Of course, that’s never the case. The events of 2008 were highly predictable to anyone who had a rudimentary understanding of what was going on. But these guys were in denial, and they’re in denial again…

Matt: Bears are always wrong until they’re right… Are you able to still make money playing arbitrage on these bearish predictions that haven’t yet happened the way that you might have spelled out?

Peter: I’d rather be wrong until I’m right than right until I’m wrong. If you’re right in the long run, you get to keep the money. If you’re wrong in the long run, you lose the money that you never really had. You have paper profits that vanish. I would rather wait patiently for real profits to materialize. The problem with being right and being early is that everybody else thinks you’re wrong…

Matt: Doesn’t the US have some sort of success curse at play here? Which is to say, we are a reserve currency. We are a huge, thriving economy, even when we’re not thriving particularly well. We’re this juggernaut. So we can’t be a Greece, because we can print our own money, and we have this economic engine that will outpace whatever Greece does in any given period of time. So is that a hedge against the darkness that you see, or is that more inflating the ultimate final bubble?

Peter: The fact that we can print our own money is ultimately going to be our undoing. It’s because we can print our own money that the world has given us so much rope, which we’ve unfortunately hung ourselves with – or we’re in the process of hanging ourselves with it. The vibrant that you talk about in the US economy is merely a function of our ability to keep borrowing money that we can’t repay, to keep spending money to buy stuff that we don’t have the industrial capability to produce. So as the world continues to vendor-finance a customer that can’t possibly pay, yes, we can continue to have what looks on the surface what looks to be a robust, thriving economy. But all that can change very quickly when the perceptions of those doing the lending change…

Think back to how quickly the Soviet Union collapsed. It was a huge monolith, a super power. The world basically was America and the Soviet Union. It was like an empire. It didn’t take very long, and then all of a sudden it wasn’t there. Things change quickly when they change. This idea that America is an all-powerful nation is just an idea. It’s based on a myth. At one time that was true. We were a mighty nation. We did manufacture the goods that everyone wanted to buy. We were the lowest cost producer of manufactured goods. We had the most economic freedom. We had the lowest rates of taxes, the fewest regulations. We were a very free society… We built an incredible country based on those principles. We’ve abandoned those principles, and the wealth has been abandoned as well. Now we’re just an illusion…

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