China Will Abandon the Dollar and Destroy American Purchasing Power (Video)

Peter Schiff appeared on Bloomberg TV yesterday to explain why China is going to be forced to remove its peg to the dollar, just as Switzerland abandoned its euro peg. When this happens, the big losers are going to be American citizens, while Asians will likely enjoy a higher standard of living.

Follow along with this transcript:

Question: You’ve warned your investors that Switzerland’s relationship to the euro is just a microcosm of China’s relationship to the US dollar. What do you mean by that?

Peter: It’s very rare that a central bank ever does something right. Fortunately, Switzerland did that, although I guess what they did right is fix their own mistake. But China has been making the same mistake that Switzerland made, only for a long time with the dollar. You see, the Swiss decided to put a ceiling on their currency to prevent it from rising against the euro, to preserve their export markets in Europe. They’re afraid a rising franc would price them out of these markets. China has been operating under the same principle. They think that they have to preserve their export market to the Untied States. So they have a [ceiling] on the yuan. They’re preventing their currency from rising. Just like Switzerland, they have trillions now in foreign reserves; they’ve bought all these dollars. But what they’ve really done is transferred purchasing power from their own citizens to Americans. I think eventually they’re going to get tired of throwing good money after bad, just like the Swiss. They will remove the ceiling. Just like the Swiss franc, the Chinese yuan will soar against the dollar to the benefit of the Chinese people.

Question: What would the ripple effect look like?

Peter: It would mean that a lot more of China’s production would be consumed by Chinese people. They would get to enjoy the fruits of their labor, and Americans would be denied a lot of those products, because we would be priced out of the market. Also, the value of Chinese savings would rise. Their real incomes would rise. You would have consumer prices declining in China, which would be a boon for the Chinese economy. Because as consumer prices go down, you experience an increases in your standard of living commensurate with the decline in your cost of living.

Question: Well, Peter, it all sounds so good. Why isn’t China doing it?

Peter: I don’t know. I’ve been trying to figure that out for a long time. Obviously, they’re trying to preserve the status quo. And there certainly are factions that benefit from this relationship. I think no one benefits more than the United States, because we enjoy a massive subsidy at the expense of China. Even though a lot of the Chinese politicians aren’t elected, I guess they’re still worried about certain things and they’re trying to preserve the status quo. Ultimately this is undermining the standard of living of the broad population of China. I think eventually China is going to change this policy. I think they’re already preparing for a post-dollar world. I think they’ve been accumulating gold. We don’t really know how much they’ve bought, but I think they’re trying to buy as much gold as they can to have something other than dollars backing up their currency when they do float it.

Question: You say it’s going to be a 10 on the economic richter scale, but who are going to be the big losers here?

Peter: As I said, in the short run, the United States. We are the major beneficiary of this Chinese subsidy, because American consumers enjoy a higher standard of living. We get to consume without producing. We get to borrow a lot of the Chinese savings. So we get to live in this phony economy. In the short run, it’s going to be very damaging to the US. Long term, I think it’s the best thing that could happen to us. The longer the Chinese wait to remove this subsidy, the worse it’s going to be for us. On the other side – China, Southeast Asia – there are going to be a lot of people in these emerging markets that are going to see an enhanced standard of living, because as their currencies rise, so too does their purchasing power. All the factories that exist in China – they’re not going to go away if Americans are too poor to buy the products. The products are still going to be produced. They’re just going to be produced for the Chinese consumers rather than for the American consumers. China is going to be a lot better off with their products than our paper money. What good are the trillions of dollars that the central bank is warehousing doing for the average Chinese citizen? They’re not doing anything good at all. All they can do with them is buy Treasuries. When they mature, they have to roll them over into more Treasuries. When they get interest, they have to buy Treasuries with that. They can’t spend any of this money. I think Switzerland was staring into the abyss. They looked at the prospect of having to buy up even more euros now that Europe is going to be doing more quantitive easing. They didn’t want to do it. Well, we’re going to be doing QE4, probably before the end of the year. China is going to be faced with a similar decision. If we do QE4, and I think we will. I think it’s going to be bigger than QE1, 2, and 3 combined. We’re going to expect the Chinese to buy the lion’s share of those dollars, and I don’t think they want to do it.

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