Tom Woods & Peter Schiff on America’s Economic Future (Audio)

Tom Woods interviewed Peter Schiff this week. Woods is a senior fellow at the Mises Institute, a New York Times bestselling author, and a well-respected voice of Austrian Economics. He and Peter had a friendly conversation about the broader economic problems facing the world and what investors can do to prepare.

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Follow along with this partial transcript:

Tom: Paul Krugman mentioned you in a column sometime ago, and you responded. What did he say and what did you say?

Peter: You know, he mentioned me again just a couple days ago. So I’m now his favorite punching bag. He used to refer to me without actually naming me, but now he actually says “Peter Schiff.” The most recent criticism… was because Yahoo! Finance had an interview with me where I was predicting the result of QE in Europe would be inflation. Of course, he was laughing, he said, ‘Look. [Peter] has been saying that for years.’ But the very goal of QE in Europe is to create inflation. So that would be a success. They supposedly want inflation. What I said, is that I think before the end of the year they may be too successful. I think the one thing they will be able to do is lift the official inflation rate. I don’t think they’re going to create jobs or economic growth. But I do think they’ll get a CPI above 2%. I think that could be problematic, because then they have to end the QE program, because then they have to keep inflation below 2% in the eurozone.

Tom: What are your thoughts on the development in Greece?

Peter: The reason that America is a republic and not a democracy is because our founding fathers were historians, and they studied the ancient Greek democracies and what an abysmal failure they were. Greece is giving us another example of why democracy doesn’t work. This is what the Greeks vote for. They vote for socialism. That’s not going to work.

Tom: It seems like it’s going to fail pretty badly because of how severe their economic condition is. Do you think this may have at least a silver lining of discrediting leftism or can leftism ever be discredited with these people?

Peter: I don’t know, but you’d think it should already be with all the spectacular failures. The problem is the right doesn’t really give a good contrasting element, because we have adopted so many of the failed policies in what masquerades as capitalism these days. Everybody thinks that Europe needs Greece. I think they need them like a hole in the head. They’d be better off to let them leave. They had to cheat just to get into the eurozone, now they’ve got everybody hostage. I think what should have happened… They never should have been bailed out in the first place. That was a mistake. Greece should have been allowed to default on its bonds, but remain part of the euro. I think that would have been a much better situation, because bond holders would have been dealt a loss. People would now realize that you have to worry about the ability of taxpayers to repay the money you’re loaning them. You’re not going to have a central bank with a safety net. Then maybe there wouldn’t have been any reforms enforced upon Greece by Europe. Basically, Greece didn’t default, and then Europe imposed these requirements that everybody is protesting. But if they didn’t have any bailout money whatsoever, and Greece just defaulted. They would have then been shut out of the bond markets. Then they would have had to impose the austerity on themselves. That probably would have been much easier for the Greeks to accept, rather than austerity imposed by the Germans. That austerity might have worked. It might have been big cuts in government spending, freeing up their labor markets, and reforms that would have actually worked. Not what they’re contemplating now, which is just to grow government even bigger.

Tom: I know you’re long-term bullish on oil. Yet it fluctuates and it can be unstable in terms of its price. What’s going on with oil right now and is it bound to rebound?

Peter: It was obviously a big drop. I wish I had seen that coming. I was not expecting oil to be the first casualty of the end of QE. But hindsight is always 20/20 and it gives you a fresh perspective. One of the reasons that I was so bullish on oil was because of QE and all the money printing. I knew that it wouldn’t grow the economy, but it would lift prices. It lifted oil prices, stock prices, real estate prices. It seems like the threat of no more QE and higher rates – the first market the Fed pulled the rug out from under ends up being the oil market. I think it’s just indicative of what’s going to happen in all the markets if the Federal Reserve stays on this trajectory. I think you’re going to halve the stock market as well, and the real estate market… Which is why I believe we’re not going to get higher interest rates. We’re going to get QE4. So we won’t have an implosion in the stock market, but we will have a sharp rebound in the oil the market.

Tom: How can you direct people in both [higher income and lower income] categories [to invest]? Just in very general terms. What to look for and what to stay away from?

Peter: For the people that only have a couple hundred dollars a month, there’s not much I can do. Individually, you can pick up some silver coins at a local dealer. Try to buy as close to the spot price you can, just to save a little money. For people who have more substantial sums of money, my worldview is that at the end of all this madness, you’re going to see the world emerge in a different way… I think American consumers are going to be big losers. Our ride on the global gravy chain is going to come to an end. Our currency is going to be substantially devalued relative to certain currencies. I think individuals who own those currencies will be awarded with the purchasing power Americans lose. You’re going to see a realignment of global living standards. I think Americans are collectively going to be hit with a big reduction in their standard of living. I think people in predominantly emerging markets – not all, but some – are going to see a substantial increase in their quality of life and their standard of living… They’re going to buy more products and less Treasury bonds. Long-term this will be a catalyst for America to really have radical reform… You want to position yourself to be on the winning end of this gigantic transition, this transfer of wealth…

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Tom: The central banks of the world portray themselves as being indispensable sources of stability, and the world couldn’t survive without them. But I’m sure you view them as creating a whole lot of white noise. When you’re trying to figure out what’s a good investment, you have to figure out if this thing is prospering because it’s part of a Fed or central bank induced bubble, or is it the real thing. How do you do that? How do you disentangle the central bank influence from the real profitability?

Peter: I think it’s pretty easy to understand which businesses are the beneficiaries of the largesse, and which industries are being retarded by what the central banks are doing. Certainly, the average living standard of people is being impeded by central bank activity. There are a few people who are being lavished with huge rewards. A lot of these guys are meeting with each other in Davos just last week, talking about how everybody has to sacrifice. The hard part of this is that you have to understand… In the short run you get rewarded for betting on the [central bankers]. But eventually, it’s going to be a disaster. Like the people who were betting against the Swiss franc. The franc was falling for years, until it had a spectacular rise and a lot of people got wiped out… I think that’s going to be happening on a bigger scale in markets around the world… Everybody is in bed with the central bankers and this is not going to end well.

Tom: Why should Americans care about the policies [in Europe]?

Peter: Right now, the policies over there are benefiting us to the extent that our currency is going up, which means Americans can buy stuff for less money, which is probably a good thing because Americans have less money. They need some kind of break on prices. Other than that, I think they have more to worry about with the Fed, because I think the Fed is going to be picking up the QE baton. Everybody thinks that we’ve dropped it for good, but we’re going to take it back and run with it. It’s just a pretense of when…

Singapore came out last night, and they deliberately pushed down their currency. They said it’s because their inflation rate is too low. It’s not negative, it’s some positive number… Canada just cut rates last week, because their inflation rate is too low. It’s around 1% maybe… When did this happen? When did this magical transformation happen when central bankers all agreed that low inflation is bad? That inflation below 2% is somehow a really bad predicament to be caught in, and that is their main concern? They do this in the name of price stability. They say, “Prices are only rising by half a percent a year, and we need price stability, therefore we need to force them to go up by 2% a year, and then we’ll have price stability.” It seems that they’re getting further away from their goal if they want stable prices, and they’re forcing them to go up.

Tom: Right. Of course, in the 1920s, you did have very fashionable opinions, like Irving Fisher saying things like, “We need to have inflation to keep prices stable.” But they didn’t say anything like, “We’ve got a target of a positive 2%, and if it’s only 1.2% that’s not good enough.” That seems to be a much more recent phenomenon. Of course, in the 60s and 70s you had such substantial inflation that it just was not an issue. I don’t know exactly when, but it’s quite a recent phenomenon. On that general subject, do you have any forecasts with regard to major currencies, and maybe a political forecast too about the peg to the dollar? Where do you see that in 2015?

Peter: Everybody is long the dollar. It’s the most crowded trade going. It’s going to blow up eventually, just like it blew up on a smaller scale with the Swiss franc. You’ve got peg relationships with the Chinese yuan, the Hong Kong dollar, other Asian currencies like Singapore… You have a lot of countries that are trying to peg. The way pegs came about is you’d have a country that had a weak currency with a history of inflation, and they had high interest rates. They wanted to reassure the world that their currency was safe. They would peg it to a stronger currency so that the currency would not sink. You always tried to peg your weak currency to a strong currency. Then you would have to have fiscal and monetary discipline in order to maintain the peg. If people knew you were committed to maintaining that peg, then you can have more borrowing and more commerce in your currency. Now, the way pegs work is the strong currency pegs itself to a weaker currency. The idea is to make sure that your currency doesn’t strengthen against that weaker currency, which is crazy. it turns the whole concept upside down. It’s easy to maintain your peg to a weak currency. You just print a bunch of money… It’s a bizarro world where a strong currency will peg itself to a weak currency…

When is all of this inflation that all the central banks are so determined to create, when is it going to come back and bite them? I think they’ll succeed. They’re never going to succeed in creating economic growth. But they will succeed in pushing up consumer prices. You print enough money, prices are going up… Maybe the central banks or governments aren’t reporting prices as accurately as they used to. They’re fudging the numbers… As economies are weak, you would expect prices to decline… But at some point you use up all your inventory and prices start to rise. At some point your’e going to see inflation throughout the eurozone, throughout Japan… throughout Canada. Every place that is complaining that inflation is too low, pretty soon it’s going to be above 2% everywhere in the world. The question is, how high do they let it go and then what are they going to do about it? Are they going to change the goal posts and say, “We need 4%”? … Or are they going to say, “Wait a minute, we have too much inflation, we need to bring it back down.” How are they going to do that? Now that they’ve got everybody levered up, how are they going to raise interest rates to fight inflation? …

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