Who is Peter Schiff and why didn’t we listen to him?

If you have a circle of Internet friends, you are probably covered up with forwarded opinion pieces every day, as I am. The current financial crisis gives almost everyone a bully pulpit of righteous indignation, and keyboards are smoking. Many of the diatribes are written by educated people who know lots of pretty words, but don’t know when to come in out of the rain. Every once in a while, you get something real you can sink into. I received something like that recently.

I didn’t know who Peter Schiff was before I received the video. He is the president of Euro Pacific Capital, which is an American company specializing in international investments. The piece that was forwarded to me was comprised of snippets of several interviews he did in 2006 and 2007 on several major business news television shows.

• In the first interview in 2006, he stated that we were headed to a recession, and it was probably going to last for several years. In a later interview, he stated that we would be in a recession by November of 2007. Since we all know now that the recession has been officially recognized as beginning in December of 2007, he missed it by one month!

• Long before the official recession began, he stated that we had too much debt financed consumption and too much borrowing. He continued by saying that the increases in home prices were only paper values, and that home prices were unsustainable. Peter said home values were going to come crashing down when Adjustable Rate Mortgages began to reset, and the market would collapse.

• In 2007, Peter stated that the worst was not over, but the party was over. He said everyone was going to have a difficult time borrowing, and that the foreigners who had been lending us money for years were now realizing that we can’t repay it. He recommended that we stay away from financials as equity investments, because they had no earnings.

In all cases, Peter was counter-pointed by other so called experts, who, in many cases, actually laughed at him. Somebody I’ve never heard of named Mike Norman laughed continuously, and I hope he has watched this video since then to see how ridiculous he looked…and how pathetic his understanding of what was happening in a world he professed to understand looked. He was joined in his misguided disdain by Arthur Laffer, who was indignant and said that Peter was totally off base.

Ben Stein may have been further off base than all of them. He said that the credit crunch was over-blown, and the sub-prime issue was a tiny problem. He also said the worst was over. Stein put his other foot in his mouth and mumbled that financials were a bargain, and recommended Merrill Lynch. If Ben Stein’s Money went where Ben Stein’s Mouth went, he is probably at home practicing, “Hi, welcome to Wal-Mart.”

Charles Payne, who probably caught a serious case of foot-in-mouth disease from Stein, predicted a boom within a few months, and recommended Goldman Sachs and Washington Mutual as good buys. He also predicted the Dow would hit 16,000.

It is actually uncomfortable watching men such as Norman, Laffer, Payne, and Stein make fools of themselves on national television programs. I know nothing about Norman, and I don’t want to…he reminds me of one of the very few guys I have met in my life who I immediately didn’t like. I know very little about Laffer (how appropriate is that name?) and Payne (That’s a little appropriate too!), and Stein should have stuck with goofy game shows. All three were rude to a man who obviously has a much better grasp of the big picture than they do.

With all of that in mind, it brings us to the present, and I’m going to pay a little more attention to Peter Schiff from now on. The point of this writing is not to discredit the laughing boys who chided Peter; it is to present him as a credible source for us to listen to now. Currently, he states that he has always warned that rapid expansion of government debt would result in inflation and higher interest rates, because a rising supply of government debt inflates the money supply and weakens the government’s ability to service it’s debt through legitimate means.

He now believes Barack Obama’s New Deal stimulus and public works program, which is wholly dependent on the willingness of foreign creditors to supply the funds, will face difficulties because purchasing U.S Treasuries will be a tough sell to foreign lenders. According to Peter, once the dollar begins to collapse beneath the weight of all of this new deficit spending, accumulation of contingency liabilities, and the socialization of our economy, commodity prices and interest rates will rise…which is hard to imagine right now. Additionally, once all of the going out-of-business sales at U.S. retailers are over, and excess inventories have been reduced, there will be big price increases at the consumer level.

Continuing, he says that once there are no bidders for new treasuries, the Federal Reserve will be the only buyer, and sensing that, the Fed has recently indicated a desire to begin issuing it’s own bonds. The vicious cycle widens. The Fed already issues debt, since dollars (Federal Reserve Notes) are recorded as liabilities on the Fed’s balance sheet. The Fed hopes the proposed interest bearing debt will be more attractive…but the interest will be paid with additional Fed script (more debt!).

Peter Schiff’s messages are daunting, but given his right-on prediction about what is happening now, he is hard to ignore. It is easy to pick the right opinions when using hindsight, but Peter’s staunch defense of his convictions in the face of open ridicule on national television is admirable, and gives him credibility. I wish I could say he is wrong, but all of this is barely within my grasp. I write fiction so I can make up the endings. In our non-fiction world, I don’t know where all of our current problems are going to take us, but I do know that we will come out of this eventually, and we will probably come out of it as a much stronger and wiser nation.

Peter Schiff debates Arthur Laffer in August, 2006

Video mentioned in the above article from August, 2007