Speech given by Peter Schiff on the Economic Crisis

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Subject: Speech given by Peter Schiff on the Economic Crisis
Hugo 6/16/2009 10:06:00 AM

I'm not sure to apologize for what to some might seem like a bombardment here recently but I felt this too good not to share for its simplicity and clarity. The below is a transcript of a speech so is read in that form. I think it is a good summary for what went wrong and why US policy choices are going to make things worse. I wish it weren't so. Why the Meltdown Should Have Surprised No One Mises Daily by Peter Schiff | Posted on 6/12/2009 12:00:00 AM [Henry Hazlitt Memorial Lecture, Austrian Scholars Conference, March 13, 2009. An MP3 audio version of this lecture is available for download. You can also watch the video. Transcript provided by Jennifer Lewis.] Introduction by Joseph Salerno It is my great and distinct pleasure to introduce the Henry Hazlitt Lecturer, Peter Schiff. Schiff, president of Euro Pacific Capital, is familiar to everyone who has watched financial coverage in the last year. He is famed for being the most vocal financial economist to have perfectly predicted the crash. He also happens to be a dedicated student of the Austrian school. He is the author of the prophetic Crash Proof and, most recently, The Little Book of Bull Moves in Bear Markets. Whenever he speaks about finance and economics, he also seeks to teach sound economic theory, writing for publications such as the New York Times and the Washington Post. Today he will speak on the relationship between theory and practice in financial markets. Peter Schiff. Peter Schiff I just looked at the topic for my speech about thirty seconds ago before I walked in the door. But apparently I'm talking about why is it that people didn't see this coming, or should people have known that this meltdown was coming. I don't know. Is there anyone in this room that was surprised by the economic meltdown? Does anybody think it's over? Anybody? Raise your hand if you think it's over. And does anybody think that the government solutions are going to work or that they're going to help? Is there anybody? One. All right. So, I guess there's really no reason for me to speak here. I don't know that I'm going to tell anybody anything they don't know. But, if you want to indulge me, I guess I could talk about it a little bit anyway. But I don't know why so few people seem to understand what was going to happen. I guess when you're living inside a bubble, it's very difficult to actually see what's going on, from your point. But I lived through two of them, because I'm a stockbroker. I lived through the NASDAQ bubble. And to me, at that point in time, it seemed pretty obvious what was going on, in 1997, '98, '99. It seemed obvious to me that these companies that people were touting couldn't possibly be worth the prices that people were paying. Yet nobody seemed to be able to figure that out back then. Everybody seemed to be living in this new era, and the Internet had captured everybody's imagination. To me, I couldn't see the difference between the Internet, really, and a catalog or a telephone. People were saying that everybody's going to buy everything on the Internet. Why? Why aren't people just shopping by telephone? Or why aren't they just buying everything in a Spiegel catalog? It didn't seem that it was any different. And I knew that the valuations they were putting on a lot of these companies, I knew they'd come out with a company, maybe it'd be Doorknobs.com, or whatever it was. And you'd say, "Well, gee, even if they sold every doorknob in the world, they couldn't possibly be worth the multiples that they're trading at." And of course they didn't even make any money selling them. And the whole idea behind so much of the e-commerce was just nonsense. The idea that it was more cost effective to individually FedEx items to people, as opposed to letting them show up and buy them and put them in their cars and leave. There's no way. There are certain items that lend themselves to online sales, but most items didn't, but it didn't matter. Everybody was going public. And people were getting rich, but none of the people were getting rich because the businesses were successful. The people were getting rich because suckers were buying their stock. The guy that started eToys lived in my apartment building in downtown Los Angeles. And I started my company, Euro Pacific Capital, about the same time he started his. He made a lot more money than I did, but he didn't make a profit. He never made a profit. But he made a lot of money because he found people to buy into his idea. And at one point, eToys was worth more than Toys "R" Us. I remember when I was trying to get clients, back when I was starting out at Euro Pacific Capital, and I was trying to get people to buy foreign stocks. And I remember one country I was active in was New Zealand, and I remember trying to convince people who owned shares of stocks, like Yahoo, why they should sell their Yahoo and buy a stock in New Zealand. I would point out that Yahoo was worth twice

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Herald12345 Thanks for this Hugo! 6/16/2009 12:42:32 PM

Herald

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Hugo video 6/16/2009 4:44:04 PM

http://blog.mises.org/archives/009620.asp

h^^p://blog.mises.org/archives/009620.asp

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Herald12345 6/16/2009 5:11:31 PM

Schiffer speech.

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EvilFishy 6/16/2009 8:41:41 PM

I agree with about 99% of what he said but I do take issue with the idea that when the dollar collapses, other equally leveraged and manipulated fiat currencies will not fall as well.

Those Chinese will not be trading in their bikes for cars because when the dollar collapses, their economy will collapse (for a whole host of reasons ranging from corruption to incompetence) and the Chinese government will be left holding mountains and mountains of devalued paper while Chinese citizens find their savings evaporate.

He lays out a great case with the past why what Obama and this Congress are doing WILL FAIL.

Interesting times ahead indeed.

Thank you for posting.

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YelliChink 6/17/2009 2:31:20 AM

I finally came to hear about Peter Schiff last month and I'm an instant fan. Thanks for posting!

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debugger 6/17/2009 3:57:48 AM

I agree with about 99% of what he said but I do take issue with the idea that when the dollar collapses, other equally leveraged and manipulated fiat currencies will not fall as well.

He lays out a great case with the past why what Obama and this Congress are doing WILL FAIL.

Interesting times ahead indeed.

Thank you for posting.

My feelings exactly. Many other similar free-market economists agree with Schiff that east Asia will do well in the next few years. In particular that guy who moved to Singapore. I think they put too much stock into their good savings rate and trade surplus and not enough in how they fail in about every other area.

Sure wish I had some real savings...

It's like knowing a tidal wave is coming when your locked in the basement.

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Hugo 6/17/2009 4:14:31 AM

I agree with about 99% of what he said but I do take issue with the idea that when the dollar collapses, other equally leveraged and manipulated fiat currencies will not fall as well.

He lays out a great case with the past why what Obama and this Congress are doing WILL FAIL.

Interesting times ahead indeed.

Thank you for posting.

I am struggling to find other currencies that are as manipulated as that of the US dollar. Sure the Chinese manipulate the value of their currency but they do so in a way that hinders private spending rather than encourages it and instead encourages productive investment - this is not good because the result is they are overly dependent on the US but it is better than a debt financed consumer society. You're right of course, if the US economy collapses then the Chinese (and everyone else) are going to be in a bad way - at least in the short term. But Schiff is right in pointing out that there is a big difference between the perception of increased wealth in the United States (and elsewhere) for example through the so called wealth effect and actual increases in wealth in places like China. Wealth is best seen as productive capacity and a country's increase in wealth is best measured as an increase in productive capacity. Towards the end of the speech he notes that we in the West are buying things on credit. We may feel wealthier if we live in a larger, debt-financed home or the value of that home has increased but we'd only genuinely be wealthier if we produced more - a more expensive house doesn't produce more (accomodation) than a less expensive home. The Chinese will still be able to produce if we stop buying their products, they'll certainly get a lower price for those products and those prices may have to drop to levels such that the chinese consumer can purchase them - but that productive capacity will still largely be in place.

It needs to be acknowledged now more than ever how fundamentally dangerous governement involvement in economic matters is to our future prosperity and place in the world. Your new president's thinking, like that of recently minted Nobel Prize winner Paul Krugman (for trade theory not monetary or fiscal policy I'll add) is so thoroughly false and premised on such completely false assumptions that policy prescriptions both under this new administration and its predecessors are actually the literal opposite to what is required in the United States. Let markets work. Your government has no business in the mortgage market nor any other market that is effectively, efficiently and profitably served by free markets - Fannie and Freddie need to be liquidated immediately, failing auto companies need to be liquidated (they wouldn't be failing in the first place if if were not for Washington), shut down banks - Mr Schiff is right we don't need Goldman Sachs - tens of thousands of the brightest minds in US employment engaged in destroying wealth in the financial services industry - we'll still have investment banks only they'll be better ones and they'll think thrice before discouting risk and engaging in absurdely speculative activity.

Close the Soviet bureaucracy that is the Federal Reserve and again allow the level of savings and the demand for investment to determine interest rates and with it the extinguishing of malinvestment of the kind we've seen these past two decades. If a cotery of Ivy League economists like Mr Krugman - none of whom predicted the crash incidentally - continue to believe in a fantasy where they can engineer a 300 million person economy to deliver a better outcome than free markets can then so be it but keep them the hell away from politicians and the real world and allow them to be admired by themselves and the declining readers of the NYT. Let them accept consulting work from North Korea, Hugo Chavez and the Kremlinites. We however can't afford their experiments, they've cost us too much already.

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Hugo Herald 6/17/2009 5:23:07 AM

Thanks for putting the clip up Herald. I'm an involuntary luddite.

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EvilFishy 6/17/2009 2:02:09 PM

Those businesses in China have been working to produce goods for Americans. Oddly, if not ironically enough, many Chinese have a stigma on Chinese made goods and they prefer American (designed if not made on US shores) goods. Look at the most popular vehicles sold in China. Look at Ford-s sales in China. This despite the fact Chinese companies do produce cars (one recently got a whopping ONE star rating in Germany a few years back on collision testing with, if memory serves, a FATAL accident rating at 30 mph).

This goes to another problem: consumers. The CCP has been trying to flip the switch and get the common Chinese worker to turn into the common American worker. That is to say, SPEND what they earn rather than save it. This is has not worked out so well as of yet. People cite the numbers and stand by impressed but 1 billion people does not mean much if they are not buying. The Chinese culture, as of now, is one of saving and thrift. Especially so when you consider how much they have to save just to send their kids to school with respect to how much they actually earn. What is worse is that all those Chinese have been saving their money and investing these last few years (those who could) and they invested in the same toxic assets that folded not long ago. Many in China have lost quite a bit.

From what I have heard, Chinese businesses on the mainland are already closing down due to the fall off in demand from foreigners. I would not doubt this seeing as the CCP has a nasty history of overextending.

Remember, a factory that does not produce goods is not a factory for long. I like to think the USA could re-start production even if it took a few years to get up and running due to the concentration of knowledge (God willing it is not atrophied). Perhaps that is just my wishful thinking.

The Chinese governments, both at the Federal and local level are too corrupt, incompetent, and too destructive for the Chinese consumer dream to come true (right now at least). The Chinese are doing some things right. They are smart enough not to tax the **** out of foreign nationals as the US Congress does six ways from Sunday.

This does not even address the banking issues in Mainland China. This is one reason the US Greenback has not collapsed already, as I see it: Rule of Law.

We may inflate the hell out of the money and rob of you two or three percent of your money (the real number may be a hell of a lot larger) but at least we have a rule of law that applies relatively consistently. Especially so when compared to certain Asian nations.

The Chinese have great potential but they have too many problems standing in their way ranging from a Fascist government (the next evolution of Communism), corruption, societal differences, pollution, demographic monkey business, etc.

As for other currencies, look at the Euro and the MASSIVE debts and spending enjoyed by the Euro zone. They have been doing this for decades and it is finally coming home to roost. This does not even include the UK which has problems all of her own (one which should make Zimbabwe blush).

I am convinced the Euro has been riding high these last few years due to currency manipulators and a few key players who had enough green backs to short the dollar, prop up the Euro, and make a ton of money in the process (George Soros comes to mind).

Regardless of all that, the Euro is just a fiat currency, same as the Dollar, and they are wearing out their printing press just as we are (if only in creative ways).

As for the USG and the Fed (I love the way you phrased that), you are spot on, as usual.

I only hope that when the entire house of cards comes down, and it will, we can start over properly. Sadly, I know from history what generally follows a massive upheaval in the financial system. Perhaps I am wrong. I am wrong on many things so hopefully I am wrong here yet again.

Time will tell.

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buzzard 6/17/2009 3:11:16 PM

He's right and he's wrong. He's another of those people who discounts the service economy, which really isn't valid. Our industrial output is higher than it ever has been before, but that is due to automation and more efficient processes. We make more using fewer people. That is simply the way of progress. Hell, he could just as soon whine about the lack of farmers, but most people are quite happy that agriculture is well automated and we don't need most of our population busting their backs out in the fields behind a plow.

Much of the service economy is the knowledge economy. They don't produce hard goods, but they produce ideas, entertainment, education, and analysis. If you assume only a hard good has value, then what the hell is that man's job? He's a bloody financial analysis. That's the poster child of the service economy.

He is correct about the bubbles and surfeit of debt, but he doesn't understand the solution any more than many other people. Not everything of value has to be a solid good. If you somehow assume that it does, we're pooched. There is very little in the way of competitive advantage that a factory in the U.S. will have over some other country with cheap labor and low regulation. Unless we leverage our comparatively high levels of education and entrepreneurship, we will get creamed even if we do clean up all the debt, and feel all the pain that is coming. He's right about having to take out licks, but he should know better about what is a possible future economy.

It's amazing how many financial analysis (and MBAs) don't know squat about actual industrial production, even the free market ones. It's as if they hearken back to the pre- welfare state days as a model, and since they were industrializing then, we have to do it now.

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