Review: The Real Crash, by Peter D. Schiff - The Objective Standard

The Real Crash: America’s Coming Bankruptcy, by Peter D. Schiff. New York: St. Martin’s Press, 2012. 352 pp. $25.99 (hardcover).


From 2006 to 2007, Peter Schiff, CEO of Euro Pacific Capital, was one of few people warning that the U.S. economy was fundamentally unsound and that real estate was grossly overpriced. In his first book, <e,>Crash Proof: How to Profit From the Coming Economic Collapse (2007), he predicted that the economy, the housing market, and the stock market would fall apart. He also voiced these predictions on several cable news shows, yet few people heeded his warnings. Some hosts and other guests even mocked and ridiculed him.

But Schiff was right.

In his recent book, The Real Crash: America’s Coming Bankruptcy—How to Save Yourself and Your Country, Schiff says that the worst is yet to come and that the 2008–2009 economic crisis was merely a “tremor before the earthquake.”

Schiff argues that the main culprit of our economic instability is America’s central bank: the Federal Reserve. Through its control of the money supply and the effect this has on interest rates, the Fed artificially inflates the prices of various asset classes, creating so-called “bubbles,” and when those prices inevitably collapse, the Fed then inflates the prices of other asset classes. “Throughout the 1990s,” Schiff observes, “we had the stock bubble and the dot-com bubble. The Fed replaced that with the housing bubble and the credit bubble. Now, the Fed and the administration are replacing those bubbles with the government bubble” (p. 20). By “government bubble,” Schiff is referring to the U.S. dollar and Treasury bonds.

When asset prices collapse and recessions ensue, Schiff notes, the Fed—via bailouts and low interest rates—props up insolvent banks and other companies (while also helping to finance government debt). It has taken these actions allegedly to minimize the short-term pain of recessions, but in doing so, the Fed has prevented the economy from correcting itself, making it increasingly unsound. “If you keep replacing one bubble with another, you eventually run out of suds. The government bubble is the final bubble” (p. 23). If the Fed keeps interest rates artificially low and if the government keeps running massive budget deficits, the day will come, Schiff argues, “when the rest of the world stops trusting America’s currency and our credit. Then we’ll get the real crash” (p. 1).

In his introduction to the book, Schiff explains that he is taking a different approach here than he took in his previous books: “[T]his time I have decided that rather than simply predicting doom, I would lay out a comprehensive set of solutions. That’s why I wrote this book” (p. 2).

After diagnosing our economic problems, Schiff explains how we can fix them. He covers many issues, from creating jobs to fixing the financial industry, from reforming the tax code to establishing sound money, from dealing with entitlements to reducing the costs of health care and higher education. In each case, Schiff points out what the government has done to cause the problems and then shows how things would improve by reducing or eliminating government interference—that is, by letting the free market work. In his chapter on the financial industry, for example, Schiff tells us about his own experience dealing with the government while running his investment company. It is mainly a story of how government regulators have stifled his ability to expand and to create jobs. He does not hide his frustration:

[E]ven though I own my firm, it often feels like I’m simply managing it for the government. Apart from the fact that taxes result in the government earning a lot more from my business than I do, regulators basically call the shots on how my business is run. Why do I need permission to hire people? Why do I need permission to publish my research? (p. 89)

Schiff does not claim that his free-market prescriptions will avert the coming crash. Given the massive private debt spurred by artificially low interest rates and given the government’s tens of trillions of dollars of debt—including its unfunded liabilities that will never be paid—another crash is inevitable (though Schiff does not specify a time frame as to when it will happen). But he believes his prescriptions, if adopted, would reduce the severity of the crash while helping the economy to recover faster.

Schiff argues that the Fed has only two basic options. Either one will be painful, but one will be more painful than the other. Option one: The Fed tightens the money supply and lets interest rates spike, leading to a severe contraction. This, Schiff says, will force the federal government to admit it is bankrupt, force it to dramatically cut its spending, and force it to restructure its debts. Unfortunately, this is the less painful option.

Option two: The Fed continues with its current policy—inflating the money supply via “quantitative easing” while holding down interest rates. When this inflationary policy eventually causes prices to start rising at a rapid clip, creditors will force interest rates higher in order to compensate for their loss of purchasing power. At that point, for the Fed to combat market forces and continue to hold down interest rates, it will have to pump money into the economy ever more aggressively, which, potentially, will wipe out the dollar through hyperinflation—the most economically destructive scenario of all.

Pain will come, Schiff argues, “one way or another, either through contraction or through hyperinflation. The difference is that tightening money supply and rising interest rates will be productive pain—like medicine—while hyperinflation will be destructive pain” (p. 26).

The book contains some inconsistencies. For instance, Schiff says, “in theory the Fed was a good idea. It’s just that in practice it did not work, because politicians quickly abused it” (p. 123). Yet on the previous page, he says, “I think the nation would be better off if the Fed had never been created” (p. 122). Given his intense criticism of the Fed, his advocacy of a gold standard, and his vast knowledge of monetary economics, Schiff’s belief that “in theory the Fed was a good idea” is baffling.

Such weaknesses, however, do not detract much from the book’s strengths. Schiff accurately identifies our current economic problems and what caused them. He also makes a persuasive case that another, even worse, crash is coming. Time will tell whether his prediction proves correct. But crash or no crash, Schiff shows that repealing most government interventions—and thus restoring freer markets—is the best way to revive the economy.

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