Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Costa Mesa, California. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
Jason Hartman: Welcome to another edition of Creating Wealth. This is Jason Hartman, your host. Great to have you here today. We’ve got kind of a special show today where we have interviewed a very renowned guest, author and commentator, Peter Schiff, of Euro Pacific Capital, and Peter is an interesting guy. I would definitely classify him as a very bearish commentator. He’s got a very negative outlook on the economy and what’s going on. There are many things where I agree with Peter completely. He’s got his fans. He’s got his detractors, and most people, when it comes to Peter Schiff, are on one side or the other. They either like him or they think he’s really, really way too doom and gloomy.
So let’s kind of get into this. Let me make a couple comments before we go to the interview. First of all, as you know, I’m a big follower of his work. I like it and agree with him on most things. However, just in general, I want to talk for a moment about gold bugs. Have you heard that expression, someone is a gold bug? He’s a gold bug. She’s a gold bug. The gold bugs, I think, those are people that generally believe buy gold. Some of them really think stock up on food; get a ranch with a weapons cache in Montana type of thing. Some of these people really believe there’s a serious economic collapse coming.
And you know what? We’re kind of experiencing a bit of an economic upheaval right now. So the question is to what degree will this all occur. None of us really know for sure. Some people think it will be really bad. Some people think we’ll be into a recovery here in the next six months to a year. Probably the reality of the situation is that it’s somewhere in between, somewhere in the middle because there are just so many unknown factors and so many intervening circumstances that you just don’t know for sure. We can’t predict the future, right?
I generally think that the gold bugs have a very good premise. I do agree with them that we have a lot of monetary inflation coming and I do agree we have some degree in some areas of asset deflation. We’ve already experienced some monetary deflation and asset deflation both, and I think we’re going to see more. But the question is there are certain areas in the economy where this is allocated, so we will see how that plays out and talk about it on future shows of course.
So I believe with the gold bugs, I believe in their premise about inflation, of course. You’ve heard me talk about it a lot. However, generally speaking, I don’t really agree with their conclusion. The reason is is that I said to someone the other day, someone who responded to one of our emails that we sent out, they said buy gold because we were talking about inflation and so forth. And I wrote them back and I said, you know, I would think gold or other precious metals to be a great investment if I could finance it for long-term financing, 30 years fixed, if the interest on that financing were tax deductible, if I could then rent that gold to somebody else, if I could have it generate a whole bunch of tax benefits. That would be phenomenal.
The problem is gold, silver, platinum, palladium, all these precious metals, none of them offer these opportunities. And you’ve heard me say before that I believe that to qualify as an investment, something has to be income producing and that’s why I like income property so much.
Now, of course, I don’t like income properties in overpriced bubble markets and I think we are going to see continuing deflation of real estate prices in many areas, the Coastal areas, the Western U.S., the Northeastern United States, and several other markets we will continue to see depreciation in real estate prices there, in real dollars and in nominal dollars, both of them. But I think there are other areas that have quite the opposite trend, as you’ve heard me talk about.
The next issue I want to just comment on in this interview coming up is the issue of immigration. Now, there is a rather small school of thought of people who believe that immigration into the United States will dramatically reduce in the future due to the U.S.’s continuing inflationary problems and other economic problems. And I agree that we may see some decline in immigration.
However, the question is not will the U.S. increase its standard of living, maintain its standard of living, or see a decline in standard of living, which, by the way, for the record, I think we are going to see a decline in the standard of living for many, many Americans. In fact, most Americans. The ones who will not suffer that decline, in my opinion, are the ones who follow my plan and so I won’t go into that again, but that’s my general comment.
So it’s a question of relativity. Look, the U.S. for a long, long time, for as far as I can see, I believe will be a far better country than Mexico in which to live. So it’s not a question of how great will the U.S. be. It’s a question of how much better will it be than its neighbor to the south and that will keep people coming in here.
It’s not a question of how much better is it than many Middle Eastern or Asian countries, where we also receive a lot of immigrants. It’s better than those. African countries, certainly the U.S. is much better than almost every country in Africa in a place to live. So it’s a question of relativity and we will see continuing population increases due to mortality rates being reduced in the U.S., life spans increasing, and continued immigration. Granted, that immigration may take a bit of a downturn, which frankly, I wouldn’t mind because I think it’s getting a little too crowded. But I think the net numbers will be increased in immigration and certainly population. The experts say in 31 years, we’re going to add another 100 million people in the U.S. and they’re taking all this into account of these immigration issues as well and birth rate issues.
By the year 2050, they say we’ll add 138 million people. Around the world, when you look at the cost of building materials, construction materials, we’re going to increase the world’s population by 2050 by 50 percent. I mean that has never happened in history, so I think we’ll see a lot more consumption.
My guest host, Dr. Mark MacVay, who kind of co-hosted the program with me today, he had asked a question about debt, using debt as a strategy to win in inflationary environments. And I just want to kind of explain that because Peter’s thinking instantly was, as sort of a Wall Street person, that debt was related to bonds. He thinks while you’re investing in debt, you’re investing in bonds. We didn’t mean it that way. We meant you’re getting a long-term, fixed-rate mortgage, so I think that will become clear as the interview unfolds and you hear that.
But of course, remember inflation destroys the value of our savings, our equity in real estate, our bonds, our stocks and thankfully, our debt. So that’s one of our great strategies is to use prudent, long-term, high quality, investment-grade, fixed-rate debt, attached to very, very cheap land that’s almost free, and a structure where you have rising prices for construction materials, both in the U.S. and around the world.
Also, Peter mentioned the issue of down payment where he thought this was a good strategy, but only if you could buy the property with nothing down or 5 percent down. Heck, if you put 20 percent down on a property, guess what? That’s one-fifth of the amount you’re going to put down on gold, silver, any precious metal, stocks, bonds, mutual funds. When you buy these things, in every normal way of buying them – I know there are a few different schemes out there, but we’re talking about the common world here – you’re putting 100 percent down on these. So again, I think even with 20 percent down, very, very good opportunity we have.
And then talking about the consumer issue, I asked Peter about the issue of China creating their own consumer base and the rest of the base creating their own consumer base, and I do think we are seeing a large growing middle class outside of the U.S. consuming resources. Good for us with our investment philosophy definitely. But when asked about why is China propping up the U.S. economy because a lot of people have said they buy our Treasury bills, they keep their currency weak intentionally – many people have criticized them for doing that – to make our dollar in relation to it more valuable and keep our dollars stronger so we have more buying power, and they increase their export business to the U.S.
The U.S. is their largest customer and while I believe that ultimately in the future, they may want to sell off those Treasury bonds, which will likely cause much higher interest rates here – so again, lock in those long-term, 30-year, fixed-rate mortgages, even if you have to put 10, 20, even 30 percent down, very, very good bet in an inflationary environment and in an environment where we see interest rates increase. So that’s good for us as well. They’re not going to walk away from their biggest customer too easily. Of course, I think gradually the shift will be toward creating their own customer base in other customers around the world.
And then the last comment I have on this interview, which is something I’ve been meaning to talk to you about more on the show, is the concept of stock investing, and when I think Wall Street really, really became a scam. A long time ago, before the mid-1980s or so, the focus with investors, who were buying stocks, was simply this. Dividends, dividends, dividends. The big blue chip stocks, a lot of people, especially older people would buy those stocks and they would love the dividends that the stocks were paying them. And the big question when investing in a stock used to be how much does it pay, meaning what is the dividend that stock pays?
And what started to happen is you started to see these CEOs, the boards of directors of these companies, the investment banks, the fund managers, basically, these crooks, whether it be legalized criminal activity of taking these huge management fees off the top. So they were skimming the cream off the investment and the shareholders really didn’t get a very good deal of what’s left over.
So what they had to do, I believe, is Wall Street had to divert the investors’ attention from how much does it pay or is there a dividend to hey, gee, the stock has a great story and it’s going to be a big run-up in stock value. And that’s when Wall Street really became a very lame deal in my eyes because we moved away from prudent investing, where an investment would produce income, cash flow, and our investments produce income. Anything that qualifies as an investment in my book has got to produce income. If it doesn’t produce income, it is purely a speculation or a gamble.
And so toward the end of the interview, we address this with Peter a little bit and again, if it doesn’t produce income, forget it. Stocks, big speculative, well, you know what’s happened to millions and millions of people who have done speculative stock investment or speculative precious metals investments. They haven’t done too well, at least historically. There are a few exceptions, but by and large, it’s not good.
Anyway, it’s my real big pleasure to bring this interview to you with Peter Schiff. We’ve got a bunch of great guests coming up on future shows, so listen in and after the interview, we will look forward to seeing you on the next edition of Creating Wealth.
It’s my pleasure to welcome Peter Schiff, the author of Crash Proof, How to Profit from the Coming Economic Collapse. Peter, welcome to the show.
Peter Schiff: Thanks for having me.
Jason Hartman: Great to have you here. A lot of stuff going on in the news, obviously. Tell us a little bit about the WaMu situation. We’ve got the biggest bank failure ever, I guess, on our hands now.
Peter Schiff: Yeah, Washington Mutual has basically collapsed. Over night, the Federal government shut it down. Their deposits and I guess a number of the assets were sold to J.P. Morgan, which I think now has become the biggest bank in the United States as a result of this acquisition. But the events that led to the failure, of course, of Washington Mutual will ultimately lead to the failure of many lending institutions throughout the country and that’s because they simply loaned too much money to Americans who can’t afford to pay the money back.
Americans have been borrowing money for decades, but in the last five or ten years, they’ve certainly raised that to an art form. But they borrowed a lot of money to buy houses, to overpay for houses that they couldn’t afford, to buy cars, to take vacations, to buy appliances, to go to college, to do all sorts of things. They can’t pay the money back and so the banks that have been lending the money naturally are going to go bankrupt because they can’t collect.
Jason Hartman: I know. What an elementary concept. It’s amazing that we didn’t see this coming. Well, a lot of people did, like you and many others, but it’s just been so totally irresponsible, it’s incredible. How many more bank failures do you think we’ll see over the next two years or so?
Peter Schiff: Oh, hundreds. I mean maybe thousands. Banks are going to fail and of course, the government guarantees all deposits and the government doesn’t have any money, so they just have a printing press. And so what people have to bear in mind is even if the FDIC insures you, that if you have money in the bank, you will get it back. What they don’t insure is what that money will buy and it’s my fear that based on the types of bailouts that are presently being discussed by Congress that when you get your money back, it will have very little and maybe no value whatsoever.
Jason Hartman: I completely agree with you. What’s going on now in the credit crisis has been called by Bill Bonner a war on bear markets, as if we’ve got the war on terror; now we’ve got the war on bear markets. What do you think about this?
Peter Schiff: Well, maybe even a war on recession. I mean the government is trying to desperately stop this recession and it’s just like King Canute trying to stop the tides. This recession is coming and there’s no way the government’s going to stop it.
Jason Hartman: Yeah, exactly. So they prop it up, they put band-aids on it, and do you think they’re making the long-term problem worse by doing that?
Peter Schiff: Of course. Of course, they’re making the long-term problem worse. And I don’t think the long-term is going to be decades or maybe even years. I mean it could just be a matter of months is all they’re buying us. But for politicians, when an election is six weeks away, if you can push off the catastrophe by a few months, it’s worth doing.
Jason Hartman: What do you think this will create, Peter, in terms of if you had to make an analogy between the coming American economy and comparing it, say, to Japan or Argentina?
Peter Schiff: Well, it’s going to be much more similar to an Argentina. Japan is a very different situation. Japan clearly had a bubble in their economy. They had a bubble in houses and they had a bubble in stocks. There’s no question about that and that bubble burst. But beneath the surface of those bubbles was a healthy economy. The Japanese were manufacturing and producing and exporting and saving, and so when the bubble burst, it created problems, but it didn’t destroy the fabric of their economy.
You contrast that to the United States. We had bigger bubbles than Japan or as big, but the foundation of our economy was not nearly as sound because beneath the surface was a lot of borrowing to consume, big trade deficits, and big current account deficit. So we were borrowing all this money to finance our bubbles, whereas the Japanese actually paid for their bubbles themselves. And so the bursting of our bubble economy is going to be far more problematic and far more painful for American citizens than the Japanese.
Now, one thing we do have in common is that Japanese politicians repeatedly interfered with the free market and so exacerbated the economic downturn in Japan. It would have been much less painful for the Japanese had the government stayed out of it and allowed the free market to function. And so we’re making those same mistakes, but we’re playing with a much bigger fire than they were.
Jason Hartman: Yeah, I agree completely. Where do these $700 billion number come from as we hear this bailout?
Peter Schiff: I think they came up with that number because it was less than a trillion. But they’re pulling these numbers out of thin air. They don’t know what it’s going to cost. And in fact, $700 billion is more likely the down payment. There are trillions and trillions of dollars of impaired illiquid assets out there on the balance sheets of banks and insurance companies all over the world, and I’m sure they would blow through that $700 billion very quickly. Remember when Paulson came to Congress initially asking for that bazooka to try to save Freddie and Fannie, and he swore that he would never use it; please, please, please just give me this power, and I’ll never have to use it. I mean he used it the first chance he got.
And so they’re going to use it. They’re saying we’re going to do this slowly in installments and it’ll be a little bit at a time. No way. They’re going to blow through the whole thing and then they’re going to be asking for more.
Jason Hartman: Boy, that’s going to make the dollar increasingly more worthless all the time. Mark, you had a question.
Mark MacVay: Yeah, Peter, Mark here. I’m a client and a big fan of your writing. We’re starting to hear more and more about the looming crisis in the derivatives market, but for the average American, they really have a poor understanding of what that entails. Can you flesh that out a little bit more for us?
Peter Schiff: Yeah, all the derivatives market has to do with the counter-party risk, the other party to a derivative. The way a lot of people could understand it, most of us have some type of insurance. We have fire insurance, we have auto insurance, and when we get into an accident, we rely on the insurance company to actually make good on the promise. We’ve been paying the premiums over the years and oh, okay, I had a car accident. I put in my claim and you expect that claim to be paid.
Well, you have a counter-party risk there because what if the insurance company doesn’t pay your claim because they’re broke? Well, this is what really derivatives are. They’re like insurance products. There’s credit default swaps or all sorts of things where somebody agrees to pay off somebody else in the event that something happens. And they collect income from that. They collect premiums.
But ultimately, what happens is you have so many different financial entities out there insuring against things that they thought would never happen, and so they didn’t accurately price the insurance and they don’t have enough money to pay all the claims they’re going to get. So it would be like in your local neighborhood, let’s say there’s somebody that is writing fire insurance and they’re charging a premium based on the fact that maybe one house out of 100 is expected to burn down in any given year. Well, let’s say all of a sudden, there’s just a raging fire and every house in the community is burned down. Well, the insurance company can’t possibly pay, so they go bankrupt and now, all of a sudden, a lot of people who thought they had homeowner’s insurance find out they had nothing because the insurance company’s gone.
Well, that’s what’s going to happen all over Wall Street. People are going to find out, oh, I had some insurance against this company going bankrupt, but then they realize that the counterparty just really can’t make good on that. You’ve got trillions and trillions of dollars of derivative instruments out there, where people assume that certain risks are covered. But the reality is they’re not because there’s not enough to pay for all the claims.
Jason Hartman: So Peter, just outline the next couple of crises that are about to come our way. I mean we’ve got the Alt A loan. We’ve sort of gone through a lot of the subprime. We’ve got the Alt A, we’ve got the Pay Option Arms, we’ve got derivatives.
Peter Schiff: Well, all these various crises have to do with Americans not being able to pay their debts, which is obvious. It’s showing up in the subprime mortgages first and it’s creeping into other types of mortgages, like the Alt A’s and now it’s going to be the Option Arms and all sorts of gimmicks where Americans bit off more than they could chew by relying on short-term financing tricks. Where for a few years they could pay interest only, they could do a negative-Am, or they could have a teaser rate, but then ultimately, the mortgages reset beyond their ability to make the payments. And that’s going to happen.
But we’re also going to see crises in the ability of Americans to pay back other types of debt, like student loans, like automobile loans, like credit card debt, because Americans are basically broke and they have so much debt. Meanwhile, more and more of their incomes are going towards basic necessities, like food and insurance and energy, and more and more Americans are actually losing their jobs. Or if they still have jobs, they’re not earning as much as they were. There are plenty of people working as realtors, for example, on commission and obviously, there commissions are a lot lower now than they used to be.
Jason Hartman: Yeah and many of them don’t earn any money. They don’t show up on unemployment.
Peter Schiff: [Inaudible] they can’t handle the payments that they thought they were going to be able to handle because they assumed that their commissions would always be going up. So as Americans start to default on their debt, you have one financial crisis after another, as the lenders, who are holding onto these instruments, have to write down their value because all these assets are held. A lot of the credit card debt, and the auto debt, it was all securitized and sold to Wall Street, just like mortgages.
Same thing with a lot of times you go into a department store and they advertise that you can buy some products and you don’t have to make any interest or any payments until January 2009. All that paper is securitized and somebody owns it on Wall Street somewhere. But all of a sudden, when the American who bought that fancy stereo equipment or that bedroom set, when January 2009 rolls around and they don’t have the money to make the payments because they were counting on extracting some home equity or they were counting on a job that they don’t have. Well, they can’t make the payments. And so all of a sudden, that paper loses value.
And then there’s a Washington Mutual or a Bear Stearns or somebody that’s got that payment on their books. And in fact, there could be some hedge fund that owns that paper, but they’ve leveraged it up ten times, so they own a million – let’s say they own $100 million of that paper with $10 million in equity. And so it’s just a chain reaction, but you have a whole economy that’s built on the ability of Americans to continue to pay their debts. Well, we know they can’t do that.
Jason Hartman: Yeah, so Peter, two quick metrics I want to get from you: Your opinion on the true unemployment rate and your opinion on the true rate of inflation.
Peter Schiff: Well, the rate of inflation is the degree to which money supply is growing or the expansion of the money supply. Now, if we measure the effects of inflation using consumer prices, which often is not a very good way to do it, but as far as the public is concerned, we like to measure the effects of inflation by its effect on the prices of things that we buy. And up until the late 1990s, the CPI was a relatively good measure. We tinkered with it a little bit in the ’80s, but we really screwed it up in the ’90s when we gave the government the ability to subjectively alter the components of the CPI.
So rather than just looking at a fixed basket like we used to, the government is able to adjust the basket. They’re able to include and exclude certain items. They’re able to heavily weight items where the price went down and underweight items where the price went up. They’re allowed to substitute one product for another based on consumer preferences and the way they might respond to changing prices. They’re also now able to adjust prices for changes in quality that they perceive, so if the price goes up, they can subjectively say the price went down because we think it’s better than the old model.
And so because of all this tinkering around, I think the index has lost all meaning and I think the reason they’re tinkering with it is because they’re trying to keep the index low. So my guess, and if you look at the work of John Williams And Shadow Government Statistics, and just anecdotally, just by looking around at the things that I buy, I would guess that the consumer prices are probably rising around 10 percent a year, maybe higher at this point. And so the government’s said numbers are a complete sham.
And I think, too, when you think about it, if inflation is really running at about 10 percent a year, then the economy is in a recession right now because the government, when they report the economy growing at 2 or 3 percent –
Jason Hartman: They don’t adjust for inflation.
Peter Schiff: — it’s because they’re using a phony GDP deflator to adjust the nominal increase in GDP for what the government claims is inflation. And to me that makes a lot more sense because it feels like a recession. The average American is convinced we’re in a recession, yet the media wants us to believe that there’s some kind of disconnect between the public and reality. But the real disconnect is between the government numbers and reality. We’re in a recession and it’s getting a lot worse.
Jason Hartman: Couldn’t agree more.
Peter Schiff: As far as unemployment, I think that’s the same thing and I think this bears to doubt that the government has constantly changed the definition of who is considered unemployed, and so as they change, they basically make it harder to qualify as unemployed. So today, a lot of people are unemployed who would have been counted as unemployed 10 or 20 years ago, but who are not counted that way today. And so that’s one of the reasons that the unemployment rate is still so low because if you’re unemployed and you’re not actively looking for a job, if you’re discouraged, then you are not considered unemployed.
Jason Hartman: Or if you’re an independent contractor.
Peter Schiff: If you lost your job as an engineer and while you’re looking for another similar job, you take a part time job at McDonalds, you’re not considered unemployed. If you happen to open up your own online store on eBay while you’re looking for a job and on your online store, you’re selling off your furniture because you’re so broke, all of a sudden you’re not unemployed. You’re an entrepreneur on eBay. You’re a small business owner.
And of course, a lot of Americans now work as independent contractors because the labor laws are so onerous in many cases, employers don’t want to hire people, so a lot of people are forced into an independent contractor status. Well, independent contractors can never be unemployed because they’re never employed.
And let’s say you’re a realtor and you used to work and used to make $50,000.00 a year and now you’re making $5,000.00 a year because you’re not selling any real estate. I mean you’re basically not employed anymore, but you’re not counted as unemployed. You’re seriously under-employed. So there’s all sorts of things in there that skew the numbers.
Jason Hartman: Yeah, I completely agree.
Peter Schiff: I would guess the unemployment rate is probably about 10 percent as well.
Jason Hartman: Good point. I completely agree with you, Peter. I’ve employed in my old real estate company many independent contractors and they don’t hit the rolls, but I know they’re not making any money. I signed their checks, so it’s definitely true. Peter, you’re bullish on commodities. What do you think will happen to the price of building materials, like lumber, glass, copper, wire, all the petroleum products that go into a house, etc?
Peter Schiff: Look, obviously, they’re going to be depressed for some time relative to other commodities. The ones that are – because home building is certainly going to slow down in the United States. There’s no question about that. But over time, home building is going to pick up dramatically outside the United States, particularly in Asia. So to the extent that those building materials are transportable, I think ultimately the prices are going to rise because of the much higher construction abroad.
But certainly, in America, we’re not going to be building homes for a couple of generations. We’ve got more homes than we know what to do with. But ultimately, I think it will mean that homes at some point will be selling for way below their replacement cost. The land will be free and the structures will be selling for less than it costs to replace them.
Jason Hartman: Yes, so how deep do you think the inventory hangover problem is?
Peter Schiff: Well, I think it’s huge. I mean I think it’s bigger than the government admits because I know for a fact that a lot of the homes that are actually on the market are not even being counted because let’s say when a home builder sells a home, and then the person who bought the home decides not to follow through and they walk away, that home is not even considered in the inventory, but it’s there.
I also think there’s a lot of people who would like to have their house on the market, but they’re not on the market because they know they won’t sell. But there’s a lot of people who want to sell their homes, but they just don’t want to list them because they don’t want them to sit on the market and have the stigma, so they’re waiting for an upturn in the market and then they want to list their prices. So I think there’s a lot of hidden inventory that will hit the market.
And I also think that there’s going to be a lot of properties coming on the market ultimately because I think there’s going to be in this recession, I think, a lot of people are going to – a lot of households are going to be destroyed. I think you have a lot of homes right now occupied by single people in their 20’s. I think that’s going to change. I think more people are going to move in with roommates. I think more children will move back in with their parents. I think more elderly parents will move back in with their grown children. And so I think the supply of housing for sale and for rent is going to continue to increase, depressing prices.
Jason Hartman: So just out of curiosity, when you look at that number, the population numbers coming at housing are pretty darn good. I mean 31 years, another 100 million people. It’s growing fast, but I know we’ve got a huge inventory out there.
Peter Schiff: How do we know that the immigration trends aren’t going to reverse? How do we know that we aren’t going to raise taxes so onerously to try to – you know, that we’re going to have people fleeing the country? So I would just assume a lot of immigrants are going to be coming here. They might be going the other way.
Jason Hartman: Yeah, that’s an interesting point and a lot of people have talked about that. My theory is, though, that the relative difference is really the issue. This will still be a better place to live than Mexico for a long time coming.
Peter Schiff: Well, we don’t know that. We don’t know what kind of laws are coming down the pipe, what kind of draconian, martial law. I mean who knows? I have a feeling that what’s going to happen here is that as they continue to create money to try to stop this recession from happening, they’re going to let loose massive inflation. Ultimately, I think the government is going to impose price controls on food products, price controls on energy, and it’s not going to be a very fun place to live when you have to wait in a long line to try to buy a loaf of bread.
Mark MacVay: Peter, speaking of the draconian laws, in 1933, the government outlawed the private ownership of gold. Recently, albeit temporarily, outlawed short selling. How far away or how seriously should we take the potential confiscation of gold in the United States?
Peter Schiff: Oh, very seriously. I wouldn’t put anything past them. Look, they just bought up AIG. They can buy anything. That’s why with my clients at Euro Pacific Capital, not only do I recommend that they buy gold, but I buy it for them and have it stored in Australia through this Perth Mint program because I think it’s not just important to have gold, but that you have it out of the country. I was just watching on CNBC, Mark Faber today saying the same thing, that you’ve got to own your gold, but you have to own it offshore because you have to own it in a place where the U.S. government can’t seize it.
Mark MacVay: Shorting stocks has been temporarily outlawed, like we just mentioned. What do you think in addition to acquiring certain assets around the globe, what do you think of the value of holding long-term, fixed-rate debt in a soon-to-be hyperinflationary environment?
Peter Schiff: Well, you’d have to be a complete moron to have any U.S. government bonds, any bonds denominated in U.S. dollars, whether issued by the U.S. government or by state municipalities or corporations. But that’s going to be wiped out. I mean that’s just – all these bailouts, everybody in Congress, they’re all talking about the taxpayer, the taxpayer, let’s protect the taxpayer. It’s not the taxpayer. We’re not going to pay for this through our taxes. Nobody is talking about raising taxes. This is going to affect us as wage earners. It’s going to affect us as savers and investors because the value of what we’re earning and the value of what we’re saving is going to be the base to fund all these bailouts.
And so the people who are going to lose the most are the people who have the most amount of savings and investments, and these are the people who are buying bonds. The elderly people on fixed incomes, they’re the ones that need to take action. I mean that’s what my firm, Euro Pacific Capital, is all about. It’s trying to get those individuals to understand that their savings are in jeopardy, that their investments are at risk right now, if they’re denominated in U.S. currency, especially if they’re in bonds. And they need to take action now to change the portfolio so that the portfolio is not dollars, so if you own bonds, you own obligations of Singapore or Switzerland. Not the United States. You get them in currencies that aren’t being debased.
Jason Hartman: Yeah, good point. So Peter, we were taking that, though – you’re talking the question of being the bondholder, which we definitely think bonds are a terrible deal and we definitely see the devaluation of the dollar a lot further. What we’re talking about is when you buy properties on really cheap land, where like you said, the land is free, you buy at or below the cost of construction, and you turn around and you lock up a long-term, 30-year, fixed-rate mortgage. I mean in a hyperinflationary environment –
Peter Schiff: Yeah, in a hyperinflationary environment, that strategy will work. Now, if you have to put a down payment, then the bigger the down payment, the more I would question it because potentially, if you have to put 20 percent down, if you just simply put that 20 percent in gold, the gold would probably go up enough so that in a few years, you could buy that property without a mortgage anyway. But if you can do it with nothing down or very, very little down, you can lock up money for 30 years at 6 percent, and you actually can buy a place that’s not in a bubble market, then yeah, it’s probably not a bad thing to do because you’ll end up owing the money for free.
But where you’re making your money is not as a property holder. You’re making your money as a debtor, having your debts wiped out.
Jason Hartman: Couldn’t agree more.
Peter Schiff: The value of U.S. property is going to go down in real terms, so I certainly wouldn’t buy any property for cash right now. But if I could leverage it up good – I would still avoid markets like California, which have a long way to go, but maybe if you’re in Des Moines, Iowa, or some little town in North Dakota where real estate prices are reasonable, if you could buy a property and lock up a $500.00 mortgage payment, then in five or ten years, your mortgage payment could be the same as what it would cost you for a tank of gas.
Jason Hartman: Yeah, what do you think about as we see the dollar collapse, what do you think about the possible introduction of a new currency like the amero?
Peter Schiff: I don’t think we’re going to be able to pull it off. The amero, which would include the peso and the Canadian dollar, merge into our collapsed currency. But I don’t know that we’re going to have a new currency. I mean we might continue to have the dollar. It’s just that the dollar will be at a much lower exchange rate. The only thing that would change would be if we were to back the dollar by gold again and that would be a positive change. If we just say okay, we used to use the dollar and now we’re going to use the dollar II or whatever we’re going to call it, I mean if it’s basically backed by nothing, it’s no different than the dollar that they’re replacing.
Mark MacVay: Peter, let me ask you. In some of your writings, you talked about the global economy eventually decoupling from the United States, but given all these credit derivatives and given how everything seems to be cross-collateralized throughout the globe, if and when, how do we see that happening because it seems like the United States –
Peter Schiff: I’m not talking about a financial decoupling yet. Obviously, the creditors are suffering when the debtors can’t pay and that’s what we’re seeing. The rest of the world is hurting because we can’t pay back the money we borrowed. This is just the blowing up of the vendor-financing scheme. The world is vendor financed. They’ve loaned us money to buy their stuff. We can’t pay them back and now they’re taking a hit.
But ultimately, the world will be able to decouple and the global economy will be fine. The global economy is not suffering because Americans can’t spend anymore. That’s not the problem. The problem is we can’t pay them back the money we borrowed. But going forward, the world is fine without Americans buying stuff because the rest of the world has plenty of consumers and as long as the dollar sinks, other currencies will go up and our purchasing power will simply be transferred abroad.
Jason Hartman: Any thoughts on why the Chinese are so willing to hold our bonds? Why are they doing that? It seems like they’re propping up our currency, but what are they getting out of it?
Peter Schiff: Well, people do foolish things. They’re doing it out of desperation, out of hope because they already own so many. They’re trying to preserve the status quo. I mean we are the world’s biggest customer. It’s like if you ran a small store and you had one customer that was buying such a high percentage of your goods and they were in trouble, you might feel compelled to help them out because you want to keep the business. But once you realize that no matter how much you help them, they’re going to go broke anyway, you might have to decide to cut your losses. And ultimately, the world is going to realize that the cost of propping up America far exceeds the cost of letting us collapse.
Jason Hartman: So what do you think about the thought of Chinese creating their own consumer class and not needing the American customers.
Peter Schiff: They don’t have to create it. It exists. It’s created by itself. You have a billion Chinese who are working hard and producing, which means they can consume. The reason they’re not consuming is because the Chinese government is stealing their purchasing power and giving it to us. They’re suppressing the exchange rate of the R&B to prop up the buying power of the dollar so that we end up outbidding Chinese citizens for the very products that they would love to be able to consume. And if the Chinese government stepped out of the way, then the R&B would rise and all of a sudden, the Chinese would be buying stuff and we’d be left out in the cold.
Jason Hartman: So do you think they’ll do that at some point? And if so, when?
Peter Schiff: Eventually, they will, yeah. It’s going to happen soon, whether it’s in six weeks or six months or six years. I don’t know, but it’s coming. This is not something that our grandchildren are going to deal with. This is something that we’re going to deal with.
Jason Hartman: Our current situation is pretty scary, Peter. What is your advice for protecting wealth and profiting in the future?
Peter Schiff: The advice is re-diversify their investments outside the U.S. dollars. Diversified portfolios of dividend-paying stocks, precious metals, foreign bonds to preserve wealth, in the event that I’m right and the dollar does collapse. In the event that I’m wrong, worst-case scenario, you’ve got a portfolio of foreign stocks that pay good dividends. So I think it’s a very prudent approach. You can hope for the best, but plan for the worst and that’s basically what we’re doing. The important thing is to get out of U.S. assets while you can, get rid of the dollar before it loses much more of its value, and accumulate assets that are going to hold their value, and that are going to provide you with income in currencies that are not the dollar.
Jason Hartman: Excellent. Well, Peter Schiff, thank you so much for joining us. Any final words in closing?
Peter Schiff: Just anybody tuned in, make sure to go to my website. It’s www.europac.net.
Jason Hartman: Good stuff. Well, Peter Schiff, thanks for being with us. Good to have you on the show. Thanks.
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Duration: 45 minutes