Worried about the crash?

Peter Schiff's book, Crash Proof, suggests you should be.
Crash Proof is a great book. It asks some hard questions about the nature of todayÆs global economic structure, and does so in a clever and thought-provoking way.

One of my takeaways was the treatment of savings, which gives a good indication of how Schiff thinks. His argument that æhome equity and stock market appreciation are not savingsÆ will fill people with dread, for sure, as they are coming true right now.

Schiff points out that savings used to be an indicator of a genuine buffer zone for hard times. They were the difference between earning money and spending it. So they were a function of all those unfashionable qualities (at least in recent years) such as deferred gratification, thrift and self-discipline. In short, savings had a value of blood and sweat which home equity and stocks canÆt match.

Savings also used to be cold hard cash, maybe even gold. Both are a great hedge in a downturn. Buying a house or shares these days hardly needs any capital outlay in the first place û zero down for a house and margin lending for stocks. How can that protect you in a downturn? Debt is great rocket fuel in an upturn, but can easily ruin you in a downturn.

I also liked SchiffÆs treatment of purchasing power. He asks the question about why Asian central banks keep buying the dollar, thus boosting the USÆ purchasing power. He puts it down partly to bureaucratic inertia. He agrees that China may well be keeping the currency artificially low û but he blames AmericaÆs addiction to consumption and unproductive investments, rather than the Chinese.

In fact, keeping their currency low deprives the Chinese of purchasing power. This puts them on a consumption diet, as it were, and contributes to ChinaÆs stellar economic numbers.

Schiff is old-fashioned enough to respect what the Chinese are doing: deferring gratification by working hard, saving and exporting and encouraging greedy decadence in the US. That's because the dollar still buys more than it should, thanks to Asian central bank support.

But he warns û and how right, again, given the huge Chinese investments in overseas corporate assets recently û that sooner or later, the Chinese will flex those muscles, simply because they can, and because they are afraid of a collapse in the dollar.

A more sinister explanation is that the government imbalance, currently hugely favourable to the US, will at some point tilt back towards China. In other words, the Chinese aren't destroying their environment and using slave labour for fun. At some point, they will want pay back for all those cheap goods they have provided and the credit they have extended.

Schiff doesnÆt pretend to be an expert on China, but I think he hits on a profound truth about the country û the idea that by going about their own business in their usual disciplined and frugal way they are setting the scene for a future showdown. Conforming to classical Chinese military philosophy, the battle will be won without being fought û the US will be an under-invested, consumption addict while China is building up genuine financial muscle.

The USÆ financial muscle is ultimately due to its ability to print money, since the dollar is the global reserve currency. (Incidentally, Schiff claims the US government refuses to divulge M3 figures any more.) The US is addicted to printing money, and sooner or later, that debases the currency. All empires have been corrupted by their currencies, and the US wonÆt be an exception.

In essence, Asian bankers are currently supporting US excess - which is similar to giving somebody sufficient rope to hang themselves with.

The second half of the book is less interesting to those without a portfolio of US stocks, but Schiff gives a useful practical guide to avoiding the coming crash û mainly by investing outside the US. The big question will be to what extent this provides a decent hedge, given the interlinked nature of global markets.
¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media