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Book Review: The Crisis Ahead

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The Real Crash: America’s Coming Bankruptcy — How to Save Yourself and Your Country by Peter D. Schiff (New York: St. Martin’s Press, 2012), 352 pages.

As  I write this review, the presidential campaign of 2012 has recently (and mercifully!) come to its end. Neither major-party candidate ever addressed the most salient issue facing the nation, namely, the fact that the federal government’s obligations vastly exceed its intake of tax money. The government must borrow enormous amounts to cover its trillion-dollar-plus annual deficits, and those deficits are sure to widen as payments for Social Security, Medicare, and other entitlements keep growing.

The nation plunges further into debt every minute, yet neither Barack Obama nor Mitt Romney uttered anything but platitudes about the looming financial cataclysm. Obama reassured voters that America could fix its fiscal problems by “asking the wealthiest Americans to pay a little more.” Romney referred to a vague plan to balance the federal budget — in 2022. Neither was willing to admit that the government simply can’t pay all that it has promised. Instead, they led people to believe that America’s fiscal problems are manageable.

Once you read Peter Schiff’s new book, however, you will know that America’s fiscal problems are not manageable and can only lead, sooner or later, to default. Owing to decades of profligacy, the government’s financial situation is like that of the Titanic after hitting the iceberg. It is just a matter of time before the ship sinks. Saving it is no longer possible. Schiff argues that “the day will come when the rest of the world stops trusting America’s currency and our credit. Then we’ll get the real crash.”

Predictions of financial doom are fairly common, but Peter Schiff is a writer worth heeding. He famously predicted the housing-market crash when almost everyone else was certain that home prices would keep rising. He was able to make that prediction because he understands the crucial insight of Austrian economics that central-bank manipulation to artificially depress interest rates inevitably leads to widespread misallocation of resources. Low interest rates combined with a political obsession to increase home ownership led to a massive housing bubble that burst in 2007 and whose effects we still feel.

The housing bubble, however, was just the most visible manifestation of the federal government’s baneful impact on the nation. The Real Crash explains that federal policies continue to divert resources away from market-directed production and into politically directed follies that impede market production. The Federal Reserve (one of several villains in the book) has been keeping interest rates artificially low, thus enabling the politicians to continue their spending spree. But that policy has a heavy cost: Americans are saving very little. Why would they, with such meager rewards that don’t offset the loss of purchasing power? Schiff’s point is that while the cost of government expands, people are accumulating very little capital, the source of economic growth. Thus the federal government’s wasteful (and mostly unconstitutional) ways guarantee that Americans will be poorer in the future.

Schiff confronts his intellectual adversaries throughout the book and blasts the Keynesians who say that prosperity stems from spending and is reduced by saving. It is the other way around, he writes. “A society that does not save cannot grow. It can fake it for a while, living off foreign savings and a printing press, but such ‘growth’ is unsustainable.”

The government owes so much that it can’t possibly repay, and its creditors will soon realize that. They will decide either that the risks of lending to Uncle Sam are unacceptable unless they get substantially higher rates, or that they have better things to do with their money than to lend it to the U.S. government. Either way, the loss of the river of cheap credit U.S. politicians have come to depend on will turn America’s budgetary problem into a full-blown crisis. Apropos of his earlier call on the housing-market crash, Schiff writes that it is no more possible for interest rates to remain depressed forever than it was for housing prices to escalate forever. Once interest rates rise to normal levels, Schiff notes, the government will have to dedicate so much of its tax revenue to debt service that very little will be left for all the rest of its functions. The Federal Reserve could buy Treasury debt for a while, but that would ultimately lead to runaway inflation.

The impending crash will force hard decisions on politicians. Do they pay the creditors or do they pay Americans who depend on entitlements? Schiff doesn’t think that will be hard. Politicians will choose the latter. That will mean default, and he argues that the sooner they announce that, the better off Americans will be. It will be a good thing for America when people stop lending to the government because the politicians waste the money and thus leave the people worse off. If lenders said, “No more,” to the government, that would be the equivalent of taking the booze away from a drunkard.

But wouldn’t it be immoral for the government to default on its debt? Schiff vigorously replies, “The immoral thing was making the promises Congress has made — saddling future generations with debt for unsustainable programs. Don’t feel bad for our foreign creditors taking a haircut. They had access to our budgets. They could read my books. They knew they were lending to a financially crippled nation.”

 

Recommendations

Like a wastrel who has blown through his wealth and needs to begin anew, America must stop borrowing, put its economic and financial blunders behind it, and make a fresh start. Much of the book is devoted to Schiff’s prescriptions for an economically healthy nation. His recommendations include all the libertarian favorites, and he gives us reason for optimism that in the postcrash environment at least some of them might be feasible.

Return to gold as money. Schiff explains clearly why gold became the monetary standard and why it is preferable to any monetary system that government can manipulate.

Abolish the entitlement programs. Social Security, Medicare, and other entitlement programs were bad ideas when they were instituted because they substituted dependence on government for personal responsibility and market initiatives to solve people’s needs. The crash will create an opportunity to replace federal handouts with individual responsibility.

Reform the tax code. The income tax was one of America’s greatest national blunders, Schiff maintains. It provides federal politicians with a steady and increasing flow of money for them to waste on programs that make them popular at the next election, but undermine both liberty and prosperity. He advocates a low consumption-oriented tax system.

Deregulation. Leftists’ main line of defense following the bursting of the housing bubble was that all the bad that happened to the economy from 2007 on was due to deregulation under the Bush administration. Schiff is especially ferocious in attacking that notion because he runs an investment firm and knows firsthand that government regulation over his industry increased dramatically during the Bush years. He wants deregulation across the board.

No more bailouts. Government has no business subsidizing businesses in any way, including bailing them out when they lose money. Schiff excoriates the “too big to fail” mentality that politicians of both parties have fostered and he would like to see a complete separation of business and state.

End military adventurism abroad. U.S. budget deficits are heightened greatly, thanks to its penchant for military adventurism. A large part of getting its fiscal house in order must be the elimination of needless (and often counterproductive) military spending.

Leave education to the free market. There is no logical reason or constitutional justification for federal involvement in education at any level. Unfortunately, federal spending and control over education have been growing rapidly. Schiff would put an end to it. I was particularly glad to read his assessment of the federal government’s impact on my own field of higher education.

For readers who are convinced that the U.S. government has in fact gone beyond the point of no return on its finances, Schiff provides a wealth of investment advice. He writes, “You want to be investing today where people are saving and producing, so that tomorrow, when they’re ready to spend, you’re getting some of that money,” and suggests investing in countries that still allow the market to work to a large degree (unlike the United States). Short the U.S. dollar, he advises, by putting money into the Australian dollar, for instance.

The Real Crash, to use an overworked phrase, is a must-read. Americans desperately need to understand that the relentless expansion of the federal government has gravely weakened the nation’s economy and will soon result in a financial crash. When that crash comes, it will be crucial that the people know its cause. Advocates of the mega-state will work incessantly to deceive them into believing that the crash should be blamed on greedy businessmen, speculators, foreigners, global warming, and so on — anything other than the politicians who have wrecked America’s economy and debased its money. When the country reaches that point, Schiff’s book will be worth its weight in gold as a counterargument to the statist scapegoating.

Get and read the book now, but hold on to your copy for use when the crash hits.

This article was originally published in the March 20103 edition of Future of Freedom.

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    George C. Leef is the research director of the John W. Pope Center for Higher Education Policy in Raleigh, North Carolina. He was previously the president of Patrick Henry Associates, East Lansing, Michigan, an adjunct professor of law and economics, Northwood University, and a scholar with the Mackinac Center for Public Policy.