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Dusk In America?

Peter Schiff, owner of Euro Pacific Capital, a broker/dealer based in Darien, Conn., has been called and essentially likened to a traitor. His treason?

Peter Schiff, owner of Euro Pacific Capital, a broker/dealer based in Darien, Conn., has been called “un-American,” and essentially likened to a traitor. His treason? Schiff believes that the very foundations of the American economy are rotten and unhealthy — that a painful recession looms over the not-so-distant horizon. The dollar, he predicts, is poised to continue its free fall — even though the Greenback is already at 26-year lows against the pound sterling and near record lows against the euro.

Schiff's answer? Get away from dollar assets and take your clients' money overseas. Specifically, put it in high-yielding, nondollar assets in Australia, Canada, Europe, Scandinavia, Japan, New Zealand, Singapore and China. He likes commodities plays, such as gold and oil, emerging markets and even real estate and bonds. But he just doesn't like them in the U.S. — or held in dollars. In his new book, Crash Proof: How To Profit From The Coming Economic Collapse (Wiley; $27.95), Schiff says, “The economy of the United States, long the world's dominant creditor, now the world's largest debtor, is fighting a losing battle against trade and financial imbalances that are growing daily and are caused by dislocations too fundamental to reverse.” In short, a painful correction is on its way, one that will make Americans poorer.

Schiff is the owner of a b/d, employing about 15 reps who help him run 7,000 accounts worth about $1 billion in assets. He has offices in Darien, Phoenix and Newport Beach, Calif. Isn't it odd to run a b/d and be so negative about the U.S. economy? Does he advocate shorting the U.S.? “No,” he says. “Because there's a bull market somewhere.” Neither does he tell clients to go only to cash. “All I tell them is, invest abroad instead. I say, ‘Look. The U.S. is in trouble. The dollar is going to lose value. The opportunities are better abroad. The valuations are better, the growth's better. Just invest abroad.’” Oh, and if you agree with him, give him a call. He's looking for more reps to spread the word.

Registered Rep.: In your book you say there is an impending economic crisis that is going to wreak havoc on the United States. What's wrong with the U.S. economy?

PETER SCHIFF: The biggest flaw with our economy is that we're not a viable economy anymore. We don't save and we don't produce anything. What we're doing is we are living off of the charity of the rest of the world by selling them government bonds.

RR: Our economy isn't viable? Yet, you're bullish on Europe. They have socialist economies that are, except for perhaps Germany, slow-growing and bogged down with high unemployment.

SCHIFF: Most countries have the problem of government being too big and too expensive. And the result of having too much government is that your standard of living is lower than it otherwise would have been with less government and fewer regulatory burdens. All that socialism has, in fact, diminished their standard of living. Okay, fine. But Europe, as an economic union, still has a viable economic system. Sure, the people of Europe would be more prosperous if they had less government, if they had less regulation and fewer taxes and all that. The average European's lot in life would be improved. The Europeans are, nevertheless, living within their means. And their system is still viable. We're not. That's the problem.

RR: Wait, Europeans have a bloated public sector, they are welfare states and …

SCHIFF: But they're still saving money. European economies still have current account surpluses, and they have a trade surplus, meaning that whatever goods they're importing from the rest of the world, they're paying for them. They're exporting enough to the rest of the world to cover the cost of what they import. And they're still a net creditor. They're earning income on foreign investments; they're not paying interest on foreign liabilities. So their economy is still viable. They don't depend on the rest of the world for financing. They're fine; they could be better off if they didn't have all this government, no question about it.

Then there is Asia. The cost of government is way lower in Asia than it is here, pretty much hands down. So there's a lot more economic freedom, in general, in Asia than there is in America or Europe.

RR: How did this happen? How did the United States, a country synonymous with free enterprise and hard-working people, get into this mess?

SCHIFF: Our economy has evolved in a way that no other economy in the free market was able to evolve, because we were the only country that was issuing the world's reserve currency, the dollar that everybody just had confidence in no matter what. Whereas a normal country would have to export products to import products, we've been able to print money and import products. So we can import the services and goods produced by other people, but not export goods that we produce ourselves. So that means the world is willing to accept our IOUs in exchange for the stuff that they make.

RR: Why does a country have to be manufacturing-based to be viable? That seems to be what you're saying.

SCHIFF: It doesn't have to be manufacturing-based. It can be information-based or whatever. It just has to produce enough of that product to pay for all the products that it imports — it can be an album or a DVD, whatever. We have to sell something in return. Right now we are giving nothing.

RR: How are we doing that?

SCHIFF: Because we have a trade deficit of about $60 billion a month.

RR: There are some smart guys, such as Greenspan, who aren't worried about trade deficits, saying that a weaker dollar will cause our exports to increase.

SCHIFF: The people who aren't worried about it are wrong. These are the same people who weren't worried about the lack of earnings in the dot-com stocks in 1999. Or the same people who weren't worried about adjustable rate mortgages. They weren't worried about what was going to happen when the payments were reset. There are a lot of things that people didn't worry about that they should have worried about. The trade deficit is, in fact, something that we should be worried about. And we're not. I mean, it's a huge, huge problem.

RR: So what do you do about it?

SCHIFF: We have to build a viable economy again, which means Americans have to consume a lot less and produce a lot more. It means we have to borrow a lot less and save a lot more. We can't get from where we are now to where we need to be without a huge recession; it's just not even possible.

RR: What will be the catalyst, the trigger?

SCHIFF: I don't know. But it should happen pretty soon. I think that you can already see that it is happening. For the last six or seven years the out-performance of foreign assets versus American assets is so staggering that it's almost unbelievable. It's unprecedented in history that people are doing so much better investing abroad than they are investing here.

Just in the last four years I think the European markets are up about 160 percent [in dollar terms]. And they're now more valuable than the U.S. market for the first time since before World War I. So for 90 years our market has always been worth more than all the European markets combined. Now that's not the case. And I think three years from now the European markets could be one-and-a-half to two times bigger than our market. And that's just Europe. Wait until you see what China does. I mean, I don't think it'll be that much longer before the Chinese market alone is worth more than the United States. So we're going to be dramatically shrinking.

I think as more and more people around the world are waking up to that, they won't want to take that big $60 billion a month in IOUs that we give them and funnel it back into our market. It doesn't make any sense when every other market in the world is running circles around us.

RR: So, we're in deep trouble in the U.S.

SCHIFF: What's going to happen is you're going to see a big drop in the American standard of living, a rise in foreign living standards and we're going to start consuming a lot less as a nation. Americans are going to be substantially poorer, and many, many more Americans are going to go without things. We're not going to be going to the malls and shopping. I mean, there's going to be a lot of people handing down things. A lot more people are gong to learn how to sew. People are going to get by. People are going to have cars that are ten and fifteen years old, they're not going to be driving a new car every few years. And if they drive a car, it will be much more fuel-efficient. People are not going to be heating every room in their house.

RR: What about real estate?

SCHIFF: Real estate is going to lose a lot of value. It's going to lose a lot of value, certainly in real terms relative to the price of coal or relative to foreign currencies or a bushel of wheat or a barrel of oil. Real estate is going to get killed. Even in nominal terms, real-estate prices might actually decline sharply.

RR: As for China, it has an authoritarian government, does it not? How can that be good for business?

SCHIFF: Look, no governments are choir boys. Neither is the American government. The American government is one of the first ones to try to slap a windfall profit tax on a company that starts making money like an oil company. That's confiscation. And we have high taxes. Our taxes are already higher on a corporate level than they are in most of the foreign countries in which we invest. So our government isn't very friendly to capital, either.

RR: So, you sound like an ideologue.

SCHIFF: No. It's economics. If a potential client is too brainwashed to understand there's a problem here, if he thinks everything's okay, if he thinks the U.S. economy is the greatest in the world and we're the rulers and we rule the world, I don't even want to talk to him. Because — and I tell our brokers — there's no point in having political arguments, because we're not going to make any money. You know? It's like arguing with somebody about religion, or politics. You're not going to win. You're just going to have an argument.

So what I'm trying to do is, I'm trying to reach out, in the broadest way that I can — through television, through radio, through print media, through my book, through the Internet — and I am trying to explain what the problems are in the U.S. and why there are problems, and why this is significant and why it's particularly significant with financial assets. And then I want those people to seek me out, the people who understand that.

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