ffirs.indd iii 9/26/11 8:15:31 AM CRASH PROOF 2.0 How to Profi t from the Economic Collapse

PETER D. SCHIFF with John Downes

A Lynn Sonberg Book

John & Sons, Inc.

ffirs.indd i 9/26/11 8:15:30 AM Copyright © 2009, 2012 by Peter D. Schiff and Lynn Sonberg Associates. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, . Published simultaneously in Canada. The fi rst edition of this book, Crash Proof: How to Profi t from the Coming Economic Collapse, was published in 2007. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748- 6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. ISBN 978-0-470-47453-2 (cloth); ISBN 978-1-118-15200-3 (pbk); ISBN 978-0-470-55056-4 (ebk); ISBN 978-0-470-55057-1 (ebk); ISBN 978-0-470-55058-8 (ebk) Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

ffirs.indd ii 9/26/11 8:15:30 AM To my father, , whose infl uence and guidance concerning basic economic principles enabled me to see clearly what others could not; to my son Spencer, in whom I hope to instill a similar vision; and to his and future generations of Americans, who through hard work and sacrifi ce might one day restore this nation to her former glory

ffirs.indd iii 9/26/11 8:15:31 AM Disclosure

Data from various sources was used in the preparation of this book. The infor- mation is believed to be reliable, accurate and appropriate but it is not guaran- teed in any way. The forecasts and strategies contained herein are statements of opinion, and therefore may prove to be inaccurate. They are in fact the author’s own opinions, and payment was not received in any form that infl uenced his opinions. Peter Schiff and the employees of Euro Pacifi c Capital implement many of the strategies described. This book contains the names of some com- panies used as examples of the strategies described, as well as a mutual fund that can be sold only by prospectus; but none can be deemed recommendations to the book’s readers. These strategies will be inappropriate for some investors, and we urge you to speak with a fi nancial professional and carefully review any pertinent disclosures before implementing any investment strategy. In addition to being the President, Peter Schiff is also a registered repre- sentative and owner of Euro Pacifi c Capital, Inc (Euro Pacifi c). Euro Pacifi c is a FINRA registered Broker-Dealer and a member of the SIPC. This book has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation to buy or sell, any security or instrument, or to participate in any particular trading strategy. Investment strategies described in this book may ultimately lose value even if the opinions and forecasts presented prove to be accurate. All investments involve varying amounts of risk, and their val- ues will fl uctuate. Investments may increase or decrease in value, and inves- tors may lose money.

ffirs.indd iv 9/26/11 8:15:31 AM Contents

Author’s Note, Crash Proof 2.0 vii Preface xv Introduction: America.com: The Delusion of Real Wealth xxi

1 The Slippery Slope: Consumers, Not Producers 1

2 What Uncle Sam, the Mass Media, and Wall Street Don’t Want You to Know 33

3 For a Few Dollars More: Our Declining Currency 63

4 Infl ation Nation: The Fallacy 91

5 My Kingdom for a Buyer: Stock Market Chaos 129

6 They Burst Bubbles, Don’t They?: The Coming Real Estate Debacle 159

7 Come On In, the Water’s Fine: Our Consumer Debt Problem 199

8 How to Survive and Thrive, Step 1: Rethinking Your Stock Portfolio 237

v

ftoc.indd v 9/23/11 9:51:24 AM vi CONTENTS

9 How to Survive and Thrive, Step 2: Gold Rush— Be the First Person on Your Block to Stake a Claim 283

10 How to Survive and Thrive, Step 3: Stay Liquid 317

Epilogue 339 Books for Further Reading 345 Glossary 349 Index 353

ftoc.indd vi 9/23/11 9:51:24 AM Author’s Note, Crash Proof 2.0

ver since the fi rst version of Crash Proof was published in Feb- Eruary of 2007 I have been credited as one of the few widely visible analysts to have clearly foreseen the great unraveling of the U.S. economy. And while I’m not known primarily for mod- esty, I have to admit that the most dire predictions I made in that fi rst edition have yet to happen. However my convictions have never been stronger that real economic catastrophe is an event of the future, not of the past. I was certainly not the only person to have warned about a general economic slowdown after years of record “growth” in the middle years of the George Bush presidency. But I was the accuracy of my predictions concerning the real estate and credit busts put me on a very different level. I knew that homes had become massively overvalued, and as a result I saw a string of events that would bring the curtain down on an era of easy wealth and stunning blindness. To a chorus of laughter and derision I predicted how a 30 to 50 percent decline in national real estate prices would spark a wave of foreclosures, a collapse of the mortgage market, the demise and nationalization of Fannie and Freddie, widespread failures of banks and fi nancial institutions, an implosion of the credit markets, and ultimately the deepest recession since the Great Depression. Those forecasts now read like history.

vii

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But of greater concern were my predictions as to how the federal government would destroy any remaining economic vitality through misguided stimuli. I believed that a campaign of printing, spending, and borrowing would destroy the dollar, causing both consumer prices and interest rates to spike. The crash I spoke of in Crash Proof was not a housing collapse but a collapse in American living standards. In the most part, that has yet to happen. When I published Crash Proof 2.0 in mid-2009, more than two years after the collapse of Bear Stearns, the and invest- ment shelves of bookstores had become fi lled with titles analyz- ing the calamities of the previous two years and offering various theories about the future. With all due respect to my fellow au- thors, most of them were writing after the fact and starting from the premise that the crisis could not have been predicted. As 2009 wore on, and red ink piled up on the federal balance sheet, the economic crowd turned surprisingly optimistic. The watchwords of the day were “green shoots,” and by year end much ink had been being spilled about how the Fed would engineer an “exit strategy” to withdraw liquidity it had previ- ously pumped into the system. Stunningly, the media gave great credence to this message, even though the messengers themselves had been blind to the crash in the fi rst place. At the time I was warning that any signs of recovery were an il- lusion and that the Fed had no exit strategy. Instead I fore- cast further easing (later called “”) and no end to the debt, defi cits, dollar debasement, and stagnation. I was ignored almost as completely as I was in 2007. Most believed then, and continue to believe now, that the economic collapse had ended. I believe that we have merely seen the events that have set the collapse in motion. It will take some time for all of the dominoes to fall. But fall they will, perhaps even more spectacularly than I initially envisioned back in 2005.

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In 2009 testimony before Congress, Federal Reserve chair- man Ben Bernanke claimed that aggressive Fed action and gov- ernment intervention had averted economic catastrophe. Two years later we can say with high confi dence that rather than being averted, the catastrophe has been postponed, and its se- verity has been worsened. But this isn’t the fi rst time that “the Bernank” (as he is now known) has been spectacularly wrong. Back in July 2005, as I began writing the fi rst draft of Crash Proof (which includes an entire chapter on the pending real estate debacle), Bernanke told CNBC’s Maria Bartiromo that a decline in national house prices was highly unlikely, and that any future real estate-related slowdown would not cause the economy to veer from its full-employment path. Incredibly, Bernanke is still calling the economic shots. In mid-2008, investors around the world reacted perversely to a collapsing American fi nancial system. Like horses running back into a burning barn, they dumped commodities and for- eign stocks and poured funds into U.S. dollars and U.S. Treasury securities. Several factors explained the move:

• A credit crunch that amounted to a global margin call caused forced massive selling of gold and other viable as- sets that had high liquidity; • America’s trading partners were instinctively inclined to prop up their best customer and continued buying Ameri- can debt regardless of its diminishing creditworthiness; and • the dollar was falsely perceived as a safe haven by short- term investors waiting for the storm to pass.

In March 2009, as these market trends were still in force, I was writing an update of Crash Proof, which became for Crash Proof 2.0. In that edition I advised readers to seize the oppor- tunity to buy foreign stocks, gold, and other commodities at

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fi re-sale prices. By buying at that time, I argued that investors could capture currency gains, capital gains, and rising divi- dends as the dollar weakened and foreign economies revived. In the second quarter of 2009 the markets behaved as I predicted. By the summer, with Crash Proof 2.0 on the way to the printer, I added a brief update to the author’s note in which I assured readers that although the fi re sale had largely passed, the argu- ments behind my investment strategy remained stronger than ever. I continue to believe that today. For Crash Proof 2.0 I decided to keep the original Crash Proof text unchanged by adding updated commentary at the end of each chapter. My reasoning had partly to do with the time-honored rule of not fi xing something that wasn’t broken. My other reason was to lay out the basic economic thinking that underlies my accurate predictions. Anyone can be a Mon- day-morning quarterback. It’s another thing to call the plays on Sunday afternoon. Leaving the original text intact enabled read- ers to see that our problems then, and now, are the consequences of pernicious fundamental trends that I had recognized and warned about for years. It’s also important to note how my thinking separates me from the “perma-bears,” those chronic pessimists whose uni- formly negative predictions, like a stopped clock, are accurate twice a day. It may surprise some that I have been very bull- ish on investments in overseas markets. And while it’s true that many of these investments saw oversize declines in 2008, their recovery in 2009 and 2010 was oftentimes astounding. I have equal confi dence that my current predictions will be borne out over the long haul. As I write this in the latter half of 2011 the U.S. economy is essentially comatose. As I forecast two years ago, unemployment has stayed high, the work force has atrophied, the housing mar- ket has continued to drift downward, and debt levels continue

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to mount. But, amazingly we continue to be spared the gravest consequences that I described in the original Crash Proof. Many people may fi nd it hard to believe that things could be worse. Trust me, they could be. While I knew that unending stimuli and defi cit spending would sap our economy (as it has in Japan for more than 20 years), and encourage a stampede into gold, I did not properly reckon with the power of the status quo and I overestimated the ability of the establishment to fi nally recognize the bubble after it burst. I did not imagine that investors the world over would run toward the exploding fi nancial time bomb that has Wall Street and Washington as its twin epicenters. It never occurred to me that yields on U.S. Treasury debt could sink to all-time lows as the U.S. government added more than $1.5 trillion of new debt every year and spectacularly failed to deal with our long-term fi scal imbalances. It never occurred to me that consumer prices would stay relatively fl at while the Fed pursued the easiest mon- etary policy in the world, printed trillions of dollars, and mon- etized the federal debt. But that’s exactly what has happened in 2009, 2010, and 2011. As a result, Americans can still borrow money at the low- est rates in our history. Foreign exporters are still willing to sell goods to Americans on credit, and the dollar has held a good deal of its value. I believe that this good fortune comes from a combination of luck, habit, political will, market timidity, and abject economic ignorance. We have dodged the bullets for now, but sooner or later we are going to step on a land mine. With the benefi t of hindsight, it now appears to me that emotion can trump reason for a longer time period than I had anticipated. The saying goes that the markets can stay irratio- nal longer than you can stay solvent. But I still believe that over time people will wake up and rub the sand from their eyes. The strangeness of our economic times is manifested in the increased

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volatility of the fi nancial markets. During times of panic, inves- tors seek safety in assets that inspire confi dence. But inspiration can change. A look at the last three market corrections of 15 per- cent or more reveals some important clues. Between January 2, 2009, and March 6, 2009, the S&P 500 sold off more than 21 percent. During that time, the U.S. dollar rallied by 9 percent and gold just under 8 percent. In con- trast, foreign currencies sold off heavily, including a 7 percent drop for the vaunted Swiss franc. The next major correction in stocks showed a slightly different result. Between April 23, 2010, and July 2, 2010, the S&P 500 dropped 16 percent. Dur- ing that time, the dollar rallied just 3 percent. Notably, this time around, the Swiss franc did not sell off, but rather rallied by about 1 percent. More importantly, gold rallied nearly 5 percent, taking from the U.S. dollar the title of “fear asset of choice.” These trends gained momentum in 2011. The worst carnage of the year (thus far) came between April 29 and August 8, when the S&P 500 lost almost 18 percent. During that time, the dol- lar managed just a skimpy 2 percent gain. Meanwhile, the Swiss franc jumped almost 13 percent and gold surged 12 percent. It does appear that the crowd has changed at least some of its as- sumptions. It no longer runs blindly into U.S. dollars. It consid- ers other options. As these assumptions slowly change we can continue to en- joy relatively good fortune. Meanwhile, the economic pillars that should be healing are rotting instead. We should have repaired our communal balance sheet. But as a people and a government, we are taking on unsustainable levels of debt. At the same time, the non-productive sectors of the economy—government, health care, and education—have grown, while the productive sectors—man- ufacturing, resource development, and agriculture—have con- tracted. An activist federal government, intent on engineering a recovery, has taken the wheel, and has relegated private enterprise

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to the back seat. The central planning tendencies of the Obama ad- ministration are leading our economy down a blind alley. Based on the faulty assumption that spending is the key to economic growth, current economic policy involves get- ting Americans to borrow and spend. But we dug ourselves into an economic hole by borrowing and spending too much. We will never get out by digging deeper. Instead we have to produce our way out. That requires more saving and more in- vestment, which necessitates less spending. We must also recognize that government interference in our economy created the problems that free market forces would have prevented. The housing bubble and ensuing fi nancial crisis were not a failure of capitalism, but of government’s failure al- low capitalism to work. Rather than learning from past mistakes, current policy involves stricter regulations on business and pref- erential treatment for politically favored sectors. But the hopes for real recovery lie only in the strength and dynamism of free markets and unregulated entrepreneurship. Back in 2008, governments bailed out failing banks, trans- forming bad private debt into bad public debt. Now entire governments need bailouts. This is new territory for the world economy. For now, creditor nations such as and Germany are willing to throw good money after bad. We can only hope their largesse has no limits. But I am convinced they will one day throw in the towel. When they do, the purchasing power of the U.S. dollar will refl ect the underlying fundamentals of the American economy. Those fundamentals are bad and are getting worse. In addition, sovereign debt problems abroad are temporar- ily overshadowing the larger sovereign debt problem looming here at home. As with the mortgage crisis, the “experts” are convinced that sovereign debt problems are “contained” to sub- prime nations like Greece, Ireland, and Portugal. In contrast, I

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