How to Profit from the Coming Economic Collapse

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How to Profit from the Coming Economic Collapse ffirs.qxd 1/29/07 9:02 AM Page i CRASH PROOF HOW TO PROFIT FROM THE COMING ECONOMIC COLLAPSE PETER D. SCHIFF with John Downes A Lynn Sonberg Book John Wiley & Sons, Inc. ffirs.qxd 1/29/07 9:02 AM Page ii Copyright © 2007 by Peter D. Schiff and Lynn Sonberg Book Associates. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. Wiley Bicentennial Logo: Richard J. Pacifico 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 specifically disclaim any implied warranties of merchantability or fitness 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 profit 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. Library of Congress Cataloging-in-Publication Data: Schiff, Peter, 1948– Crash proof : how to profit from the coming economic collapse / Peter D. Schiff, John Downes. p. cm. Includes index. ISBN: 978-0-470-04360-8 (cloth) 1. Economic forecasting—United States. 2. United States—Economic conditions—21st century. 3. Financial crises—United States. 4. Investments—United States. 5. Liquidity (Economics). I. Downes, John, 1936–. II. Title. III. Title: Profit from the coming economic collapse. HC106.83.S35 2007 332.60973—dc22 2006034736 Printed in the United States of America. 10987654321 ffirs.qxd 1/29/07 9:02 AM Page iii To my father, Irwin Schiff, whose influence and guidance concerning basic economic principles enabled me to see clearly what others could not; to my son Spencer, to whom I hope to instill a similar vision; and to his and future generations of Americans, who through hard work and sacrifice might one day restore this nation to her former glory. ffirs.qxd 1/29/07 9:02 AM Page iv ftoc.qxd 1/29/07 9:02 AM Page v Contents Preface vii Introduction: America.com: The Delusion of Real Wealth xiii 1 The Slippery Slope: Consumers, Not Producers 1 2 What Uncle Sam, the Mass Media, and Wall Street Don’t Want You to Know 25 3 For a Few Dollars More: Our Declining Currency 47 4 Inflation Nation: The Federal Reserve Fallacy 67 5 My Kingdom for a Buyer: Stock Market Chaos 95 6 They Burst Bubbles, Don’t They?: The Coming Real Estate Debacle 115 7 Come On In, the Water’s Fine: Our Consumer Debt Problem 143 8 How to Survive and Thrive, Step 1: Rethinking Your Stock Portfolio 173 v ftoc.qxd 1/29/07 9:02 AM Page vi vi CONTENTS 9 How to Survive and Thrive, Step 2: Gold Rush— Be the First Person on Your Block to Stake a Claim 209 10 How to Survive and Thrive, Step 3: Stay Liquid 237 Epilogue 255 Books for Further Reading 261 Glossary 263 Index 267 fpref.qxd 1/29/07 9:03 AM Page vii Preface hen I began this book early in 2006, I didn’t plan to have a WPreface. My goal was to explain in a readably informal, easy- to-understand way why America’s persistent and growing im- balance of imports over exports—its trade deficit—would cause the dollar to collapse, forcing the American public to accept a drastically lower standard of living and years of painful sacri- fice and reconstruction. Seven chapters would show the various ways the world’s greatest creditor nation had become, in the in- credibly short space of some 20 years, the world’s largest debtor nation while the public’s attention was focused on other things. My challenge, as I saw it, was to create public awareness, where it didn’t exist, of an impending economic crisis for which I have been helping my clients prepare for years. My final three chap- ters would share investment strategies already being used suc- cessfully by my several thousand brokerage clients, so that readers could avoid the dollar debacle and position themselves to profit during the rebuilding. That’s the book you are about to read. Why this Preface? Because as I write this in the final days of 2006, with the book scheduled for publication a month or so from now, everybody has started talking about the trade deficit. Virtually ignored for years, it has suddenly become a subject of public debate. And while there is a growing consensus that the problem is deadly se- rious, there’s a concurrently emerging consensus, mainly repre- senting Wall Street with its vested interest in the status quo, vii fpref.qxd 1/29/07 9:03 AM Page viii viii PREFACE making the opposite argument that trade deficits are a sign of economic health—that American consumption is the engine of economic growth. It’s this group that I want to take on at the very outset. Their arguments are self-serving nonsense. If I can con- vince you of that here and now, you can get the full benefit of the wisdom and guidance I humbly set forth in the coming pages. I’ll get to some more comprehensive examples in a minute, but for sheer pithiness it would be hard to improve on a pro- nouncement made last week by Lawrence Kudlow, the genial host of CNBC’s daily program Kudlow and Company. Opening the program, Kudlow welcomed his viewers, and then brazenly intoned: “I love trade deficits. Why? Because they create capital account surpluses.” In the way of background, the balance of payments, the book- keeping system for recording transactions between countries, is made up, among other items, of a trade account, which is the part of the current account that nets out imports and exports, and a capital account, which nets investment flows between countries. Because dollars we send abroad in payment for goods and ser- vices are returned as investments in U.S. government securities and other assets, one account can be viewed as the flip side of the other. A country, like the United States, that is a net importer will therefore typically have an offsetting capital balance, the trade ac- count being a deficit and the capital account a surplus. But “surplus” as it is used here is a bookkeeping term mean- ing simply that more cash flowed in than flowed out. The rea- son cash flowed in is that an asset, say a Treasury bond, was purchased by a foreign central banker. But selling a bond doesn’t make us richer; it creates a liability. Sure, we initially have cash in hand as a result of the sale, but it’s money we are obligated to pay back with interest. So the word “surplus” has a positive ring to it, but a capital surplus has the opposite meaning of, say, a budget surplus. Sur- fpref.qxd 1/29/07 9:03 AM Page ix PREFACE ix pluses can be bad or good. A surplus of water in a reservoir dur- ing a drought is good, but when it’s in your basement during a rainstorm, it’s bad. Now Larry Kudlow is a smart guy, and I’m not suggesting he doesn’t know what the word means. But in his opinion, a capital surplus is evidence of our country’s creditworthiness. The impli- cation is that we can depend on that to keep the music playing. That’s where I think he’s wrong. Our trading partners are quite free to invest elsewhere, and that’s just what they’ll do when they realize the United States, with $8.5 trillion in funded debt ($50 trillion including unfunded obligations) and persistent budget deficits that add to that figure annually, is no longer creditworthy. It’s not as though they are getting higher yields by investing here; our markets are underperforming all the other major markets in the world, and that’s been true for six or seven years now. The continued demand for U.S. government investments among central bankers has its explanation, I think, in robotic bureaucratic momentum.
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