Peter Schiff often seems to time his comments to attract the most controversy. With the US dollar riding high on global foreign exchanges this hardly appears the right moment to be talking about its demise. But then he spotted the subprime crisis in a housing boom so this is just about par for the course.
The logic he employs is equally compelling in his latest book, ‘The Real Crash: America’s Coming Bankruptcy, How to Save Yourself and Your Country’. In a nutshell the recovery and growth being seen in the US today is a complete sham because it is a mere fraction of the amount borrowed and spent to create it. Those numbers are a matter of public record and irrefutable.
The Real Crash
He argues: ‘As the curtain eventually falls on the drama unfolding in Europe, the world will refocus its attention on the more spectacular events in the US. The sovereign debt crisis that is now playing out in Europe will cross the Atlantic, and when it opens here the Real Crash may indeed finally begin. The average American will have a front row seat but will hardly enjoy the show.’
And his conclusion is dramatic: ‘When the government’s delaying tactic, which involves continuous debt accumulation and money printing is no longer tenable, the dollar could collapse, borrowing costs and consumer prices could soar and the US economy could implode.’
ArabianMoney has been discussing this sort of Armageddon scenario for four years. It is also what ‘This Time is Different’ by professors Reinhart and Rogoff have seen as the ultimate conclusion to the economic problems we face. But will this actually happen?
Similar noises were made about the US dollar in the late 1970s. Yet 35 or more years later the US dollar’s hegemony is unchallenged, indeed its avowed competitor the euro is the currency in the deepest trouble right now.
John Mauldin’s book ‘Endgame’ quotes vast sections of Reinhart and Rogoff’s text and comes to a more optimistic conclusion that there is still time for the US to rebalance its books through tax increases and cutting public spending. Yet time is running out and just as the US housing market eventually blew up because of cheap credit so the whole economy could go the same way.
Flawed US economy
For the situation in the US is not at all far removed from the eurozone. The national debt is beyond 100 per cent of GDP. Total leverage in the system is at all time highs and going higher. The federal debt limit was raised, not contained. There has been no austerity just yet.
Clearly this debt-fuelled party will have to end one day, just as the housing boom came to a terminal moment. And yes inflation, higher interest rates and dollar devaluation would then happen pretty quickly all at the same time.
However, what we don’t know is whether the US will step back from the brink before stepping over it. The United States almost did the same thing in the 1970s and managed to avoid Armageddon.
Winston Churchill once said that the US will always do the right thing ‘but not before it has exhausted all the other options’. So the dollar will survive but maybe not without a near death experience. That ought to give gold and silver their moment in the sun before a final dollar reset.