Review: "Crash Proof" by Peter D. Schiff

In the 1970’s there was a spate of “crash” books, many by Harry Brown, that are very similar to this book by Peter D. Schiff. These “crash” books presented a set of problems that the economy was suffering and promised that these problems would lead to a “crash”, and if you were well positioned, you could profit. I don’t remember any “crashes” during that time. There was horrible price inflation. There was a blip in 1987. But, we had modest recessions in the early 1990’s and in the early 2000’s, and then now. This is a mess, we had a panic, we have unemployment higher than we have had in decades, and the banks aren’t lending. But, is it a “crash”? And how does the current situation correspond to what Schiff is expecting. One of the biggest problems I have with this book is that Schiff does not tell us what a “crash” is.

Although Schiff did expect the housing market to do something close to what has happened, and the stock market has dropped to levels he thought were closer to the proper level in 2006, the central theme of his book has not been fulfilled. Schiff’s “crash” clearly centers around a significant drop in the value of the dollar. That event has not happened, at least at this writing, and there doesn’t seem to be any real movement either. Against the Euro, there has been no significant upward movement since early 2008.

Actually, since I had seen references to Crash Proof on sites that I wanted to like, I had high hopes for this book. Mostly, I was very disappointed. My disappointment centers mostly upon three main, closely related points.

To get to those points, let’s set up Schiff’s U.S. scenario. The U.S. has been exporting significant amounts of money since the about 1983, 26 years. This money was created by the Fed (The Federal Reserve System). It is inflation (Schiff doesn’t call it that, but he does recognize the connection. I will talk about inflation a lot in forthcoming blogs.). I agree with this completely.

So foreigners, foreign central banks, foreign businessmen, foreign citizens, are accepting U.S. money and keeping it. Here is the first point that Schiff and I part ways. I want to know why foreigners are doing that. Schiff’s explanation is two fold: foreign citizens and central bankers and are keeping and hoarding U.S. dollars because the U.S. has fooled them into thinking that U.S. dollars are worth something. U.S. dollars are in fact worthless, according to Schiff, because the U.S. produces nothing, i.e., we are no longer a manufacturing powerhouse, we are a service economy. We do produce dollars however, and that contributes to their worthlessness, which is true, as a natural result of inflation. So, in a manner that Schiff does not explain, foreigners believe that the dollar is worth something and accept it as a reserve currency. For clarity, I must say that Schiff’s explanation is meant to explain current behavior rather than the reason why foreigners began accepting money in the first place, which began after WWII.

I will leave it to an economist to examine the question of the strength and viability of a manufacturing vs. a “service” economy. Frankly, I found Schiff’s comments on this and the role of Americans to be short of the truth and often insulting, esp. p. 14ff. (See my commentary about the level of manufacturing in our exports.)

That leaves us with Schiff’s argument that we are purposely misleading foreigners. Schiff says that as soon as they realize that the dollar is worthless, they will begin off-loading dollars and the value of the dollar will crash. (Sometimes Schiff says that this process could take a long time, which I guess is a slow-motion crash.)

I think that the reasons why foreigners began accepting and keeping dollars has something to do with whey they might begin selling.

A long history lesson will not be appreciated by most readers, so let me just say quickly, that the two underlying reasons why people began and still do accept and keep dollars are, one, that they all agreed to do so. At the time of the agreement the U.S. was the major economy in the world and few countries had any gold. Two, the currency of their own country was not stable.

Point one is still true, although less so than after WWII. Foreigners do find a lot to buy from the U.S. Point two is also still true, only a few currencies in the world are stable. The dollar is not as stable as it was (more on that elsewhere). Also, over time, more and more places around the world are accepted dollars without question. It became the international currency. You walk into just about any bank anywhere and offer dollars and you get smiles. The same is true for many retail stores, even in parts of Europe. Try either of those efforts with Euros or the Yen, and you will not be as successful. So many businesses and investors find using the dollar to be convenient and probably less expensive (by saving on currency exchange costs, etc.).

For the international community to decide that the dollar is worthless, would be a crippling blow to international trade. That the dollar is not as desired or revered as it was, and has fallen in value to the Euro, the Pound, and Yen significantly, is not to say that foreigners have rejected it.

As correct as Schiff’s beginning scenario is, since he ignores the context in which the non-U.S. participants began this mess, he really cannot jump to the conclusion that they are going to dump dollars. It is a leap. I don’t think the “fooled them” explanation works at all. I think that he pulled that one out because he couldn’t figure out any other rational explanation for people to accept currency Schiff believes is worthless. Actually, point of fact, every currency is worthless, since they are all fiat currencies. In that sense, foolishness is widespread.

For clarity, my three closely related points are: one, neither the dollar or the U.S. economy is worthless; two, there is a better explanation as to why foreigners accept and keep the U.S. dollar; and three, there will be no “crash” of the dollar as it would be a crash of the world system (not just “dislocations”).

That doesn’t mean that we are out of the woods regarding the value of the dollar. A significant amount of that exported inflation is going to come back. Some of it is in the form of a lower dollar vs. other strong currencies. It is not a question of the strength of the different economies, but of the quantity of our exported dollars.

Now briefly, I will list a few of the other themes in the book I find to be very questionable:

1. The U.S. government has consciously and purposely engaged in fooling the world and its own citizens by manipulating all kinds of statistics, programs, etc., over generations, different administrations, various departments, and literally thousands of employees of various levels, talents, and loyalties.
2. Speculation is presented as bad, or at least ignoble.
3. Inflation is the cause of everything bad in our economy (this stand is lessened in the last chapter or two).
4. Schiff's one-note song is even worse when other disastrous policies are going to be bombarding us, e.g., social security and medicare. How will Schiff's investment ideas hold up to that, especially considering that those same problems are going to cripple Japan and several other countries?
4. Manufacturing is the root of all wealth.
5. He also has some strange, conflicted ideas as to what is savings and what to do with it.

I am not a big fan of the prescriptive chapters at the end of the book. Much of what he has to say is more conventional than I expected, especially given what he said by way of build up in the early part of the book. His recommendation to invest solely in foreign equities has not panned out well so far. His recommendation of GLD is a bright spot for him from mid ’05 to early ‘08. Since then GLD has moved with the other markets. That is not a record on which I would like to base a long-term strategy. Until the dust clears a little, I do not think that we have a reason to anticipate anything in particular (yes, with Obama in charge, it can’t be good).

In my notes on the book I didn’t discuss the last chapters with much enthusiasm or detail. I would respond to questions.

So, if you have read this book or are considering doing so, look at it closely. Watch for those many points in the book in which he makes unsupported assertions and be prepared for the leaps in his thinking.
In the following posts I will publish my notes from my reading in which I discuss many points in greater detail. It isn’t comprehensive, just a running commentary on the points I thought needed elaboration.