Peter Schiff: U.S. Is in a Depression

Peter Schiff: U.S. Is in a Depression

Alix Steel

06/26/10 – 09:24 AM EDT

NEW YORK (TheStreet ) — Peter Schiff, president of Euro Pacific Capital, Senate contender and author of How an Economy Grows and Why It Crashes, is sticking with his doom and gloom theme.

Schiff made his reputation in 2005 when he warned against the impending subprime mortgage crisis at a time when most investors were heavily invested in mortgage backed securities. Despite some improving economic data out of the U.S. and a stronger U.S. dollar, Schiff is no less pessimistic. Schiff has recently said that the U.S. is the next Greece and that we are in a depression.

I sat down with him recently to see just how bad he thinks the U.S. economy will get, what’s in store for other countries and how he’s making money.

Peter, let’s start with the headline of the day then. China letting the yuan appreciate, is this good or bad?

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Schiff : Well, it’s good for China. For the U.S. it’s going to lead to a rude awakening. For now, it’s going to be a slow appreciation so it will take a little while before the impact of a stronger RMB affects the U.S.

But it will affect us in the short run in a very negative way … because if the Chinese are going to allow their currency to rise, they don’t have to buy as many [U.S.] dollars, they don’t have to buy as many Treasuries. They don’t have to export as much to us because their own consumers have the purchasing power to purchase their own products.

So what that means over here in America is that American consumers are going to have to pay higher prices to buy Chinese goods and … the Treasury [will] have to pay more money if they want to go out and borrow. [This will lead to] higher interest rates so that’s going to ultimately disrupt the phony recovery that people think we have going here.

Schiff: Stronger Yuan Is Bad For U.S.

Are you going to try and invest in China at this point?

Schiff: Well I’ve been investing there for many, many years and I will continue to do so. In fact, a strengthening RMB is part of my thesis. They’re one of the reasons I’m in China. And my whole focus on my Chinese investments is domestic demand. I want to benefit from the increased purchasing power of the Chinese middle class, and that is exactly what a strengthening RMB is going to lead to.

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How are you investing?

Schiff: Mostly Chinese companies that are growing market share in China. I also play the Chinese market by buying some of the resource companies around the world [in] Australia, Norway, Canada, that supply raw materials to Chinese industry … but my main focus is [on] Chinese companies and also companies that are on [the] periphery, you know in Singapore, other companies in southeast Asia, of course Hong Kong, which is now part of China. There are a lot of companies there that are very well positioned to benefit from a growing Chinese economy. That doesn’t mean that there aren’t any U.S. companies that can benefit as well. I just think that you get more bang for your buck investing in Chinese stocks.

So what does a stronger yuan mean for gold prices ?

Schiff: Well, I think ultimately it’s bullish for gold. Because as the RMB is appreciating, what that does is that it brings down the RMB price of gold. It makes gold cheaper for Chinese investors and savers to buy it. It creates a dip that they can buy into.

There’s still an inflation problem in China because the Chinese government is still artificially suppressing their currency even if they allow it to increase, it’s still artificially low … the Chinese want to protect themselves from inflation and they’re going to do so by buying gold, and stronger RMB simply makes that gold cheaper for them, so they will buy more of it.

So gold hitting a new high around 1,266. Where do we go from here? Is this the top now or are we going much much higher?

Schiff: I think we go much higher, certainly in terms of dollars … I think we’re still going to several thousand per ounce and ultimately maybe a lot higher if we refuse to do the right thing.

How would you recommend an investor to invest in gold ?

Schiff: Well, there are a lot of ways you can invest in gold. You can own the actual physical precious metal. I have been buying the physical precious metals for my clients at my brokerage firm Euro Pacific Capital since I think 2001, 2002. We’ve been buying it through a program in Perth … where we actually store the bullion for you in Australia free of charge.

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You want to avoid [collectibles]. Unfortunately there are a lot of gold dealers out there and a lot of these companies advertise very frequently on television … [people] who want to buy gold bullion should stay away from these coins because the mark-ups are horrific. In many cases you need the price of gold to double just to break even on the spreads. If you want gold, buy gold, don’t buy a coin that has a little bit of gold in it. Buy the real thing.

Also, I own a lot of mining stocks, personally, gold mining companies around the world. There are some in the United States, but more often than not they’re in Canada, Australia; they’re in Asia, South America, South Africa. There are a lot of companies that are going to benefit … because as gold prices go up, if the price of gold is rising faster than the cost of mining it, their profits really increase. And so you gain some leverage to a rising gold price.

Is four-digit gold telling us we’re going to see a gold standard? Is it telling us that the currency land as we know is going to be completely different?

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Schiff: I hope that we go back to a gold standard because it works. It’s constitutional. It’s sound money. It’s what gives you better economic growth and holds government spending in check and keeps inflation under control.

But I think what rising gold prices are telling us is that there is a lot of inflation in our future … As the world stops lending us money, my fear is that rather than making the necessary cuts, the way Europe is trying to do now … we try to avoid the pain by simply monetizing the deficits; that we just print money; that the Federal Reserve just buys more debt so that the government doesn’t have to make the hard choices.

If we don’t have the guts to level with voters, and instead we try to print money to avoid that, that’s when we have runaway inflation. I think that’s what gold is saying. Gold is telling you our politicians are most likely to act in their own interests rather than national interest. As you know, I am running for U.S. Senate myself in Connecticut; I want change that dynamic. I want to start making decisions that benefit the country, not that benefit the people who are leading the country.

Where do you stand then on the metals like silver, palladium and platinum that are very much tied to the global economic recovery vs. gold, which is just an investment?

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Schiff: I don’t think we’re headed for a global depression. I think we’re headed for a depression in the U.S. It’s going to be an inflationary depression, so you have to understand the difference. But I believe that other parts of the world, particularly in the emerging markets; they’re going to be very strong.

If you remember the 1990s, Japan had been the fastest-growing part of the economy during the ’80s. And [when we] removed Japan from the equation … the world continued to prosper despite the lost decade in Japan. I think you’re going to see something similar with the U.S. We’re going to be contracting, dealing with all the debt that we’ve created and the unproductive nature of our economy.

But as the rest of the world, or particularly China and the countries who have been loaning us money and supplying us with merchandise, stops using their resources to prop up our economy and instead use their resources to grow their own economies, then they’re going to grow even faster. I’ve often said people think America is the engine to the global economy. I think we’re the caboose. And I think when you sever the caboose, the rest of the trains will move along the tracks even faster.

Does that mean that you are bullish on other precious metals?

Schiff : Well, I’m bullish on precious metals silver [and] platinum. But I’m also bullish on industrial metals, bullish on commodities in general. I’m very bullish on oil. Not only because of the demand that’s going to come out of China, but because of what’s happened in the U.S. following the accident of BP(BP).

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Not only are we losing that production [from BP] but we’re having a moratorium now on off-shore drilling. That’s going to take production away. Also, [there is the] cost of insurance … It’s going to cost a lot more to [drill off shore], so production is going to decline. So you’ve got lower supply, you’ve got increasing demand. Prices can only go up.

Do you think we’re going to see alternative energy? Wind, solar or natural gas?

Schiff: Oh sure there’s alternative energy already. I’m investing heavily in alternative energy myself. I’ve got investments all around the world in alternative energy, but I understand right now the best alternative is fossil fuels, oil and gas, because that’s the most economical today. It’s not going to be the most economical forever, and so I’m investing in some of these [alternative] technologies myself.

What I don’t want is to see Washington try to micromanage which alternative energies get investment by tax code. I don’t want them subsidizing or penalizing one form of energy over another because then you don’t get an efficient result. You get a politically motivated result that undermines our energy independence.

Do you have a favorite alternative energy that you’d be pushing?

Schiff: I’m investing in biodiesel. I’m investing in wind power. I’m investing in coal. I don’t know what’s going to win.

All right, let’s move to Europe, then. What’s your best prediction for the EU and the health of the euro?

Schiff: I think they handled the situation incorrectly with respect to Greece. The eurozone should have made it clear that Greece was on its own and Greece should have been allowed to restructure its debt. I mean, the Greeks borrowed too much money, and I think the best thing is the restructuring of that debt. Not that they walk away from their obligations completely, but that the creditors who loan them money … take a haircut, along with Greek citizens. Everybody needs to sacrifice. Everybody needs to take a reduction.

Unfortunately, they decided to bail out Greece, and I think that has very negative long-term repercussions for the euro. However, in the short run, they’re trying to repair the damage. What I do see that is favorable right now is that a lot of the European nations are starting to make cuts in government spending. They’re ignoring our advice, doing the opposite, and they are shrinking their governments and cutting back on spending. And in the short run, I think that’s going to be bullish for the euro.

I think that you have a lot of negativity now, a lot of negative sentiment built into the euro. I think that’s going to create the basis for a pretty big rally in the euro. I think the real problem is when the sovereign debt crisis moves here, moves to the U.S.

We are the country that is in the most trouble. We have debts that are enormous in comparison to Greece … You could say that Greek debt to GDP was larger than ours [but] not if you count all the off budget items, not if you count all the contingency items. Greece is tiny. The amount of money that they owe is tiny. We owe a fortune. And it’s a much, much bigger problem. And, of course, Greece wasn’t a problem a year or two ago … The reason it wasn’t a problem is because interest rates were still low. It wasn’t until rates started back up that Greece could no longer service the debt.

We’re in the same situation. We’ve borrowed $13 trillion to $14 trillion with T-bills. The reason we could afford the interest payments is because the rates are still low. But just like the subprime mortgage borrowers found out when their teaser rates reset, when the world starts to question our ability to repay and the risk premiums rise and rates start to rise, that’s when we [will be] exactly in the same situation as Greece.

So would you be buying the euro here and selling the dollar, if you had to choose?

Schiff: Between those two currencies, if they were my only choices, I would choose the lesser of the evils and take the euro. Fortunately, the world is bigger than just euros and dollars, and you have other currencies that you can own, which I do own. I own some euros, but I am very underweight the euro relative to other currencies. And of course, you don’t have to own currency at all. You can own gold. And the reason that gold is so strong is because investors around the world are expressing a preference for real money as opposed to just substitutes, which are fiat currencies.

What other currencies do you own?

Schiff: In Europe, I own the Swiss franc, the Norwegian kroner. We also own the Singapore dollar, Hong Kong dollar, Chinese RMB, Japanese yen, Australian dollar, New Zealand dollar, Canadian dollar.

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