What Kind of Economy Will the President-Elect Inherit?

Peter Schiff June 23, 2016

Peter Schiff: I don’t know what effects the election is going to have on the economy. Will the outcome have much of an effect? It’s hard to say because Trump is a bit of a wild card. I mean certainly re-electing Hillary Clinton is pretty much more of the same and we’re guaranteed more debt, a bigger government and a lower standard of living and I think we are headed for a major economic crisis on an order of magnitude greater than what we lived through during the financial crisis of 2008. I think the economy is in much worse shape than it was going into that crisis. The debt obviously is more than twice the size than it was back then. So I think the underlying structural problems in the economy were created by a combination of bad monetary policy and bad fiscal and regulatory policy. I think that those imbalances and problems have been exacerbated by the fed monetary policy subsequent to the bursting of the real estate bubble. So I think we’re in some serious trouble. I think the crisis is coming regardless of who occupies the White House. The question would be how do we come out of it on the other side and potentially a Trump presidency, depending on what he does, might give some more hope for a lasting legitimate recovery on the other side of this crisis.

How Do the Economy and Stock Market Affect Elections?

Douglas Goldstein: Talk to me a little bit about how the economy or the stock market reflects an upcoming election, meaning when there’s uncertainty. Let’s start with that and then we’ll talk about what the possibilities are afterwards.

Peter Schiff: Everybody likes to say, “The markets hate uncertainty.” I think what they like less than uncertainty is certainty when that certainty is bad. There’s a lot of bad policy that’s coming, and I think that’s a certainty, and I also think that we are back in a recession. I think the recession is starting - or will start – late last year or early this year or maybe even by the middle of this year. It’s hard to say. But I think whatever we just experienced, if you want to call it a recovery… I really don’t but if you do call it a recovery, it’s already over and now we began the greater recession. We’re beginning this recession when interest rates are practically at zero and the fed already has an enormous balance sheet leftover from the last route of monetary stimulus that we were never able to unwind.

Douglas Goldstein: Let’s go over some definitions and one of them is the term recession. A lot of people would say “What do you mean there is a recession? The stock market has been doing well. If you look since Obama got into the office, we’ve gone up a huge amount. How could you be calling these bad times?”

Peter Schiff: The stock market and the economy are two very different animals and a recession refers to economic activity or economic growth. It doesn’t matter what happens to the stock market. Now, the stock market has not been going up for the past year and in fact, if you look at the average stock, the average stock has been falling for two two-and-a-half years. In fact, I think better than 50% of all stocks and the S&P 500 are now down more than 20% from their peaks and many stocks are down 40%, 50% or more so we have had stocks falling for the past couple of years. It’s a little bit deceptive if you just look at the overall market but the overall market has not been going up. I mean the rallies stopped. I mean it was about a year ago that we made the high and we haven’t made a new high since but meanwhile oil prices are now rising again. I mean we’re now above $48 a barrel. This is the highest price it has been all year and they are pretty much going up almost every day. This is not a good sign for the consumer who was kind of relying on the cheap gasoline prices to help him deal with higher rents and higher insurance, health insurance in particular, and food costs that were going up. And now you have rising gas prices. The price of gold has been strong this year. Gold is up 17% or so on gold stocks, pretty much double so far this year. So where you’re seeing strain to the stock market, it’s not where you’d want to see it if you believe in the economy. You don’t want to see the NASDAQ down 5% a year to date and gold stocks doubling. That’s probably not a good sign if you look at the stock market. But you know the stock market was very strong up through 2007 even though we were setting ourselves up for a meltdown in 2008, the worst recession since the great depression. The stock market did not do a very good job of forecasting that recession and, in fact, neither did the Federal Reserve. The Federal Reserve did not believe a recession was coming even as late as mid-2008. They still had no recession in their forecast even though the recession had started seven months prior. They still didn’t know it was coming even though we were in the middle of it.

What’s Better for the Economy? High or Low Oil Prices?

Douglas Goldstein: One of the issues you mentioned was low interest rates and the other one you touched on was the price of oil and it seems that the way that people talk about the price of oil and the expectations they have doesn’t always play out. For example, when oil prices were dropping and dropping and dropping and the market was dropping, everyone said, “Because the price of oil is dropping, so the market is dropping.” On the other hand, you would have thought, like you just said a minute ago, if oil is low, that makes the price of gasoline low, and it’s easy for the economy to get going because you don’t have the oil tax going up. But now the opposite – you’re saying, rates are going up. So which is it? Do we want to have low oil prices or high oil prices?

Peter Schiff: We definitely want a low oil price unless you’ve got a lot of oil that you’re looking to sell. So if you’re a producer or an oil company, you obviously want high oil prices. But, a typical American doesn’t own an oil well. He buys gasoline on a regular basis and so we all want lower oil prices. And the whole time that the oil price was dropping and the stock market was dropping, it was just a coincidence. It wasn’t that one was causing the other. It wasn’t that the low oil price was hurting the stock market. I mean it hurt oil stocks that’s for sure, but it didn’t hurt technology stocks. You can’t blame the drop in tech stocks or retailers. You know some of weakest stocks were the retailers and those are the stocks that you would think would benefit the most from cheap gas because it relieves their customers of the expense and now the money is freed up to buy other things. So it was hard for Wall Street although they did it but it didn’t make any sense to blame a collapse in retailers on cheap gasoline when they would be some of the biggest beneficiaries of cheap gasoline.

So what was actually happening was that the economy was weakening and the fed was threatening to raise interest rates and it was the idea of the slower economy and tighter monetary policy that was causing both the stock market and the oil market to go down together. It wasn’t that one was causing the other. They were both reacting to the same thing, but now the oil market is starting to rise because the markets are now starting to price away some of those rate hikes and the dollar is now weakening. The dollar had its weakest shown in five years in the first quarter so a weak dollar and the fed not hiking rates as much as the people thought, that is causing the dollar to go down and that is causing the gold price or rather the oil price too to go up. But corporate earnings are under a lot of pressure because the only reason, that’s theoretically, the fed is not raising rates is because the economy is too weak to allow it and part of the problem with the weak economy is weak earnings. So now you have the stock market caught between two counterbalancing forces. You have more cheap money or fewer rate hikes which is a support of another market because of the extra liquidity. But then you have the reality that the reason the fed is not hiking rates is because the economy is much weaker than they thought and if the economy is weaker so are corporate earnings.

Douglas Goldstein: You also mentioned a weak dollar. There are certainly those people who would say that a weak dollar ultimately is very good for the United States. It will help us to get out of the recession and will help the stock market because it means that people can export the goods to sell them all over the world whereas a very strong dollar is going to prohibit that. And at the same time, with interest rates really continuing to be very low and the fed not seeming to be interested in raising them much at all, it seems that this is going to make cheap money available and that liquidity is certainly what seems to be able to help fuel the economy.

Peter Schiff: It doesn’t. I mean it fuels inflation. If fuels investments and speculation but it actually inhibits real economic growth. A weak dollar doesn’t help our exports because we don’t have a lot to export. I mean what a weak dollar does is it increases the cost of our imports and it means that we have to export more to pay for our imports. But, since we can’t do that, we end up with even bigger trade deficits with a weaker dollar then what we have. And that’s been the recent history of the United States, as the dollar goes down, our trade deficits get worse. They don’t get better. Our trade deficits were the largest in history in mid-2008 when the dollar was the lowest in history and, if I’m correct and the dollar does continue to fall, it’s just going to make our trade deficits bigger and bigger and bigger. We’re going to have to pay more and more money for all the things that we import because we do not have the capacity to produce those things domestically because the industries no longer exist. The plant equipment is no longer here. The skilled workers are no longer here. We’re just importing. If we don’t have the products to export, that’s one of the problems with Donald Trump’s “Let’s just build some walls.” That’s not going to do anything to bring back our jobs because the industries that used to employ the workers are no longer here. They are no longer viable. They’ve been dismantled over the generations because of all the high taxes and high regulations. All this activity now takes place outside the United States and we rely on the strong dollar to import all the things that we don’t produce ourselves. And, as the dollar weakens, it becomes harder and harder for Americans to live within their means because the secret to that is the ability to take print money and export it to buy real goods and as the dollar goes down, that becomes more and more difficult to do.

Are People Feeling the Inflation in the Economy?

Douglas Goldstein: Are people feeling the inflation you mentioned before because the numbers that come out of the government don’t seem to be terribly inflationary at this point?

Peter Schiff: First of all considering how weak the economy is, if you look at the weakness of economic growth, there is still positive inflation. It’s a positive number – even the government number. Let’s say the government claims inflation somewhere between 1% and 2%. That still means that the cost of living is going up 1% or 2% a year. Most people’s paychecks are going down. You’ve got a lot of people that used to have a fulltime job and now they only have a part-time job or maybe they have two or three part-time jobs. But if you add them all up, they still don’t earn as much as they used to when they had good full-time jobs. So any increase in the cost of living under these circumstances is a problem but I don’t believe the government’s numbers are accurate. I think the cost of living is rising more rapidly than the government CPIs would suggest. You can look at rents. I read recently that rents rise yearly – that creates a huge jump in rent and a big cost. For most people, that’s their biggest expense. Maybe for some taxes could be their biggest if you add security taxes, state taxes, federal taxes. But, not counting taxes, that’s probably number one. Now you’re second biggest expense is probably health care, health insurance and their costs are rising even faster than rent. So you’ve got two big costs, health care and rent. Both are really going up at much faster pace than the CPI. Of course once you finished paying your rent, your health care and your taxes, a lot of Americans don’t have much money left. But food prices are going up, utility prices are going up. I mean I don’t know where the government is getting such low CPI numbers when so much of what Americans buy is a lot more expensive. I know that when you poll voters – I haven’t seen one of these polls recently. But certainly over the last several years and last elections when the government was saying there’s no inflation, the polls – when you asked people about the economy – poll after poll was showing that the biggest concern that voters had was rising prices and that doesn’t seem to make sense. If there’s no inflation why would rising prices be so predominant among the concerns that typical people had.

I think one of the reasons too that people like Donald Trump and Bernie Sanders are so popular is because the economy is much worse than the government reports. If things really were as good as Obama claims or as Janet Yellen claims, I don’t think Bernie Sanders would be getting so many votes and I don’t think Donald Trump would have won the republican nomination if the voters were more satisfied with the career politicians and the status quo. The fact that voters on both sides of the aisle are so desperate for anything different whether it’s a populist or a socialist is an indication that they know things are bad – because if they were satisfied that things were good, they wouldn’t have wanted to take a chance on screwing it up. It’s only because things are so bad that they are willing to try anything.

Douglas Goldstein: If you get a call from either Hillary or Trump asking you to be an advisor on the economy, what would be the top thing that you would suggest that they do in their first 100 days?

Peter Schiff: First of all, I’m not expecting such a call. If one of them called me, I would assume that it was some kind of a joke … but I mean I suppose that Trump is probably more likely to make such a call than Hillary. I can’t imagine Hillary Clinton under any circumstances caring what I have to say, given the huge gulf between us when it comes to policy. I believe that Trump’s idea of making America great again – and I would like America to be great again – recognizes and acknowledges that we are no longer great and we are not and we haven’t been great for a long time. But in order for America to be great again, we have to understand why America became so great in the first place and why America today is so different from that America. The America that became great was the America that was created by our founding fathers and the principles that were in the constitution. These are principles of limited government, of individual sovereignty, of the rugged individual, of government simply there to protect private property against people who would steal from you or attack you. So the government was really just there to stop people from doing bad things, but it wasn’t there to redistribute wealth, or to provide safety nets, or to micromanage the economy, and for politicians to decide this is what we think we should have, or this is what we should have and we should take money from this person and give it to that person. We had a minimal government that did very little and we relied on the individual. We had maximum freedom and minimal government. We had sound money, we were on a gold standard, and we thrived and we prospered, and America built a society wealthier than anything that existed in history. We built a middle class that was really a concept that wasn’t even known prior to America. Before, there were just rich people and everybody else worked hard just to keep things going. In a society where everybody benefits from the hard work of the individual, of the entrepreneur, everybody is pursuing their own self-interest. There was the Adam Smith’s invisible hand on a grand stage and it really proved to work beautifully and had this really great wealthy society but we destroyed that. We destroyed that with government. We destroyed that by minimizing individual liberty and now maximizing government and having all sorts of decisions made by government. We run away from honest money to centrally planned paper money. This is a disaster that the Federal Reserve has done and we have this enormous government in Washington that is spending a fortune and regulating and has inserted its tentacles in just about everything that we do and it’s very difficult for people to succeed and prosper. It’s very hard to hire people in America now. The government has made that very difficult. It’s very difficult for people to succeed and start their own businesses. It’s not that it’s impossible, it’s just that the bar to do that successfully has been lifted so high now, thanks to governments. It used to be much lower and it was much easier to succeed. So we need to start rolling back government. I mean all of these big grandiose plans about what the government can do. Government is a complete failure. We need to undo all the terrible things the government has done. We were in much better shape 100 years ago before we had all these rules and regulations. So we need to try to recreate the America of the past and I’m not talking about going back to slavery. We’re not to go back that far but we can go back to around 1900.

Was the past a Better Time to Live in Than Today?

Douglas Goldstein: Would you want to live in 1900 or would you want to live in today’s age?

Peter Schiff: I don’t want 1900 technology; I want 1900 freedom. I want the liberty and the freedom that my grandparents had when they arrived in this country but I don’t want to give up the benefits of 100 years of progress that has been made despite big government. The issue is, have you ever tried to think about this? Imagine what 21^st century America would look like in 2016, imagine what this country would look like had we maintained the level of government that we had in 1900 consistently throughout the last century. Imagine the progress that would have been made that wasn’t made. Imagine the things that we would have today that we don’t have.

I remember when I was a little kid. Have you ever watched the TV show, the Jetsons? So the Jetsons was made in the 1960’s and people were just assuming that the type of progress that had been ongoing would continue into the Jetsons’ future. In the Jetsons future, not only does Jane not have a job, because in the past they couldn’t even foresee women working in the 1960’s. I mean why would a married woman with children work because her husband had a job? But not only did Jane not work, but George barely worked. George complained that the three-day work weeks were killing him because the weekend was four days or two days. Yes, it was a two-day work week. You work for two days and the weekends were five days because they just assumed that the progress would continue where we continue to automate and mechanize and so the need to work would be smaller, smaller and smaller and our standard of living would keep going up and there were always gadgets. I mean I think that I didn’t know that we would have flying cars and all those kind of things. I do believe that had we stayed on the trajectory that we were on, we wouldn’t have married women with children working and men wouldn’t be working two or three jobs. They’d have one decent job and they’d probably work fewer hours and people would retire a lot earlier. People would have a lot of savings and we would have a much higher standard of living and who knows what extra inventions we would have come up with had we had less government. Who knows what diseases we would have cured if we didn’t have the FDA? If the government didn’t make it so expensive to develop cures, maybe we would have cured cancer by now. Who knows? We don’t know but I think we would have a much higher standard of living. But, when people say Peter wants to go back to the early 1900s. No, I want air conditioning. I like computers, I like cell phones, I like indoor plumbing and I like these things so I don’t want to give them up but I’d like to have my freedom too and then we could be a lot more prosperous.

One more thing. They have to prepare the American public for some pain, just like you know if you’re going to go up to a drug addict and say “What advice are you going to give a drug addict?” “Well, you got to stop doing drugs.” So the advice is not to do more drugs so you don’t have to deal with the pain of withdrawal or have to go through a rehab. So that’s what they have to prepare America for. because we’re like a gigantic drug addict. We’re addicted to cheap money and big government. and that’s a very, very debilitating habit. If we don’t kick the habit soon, we’re going to overdose on this stuff so I’d rather do it voluntarily. It is better to check ourselves into the rehab then get dragged in there by our foreign creditors because we have a dollar crisis which, unfortunately, is where the situation is headed. So speak with people up the level of the American public and tell them how screwed up we are and what really needs to be done and it’s not something from government. The government cannot solve our problems. The government is our problem. What the government has to do is extricate itself from the economy… remove itself. We need to massively dismantle much of government and that means a lot of people who are getting checks from the government and will have to be told, “You’re not getting that check.” And you know when Donald Trump says something like “I’m not going to touch social security” we need to touch social security. We can’t afford to keep taxing young people to give money to older people especially when the older people are wealthier than the younger people who are being taxed and the young people who are being taxed can’t afford to pay these taxes. They can barely get out of their parent’s basements and few can handle their student loan debt. They can’t pay social security taxes so their grandparents can play golf. So we’re going to have to level the American public. Let them know how broke we are and that people have to rely on themselves; they can’t rely on the government. They can’t rely on some type of program and the solution is not a program. It’s getting with the programs and letting the people find their own solutions. Unfortunately, some problems were made by government.

Douglas Goldstein: How can people learn more about your ideas and follow you?

Peter Schiff: I’m all over the internet. I do my own podcast, The Peter Schiff Podcast, at www.schiffradio.com. It’s also on iTunes and all these different places that podcasts are, so make sure to listen or go to my YouTube channel, The Peter Schiff Show. We post them up there. I also do video blogs on my YouTube channel. I’ve got a number of books out there that you can read, the most recent one being The Real Crash: America’s Coming Bankruptcy -- How to Save Yourself and Your Country. In fact, when Donald Trump talks about restructuring your debt or defaulting on the debt even though he wants to backtrack, that is exactly part of my prescription in my book. We are bankrupt and we have to admit it, and rather than taking on new debt, we need to restructure the debt that we already have that is unpayable.

What Kind of Economy Will the American President-Elect Inherit?

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