Wednesday, August 15, 2012

The Real Crash by Peter Schiff

The Real Crash by Peter D. Schiff tells the scary story of how bad our economy is and how to fix it. The solutions are radical and not likely to happen anytime soon. That makes the whole thing even scarier.

The crash of 2008 was not THE crash. That one is still to come. We have traded one bubble for another. We are now in the biggest bubble of them all - a government bubble.  And it, like all the bubbles before it, will pop. It will be painful. According to Schiff, there simply is no easy way out. The hope is that we will rise like a Phoenix after the devastation to rebuild, and this time, do it right.

Thanks to the Fed, the U.S. has been able to borrow and print unprecedented amounts of money. When the Fed creates money out of thin air, that money has to go somewhere. So investors rush into the next hot thing with their cheap money, whether it be dot-com stocks or housing, creating a bubble. Now the government is sucking up huge amounts of money and when it comes crashing down, nothing will be spared. 

So what are the proffered solutions?

1. Jobs - The government and its policies are standing in the way of entrepreneurs creating more jobs. Taxes, the minimum wage, high unemployment insurance payments, and regulations all work to keep jobs from being created.

2. Deregulate the financial industry - The regulations governing the financial industry have created an environment in which the incentives are skewed. The rewards are private and the risks are public. Case in point, the FDIC. Having a federal guarantee for deposits allows banks to be riskier than they otherwise would be. Government regulators give the public a false sense of security in the investments. Regulations keep out smaller competitors, thus creating “too big to fail” entities. Finally bailouts should be abolished. Allow financial institutions to fail.

3. Return to the gold standard - This one is my favorite. Our money is literally worthless. These crumpled green pieces of paper only have value because we believe they do. But gold has real value and cannot be created by fiat. As our paper money becomes increasingly worth less, inflation steals value from savers. A dollar deposited in the bank a hundred years ago is worth considerably less today. But because inflating money feels like “free” money, politicians of both stripes cannot wean themselves off of it. Rather than using inflationary fiat money, we should return to the normal of deflation and falling prices (think cell phones).

4. Tax reform - I love this revolutionary idea: End the income tax. The Constitution authorizes two kinds of taxes - direct and indirect. Direct taxes are paid by the people in the states according to their percentage of the population. (i.e. California with 10% of the pop. would pay 10% of the revenue being raised.) This kept states honest in reporting their population and it kept poor states from seeking to gouge rich states. Direct taxes were envisioned as a way to raise revenue in emergency situations like war. Indirect taxes are levied through middle men, like a sales tax. You do not pay the government directly. The benefit of indirect taxes is that they are self-regulating. If you don’t want to pay the tax, you do not engage in the taxed activity. While the government made due for over a 100 years with indirect taxes and fees, the idea of an income tax was first raised in 1894. After being declared unconstitutional for not being a direct tax, the Constitution was amended. Now Congress has virtually unlimited taxing power. We could not have a worse system vis a vis economic growth.   Government should be able to fund itself with fees. If it cannot self-fund, get out of that area. All additional taxes should be in the form of a consumption tax, which does the least amount of harm to the economy. Second-best option is the flat tax.

5. End Social Security and Medicare - They are quite simply unsustainable and immoral. Wealth is transferred from poorer working people to wealthy retirees. Even the poor retirees are hurt as they generally die earlier and therefore do not get out as much as a richer person would. Let Social Security die a slow death by abolishing the payroll tax and moving wealthier people off of it. It can eventually be rolled into standard welfare for the poorest retirees. 

6. Fix Higher Ed - We spend too much on education and get too little in return. College is a bad investment for many. Young people lose four years in which they could be developing crucial skills and come out deeply in debt. We must stop the subsidies of education by the government, which only drives up the prices astronomically and stop advising every student to go to college. In fact, if we want to be truly radical and really reform education, we should end ALL government involvement in education, period. 

7. Reform health care - Start with repealing Obamacare. Get government out of paying for health care. This raises prices just like we have seen in education. End the tax deduction for insurance or at least make it applicable to those with private accounts. Insurance shouldn’t be employer-based anyways. This highly distorts the market and drives up costs. End the mandates on insurers. Open us the practice of medicine to people other than PhD’s. Sell insurance across state lines. Make insurance true insurance, rather than pre-paid health care.

8. Put government in its place - Government is too big. It must be shrunk down to its Constitutional size. Not only should government not do what private individuals can do, what it does do should be as local as possible. Abolish agencies and get the government out of as much as possible.

9. Admit the U.S. is bankrupt - We are simply too far gone. We cannot make good on the promises made by government. We would do best to admit we are broke and then enter into a bankruptcy restructuring program. We should attempt to repay what we can of our debt and enter into negotiations on how to get out from under it. Liquidate as many assets as possible to pay the debt. Pretending we can pay it off, trying to hyper-inflate the money supply, or raising taxes to ludicrous levels will not get us out of this mess. Default.

There you have it. Peter Schiff’s radical solutions to our overwhelming problems. Where do I sign up?!?

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