At last week’s “Inside Commodities” conference, the conversation returned again and again to one dominant theme: inflation vs. deflation. Some, like Nouriel Roubini, predicted the U.S. is set for a deflationary crash. But other speakers forecasted runaway inflation—including Peter Schiff, president of Euro Pacific Capital.
Author of 2007’s “Crash Proof: How to Profit from the Coming Economic Collapse,” Peter Schiff is an investment adviser, blogger and frequent commentator for dozens of financial print and television media outlets. Mr. Schiff served as an economic adviser to Rep. Ron Paul (R-TX) during his 2008 presidential campaign, and he is currently running for U.S. Senate, opposite incumbent Sen. Chris Dodd (D-CT).
While at the conference, HAI Associate Editor Lara Crigger grabbed a few minutes with Mr. Schiff to take his pulse on the global economic markets, including his thoughts on runaway inflation, the dollar’s future as a reserve currency and the possible return of the gold standard.
Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Earlier today at the “Commodities 2010: The Road Ahead” panel, you said you think the U.S. is headed for runaway inflation, rather than deflation. Why?
Peter Schiff, president, Euro Pacific Capital (Schiff): We’re headed that way because we’re creating too much money. Interest rates are too low. The Federal Reserve continues to expand its balance sheet. It continues to buy up assets that it shouldn’t be buying. That is basically the poison that the government has decided to swallow.
We have a choice between allowing a deflationary bust, allowing asset prices to collapse, allowing businesses to fail and allowing the recession to worsen in the short run; or we can try and postpone some of that pain by creating inflation, and deal with the inflation pain down the line. The latter is what the government has chosen. Unfortunately, they chose wrong, from the point of view of the American consumer, the American worker, the American saver. The American economy is going to pay dearly for the price of re-electing some of these incumbent politicians.
Crigger: On that same panel, you also said you thought the dollar would eventually lose its status as the world’s reserve currency. What do you think it will be replaced with?
Schiff: I don’t know. Hopefully nothing. I don’t think we should have a reserve currency.
Crigger: Why not?
Schiff: Well, it’s led to a lot of problems in the global economy. When the dollar was backed by gold, and was redeemable by gold, it being the reserve currency was OK. But at the moment, there are no currencies backed by gold. So I think that foreign central banks should hold gold as their key reserve, and not another currency. They can also have some foreign currencies as part of their overall reserves, but I think that gold should play a much bigger role in giving value to currency.
Because remember, you can’t have a monetary system without money. And money is gold. Just printing paper—there’s nothing behind that. There’s nothing intrinsic there. It always leads to chaos. If you can just print money at will, it has no scarcity. Then you have inflation; you have these asset bubbles; and you don’t have a well-functioning global economy. Hopefully we don’t anoint another reserve currency.
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