A colleague of mine suggested I watch Peter Schiff’s speech to a bunch of mortgage brokers in 2006 in which he in essence predicts the complete collapse of the US mortgage and real-esate markets. It is truly incredible speech that is upsetting on so many levels. I found it so interesting that I will try to transcribing it, so that it can be accessible in written form (couldn’t find this particular speech transcribed) for translation into other languages. I do believe that EVERYONE should hear this. It is just a hint of what is to come, and we need to be prepared so that we can find alternatives when things start hitting the fan.
“Nov 2006 Peter Schiff Mortgage Bankers Speech Part 1 of 8 – on YouTube by EPAdmin”
You may also find this video interesting on Money As Debt – and how banks “make” money.
Read more for the transcript of part 1/8 of the speech.
I am on the same side of the political spectrum as Barry. I believe in pretty much in the same things, limited government, freedom, capitalism, sound money, the rule of law, private property. All the concepts believed by the Founding Fathers when they first created this republic. Unfortunately, few, if any, of those principles are applicable to the modern American economy. Now, I’m going to talk mainly today about the real-estate market and the mortgage market because I know that’s the most relevant to the people in the room.
But let me first talk about the broader economic picture and where we are as a nation. Sure, when we were first formed as a republic a couple hundred years ago, the reason why we prospered, and the reason why we became the world’s wealthiest creditor nation (back in 1980 anyway) was because we had a comparative advantage in economic freedom. Taxes were much lower, the government was much less intrusive, here in America, then were the kings and the despots all over Europe. So the American colonies and our new country prospered. And we certainly borrowed a lot of money from the Europeans in the 19th century, but what we did with that money – we invested that money in factories, in infrastructures – we made capital investments. And, by taking that money and building factories. We became the world’s leading manufacturer and exporter of high quality, low cost consumer goods. Even if we eventually paid the highest wages in the whole world, American products were still the cheapest in price and quality. And because we made productive use of the money that we borrowed from the Europeans, we were able to repay the debt. You see, when you borrow money and build a factory the factory produces consumer goods, the consumer goods are sold. We sold those consumer goods – automobiles, sawing machines, dishwashers, we sold all these goods to the Europeans and we paid off our debts. And we went from a debtor nation to a creditor nation. But we had more foreign assets, that were owned by Americans, than all the other creditor nations in the world combined. We were the world’s biggest lender around the world. Americans were wealthy lenders, we had a high savings rate.
All that is different in modern America. Today the United States is not the world’s larges creditor nation – we are not even a creditor nation. We are the world’s largest debtor nation. In fact, we owe more than all the debtor nations of the world combined. We no longer flood the world with high quality, low cost manufacturing goods. We flood the world with our paper currency. Our “IOU’s”, because we no longer possess the industrial might or capability of producing those goods ourselves. Instead of being the world’s biggest lender, we are the world’s biggest borrowers. The United States routinely borrows from the poorest nations in the world. Now, according to modern economic thinking, this new state of affairs is somehow sustainable and a viable symbiotic relationship between America and the rest of the world. The relationship is: America consumes – and everybody else produces. America borrows and everybody else saves. And on the surface, potentially that argument may make sense. Without American consumption, what would all these Chinese do for jobs? As it was pointed out by Barry, it’s not about jobs, it’s about consumption. It’s about standards of living. You don’t want jobs just so you can work, you want jobs so that you can consume, so that you can have a higher standard of living. The fact that the Chinese get jobs in exchange for the products they give us doesn’t do any good for the Chinese. The Chinese are perfectly capable of consuming their output themselves. They don’t need their government to artificially suppress the exchange rate of the Yuan so that they can artificially elevate the value of the Dollar so that the Americans get to consume all the goods that the Chinese could have consumed had it not been for that monetary policy. But this current dynamic, where we don’t save and we don’t produce, is not viable. It is no more viable than the economic models that existed in the 1990’s with respect to internet stocks or technology companies, where Wall Street had people believe that stock prices could rise regardless of the fact that the companies had no earnings, paid no dividends. Without any regard to any fundamental measure-evaluation we were told that it was a new era, and we saw what happened there. And the same Wall Street economist that told us the internet era was a new era are now telling us that this current era of American consumption and global production is viable. And it is not.
I will give you a quick little analogy and then move on to another subject. I mentioned this on my website and I use it on various speaking engagements. But to describe this dynamic – assume that a group of castaways are stranded on an island. Let’s say five of them are Asian and one of them are American. And when they are stranded on this island, they need to divide up the workload. So one of the Asians is given the job of hunting, looking for meat. Another one is going to be fishing, trying to get fish. Another one is in charge of scourging the island for vegetation. Still another one gets the job of looking for wood to build a fire and cook the meal. And then it comes down to the American and they say “what job should we assign the American”? Well the American gets assigned the job of eating. And so at the end of the day, all these Asians gather around this big table after a hard day of forging and hunting and fishing and they prepare to feed this American who did nothing all day but sun himself on the beach – he had a service economy. At any event, a modern economist who is looking at this little island’s economist would say that the American is the key to the whole thing. Without the American, and his ravenous appetite, these poor Asians would have nothing to do all day. They would all be unemployed.
Well, the reality is that the Asians are perfectly capable of consuming the food themselves. Now, perhaps if they didn’t have to spend all day feeding this fat American, they wouldn’t have to work this hard. Maybe they could pursue other interests that they had. The best they could do to improve their own standards of living is to kick the American off the island. Off course when that happens, the American is in trouble because now he doesn’t have five Asians doing all his work. You know, it reminds me a lot about that book, Tom Sawyer. You know where Tom is able to convince all his friends to whitewash this fence for him. And to not only do that, but to pay him for the privilege. Because Tom Sawyer got his friends so convinced that there was so much joy in this toil that it was worth paying him. So he got the world to do his chores. And little did Samuel Clemens realize that that little passage from that book would one day form the basics of the global economy. Where America convinced a billion Chinese to paint our fence and pay us for the privilege. That is going to end. In fact, the Chinese have been talking this week about diversifying, you know out of their one trillion Dollars in reserve, of course they can’t diversify out of them, they are stuck with them. But the minute they stop buying Dollars it is over.
Let me go back a little bit to where we are right now and how we got here most recently. Back in the 1990’s we had a bubble in the stock market. The bubble, like most bubbles was created by Alan Greenspan, the Federal Reserve and a monetary policy that was that was too loose and too inflationary, even in the 1990’s. The inflation that was created manifested itself in rising asset prices. And during that time period there were a lot of “malinvestments”, as Mises calls them, made. A lot of that easy money funded a lot of cockamanie investments in telecommunications in internet companies that never should have seen the light of day. Ultimately, Greenspan started to raise interest rates and take away that monetary stimuli that he had supplied during the nineties. And eventually…