Dr. Doom forecasts depression

Janet Whitman
Financial Post
Monday, Oct 27, 2008

NEW YORK – Peter D. Schiff, an extreme bear who correctly foresaw the U.S. stock-market slide, the home mortgage meltdown and the credit crunch, still sees plenty of doom and gloom ahead. As president of Euro-Pacific Capital, a Connecticut-based brokerage, the 43-year old financial advisor has long been urging his clients to get their money out of U.S. stock and bond markets and look for safer investments outside of America or put their nest eggs into silver and gold.

Mr. Schiff, a frequent pundit on U.S. business channels whose gloomy views have earned him the nickname “Dr. Doom,” sees no need to alter that strategy. He expects a lot more downside, despite the already precipitous drop in U.S. stocks, which has seen the Dow Jones Industrial Average tumble 40% from its October 2007 record of 14,164 to 8,379 points as of Friday’s close.

Far from fixing the problem, the US$700-billion Wall Street bailout and other government interventions are only going to prolong the pain, predicts Mr. Schiff, who was economic advisor for libertarian Ron Paul’s 2008 presidential campaign.

The economy, he says, appears headed for its first depression since the Dirty Thirties. Mr. Schiff spoke with the Financial Post’s Janet Whitman.
FP: How did the U.S. get into this mess?

Peter Schiff: It was the result of reckless monetary policies. Of course, the rest of the world is not blameless. They’re the ones who loaned us all the money that we spent. We couldn’t have dug ourselves into this gigantic hole without them. We’ve printed and spent and borrowed our way into a financial disaster. What we are witnessing is the consequences of the excesses of our economy, especially over the past eight years since the bursting of the tech bubble. We basically ended up with false economic growth. Ultimately, if an economy lives by credit, it dies by credit. When we can’t borrow any more, it implodes. A lot of companies were built around this phony economy. Americans are now too broke to buy those products. We never could afford to pay for them. We were paying for them with debt.
FP: Are government bailouts helping?

PS: Everything that the government is doing right now is designed to prevent the market from administering its tough medicine. All of the bailouts are a bad idea. The government is trying to put more cash out there so Americans can keep spending. We don’t need more loans for consumers. We need less. Consumers should not be borrowing. They should be doing the opposite. We’re trying to encourage more of the behavior that’s behind the problem.
FP: What is the solution then?

PS: What we need is real change. We need to rein in the government and let lose the free market, unfettered by government. It was government intervention that created this crisis in the first place. The Federal Reserve brought interest rates down and provided all this cheap money for everyone to speculate with. A lot of Americans refinanced and took out much bigger mortgages in the last few years. The idea was, You don’t want to leave all of that equity in your house. You’re rich now, you live in half million-dollar house. You need a media room and a Mercedes. You can’t be driving that Ford. Everybody was spending all that money like they were entitled to it. Now all the debt is still there and we can’t pay it back. We can’t fix the problem. We can’t stop housing prices from falling because they are too high. Most people still think that the government can fix it and put it back together the way it was. But we need housing prices to fall to a point where Americans can afford them – where you can put 20% down and have a mortgage payment that’s only 25% of your income. I think real estate in America is going to be the cheapest it’s ever been in real terms. Pendulums don’t stop in the center. They swing in the other direction and over shift.
FP: How bad is the economic downturn going to get?

PS: As of right now, we are headed for a depression, meaning a protracted period of economic contraction with elevated levels of bankruptcies and unemployment. It’s not going to be a recession the way we’ve come to know them. Whatever we call it, we’re still going to be in it at the end of [U.S. presidential contender Barack] Obama’s term. He’s going to be known as a depression-era president. Unfortunately, [things he's proposing to do] could make it worse and drag it out. The economy will be the issue when he goes for reelection…We have to restructure the economy in a different way. That’s going to involve a lot of pain. We haven’t seen the full extent of the doom and gloom in real economy. It’s showing up on Wall Street first because they funded all of the extravagance…But the bigger picture is the party is over. We’re going to have to get used to a different lifestyle. We’re going to have to start saving money again.
FP: When might the U.S. stock market bottom out?

PS: The U.S. stock market is still fairly expensive, especially if you factor in what future earnings are going to be. I think [the Dow] still has a long way to go down. Is it 7,500, 6,000, 5,000? I don’t know, but I don’t think we’re there yet. Adjusted for inflation, I think in five years the Dow is going to be below where it is today.