The Real Fiscal Cliff: How to Spot the Ledge

0:00Our next speaker is Mr. Peter Schiff. Peter is head of CEO and founder of Euro Pacific Capital, author of a number of important books, The Real Crash, most recently. I think all of us who are interested in these kinds of ideas still thrill to the YouTubes we used to see of Peter, although they didn't know it, taking down the entire financial establishment and showing them exactly where they were wrong. And they laughed at him. Of course, they didn't, they didn't keep laughing. Now he's got his own radio talk show. So he's a star of both YouTubes and radio. And it's a great honor to have as our speaker today, Peter Schiff. He's going to talk about the fiscal cliff, cliff, how to spot the ledge, Mr. Peter Schiff. You know, I think we just went over it. So, you know, not that I actually ever prepare my talks in advance or write anything up, but if I did, I would have had to completely rewrite it just based on the events of yesterday. So, that's pretty much what I'm going to

1:02talk about. You know, what happened yesterday, and more importantly, what's going to happen tomorrow as a result of what happened yesterday. Of course, if you listen to the media reports of what Ben Bernanke did, it's a bold new plan. I mean, there's nothing bold about it, and there's nothing new about it. I mean, we've had this plan before, we've seen it fail time after time after time, but politicians always resort to it because ultimately the decision to destroy your currency is a is a political one. Ben Bernanke knows that if he does the right thing, we're gonna have a horrific recession. After all, that's what we need to correct the imbalances that have been built up in the U.S. economy as a result of the exact same policy that he is now upping the ante on. You know, when they first announced QE2, I was out there on television arguing that well that means we're gonna get QE3 and I for a while I was saying we're

2:07gonna have more QEs than Rocky movies although that's a prediction that I'm now wrong about right because this QE is open-ended so it's gonna never end so this is the last QE it won't end until there's a crisis although I was laughing earlier today I found out that Paul Krugman came out and said it's not big enough it's open-ended I mean what does he want QE for eternity maybe beyond the Grave, Ben Bernanke promises to keep interest rates at zero, although maybe he was referring to the fact that they're only going to buy 40 billion a month of mortgages, although that's probably the floor. I'm sure the Fed might end up buying more than that. But this plan, yeah, now I remember what I was saying.

2:53So when I was going on these shows, I said, look, this means we're going to have QE3. And a lot of economists, in quotes, would disagree with me, and they would say, no, no, no, we're not, this is the last QE, the economy doesn't need anymore, and I would say, well, it didn't need this dose either, but that didn't stop Ben Bernanke from administering it, and the reason that I knew that QE3 was coming was because I knew QE2 wouldn't work. And so what else would the Fed do when their last experiment didn't work? Just repeat it. That's all they could do. Whenever something doesn't work, do it again. Then, maybe do it bigger and hope for a different result, which I've heard is the definition of insanity, which I guess is appropriate here, because I knew that rather than fixing the economy or curing the disease, that the QE would make it worse.

3:45Because what is the Q, quantitative easing, what is the goal of it? The goal of it is to get Americans to spend more money, borrow more money and spend it. Well, that was the problem. We borrowed all this money, we're broke, and now we have a recession, because we have to rebuild our savings, we need savings so we can have capital investments, so we can produce things, so we can create productive jobs, we have to transition the economy, but QE was designed to prevent that process from happening. So I knew that we could never have We had to have a recession as long as the Fed was resisting the only cure. We had to rebalance the economy before it could grow. We had to repair the foundation before we can try to erect a building or structure there.

4:34So I knew that the QE was going to interfere with the process. And so I knew that we were going to get QE3. And, of course, it took a while. The Fed delayed it as long as it could. They came up with this operation twist, right, and now, you know, I've been describing the new operation as Operation Screw

4:56Because basically what the Fed is saying, if you've got dollars, you're screwed You know, if you've got a savings account, if you've got bonds, if you work for wages, you know This is what's gonna happen to you And you know that what are the what are the most amazing things and there's so many amazing things in Ben Bernanke's press conference and and the Fed Statement. But one of the things is, why is Ben Bernanke doing QE3? What is his goal, right? And basically what happened is these geniuses at the Federal Reserve all got together and they said, we need a plan to revive the economy. And then, I don't know who probably got it, I got one, I got a great idea, all right, what is it? Here's the idea, we're going to print up a bunch of money and we're going to lend it out to Americans at ultra low interest rates so that they can buy houses and that we can build more houses and then if we buy houses, prices will go up and people will feel rich

5:55and they'll be able to extract the equity and spend it on consumer goods and then as real estate prices go up, investors are going to want to buy, speculators are going to want to buy because they're going to want to get rich on real estate and then rising real estate prices, there's going to create all kinds of consumer demand and we're going to spend and lots of money and we're going to have a recovery. That was their plan. Didn't anyone say, wait a minute, we just did that. That was our last plan. Doesn't anyone remember the housing bubble and the financial crisis of 2008? They deliberately want to reflate a housing bubble, which I thought, number one, is interesting because it's kind of an admission that they're to blame for the last one because they basically said we want to use artificially low interest rates to stimulate housing, to make housing to make people feel richer so they'll spend money they don't have.

6:44That's what happened the last time. I mean, did they not even remember that they really want to do it all over again? But, you know, Ben Bernanke kind of let the cat out of the bag in that press conference because he basically said the Fed has one tool, right? We can buy up financial assets. We can print money. That's our tool, right? They have one tool and they're going to use it even if it doesn't work because it's the only tool that they got, right? All they have is this hammer, and they're going to smash everything inside, even though nothing is a nail, but they've got this big hammer. And the Fed is, we can't just do nothing, we can't just sit back, unemployment is so high, we've got to print this money. Now, the Fed's plan to inflate a housing bubble, the good news is it's not going to work.

7:29Because you never can reflate the same bubble twice in a row. There's so many holes in that bubble, the air ain't going to stay there. going to stay there. Where is all this money going to go that the Fed is creating? It's going to go into real things. It's going to go into oil. It's going to go into gold commodities. It's going to fund this big government bubble. The government is spending all this money. But it's not going to make real estate prices go up. It's not even going to bring down mortgage rates. In fact, QE3 sunk the minute they launched it. Look at long-term interest rates. We've We've had one of the biggest declines in bond prices today, and they were down yesterday. So the yield on the 10-year is now over 3%, which of course is still much too low.

8:15I mean, you'd have to be a complete moron to loan the U.S. Treasury money for 30 years at 3%, but those rates are going up. So how is he going to get lower rates? What I'm thinking that the Fed must be hoping is that Americans are actually dumb enough to do exactly what the US Treasury has already done, you know, their own operation twist. I think what Ben Bernanke is hoping is that Americans will refinance their fixed rate mortgages to an adjustable rate, because that's the only way they're going to bring down their payments and maybe that's why Ben Bernanke says, don't worry, we're going to keep rates at zero till 2015, in fact, even if the economy recovers, we're still going to keep them at zero, right? So what he's trying to do probably is create a sense of confidence so that people are comfortable enough giving up their 30 year fixed rate mortgage at four and a half to take a one year arm, right?

9:10Because that's the only way they're going to get more purchasing power. But here's the other problem too, because number one, once the government's got everybody hooked on arms, how are they going to raise interest rates? That makes the problem even worse. But also, everybody talks about the positive impact of falling mortgage rates. As if that's the only side of the equation. As if the borrower is the only one that counts. What about the lender? There are two sides of a mortgage. What's good for the borrower has to be a lousy deal for the lender. See every time you can refinance your mortgage to a lower rate, the guy on the other end of the deal, his income stream is suppressed. Of course those are banks, insurance companies, pension funds, so you're robbing Peter to pay Paul, the economy doesn't benefit from falling mortgage rates, debtors benefit at the expense of creditors, but that actually undermines the economy and of course you're undermining the most important part of the economy and of course you create this predicament

10:14which is the predicament that the Federal Reserve is now in and that nobody seems to to want to acknowledge this is that the Fed is stuck. Why doesn't the Fed raise interest rates? Because they can't. Now they should, but they can't because of the immediate economic implosion that would result from an increase in interest rates. Because we can't afford to pay. The U.S. government has a $16 trillion debt, I mean that's the tip of the iceberg but that's the funded debt. We have it financed with treasury bills. A third of it probably matures in the next year. That's six trillion dollars. I mean, obviously, we can't come up with the money. And our plan is that we won't have to because when the bonds mature, we're just going to borrow them, borrow the money, probably from the same people who loaned it to us, right? It's the Bernie Madoff plan. That's what we got. And of course, it's not going to work out any better than

11:12in his plan, and I thought it was funny, too, that Bernie Madoff actually described what the U.S. government was doing as a Ponzi scheme. And then the people said, well, don't listen to him, he doesn't have any credibility. I said, well, on Ponzi schemes he does. He knows one when he sees one. It's the only place he's got them. But, so what's going to happen when interest rates go up? How can we possibly pay? What if we have a trillion dollar interest payment on the national debt. That's half our tax revenue. I mean, where are we going to get that money? And what happens to the banks when interest rates go up? You know, people say that, oh, the banks aren't loaning any money out. Sure they are. They're loaning it to the government. They're buying all the treasuries. That's where the government's getting this money. So banks are lending. They're just lending to the government. And they own all this long-term paper with low yields. What happens when interest rates go

12:06And what happens to the housing market? Ben Bernanke wants real estate prices to go up even more. They're already overpriced still. They haven't fully deflated. How could you say that we need higher real estate prices? America's broke. People don't have any money for down payments. Real estate prices have to come down. We don't want it to go up. The only reason they're not going down is because the government is basically underwriting all the mortgages. In fact, now, not only is the government going to guarantee all the mortgages, it's going to hold the paper. Basically, we now have an economy that consists of the U.S. government basically printing money, right, and giving it to people to buy houses. I mean, that's it. I mean, the whole mortgage market, and this is supposed to be capitalism?

12:53And somehow, you know, when the whole thing implodes, they're going to look to blame it on the free market? I mean, how can anybody believe that this is the way an economy needs to be organized? needs to be organized. But this is the trajectory that we're on, because if they let interest rates go up, then we're going to have this horrific recession. We'll have the recession that we didn't have in 2008. We'll have the recession that we didn't have in 2001, or the one we didn't have in 1994, or whatever the last one was, or 1987. 7. Every time the markets tried to correct from the malinvestments that resulted from cheap money, all we got was more cheap money, so we'd have bigger malinvestments so we could paper it over and keep on kicking the can down the road. Well, the problem is, eventually, you run out of road, and I think we are at that point. In fact, I think one of the circumstances

13:48that bought us some time was the developing crisis in Europe. In fact, when I was making my forecasts about the U.S. economy, I didn't take that into consideration. I mean, sometimes you can't think of everything, and things will happen that you didn't necessarily forecast. I've always been skeptical of the euro, but I always thought that the dollar would meet its demise before the euro, and I still believe that. But for a while people began to question the Euro. And so as a result of that, that kind of bought some time for the U.S. because it really enabled us to go much deeper into debt because the fear of the Eurozone and the Euro created a lot of buying as a safe haven for dollars, right?

14:38Of course the dollar was perceived as a safe haven even though it wasn't. I mean it's ridiculous that if you are afraid of debt and you're afraid of all the debt of Europe that the solution would be to buy dollars when we've got even more debt than they do and we're even less likely to pay but it's almost like just a reflexive action in fact it's so reflexive if you can remember when S&P downgraded US Treasuries from AAA to AA plus and of course they didn't downgrade them enough and now by the way And Moody's is now threatening to downgrade as well. But remember, when we got the initial downgrade, there was such a fear in the market as a result of the downgrading of U.S. Treasuries that investors panicked and as a safe haven, they bought U.S. Treasuries.

15:27They bought the very paper that was downgraded because they were afraid of the downgrade. That shows you how it's just all Pavlovian. The perception is that the dollar is safe. The perception is that the Treasury is safe. But when people realize that that's not true, that all we can do is print money, in fact, one of the reasons that people were buying dollars and not, you know, worried about the Euro because they were worried about Greece or they were worried about Italy or Portugal or Spain or Ireland, they would always say, well, you know, Greece can't print money. That's the problem. As if that's the solution, that we can print money. In fact, I think that we're in worse shape because we can print money. You know, we rely on it like a crutch, but the bottom line is default, you know, default is default.

16:13I mean, you have different forms of it, but the result is the same. If you have debt that you can't pay, and we have debt that we can't pay, I said the only reason that we can pretend that we can afford it is because we can service it. And we can only service it because rates are so low and because the people who own the paper are lending us the money to pay the interest. So the whole thing is an illusion, but eventually the illusion pierces. The Greeks were having no problem a few years ago selling their paper even though anybody with a brain could see that they were broke and that there's no way that they were good for the money, but nobody cared until all of a sudden they cared. Well this is the tipping point now because what's happened is Europe has put a band-aid on this crisis.

17:00The wealthier nations in Europe, for right or wrong, have decided to put a lot of their muscle behind the euro to make sure that it doesn't collapse and to keep these weaker peripheral nations in the euro and to loan them money. I think it was a mistake. I think a better solution would have been to allow bankruptcies and force governments to restructure. I don't think anybody would have left the euro. I think it would have been better to stay in the euro and just not have all the debt and it would have been better for the future of the euro and the eurozone and the bond markets because I think it's important that creditors perceive risk in sovereign debt because otherwise governments have no limit to what they can borrow if at least the lenders know that if governments borrow too much money they're not going to pay you back well then there's going to be a limit on how much governments can borrow because interest rates will provide the discipline

17:54We don't have that discipline in the U.S. In fact, I know I keep switching gears, but in Ben Bernanke's press conference, he actually had the nerve to say that he thought his policy that he just announced, his operations screw, he said that it's actually going to produce smaller deficits. Now how is that possible? The Fed is going to keep interest rates at Zero, so that makes it cheaper for the government to borrow. Isn't that gonna make bigger deficits? After all, if it's cheaper for the government to borrow, wouldn't they borrow more? Wouldn't the best way to have smaller deficits be to stop buying government bonds, to stop printing money and to let interest rates go up? And then the government couldn't afford to borrow. They'd have no choice. The deficits would stop. The reason the deficits are growing out of control is because Ben Bernanke enables it. He finances it. He makes it possible.

18:48The politicians don't have to make any tough choices because Ben Bernanke gives them an easy way out. But what Ben Bernanke said is, well, this policy is going to lead to great economic growth and that's going to ultimately reduce the deficits. So he thinks because we're going to get all this economic growth, we're going to have smaller deficits. We're not. We're not going to have any economic growth. You can't grow an economy by printing money. How could you do that? I mean, if it was that simple, right? Which economies would be the fastest growing? All you have to do is run money off a printing press, right? I mean, people keep saying the problem in America, and I laugh, I had a debate on like China TV just last night with this guy, and he said the problem in America is there's not enough demand. I said, are you kidding me? Not enough demand? I mean, we bought everything in sight. You know, we're broke because of all this demand.

19:33I mean, demand is infinite. We buy too much. It's not a shortage of demand, it's a shortage of supply. We're not producing stuff. We need more production, we don't need more spending. I mean, we spent ourselves into bankruptcy, but what I was talking about before I digressed into all these tangents, was um, now I lost my, oh yeah, I was talking about Europe, so anyway, so now that, at least temporarily, the pressure is off the Euro, there is no fear right now that the Euro is about to implode, that nations are about to leave the Euro, for a while, people were like, Well, I got French francs. Am I going to have francs? I mean, I have euros. Am I going to end up with French francs?

20:21Am I going to have Deutschmarks? Am I going to have Drachma? People were afraid to keep their money in the bank. I don't want to keep my money in an Italian bank because if the euro breaks up, I don't want lira. I want to pull my money out. I want my money in a German bank or I want bundes. There was a lot of uncertainty. And some people were so uncertain. They said, look, I don't want any of this stuff. And they just bought dollars and they bought treasuries. That's one of the reasons the Fed was able to do Operation Twist, as they're selling their short-term paper, to buy up the long-term paper, there were buyers there, because they were looking for that safe haven. But now that that's gone, well, why does anybody want to buy dollars? Who's going to buy dollars now? Everybody's trying to get rid of dollars. The dollar is dropping, it's dropped below key support, gold prices are surging, oil prices are surging, even the euro. Now the euro's up at 131 against the dollar.

21:11A month ago, people were talking about parity with the dollar and it was down around 120. Now it's 131 and rising rapidly, global stock markets have turned around. Why would anybody want to own dollars? Our trade deficit, we just got our trade deficit, I think last week it had surged to a multi-year high. We're still running a trade deficit of over $500 billion a year. I guess that was possible when people wanted to hold those dollars because they thought and I thought there was some kind of safe haven there, but now that they don't need the dollars as a safe haven, what do they need them for? What are they going to buy with them? Are they really going to buy treasuries at such low yields? I mean, for a while they didn't care about the return. They just wanted to buy something that they thought was safe. All they cared about was getting their money back. They didn't care that they got no yield.

21:59But now there's no reason. And if you look at our open-ended commitment to print money, people know, look, how could you hold on to the dollar? in the dollar. So we're going to see this big drop now in the dollar. And I've been looking for this for a while, and again, something always happens, you know, to postpone it. And, you know, I don't know, I mean, you know, sometimes you never know what you don't know. Could something happen? I mean, is it possible that aliens from another planet could somehow descend on Earth and Ben Bernanke will convince them to buy our bonds? I don't know. It's not that likely. But, you know, you never, something can happen to add to the chain letter or the Ponzi scheme, but I don't know, I think we've reached the end of our line, right? The Fed is all in on this policy, there's nothing left, interest rates are at zero, right?

22:48They're pretty money to try to reflate this housing bubble, I know it won't work, prices are already rising, so what I think is going to happen is now you're going to start to see the weakness of the dollar, that's going to immediately translate into higher prices for Commodities, for Food, for Energy, and so it's the exact opposite. Ben Bernanke believed that his policy would give Americans purchasing power by reducing their mortgage payments or by creating new home equity for them to tap into that the wealth effect was going to make Americans more likely to spend. I think the effect of his policy is going to be to drain purchasing power from Americans is because it's going to cause the cost of living to rise, and if Americans are spending more money on food, they're spending more money on gasoline, they're having to spend more money on insurance, after all, insurance companies have to really raise their rates because they're not getting a return on their portfolios and bonds, and of course, you know,

23:46all the costs of raw materials, if your house burns down, if you've got to, you know, rebuild it, it's going to be very expensive because of the cost of the raw materials, so insurance First rates are going to be going up, health care costs are going up, all these prices are rising and so the consumer is going to have less discretionary income, not more. In addition, I think that the higher inflation and the preservation of these imbalances is going to lead to greater levels of unemployment, more people leaving the labor force. You see, we have to create certain types of jobs. We have to create jobs in the productive part of our economy, and this monetary policy is making that less likely. And we're still losing the jobs in the service sector, but we're not going to gain the jobs in the other sectors until the government changes monetary policy.

24:36So I know that we can't restructure. And in fact, any of the jobs that we are gaining, I mean, the last jobs numbers we had that precipitated this announcement, or gave the Fed the excuse to do what it was going to to do anyway. We created 90,000 jobs, but we lost 10,000 manufacturing jobs. So we created some consumers, but we destroyed producers. The people that got those service sector jobs, they're just going to spend their money on imports. They're going to run up the trade deficit. They're going to widen the economic imbalances. And of course, I think four times as many Americans actually threw in the towel and left the labor force as found jobs. So So now all these people are now living off the welfare state, they're collecting disability payments from Social Security, which is really unemployment in disguise, and they're also no longer paying into the system.

25:32So I think we're close to this end game. So as the dollar goes down and prices start to rise, eventually it's going to show up in the CPI. And, of course, by the time it does, the consumer is feeling the pain at the gas station, at the supermarket, much more than what you would get from the CPI. But then again, the party's over. The Fed can only maintain these 0% interest rates so long as it can claim there's no inflation. Now, how it can claim it now is beyond me, but at some point it will be impossible for Ben Bernanke to stand up there in front of an audience and say there's no inflation. And then what is he going to do? What is he going to do about the inflation? Now, I think initially he might try to say, well, a little inflation is a good thing because at least it means that we dodged a bullet on deflation. And that might work, you know, to a point,

26:23you know. In fact, initially I believe that as interest rates rise, they're going to say, well, it's a good thing that they're rising because it shows confidence that we're going to have a recovery. Even though the recovery was based on interest rates going down, they're not going to bother to think about that, but they'll just look at interest rates going up as a positive sign. They might even look at the weak dollar as a positive sign. Yeah, it's going to help our exports, as if the weakening dollar has ever helped our exports. I mean, we have record trade deficits, but eventually they'll say it's a good thing, but then pretty soon it's too much of a good thing. And when it goes from a dollar decline to a dollar crisis, when does the bond market go from a decline to a crisis? I think it happens very quickly. I think all of a sudden we wake up one morning and the dollars down by 10% overnight or 15% it's a huge move I mean maybe it's

27:15going like this it's going down like this and then all of a sudden it just falls off a cliff because it has to happen eventually people have to throw in the towel what about all the central banks around the world that are trying to peg their currencies to the dollar you know we're asking them to really you know double down on that bet right now because if we're gonna print all this money and give it to Americans to buy imports what is China gonna do with all They're going to have to print up R&B and buy up all those dollars. They're going to have to increase their inflation. We're basically asking the whole world to take a lot more inflation so that we can delay restructuring our economy. Well, at some point, they're not going to want to do that anymore. I just had a discussion before I came here with a Wall Street Journal reporter and he was saying to me, don't the Chinese benefit from this

28:07The Chinese don't benefit from this because their people get the jobs. That's what you tell me, that slaves benefit from slavery because they had a job? I mean, it doesn't benefit the Chinese to work for us. If they work for themselves, well then, yeah, then the jobs are worthwhile. Because you don't want jobs. No one wants to work. You want the things that you can buy with your paycheck. If you can get the paycheck without working, most people would go for it. In fact, that's why people want to retire. That's why you stop working. That's a goal that we have. We work so that we can stop working one day. Work is not an end in and of itself. It's a means to something that we actually want. In fact, I joke, Ben Bernanke is talking about all the jobs he's going to create. Yeah, he's going to create jobs for people who don't want them.

28:52He's going to create jobs for people who are retired right now, who are going to have to go back to work because they're too broke, because they can't survive on their retirement savings anywhere. ." In fact, yeah, thanks to Ben Bernanke, I got three jobs, and I still barely keep ends meet. I mean, that is not the goal of society, is to work harder. We want to work less. But the reason that we don't have jobs, in fact, at the Republican convention, Mitt Romney, his big thing was like, the economy needs more jobs. We need more jobs. That's not what we need. We need more freedom. And if we have freedom, then the people who want jobs will have them. But the reason there's so much unemployment is because there's no free market. The government comes in and screws it up, and they have minimum wage laws and occupational licensing laws and all these taxes and regulations that price so many people out of the market.

29:40And then the government makes it very attractive not to work. For a lot of people, not working is far more lucrative than working, and it's certainly a lot easier. It's a lot less stressful just to collect money for not working and have to show up for a job. So if we had more freedom, we'd have the jobs, but what Ben Bernanke is doing isn't going to create productive jobs, and I hear people all the time, we just need people working. Well, what are they going to do? Well, just who cares? Let the government hire them. To do what? And where are they going to get the money to hire them? The government doesn't have any money. Who are they going to take it from? What job are we going to destroy in the private sector that we might actually want that might produce something that we need so that we can hire somebody to do something that we don't need from the government? So this whole plan is failing, and as I get back to where I was, I keep digressing.

30:33So we're at the beginning of this cycle where you get this pressure on the dollar, and then there's a crisis in the foreign exchange market. There's a sovereign debt crisis, just like what's going on in Europe, except people are going to be focusing not on default, but on inflation. Now personally, I think that default is better. I think the best thing that we can do with our debt is restructure and admit that we're broke and that we can't pay. Because the only reason that we have to keep interest rates at zero is so we can service a debt that is unserviceable. But the biggest problem with the U.S. economy, the single biggest problem is that interest rates are too low. And until we let interest rates go up, we're never going to solve that problem. But if we let interest rates go up, we can't afford to pay.

31:22So we'd have to default. But the government doesn't want to acknowledge that, the government doesn't want to admit that it's broke. And it's not just defaulting to our bondholders. We have to default on our promises to seniors who are expecting Social Security, who are expecting Medicare. You can't have it. We've got to default on government employees who are expecting pensions. You know, now I don't say we give people nothing. Some people maybe we give nothing if we can means test some of these programs. But we have to reduce the benefits, not just to people way in the future, but to people Right now, people who are currently getting checks have to be told, I'm sorry, you can't get that check. You're going to get a smaller check because the country is broke. But in order to avoid that, we keep interest rates down at zero. But by keeping them at zero, all we do is perpetuate all the problems of the economy.

32:07If we need more savings, how are we going to get that if savings are being destroyed? If your interest rate is negative, who's going to be dumb enough to save money? And of course, all we're trying to do is encourage more people to borrow, when if we let interest rates go up, the market would encourage people to save and it would punish people from borrowing and we could rebalance this economy. But when we have our crisis, I don't believe that we have the integrity to default. I don't think politicians are honest enough to do that. So what it's going to be is inflation and that is going to be the basis of our currency crisis or our sovereign debt crisis. It's not that the US government isn't going to pay its bills. That's not the problem. The problem is, what is the money going to be worth when you get it, right?

32:55And if the dollar loses 50% of its value, that's the same thing as getting 50 cents on the dollar. Even if you get 100 cents on the dollar, if it spends like 50 cents because prices have gone up, if prices have doubled, well then it's the same thing. You've lost half your money. But the problem is, it might not just be a 50% depreciation. It could be an 80% depreciation. It could be a 90% depreciation. Do you remember what happened in the 1970s? I think some of the people here are old enough to remember the 70s. But when we first went off the gold standard in 1971, between 1971 and maybe 1979, the dollar lost two-thirds of its value within that decade, two-thirds. The Swiss franc was at 23 cents and it was at 75 cents. I mean, the Japanese yen used to get 360 to the dollar and then it was like 150. Now it's not even The US economy is in so much worse shape now than it was back then that the dollar's decline

34:00could be much bigger because even though the dollar declined substantially when we went off the gold standard, the dollar stayed as the world's reserve currency. They marked it down. They said, okay, a dollar backed by nothing is not worth as much as a dollar backed by The next currency crisis, they're going to throw it out. It can't be the reserve currency. The reserve currency can't be one of the weakest currencies on the planet. It's like you want to cheat on your exam, but you cheat off the stupidest person in the class. If you're going to have a reserve currency, it's got to be stronger than the other currencies. It's got to have more integrity. People have to have more confidence in it. So when the dollar loses its role as the reserve currency, then that's it, I mean that's the party's over.

34:50I mean our economy, our phony economy is based on the ability of Americans to print money and then spend it on things that everybody else makes. And everybody else is willing to take our paper for their stuff, even though the stuff is inherently valuable and useful and the paper is, you know, the stock that it's written on is probably not even soft enough to have a legitimate use. But people hold on to it anyway, because there's some perception of value there. Even though when they had gold, they had something real, they had something with intrinsic value, they're holding on to dollars instead of gold, but eventually they're going to wake up and realize what they got, especially if it keeps going down every day to every day. And then it's going to precipitate a crisis, a currency crisis, the bond market starts to implode, the currencies market starts to implode, and that's when we have to make the real choice.

35:40When the Federal Reserve is going to have to come out and acknowledge all the mistakes that it's made, it's going to have to do the exact opposite of what it's done. It's going to have to jack up interest rates. It's going to have to sell the bonds and the mortgages that it purchased. I mean, at what price? God knows. You know, when the Fed becomes a seller of mortgages, who's going to want to buy them? And at what price? The losses are going to be horrific to the Fed, to the financial system. We're going to have an economic collapse that is much worse than what we had in 08 and certainly much worse than the crisis we would have had had the government done the right thing back then and let the banks fail back then. Not done TARP, not done all the QEs. Yes, if the Federal Reserve and the government had not done the bailouts and done the stimulus, we would have had a deeper contraction back then, but it would have been constructive

37:03If we push it, if we push it to the logical conclusion, well then that's it. It's hyperinflation, it's like Weimar Republic, it's Zimbabwe, the dollar will be completely worthless. And that is probably the worst crisis of all. And my greatest fear, and I know I've got to stop talking because I'm over my half hour, is what is the government going to do when all this happens? They've been very successful in blaming the problems on capitalism, blaming it on greedy speculators, saying oh, the reason that we had a financial crisis is we just didn't have enough regulation. We had too much freedom, too much greed, we need more government. I mean, this might convince those people.

37:48People are a lot of socialists in Washington, some of them in Pennsylvania Avenue, and they're sure that capitalism doesn't work. They're just looking for a way to prove it, right? I mean, they feel a lot more comfortable with the ideas of Karl Marx than Adam Smith, and this is going to be the opportunity. I told you so, you see, I knew capitalism wouldn't work. Look at this disaster, you know? And it creates an environment in which government can seize a tremendous control of the economy, and we would lose whatever individual liberties we remain. I'm hopeful that that is not going to be the case, is a case that we will understand the disaster is a result of central planning, central banking, of government and if we're going to recover from this disaster, we're going to have to learn from those mistakes finally and dismantle much of this government.

38:42Realize we are in a big hole, but the good thing is capitalism is a very viable system. it works I mean I've seen it you know it's working in communist China so it ought to work here we give it a try and of course it would you know it worked better in 19th century America then it's you know because we had a more capitalism they do in China but the problem is China's got more capitalism that we do now which is very sad situation but if we can dismantle all this government and reinstitute freedom we have a lot more technology now we A lot has been invented in the last 100 and 150 years, and so the job of rebuilding the economy should be that much easier if the government would simply get out of the way. And yes, we would be a much wealthier economy had the government never got involved in the first place, but we can't rewrite history, but we can write the future because that isn't written yet.

39:34And hopefully maybe some of the people in this room who understand economics probably as well as I could give this speech if they had the time. But we have to help educate people in America to really understand, understand why this happened, that it wasn't like this happened, you know, nobody could have predicted it, anybody could have predicted it, who was thinking straight, anybody who actually understood Mises, that understood the business cycle, understood real economics instead of this Keynesian nonsense, anybody that understood economics predicted it. It wasn't hard, it was pretty easy. I had this debate the other day, and the moderator, who I ended up, you know, I argued with the moderator more than my opponent, but the moderator talked about how complicated the financial crisis was.

40:22I said, look, it wasn't that complicated. That's how come I knew it was coming. If it was complicated, I couldn't have figured it out. I figured it out because it was so simple. And it is simple, but we just have to do a really good job of educating that, spreading the word, getting people to understand that the source of their misery is not capitalism, but the government. Government. And the only cure that will work is a huge dose of free market capitalism.