Book Review: Crash Proof

Well another excellent book recommendation from another reader.  I’m really spoiled as you guys tell me about all these great books! Crash Proof by Peter D. Schiff is a most enlightening read despite being written in 2006 and published in 2007.  Why?  Because it basically told us that the crash of 2008 was going to happen.

WHAT?!? Yep, you read that right.  The author had saw the bubble and knew it was going to blow.  He wasn’t sure when, but knew it was coming.  The book deals with the fall of the US economy specifically and lays out the economic reasons why its going to happen and some of the bullsh!t that the US government was saying trying to keep a lid on it and the keep the party going as long as possible.

It was a VERY interesting read for the fist seven chapters which dealt with the background to the problem.  Perhaps the most interesting things I’ve learned was about inflation and the insanity of the Social Security system.

First off I learned inflation is actually the expansion of the monetary supply.  More dollars in play means reduced purchasing power.  This is actually a very good thing from the US governments point of view, but bad from a taxpayers point of view (I won’t get into all the details, it’s too much to cover in one post.  Mmm, maybe I’ll deal with this next week).  Also how the government has been basically hiding that fact that inflation is as high as it is(which anyone living in the US already knows).

Second, I learned that Social Security is just invested in US government bonds.  Which means the government is basically paying itself.  What?!?  Ok, Social Security payments come into the government.  They buy US bonds with it.  Who gets the money?  The US government, who can now spend it on anything they like.  Wow, what a load of BS, eh?  At least Canada’s government has the decency to say that Old Age Security comes out of general government revenues.  Thank goodness the Canada Pension Plan is invested elsewhere.

Now the book then starts to fall apart in the last three chaptes where Peter starts to recommend how to avoid the crash.  His basic rules are: don’t have money invested in US stocks or even US currancy (because he expects the US dollar to collapse in the near term), buy gold (because it will go up in value) and keep a large cash reserve to cover some expenses after the crash as well as pick up some investments.

The gold idea and the cash reserve make some sense.  I generally agree with those concepts.  Gold is a traditional safe investment in down times and cash is logical.  My beef is with the avoid everything US.  Why?  Because there are a lot of big US companies that get a lot of income from foreign markets.  Even if the US dollar collapses they will still have a fair amount of non-US dollar income.  Now obviously that applies to only some companies, but I think Peter was getting rid of the baby with the bathwater by saying avoid all US stocks.

So who else has read the book?  What did you think?  I’m interested to hear other points of view.

9 thoughts on “Book Review: Crash Proof”

  1. I didn’t read the book, and although I enjoy reading economic theory I’m always suspicous of these kinds of books. Conspiracy-type books portray a complete picture within themselves but sometimes if you add outside information they begin to look a little far from perfect.

    Anyway, the Canadian social security system seems like a ponzi scheme to me. We pay in, but the pay-outs come from later “investors” … that what it means when it comes out of general revenue. The funds are not protected or earmarked. Very similar to the US system, although I don’t even know that Canada earmarks the money as formally as purchasing a loan from itself.

    Inflation _is_ caused by increased money supply, but the ones who control that are the banks. The US gov’t, and Canadian gov’t, have given that control away to the “efficient” market. Canadian gov’t has supported more of a banking monopoly with only a few banks while in the US there are hundreds. We hate our banks, but at least their gauging has kept them solvent.

    Inflation caused by money supply is a little tricky because, in some sense, it is not real. Example: Bread costs $1 and your daily wage is $20 => Bread costs 5% of your daily pay. After inflation bread costs $2 and your wage is $40 => same 5% even though bread costs twice as much. This happens always and is mostly driven by UNIONS (IMHO). Wages go up every single year and that causes the general amount of money that everyone has available to spend to go up across a whole economy, as well as increasing the cost of good proportionately.

    Short term inflation is caused more by supply and demand. In such a case, reduced money might increase costs. For example you may not be able to get a car loan at 0% anymore and would have to pay more. Working capital might become too expensive for a business and it might fold, reducing competition and increasing prices, or forcing the business to increase prices to cover the costs.

    I might try to pick up that book. In general there are crashes and boom as everyone knows, so predicting a crash is easy. I’m predicting a boom in a few years right now. Buy my book, 201X-Boom 🙂

  2. Peter’s not bearish on individual American stocks, as much as he is bearish on the American dollar. His point re: the US dollar is especially relevant to those of us here in Canada.

    Any US dollar denominated investments needed to be converted back to Canadian dollars eventually.

    What good is a 15% return on an American investment if there is a 20% increase in the Canadian dollar vs. the US dollar?

    For Americans, an investment in China that earns even a 0% return, if the US dollar falls 20% vs. the Yen is a worthwhile investment.

    Investors who invest outside their country need to be more mindful of the currency exchanges involved in these transactions.

  3. Tim,

    I’m really glad you liked the book, I also thought it was a pretty interesting read.

    It’s easy to agree with the conspiracy in his arguments because he has very good points that I fundamentally agree with. Ideas that people need to save more money, more debt is the problem not the solution, and interfering in the market creates greater inefficiency.

    Even Buffet wrote that having a massive trade deficit is like selling yourself one piece at a time, often trading ownership in assets for disposable consumer goods.

    All together his predictions are pretty frightening and extreme. I found myself getting a bit defensive and skeptical at the end. I tend to think there are more opportunities for the US to correct itself and right the ship then for it to just fall over dead. Also hyper inflation seems impossible with the US dollar as the world reserve currency, if that status ever changed I think there will be time to see it coming and react.

    I’m torn with how his ideas affect me and what “moderate” steps I should take because I’m also fully against the idea of owning gold or just sitting on the sideline in cash. So far the only thing I’ve done is reallocate a few % of my asset allocation from the US market to International & Emerging Markets.

    Are you going to directly change any of your investment ideas? Like you said it’s pretty hard to avoid the US.

    Peter has also done very well fighting his points on the various financial debate shows (which otherwise I don’t watch or enjoy). His website posts clips of most of the interviews here:

    http://www.europac.net/video.asp

    Check out the links on the right, I also particularly enjoyed the “Mortgage Bankers Speech”.

    Tim, if you want another book suggestion I just finished “The Fundamental Index” based on Preet’s recommendation, it’s very persuasive.

  4. I requested and received the book for xmas. All his reasoning is solid. I’ve started acting on his suggestions already. He’s not as doom and gloom as the greaterfool.ca guy. Still, his suggestions are not easy to implement and that’s probably why people resist them. We’ll see how it goes in 2009.

  5. Goal Hunter,

    I think you got a bit confused. I was talking about the US system when it takes a loan from itself.

    As to inflation. You would be correct if our wages kept pace with inflation, but they often don’t. So hence the problem with it.

    Good point about the bank being a large part of the issue, but don’t underestimate those federal bonds. After all where did you think those billions of dollars of bailout money was coming from?

    Jordan,

    The book is scary in parts, but at the same time he is onto something. The US doesn’t make anything anymore, hell 75% of its economy is consumer spending (which was done on credit for the last few years). The whole thing is a deck of cards in a strong wind, it’s toast. The real question is what they are going to do about it.

    As to investments, I don’t owe any US stocks directly and I don’t plan on buying any soon. I will keep some US exposure via an index fund, but I’m like to reduce the % just slightly. So no big changes.

    Tim

  6. I understood what you say about US system, but what I was trying to say is that the Canadian system is probably about as bad (you’re from Canada :).

    I do disagree with your point about inflation. If the “value” of a dollar changes, as would happen due to money supply issues, then the effect is moot if you live in the country that you spend the money in. There is a bit of timing because your raise happens once a year and the value of a dollar changes continously, but that’s it.

    A more important cause of inflation is the price of items. Prices rise because a dollar is worth less, but they also rise because the costs of inputs rise in general. The big input to most manufactured things are wages, which steadily rise and cause inflation in prices, which cause inflation in wages.

    We had huge inflation over the last couple of years due to scarcity. Oil, houses, steel, wood, corn, fertilizer, etc. Prices skyrocketed for these things and anything made or related to them. Wages didn’t keep up (thank goodness!) to these increases.

    In reality, everything gets cheaper. The dollar pricetag is higher but wages increase faster than the costs of most things. Nowadays everyone owns a car, everyone has a cell phone, everyone has a computer, more people own homes. In the past these were out of reach to most people.

    Inflation is to be expected because of the feedback mechanism hinging around you expecting a raise every year. And doesn’t matter if everything were synchronized. eg You got your raise on the same day they increased the price of bread.

    By the way, a service economy is totally fine. It’s how a rich country exists. The US and Canada, and every other rich country, has enough middle class people who have disposable income to demand convenience and recreation: these are the drivers of restaurants and tax preparers and cruise operators, and other service providers. We would not accept the wages that would be required to manufacture things at the price we are used to. If we manufactured our own stuff then we would be a lot poorer. As other countries get a middle class they also will not accept low wages and this will drive inflation up again.

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