He's right and wrong.
Peter Schiff says, "
If you invest in gold, then the economy doesn’t benefit from savings, I want investment to go to plants and equipment".
This is false. He makes it sound like the money you spend on gold goes into a garbage can somewhere. It's not true. That would be like saying that trading money for a dining room table somehow prevents people from investing money. They are both collectables. The second you pay someone for gold or a dining room table, that individual has the power to spend your money however he or she pleases (such as on investments that go to plants and equipment).
Peter Schiff says, "
We consume more than we produce and we borrow abroad, but we are never going to be able to pay them back."
Despite enormous deficits, the US hasn't missed a debt payment since the Continental Congress. A country whose debt is denominated in its own sovereign fiat currency — of which it is the sole issuer — will always have the power to pay back its debt. So, his statement is pure fear mongering.
See:
YouTube: The U.S. Debt is a myth!
It's important to understand that all our money, except coins, come from debt.
The entire money supply is debt. So, this notion that there is too much debt is really a blurring of the facts. There can certainly be too much debt-based money, but the issue has nothing to do with
solvency. The whole reason people hold Treasuries in the first place is because they are risk-free — the bond market knows that the US government will always be able to make the payment.
Peter Schiff then says, "
While households have reduced their leverage, government debt has ballooned on the back of stimulus programs, but, argued Schiff, the government’s debt is the people’s debt, thus overall leverage has actually increased."
He's right and he's wrong. Since we happen to live in the confines of a debt-based monetary system, the government's "risk-free" debt is actually the private sector's
savings. In other words, in order for our base money supply to exist, the government must spend base money into existence and simultaneously issue Treasury Bonds (i.e. our "debt") — Treasury bonds also serve to soak up excess private sector savings into a risk free savings vehicle. In fact, all government spending of base money into the private sector just gets used to buy up Treasury Bonds — this is especially true since the Treasury doesn't accept bank credit as a form of payment, and only accepts government-issued
base money at the Treasury auctions. (If the Fed helps this process along, they do so only by removing another equal asset from the private sector.) All private credit is backed by that government-spent base money and debt. So, Peter Schiff would have you believe that the government's debt is somehow equal to private debt and that we all have to pay it all back tomorrow with money that doesn't come from debt (gold?). But that's not true.
All our money (except coins) come from debt.
So, private debt and Public debt are two very different things. In fact, they are polar opposites... and
that's the problem. When the government issues "too much debt" the problem isn't an issue of solvency. The problem is
stability. And that's where Peter Schiff is correct.
What Peter Schiff is
really talking about is what Hyman Minsky theorized over 50 years ago...
See this 4 minute video:
YouTube: Crash Course on Hyman Minsky, by L. Randall Wray
So, if you think of Treasuries as this very safe, risk-free, asset for the private sector... Minsky realized that a "ballooning deficit" meant that more and more risk-free Treasuries in the private sector would actually be used as a foundation for leverage, many times over, by banks — causing the economic system to become more and more fragile as time went on. Imagine a giant Ponzi scheme where the only real money backing the scheme was a pile safe base money and Treasuries. The more safe base money and Treasuries you have, the bigger the Ponzi scheme of private credit becomes. Minsky also understood that the Fed's intervention — while often necessary — would simply paper over the problems, causing people to forget until the next, bigger, problem came down the pipe. Wash, rinse, repeat.
In other words, every time a financial crisis ensued — and a giant private credit Ponzi scheme imploded — the government would be forced to step in and provide lots of safe Treasuries and base money — which would only serve to make the next private credit Ponzi scheme even larger than the one before it...causing each crisis going forward to be even larger than the one that preceded it.
Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous to financial markets. Minsky claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts.
This slow movement of the financial system from stability to fragility, followed by crisis, is something for which Minsky is best known, and the phrase "Minsky moment" refers to this aspect of Minsky's academic work.
...
Hyman Minsky's theories about debt accumulation received revived attention in the media during the subprime mortgage crisis of the late 2000s.
Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.
The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.
If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.
Source:
http://en.wikipedia.org/wiki/Hyman_Minsky
So, if you want to learn the truth about why large deficits are bad, look to Minsky... who was at least 50 years ahead of his time. It has nothing to do with solvency, and everything to do with stability of the highly leveraged private sector.
Since our entire money supply (except coins) comes from either private or public debt, there's no way for our economy to avoid this increased fragility without more regulation or changing the system entirely (a change which will likely never happen). So, Peter Schiff's predictions may very well come true someday soon — but not for the reasons he would have you believe.
All this continuously increasing private sector fragility makes the Permanent Portfolio even more appealing. We hold the PP as a way to ward of the effects of this debt-based instability. In a world where all money comes from debt, Treasuries (and gold) are the only way to virtually eliminate credit risk. Yes, Treasuries can crash, but Treasuries only tend to crash when either stocks, gold or cash are king. Either way, the Permanent Portfolio as a whole will allow you to ride out future "Minsky moments" with much less overall volatility than other investment strategies.