Peter Schiff's Parallel Universe and Ours

Under discussion: How An Economy Grows And Why It Crashes by Peter D. Schiff and Andrew J. Schiff, 233 pages, $19.95, Hardcover.

In that parallel universe Peter Schiff is probably winning his race for Senate.

But here in the United States of Criminals, Celebrities, and Corporations, he barely has ballot access in the Connecticut race to replace Chris Dodd where he trails such Republican heroes as WWE First Lady Linda McMahon and former congressman Rob Simmons before Simmons dropped out.

The groundswell for a Schiff candidacy emerged in the aftermath of the 2008 financial collapse which Schiff had predicted for years, explaining that the illusion of wealth created for the housing boom could not be sustained and that the inevitable bust would spread to other sectors of the economy. A mash-up video of his appearances on various financial TV shows in 2006 and 2007, where he was openly derided and actually laughed at, is titled “Peter Schiff was Right” and has been a Youtube sensation with over one million views.

So just how did Peter Schiff, president of Euro Pacific Capital brokerage firm, know that the economy was going to crash when almost every pontificator on both sides of the aisle was promising that the good times would never end? Did he have a crystal ball? Was he imbued with special powers to see when those unpredictable financial catastrophes are barreling down the road?

Well, one thing Peter Schiff was blessed with was a father who discovered the Austrian school of economic thought after breaking out of the New Deal orbit sometime during the 1950’s.

Schiff’s father, Irwin, is well-known among anti-IRS crusaders and perpetual victim of the income tax tyranny. At 82, Irwin is currently in federal prison (not for the first time) after unsuccessfully challenging the tax code.

But when Irwin was much younger, he entertained his boys in long car rides with economic lessons disguised as stories. One such story was “The Fish Story” which Irwin turned into a book in 1979 entitled, How an Economy Grows and Why It Doesn’t. In 2010 “The Fish Story” was modified and turned into How an Economy Grows and Why It Crashes.

At first, How an Economy Grows almost seems an odd selection for a traditional review because it is so simple and straightforward. Since the inspiration for the book is a children’s story, it’s written on a level anyone can understand. And with many of the fictional characters (from Ben Barnacle to Tricky Dickson) based loosely on real people it is certainly entertaining for adults.

The narrative can really be split into two sections. The first half is about how a primitive society began on a remote island. From there the reader is introduced to basic Austrian economics through fish. Since fish is the abundant material on the island and holds real value for the islanders it is the obvious choice for currency. The fish had value everyone on the island could appreciate and understand. Someone wants a canoe? That’ll be nine fish. That might be a lot of fish, but a canoe was a luxury and cost a lot to construct.

Then as time progressed and people had more fish on hand they discovered they needed some form of fish repository – a bank!

With depositors fish could be loaned out to prospective entrepreneurs. If the would-be businessman had a good opportunity to repay the loan with interest then there was a better chance he could get the loan in the first place. The bank might have to turn people down for loans, but they had to because they were at risk themselves. What if the loan was issued to someone who couldn’t handle it and defaulted? Who would bail them out?

Here the reader learns about the basics of banking, lending, credit, and saving.

As the people of the island increased their numbers they realized they needed some form of government and so the second half of the story begins and the republic Usonia was born. Governed by 12 senators including an executive Senator in Chief, a constitution was written so that the senators would not overstep their authority.

But after a few generations, the Senate’s wise and prudential statesmen were replaced by more appealing “go-getters.” Schiff portrays the moment things changed when Senator in Chief hopeful Franky Deep came into power:

“He observed that people loved getting stuff for free. Similarly, they hated paying taxes. So, he devised a plan: if he could find a way to make it look like he was giving something to the islanders for free, then he could gain their unconditional support. Unfortunately, all the government had was what it raised in taxes. The Senate didn’t catch any fish. They could only give by taking. How could they give away more than they took?

“After a particularly bad monsoon, Franky sensed an opportunity (politicians never let a crisis go to waste).

“He preached, ‘My fellow islanders, the storm we have just been through has wrought untold hardship on our people. Many of our citizens are now hutless and fishless.

“’We cannot stand idly by and do nothing. If elected, I will institute a government reconstruction program for our neediest citizens to repair the damage.’ But he assured the citizens that the cost of the construction would be paid for by the economic activity the spending generated.

“His opponent, Grouper Cleveland, offered nothing, except wise stewardship of the island’s savings and a promise not to interfere with the liberties of the citizenry.

“Not surprisingly, Franky Deep sailed into office as Senator in Chief.” (104-105)

With the institution of paper money in the form of Fish Reserve Notes, redeemable pieces of paper backed by real fish in the vaults, the rest of the story is laid out:

“The new bank director . . . was not crazy about the new fish notes. He thought the ease in which the notes could be printed would create dangerous incentives for the senators. Yet, he could sleep soundly at night provided that the government maintained enough actual government fish in the bank to redeem all the notes.

“Not surprisingly, his confidence didn’t last long.

“Soon, Franky and his agents had handed over far more Fish Reserve Notes than the government’s account had fish to redeem.”

“’Franky, stop the presses! . . . I have only nine fish available for every 10 notes that you guys have handed out. If the savers figure out that there really aren’t enough fish to cover their deposits, there will be a run on the bank and I’ll be out of fish. . . .’” (107)

Slowly but surely all of his successors followed Franky’s lead. The newly-appointed bank chairmen, beginning with Ally Greenfin and later with Ben Barnacle, followed in giving the government what they wanted. After Franky Deep came Lindy B, promising to

“Furnish the canoe navy with bigger spears, but he would also help the sagging economy by 'providing emergency unemployment fish notes to all laid-off workers' prevailing over Buddy Goldfish who offered nothing but careful stewardship of the island’s savings and boring protection for the islander’s economic liberties. More importantly, Buddy argued that the island could not afford such an extravagant ‘spears and fish’ policy.

“Not surprisingly, Lindy won in a landslide.” (126)

And comparably broad parallels to modern America finish out the story.

Humorously illustrated, Schiff’s story is a pleasurable read. It demonstrates that basic knowledge of economics is simple and that the laws of economics apply the same to complex societies as they do for simple ones. In short, if more saving is necessary for people on a small island to recover from disaster then saving is what is necessary to rescue a large society.

Peter Schiff will certainly not win his election for U.S. Senate in Connecticut. But he has bequeathed a valuable chapter of economic education to his country.

Perhaps this time people will listen.

Screwed coming and going

The events of the last two weeks, ie. the recent Wall Street crisis and impending $700 billion bailout, clearly demonstrates why each of the nominees and their parties are unfit to lead. John McCain suspended his presidential campaign to return to Washington last week in order to address the fiscal crisis that will result in the nationalization of our country’s banking system. After doing nothing and coming off as brutish in the debate, Mr. McCain proved himself inept. Continuing to shirk his senatorial responsibilities, the only contribution to the situation from the freshman senator of Illinois was an aloof, “Call me if you need me.” Now tell me, do you have the Messiah on speed-dial?

As last Friday’s debate approached, observers believed it was going to be exclusively about foreign policy. Not that I looked forward to 90 minutes of Senator McCain’s saber-rattling, but about half of it was dedicated to the financial mess and what each bonehead would do. It told us precisely why neither candidate should win. John McCain used the time to take a few new positions on the bailout, while it was the opportunity for Mr. Obama to tell the country that there isn’t a federal regulation he doesn’t like. (Lending institutions are bankrupt? Let the government take care of it! Public schools don’t teach enough sex ed? Let the government take care of it! Can‘t say anything nice about Barack Obama? Well, the government can take care of that - and you - too) One candidate promises intervention into the economy of our country while one candidate promises military intervention into other countries. Is there anyone still alive who remembers when the United States was a free country?

Regarding the financial debacle, Republicans point at Democrats while Democrats blame the Bush economic policies that (in their minds) forced banks to lend out money they didn’t have. It would be comical if not so tragic that the most irrelevant House speaker of all time, Nancy Pelosi, continually asserts that Democrats bear no blame for the bad money policies that are biting the country on the back side. As bad as the Republicans were, especially during the first six years of the Bush administration, it was the Democrats who promised in 2006 that they would end Mr. Bush’s atrocious war in Iraq and end Washington’s “culture of corruption.” Little did anyone know that it was only the corruptive majority party that would change. As for the economy, the Democrats blame the upcoming depression on the president “because it happened on his watch.”

That would seem a pretty damning charge, but Democrats Chris Dodd of Connecticut and Barney Frank of Massachusetts, who each head committees on banking, have each received generous amounts of money from Fannie Mae and Freddie Mac. Despite receiving warnings, the two corrupt politicians continually claimed that the institutions were stable and intact. Considering what we know now, then we should probably assume that because the Democrats were the controlling party of the whole legislative branch, then they are also responsible. They were the ones truly just watching as the economy collapsed. The absurd $700 billion bailout serves only to save their own butts and the butts of their partners in crime. If knowingly lending out unsupported money to unsuspecting people is not a crime, then I guess neither is waging an aggressive, undeclared war against a country that never attacked us. Just a little something for Democrats to chew on.

Barack Obama can probably coast to the White House now. Before the primaries, John McCain infamously said that he did not understand much about the economy. He spent the past week proving it (somewhere Mitt Romney and Mike Huckabee and probably sobbing). Barack Obama demonstrates more competence in talking about economics, regardless of whether the content he knows will be useful for taxpayers. People will be more willing to trust him to handle money matters.

Even after eight relatively good years, the American masses tend to tire of the incumbent party. While Ronald Reagan was not quite as spectacularly loved during the 1980s and Republicans gloat, his general popularity did not immediately benefit Vice President George H. W. Bush. And despite Bill Clinton’s little impeachment problem, his enormous popularity did little to help Al Gore. In 2000, George W. Bush and the Republicans tied Mr. Gore to Mr. Clinton, despite the latter’s popularity. Even though George W. Bush’s popularity probably does not need to be reiterated here, it helps to show how the GOP nominee, whoever it would be, was in for an uphill struggle. The incumbent party is always bound to face trouble after eight years in the White House. Incompetence and corruption would only compound the situation, paving the way for the opposition party.

So, what to do? My unsolicited opinion is to reject all faith in the two governing parties. This not-so-unexpected calamity regarding the nation’s economy, readily pointed out by Ron Paul, tells this writer everything necessary to decide that neither the Republicans nor the Democrats have the will nor desire to actually fix anything. Both parties stood by and watched as their mess came to fruition. John McCain’s ignorance and incompetence disqualify him from serving as president, with his age being the least of his problems. Barack Obama, who only intends to inject more fake money into the economy, somehow fund universal health care, raise taxes, and refuse to end a war that will soon be in its sixth unpopular year, will probably make taxpayers yearn for the good olds of George W. Bush.

Maybe the Alaska Independence Party in on to something.

Soon: Palin. What Happened?