June 27, 2016 - Freedomain Radio - Stefan Molyneux
28:48
3330 Brexit: Global Economic Fallout | Peter Schiff and Stefan Molyneux
With Global Economic Markets responding strongly to the United Kingdom's European Union Referendum vote - many are concerned about en economic collapse related to Brexit. Peter Schiff joins Stefan Molyneux to discuss the market reaction to the United Kingdom's vote to leave the European Union, the fall of the British Pound, the rise in the price of gold and how Brexit will be used as a scapegoat for already existing economic problems. Peter Schiff is an economist, financial broker/dealer, author, frequent guest on national news, the host of the Peter Schiff Show Podcast, the CEO of Euro Pacific Capital and the Chairmain of Schiff Gold.Schiff Gold: http://schiffgold.comSchiff Radio: http://www.schiffradio.comEuro Pacific Capital: http://www.europac.comFreedomain Radio is 100% funded by viewers like you. Please support the show by signing up for a monthly subscription or making a one time donation at: http://www.freedomainradio.com/donate
This is Stefan Molyneux from Free Domain Radio, back with a good friend Peter Schiff, an economist, financial broker and dealer, author, frequent guest on national news and this show, the host of the Peter Schiff Show podcast, the CEO of Euro Pacific Capital, and the chairman of Schiff Gold.
You can get his information and see his resources and products at Schiffgold.com, Schiffradio.com, and Europac.com.
Peter, how are you doing today?
I am doing well.
How are you, Stefan?
Well, thanks.
There is this idea that because there's been some financial turmoil since the Brexit, that somehow the traders are doing long-term political analysis of what's going to happen after Great Britain leaves the euro.
And as I pointed out, I think the day after, these guys aren't doing long-term political analysis.
They're looking for Short-term gains or at least covering short-term losses.
I wonder if you can help people to understand the mechanisms by which these relatively short-term traders, what they're doing and the effect that it's having on the market.
Sure.
First of all, I think that the Brexit vote for the UK to leave the European Union, that is not really the reason that markets are collapsing.
It's the catalyst.
It's the event that triggered the decline.
But remember, all of these markets are perched At artificial heights based on central bank manipulation and so now you get an event that comes and catches traders by surprise and of course thanks to central banks and cheap money everybody is really levered up so they have you know tremendous exposure And once an event happens that people aren't anticipating,
and everybody has these so-called risk-on trades on, where they bought a bunch of stocks and they funded it by borrowing the yen or borrowing the dollar.
And now, all of a sudden, everybody wants to make the same trade at the same time.
They want to take these risky bets off.
And you have these big swings in the markets, in the foreign exchange markets and the equity markets.
And I think that's what's going on.
And ultimately, I think what's going to turn the tide is going to have to be probably an admission from the Federal Reserve that not only is it not raising rates, but that it's going to reduce rates and go back to quantitative easing.
That's really what the markets want.
And ultimately, that's what the Federal Reserve is going to deliver.
Well, and of course, Yellen has been saying for a long time that the recovery is underway, that the economy is fundamentally sound and robust, and the inevitable consequence of that would be to raise interest rates.
And she tried it once, and boy, did it ever turn into a disaster.
So I think what you're saying is this hands her a good excuse, a good reason why she's not going to raise interest rates.
Okay, the American economy is strong, but boy, there's financial uncertainty over in Europe, so maybe now is not the best time.
Yeah, I mean, first of all, the economy never recovered.
We actually got sicker, thanks to the Fed, which is the reason why the Fed can't raise rates.
It's the reason why when they tried, it was a complete failure, because it's the cheap money that's the only thing that's keeping this phony bubble economy going.
We don't have a legitimate recovery that can withstand higher interest rates.
We have a bubble that needs zero percent interest rates, maybe even negative at this point, and more quantitative easing.
And so Janet Yellen has been reluctant to acknowledge this for a host of reasons, certainly the Fed's own credibility, but also the credibility of Barack Obama and, by extension, Hillary Clinton.
And so they've been pretending the economy is strong, yet not raising rates, but also pretending that they're getting ready to do so, just not yet.
And now all of a sudden Brexit hands them a perfect excuse to save face where they cannot raise rates.
Yet not have to acknowledge that it's the weakness in the U.S. economy that is the real reason for their inability to raise rates.
They're going to look at the turmoil in Europe and what's going on around the world and say, look, it's a global economy that we live in and our economy was healthy, but now we have these other problems and we have to acknowledge that and we're not here in a vacuum.
And so as a result, you know, we're going back to zero and QE4. Well, and your argument for a while, Peter, has been that we kind of are in a recession.
I noted that you did an analysis of durable goods orders and other indicators of the robustness or health of the US economy and found that it came up, well, just a little short.
Yeah, I think a lot of these government statistics are sugarcoating the economy.
I mean, that's, I think, one of the reasons that so many British were willing to vote to leave the EU was because the economy there is not as robust as their leaders are pretending.
And that's certainly the case in the United States.
We are living through a recession that is being packaged and sold to the American public as if it were a recovery, but the American public isn't buying it.
That's why Donald Trump is the presumptive nominee for the Republicans, and that's why Bernie Sanders gave Hillary Clinton such a run for her money in the primary because the Sanders voters and the Trump voters are not buying this recovery.
And in fact, that's why so many Sanders voters won't even vote for Hillary because they want change.
They don't want more of the same.
And if the economy were good, voters would want a continuation of those policies.
The fact that they want something different is a repudiation of those policies because they have not delivered what has been promised.
And it struck me as very bizarre that Alan Greenspan, of course, Federal Reserve Chairman from 1987 to 2006, was recently talking about how Friday's trading was the worst, the most brutal that he's ever seen.
How is that remotely possible, given just basic math?
Well, I think that what he's referring to is what he believes is coming.
I don't think he was talking about one day.
I think Greenspan is looking at this Brexit vote as a domino and that many more are about to fall, that this is really a revolution where a lot of big changes and big surprises are going to be coming.
And I think he's anticipating what comes next, because clearly what happened on Friday was nothing like Black Monday in 1987, which he talked about.
And it was certainly nothing like the financial crisis of 2008.
But I think Alan Greenspan realizes how screwed up this economy is because, A, he helped screw it up.
But he understands the mistakes that he made.
Even if he doesn't want to admit them, he understands them.
He understands the larger mistakes that have been made by Bernanke and now Yellen.
And so he is kind of preparing us for what he knows is coming.
And that's what I've been trying to do with my clients.
If you thought 2008 was bad, You ain't seen nothing yet.
I think Greenspan is right.
What's coming is going to be worse for investors, for Americans, which is why people need to quickly, if you haven't already done so, get your financial house in order.
Get out of U.S. dollar assets.
In fact, this rise in the dollar as a result of Brexit is really just a gift horse for people who want to get rid of their dollars because it's not like the U.S. is a safe haven.
This is not about buying safety.
This is about unwinding leveraged bets.
And so the dollar is a beneficiary, just like the yen, but ultimately the dollar is going to come crashing down because the problems on this side of the Atlantic are worse than the problems on the other side.
So take advantage of this.
Now, gold prices, gold's going up.
Gold's at new highs for the year.
Gold stocks are on fire.
A lot of gold stocks have already doubled or tripled this year, but they're still cheap.
Compared to where they've been and certainly compared to where they're going, there's a lot of value here in the market.
So people need to do something.
They can, you know, contact me at EuropacificCapital at europac.com, speaking to one of my advisors about how to get your portfolio, you know, under our management so we can build you a diversified international portfolio in the real safe havens, in places like Switzerland and Singapore and New Zealand and Norway and Hong Kong.
Places that really are in much better shape, where the currencies will benefit from a loss of, not only against the pound and the euro, but the dollar as well, which ultimately is going to go down.
And to get into the mining sector, and if you don't have any physical gold yet, certainly contact me at shiftgold.com.
It's not too late to buy gold.
It's not too late to buy silver.
Sure, gold and silver are up a lot this year, but it's nothing compared to how much they dropped in the three years previous to this year.
And I think we still have A long way to go on the upside of this bull market.
One thing I can't figure out, Peter, maybe you can unpack this for me, is the rise of the yen relative to the British pound.
Makes no sense to me.
I mean, I recently did a show talking about the economic problems in Japan, which basically just seems to be a black hole with no bottom.
I mean, a massively aging population, low birth rates, a, what now, three decade recession that's been going on, massive amounts of quantitative easing, the natural and inevitable holding down of interest rates as a result.
It seems like a giant mess.
So how on earth can people be fleeing, if they are, into the yen when the Japanese economy is such a mess?
Yeah, well, first of all, everybody believes that Japan is a mess.
And that's one of the reasons that everybody was already short the yen, you know, coming into this crisis.
I mean, people use the yen as a funding currency.
You borrow yen and then you take the money and you buy stocks.
And so that's where the leveraged speculative community, that's the position that they were in leading up to the Brexit vote.
You had a lot of people who had sold yen.
And then had taken the proceeds and bought stocks.
They bought a lot of European stocks.
They were bullish.
They thought that the Brexit vote was gonna be defeated and that the UK would remain in the Eurozone.
And this was supposed to be a bullish catalyst for the risk assets.
And when it didn't turn out that way, everybody rushed for the exits.
And so everybody had to unwind and take the risk off their portfolios.
And that meant they had to sell the stocks they bought and buy back the yen that they shorted.
So that's where all the buying is coming from in the end.
It's the reversal of the risk on trade as everybody is scrambling to take risk off.
It has nothing to do With the relative safety of the Japanese economy.
It's all about the traders and where they're positioned and what they're forced to do right now and where all the margin calls are going.
And so this is what's driving it.
It is all a bunch of noise, but what people who really understand what's going on will take advantage of this noise and other people's mistakes and problems to better position their own portfolio for what's actually going to happen when the fundamentals take over from the short-term traders.
Right.
And I think as you've pointed out, Peter, the recovery, if you can even call it that, in the States is weaker than recoveries from previous recessions, which means that, I think, domino-like the next recession is going to be worse than previous recessions.
Is that a fair way to put it?
That's what I've been saying all along.
Look, if you think this recovery is weak, wait till you get a load of the next recession.
I mean, because normally, when you have a recovery, things get a lot better during the recovery, and so people are prepared for the next recession.
This is probably the only recovery in history where the average American is worse off at the end of the recovery than he was at the beginning.
In fact, for most people, this recovery It's actually worse than the recession that preceded it.
I mean, that's probably unprecedented in the business cycle where the recovery is worse than the recession.
And if that is the case, just imagine what lies in store during the next recovery when we barely recovered in the last one, or rather the next recession, because we're starting from such a pathetically low level.
So this is going to be the worst recession.
They call the last recession the Great Recession.
I've been joking that they're going to have to rename that one because this one is going to be a greater recession, and it may even be greater than the Great Depression.
So what are we going to call it?
I'm not really sure, but I think that a lot of Americans are going to have to endure it.
But the best thing that you can do now is at least protect your wealth.
As I said earlier, try to position your portfolio not to get wiped out during this financial apocalypse or whatever you want to call it.
But it's coming.
And again, I think that's what Greenspan is referring to.
He sees this coming too, and he's warning about it.
And covering his own tracks, of course, as a contributor.
Now, for many years, you and I have both been hammering against collectivism or globalism or fiat currency control, massive hyper-regulation of the economy, excessive taxes, all of that kind of stuff.
Part of me, Peter, feels like it's possible that the Brexit vote, I don't want to sort of hang too much on one vote, but I think it's possible that this could be the beginning of a turnaround, because it does seem to be a rejection of collectivism, a rejection of the idea that the government is the because it does seem to be a rejection of collectivism, a rejection of the idea that the government is the source of wealth, that more
And it seems to be a rejection of the additional layers of bureaucracy and control that have been coming out of Brussels.
Now, if that's the case, then the general paradigm...
Of the last couple of decades that, you know, you borrow money, you print money, you create money out of thin air, and you are going to regulate and tax and redistribute and control your way into prosperity.
And I think the evidence has come in that repudiates that view.
So fundamentally, so foundationally, the wealth has not materialized.
What has materialized its instability, stagnant incomes, massive debt, entrepreneurial slowdowns and massive shocks that repetitively hit the economy.
Do you think that this Brexit vote might be the beginning of a fundamental reevaluation of the state and of the economy and of liberty itself?
Well, it could be.
I certainly hope that it is.
And I know a certain percentage of the people who were voting to leave were, in fact, rejecting big government.
I mean, if you look at some of the promotional material that was out there urging people to vote to leave, there was a lot of information about all the regulations and the bureaucracy.
In Brussels and how it's impeding economic growth and prosperity in the UK. And so there was that element.
But then there's also another element or aspect of it, which was more of an anti-immigration, kind of scapegoating immigrants for problems.
And so a lot of it depends on what Britain does to redefine itself.
In the aftermath of the Brexit, will they take this anti-big government philosophy to heart internally and not just reject big government coming from Brussels, but reject it coming from Parliament in the UK? Like generally try to eliminate as many regulations as they can,
cut government spending, reduce taxation, And try to make the UK into another Switzerland in a way, because certainly they were holding Switzerland up as an example of how good things can be if you're not in the UK, which is true, but you also have to emulate Switzerland in other ways.
You can't just Believe the UK, the EU, and think everything is going to be great because there are other countries that are not in the EU that aren't nearly as prosperous as Switzerland.
So you've got to follow the example and you need to have a more free market economy with more individual freedom and less government.
And the UK can certainly do that.
And to the extent that they pull that off, It is going to be a shining example of what can be done.
And you know, there is one of these movies, or a movie out there called Brexit, the movie that I've been urging people to watch.
Because in that video, apart from really exposing all the waste in the EU and Brussels, but they do a good job of contrasting what happened to the UK versus Germany in the aftermath of the Second World War.
Because the UK won the war.
Germany lost the war.
Also Japan, right?
Both those nations were obliterated.
You know, Japan, you know, they had two nuclear bombs that dropped on major Japanese cities, but Japan was in ruins, and Germany, you know, we'd bomb them.
And so they had to rebuild after World War II. Well, the good news for Germany and Japan was that not only were their major cities destroyed, but their governments were destroyed.
And so they were able to rebuild free from government.
They had more free market economies.
Britain, on the other hand, the British government survived the war and was bigger than ever and hamstringed the British economy with regulations and taxation.
And within a generation You know, Japan and Germany had risen like phoenixes from the acids to become the number two and number three economy in the world, dwarfing the UK. I mean, look at the industry that came out of those countries.
Look at the massive increase in standard of living and the abundance of consumer goods and huge exports that came out of those countries.
And look what happened to the UK. And so even though they won the war, their people lost.
And even though the Axis, Germany and Japan, lost the war, their people won because they won economic freedom and the British were hamstrung with socialism.
And so that example is out there for the British to see.
And I mentioned, too, look at how prosperous Hong Kong was, even though British The British government destroyed their own country, Hong Kong prospered, and Hong Kong did as well, if not better, maybe, than Germany or Japan because the British didn't put the same taxes and regulations on Hong Kong that they put on themselves.
So there is a blueprint out there for the British to follow the prosperity, and hopefully the British people will take advantage of that.
US, if not around the world, Peter, as this inevitable slowdown of the economy and continually escalating shocks out of It's a sort of not a very powerful phrase to say vast misallocations of capital, but it's sort of fundamentally what's going on, I think.
What is it that the people, the governments are rarely going to come up with these kinds of solutions, but what is it that the people should be discussing and talking about as ways to avoid this sort of rolling giant snowball of doom that may be coming economically?
What are the policies that they could be advocating for?
Well, they have to advocate for the free market.
I mean, look, the problem in Europe or the problem in the United States is big government.
I mean, that's what the European Union was.
I mean, it's huge government.
I mean, it started out with a noble idea.
And generally, you know, the road to hell is always paved with good intentions.
And the initial idea was, let's have a free trade area.
Let's let goods and people move freely throughout Europe.
Kind of like they do in the United States.
And that was a good idea.
But then the problem was the European government in Brussels grew almost like our own government in Washington, D.C. The United States was a good idea initially when the U.S. government followed the Constitution and stayed very small and didn't tax and regulate.
But now, of course, the Constitution is a rotten deal for just about every state in the Union.
And I think, you know, if states had the ability to leave, they should do it.
But unfortunately, we don't have that ability.
We're all stuck here.
But it was a good idea.
But, you know, it's like the camel's nose under the tent.
The Europeans made a deal with the devil.
They created this government entity that was supposed to You know, take away all the problems of all the other government entities, because why were there tariffs?
Why was it hard for goods and people to move from country to country?
It was because of big governments in the individual countries.
And so they said, hey, let's create another government to undo all the problems of all these other governments.
And so they ended up with another level of government, which initially was very small and it was a benefit.
But now it has grown to the point where it's so large that it's now people are worse off.
That countries are now worse off being part of the EU than they would have been had they never started it.
And that is always the problem with government.
That's what happened in the United States.
We tried to form a more perfect union.
We gave up the Articles of Confederation.
We wrote the Constitution.
We created government, a federal government that was still very small and that had very few powers that were enumerated in the Constitution.
But the government under the Constitution It was not quite as weak as the government under the Articles, but initially it worked very well.
You know, up until probably the turn of the 19th, 20th century, the country did very, very well.
The government followed the constraints that were initially, you know, imposed upon it by the Constitution.
But certainly, as the 20th century progressed, and we went through the Roosevelt era, first the populist, then Roosevelt, and then we went into the Second World War, and after that, the Great Society, the New Deal, the war on poverty, and now, of course, Barack Obama.
I mean, government has grown like a cancer.
It is enormous, and we would certainly be much better off today We're re-governed by the Articles of Confederation than by the Constitution the way it is currently misinterpreted by our courts.
And again, the same problem in Europe and people just need to, you know, get rid of these governments that are oppressing them and hopefully this will be the beginning of a wave that can spread around the world.
And that's a strange thing, Peter.
I mean, when it comes to free trade, if you have a bigger pile of paper at the end of your free trade negotiations than you had at the beginning, you are not achieving free trade.
Like, I think with that with regards to the euro, I mean, if people wanted to have free trade across Europe, all they needed to do was lower regulations and tariffs and smooth out the taxes.
But they didn't do that.
And they ended up – it's like with the Trans-Pacific Partnership.
They end up with giant piles of paper that reach, you know, to the top of the room – And they somehow think that this additional regulations and complications and so on are somehow going to guarantee free trade, which is insane.
The government simply need to get out of the way of free trade.
And if you're going to end up with one piece of paper saying, don't initiate force and keep your promises or your contracts, anything more than that is the opposite of free trade.
I mean, absent government, we have free trade.
We don't need regulations to have free trade.
It's the regulations that prevent free trade.
Because absent government, people are gonna trade freely with one another.
I mean, that's just the way it's gonna work.
We're all going to try to benefit to our mutual advantage.
I mean, we're going to always try to get the best deal.
We're going to look for the highest quality and the lowest price all around the world.
And everybody is going to do that.
So the only reason that you don't have free trade is because government is interfering.
Government is writing rules and regulations to inhibit free trade.
And then when the politicians get together and they say, oh, let's have a free trade agreement and it's a mile high, you've got this huge stack of paper.
I mean, in order to have a free trade agreement, it should just have one sheet of paper.
You know, we'll abolish all the existing rules and there'll be free trade.
I mean, you can write it on an index card.
The fact that, you know, these free trade agreements fill up volumes and volumes proves that there's no free trade there at all.
It's just, it's managed trade, masking as free trade.
I mean, that's how government works.
You know, kind of whatever they do, they'll slap a label on their legislation And the label is generally the opposite of what the impact of legislation is going to be.
So if they have a new bill called, you know, the tax simplification bill, it's going to complicate taxes.
But they don't want to call it the tax complication bill because no one's going to vote for that.
So they call it the tax simplification bill.
But then it's all about complication, just like the Patriot Act.
I mean, was there anything patriotic about the Patriot Act?
No.
It was the Unpatriot Act.
But no one's going to support the Unpatriotic Act.
So you put all your unpatriotic things and you wrap it up in the Patriot Act.
And so that's how it passes.
There is no truth in legislation.
Like the government says, you know, you have to have truth in advertising.
But unfortunately, that doesn't apply to legislation.
The name of your legislation can be the exact opposite of the intent to the effect of the legislation.
And that's what happens with these free trade agreements.
Now, for my younger and newer listeners, when you talk about get your hands on some gold, it seems like a vague anachronism, like go hunt some doubloons and buy yourself a blunderbuss.
They don't really, I think, understand the degree to which gold is really...
A very key part of a portfolio in adverse or uncertain times.
I wonder if you could help people understand the value of gold during these situations.
Gold was up about 5% on Friday in the US. But think about it from the perspective of the British people.
Because the gold was up 15% in terms of the pound.
I mean, think about that.
I mean, so if you went to bed in Britain and you had pounds in the bank, you know, you woke up the following morning and you lost, you know, let's say 10% of your purchasing power.
But if you went to sleep with gold coins, you know, in your safe, you woke up and you had 5% more purchasing power.
Gold protects you from events like the Brexit and what people believe will transpire in the aftermath of Brexit, which will be more money printing in the UK, lower interest rates, more inflation.
Gold protects you.
Gold was up on Friday against every currency.
Even the yen, but it was up by the most in terms of the pound.
But a better way of looking at it is that all the fiat currencies lost value on Friday and they're all losing value again on Monday.
They're just losing value at different rates.
The pound is the weakest currency and the yen is the strongest, but even the strongest currency is still losing ground against gold.
Which shows that it's better to own money, which is gold, than any kind of substitute for money, which is all these fiat currencies are.
They are money substitutes and they are poor substitutes for the real thing because there is no limit to how much money central banks will create.
And they're going to prove that because they're going to keep creating it until its market value matches its intrinsic value, which is zero.
And as more and more people wake up to the con, That the central bankers are perpetrating, just like the British woke up and they wanted out of the EU. Well, people aren't just going to Brexit.
They're going to a fiat exit or fiat currency exit, whatever the anachronism would be there.
But they're going to exit the pound.
They're going to exit the euro.
They're going to exit the yen.
They're going to exit the dollar.
And they're going to go for gold.
They're going to vote for gold and they're going to repudiate these fiat currencies.
In a similar manner that they repudiated the EU. But before that happens, you know, while gold is still, you know, right now gold's around, what, 1325 or something like that.
You know, gold got as high as 1900 a few years ago.
And believe me, the problems are a lot bigger today than they were when gold was at 1300.
I mean, 1900.
And we certainly printed a lot more money since gold was at 1900, and we're about to print even more.
So the bullish case for gold has never been stronger, yet you still have a bargain in the price that you would pay for your gold.
But I wouldn't press my luck, because I don't know how much longer the sale is going to be on.
Right, right.
And it's not like this economic uncertainty is going to go away, at least in the UK, anytime soon.
I mean, there could be years before they have negotiated an exit, and who knows what's going to happen in the interim.
So thanks again so much for your time, Peter.
Just wanted to remind people that they can go to shiftgold.com, shiftradio.com, and europac.com for more of Peter's investment advice.
He runs a wonderful podcast, which is well worth subscribing to.
As always, a great pleasure to chat.
Thank you so much, Peter.
Thanks, Stefan.
Yes, the Peter Schiff Show is at SchiffRadio.com and my YouTube channel, The Schiff Report.
I'm still trying to catch up to you on subscribers, but you're still way ahead.
All right.
Well, I do general news.
It's a little bit different.
You're a bit more specialized, but thanks again for your time, Peter.
I just passed $150,000, so that's a little bit of a landmark.
