Features

The Downturnaround Is Here

(Photo: Juho Kuva/Getty Images)

I find it hard to wrap my mind around Grantham’s vision of a Frugal America. His mathematical case is persuasive, but I suspect Americans will do almost anything not to let it drag on for as long as seven years. We’ll work longer hours, we’ll be more efficient, we’ll scour the Earth for another credit card—anything but climb in a hole like the Japanese after their credit-bubble burst. The recent jump in consumer confidence, heralded as the single greatest monthly uptick in six years, suggests that Americans will take the merest whiff of optimism and inhale deeply.

On the other hand, maybe that’s because we’re clueless knaves who refuse to accept that the free ATM is busted for good.

There Will Be No Recovery!

Illustration by Kevin Christy
Peter Schiff

Grantham’s “seven lean years” have a certain biblical bleakness to them, but there are far bleaker visions out there. Gordon, Shilling, and Grantham all share a fundamental, if somewhat shaken, faith that the difficulties of the U.S. economy are surmountable, given time. Attacking that assumption is the obsession of the Über-bears, of whom the most vehement is 46-year-old Peter Schiff, a stockbroker and former commodities trader. His father, who wrote the 1985 book The Great Income Tax Hoax: Why You Can Immediately Stop Paying This Illegally Enforced Tax, is a libertarian martyr, now serving a thirteen-year prison term for tax evasion. The younger Schiff runs a stock brokerage in Connecticut called Euro Pacific Capital that has been bearish on the U.S. economy for a decade. That should have produced spectacular returns in 2008, except that Schiff didn’t anticipate markets around the world getting clobbered right along with ours, a miscalculation for which he has been savaged in the investing community. As Doug Kass, a columnist for TheStreet.com, said of Schiff, “He’s in the Cassandra camp. It’s not a good way to make money.”

Be that as it may, Schiff’s formerly fringe ideas have found mainstream acceptance over the last six months. He’s an excitable character, prone to outbursts on CNBC, but his views have a certain punitive logic that play well on guilty consciences: We’ve had our flush times, now we have to pay for them. “There is no recovery anywhere in sight,” he bellowed over the phone to me. “There is just a bigger and bigger depression. We can’t go back to Americans buying cars they can’t afford and buying houses they can’t afford and buying gadgets they can’t afford and going to overpriced universities. We can’t go back to all the things that got us to where we are.”

Making matters worse is the government, which Schiff says is battling hopelessly to preserve the status quo. Our leaders have learned the wrong lesson from history. His interpretation of the Great Depression is that government intervention hindered recovery, just like it is doing now. “Unemployment’s going to get very high because the government’s making it impossible for companies to be formed to employ people,” he says. “They’re not letting that happen. They’re trying to keep people entrenched in jobs that need to go away.”

The recent market rally is meaningless, the spasmodic last kicks of a dying system. The economy of the last twenty years has been “phony,” he says, conjured out of thin air. Productive elements of the economy have been liquidated and sent overseas in pursuit of a service economy in which nobody makes anything useful. The financial superstructure cannot be maintained, and as it collapses, Americans will have to reconstitute its industrial base, a messy, painful transition that could take twenty years, he estimates, during which time Asia will flourish, leaving us in the dust. Baby-boomers will be denied the retirement of their dreams, forced to work into their seventies and eighties to make ends meet.

There have been moments, I won’t lie, when I have entertained such apocalyptic fantasies. But I pull back from the edge by reminding myself that to agree with Schiff, you have to see the last 50 years of globalization—which has improved the lives of hundreds of millions of people outside the United States. You have to see the likelihood that the rest of world can and will prosper while its largest economy tumbles into a bottomless pit. You have to believe that the Chinese are going to view their vast holdings of U.S. dollars as a “sunk cost” and leave us to ruin. You have to believe that the anti-American sentiments now coursing around the globe represent not just a reaction to the credit crisis and the supreme arrogance of the Bush administration but a permanent shift in opinion.

How did you come to view the world this way? I asked Schiff.