Today’s CPI Is a Lie

06/19/2012 11:00 am EST

Focus: MARKETS

Peter Schiff

CEO, Euro Pacific Capital, Inc.

Euro Pacific Capital’s Peter Schiff thinks that inflation is inevitable, and says investors should have a plan in place to protect themselves when the real level of inflation becomes evident.

Inflation is here and it may get worse, according to Peter Schiff.

Yes, of course. Today, inflation is known as quantitative easing. That is the new euphemism by which the government describes the process of creating inflation, but that’s what happens.

The Federal Reserve creates money out of thin air and uses it to buy US Treasuries, and then monetizes that debt—debases currency—and that is what is keeping this economy going right now is inflation. And of course, the inflation causes prices to rise. That’s why gasoline is so expensive. That’s why food is so expensive.

Of course, the government lies about inflation when it reports it in the CPI, because the CPI is deliberately designed to understate and mask the inflation that the Federal Reserve is creating. And now the government actually is trying to tell us that the CPI is overstating inflation and they want to fix it again.

They’re trying to hide from us the inflation that they’re creating, but eventually people are going to be overwhelmed. The prices are going to be rising so rapidly that the government is not going to be able to lie anymore and pretend that there is no inflation.

Is this similar to 1970s inflation, or is this much different?

I think it’s going to be much worse. I think it’s already probably similar. In fact, if we reported inflation today using the same CPI that they had in the 1970s, you would see that the rate of inflation is a lot closer to 10% than 2%.

But I think it could get much worse than that, and the real risk is that it becomes hyperinflation—Weimar Republic style, Argentina, or Zimbabwe style—if we don’t stop the presses. But in order to do that, and if the Fed is going to let interest rates go where they need to go to put an end to it, then we’re going to have a real financial crisis.

Why? Because then you’re going to have all of the banks that we bailed out, they’re all going to fail again, and this time there is no bailout. And the federal government is going to have to default on its debts and restructure, just like Greece, because if interest rates go up, the US government can’t afford to make the interest payments on the debt, let alone retire the principal if our creditors want their money back.

So Peter, how can investors protect their wealth?

Well, get it out of the dollar. Don’t own bonds. I mean, I don’t know when the bubble bursts, but when it does, you don’t want to be in bonds. In fact, bonds are just future payments of dollars. So there are two reasons not to own bonds. One, they’re in a bubble, and two, they’re denominated in dollars.

So you want to get out. If you want to be in bonds, look at Australia, look at New Zealand, look at Singapore, Hong Kong, Norway. I prefer real money. Look at gold and silver. I think some of the mining companies are ridiculously cheap right now that own a lot of gold and silver in the ground. And look at a lot of equities around the world that can be a good inflation hedge, particularly in a lot of the emerging market economies and southeast Asia.

The countries that have been doing all of the heavy lifting, that have been doing all of the savings, all of the investment, all of the production, the countries that are accumulating these vast surpluses, these are the countries that are doing it right. And you want to invest in those economies and those companies, because they’re going to be able to profit from the emergence of the global middle class.

I think the best thing that’s going to happen to the global economy is the collapse of the US economy, where the global economy just allows it to happen. What really puts pressure on the world is having to prop up the US economy. But when they no longer make that mistake, and allow the dollar to sink, and they invest their resources in their own economies—if they invest productively instead of just wasting their surpluses in the US Treasury market—I think you’re going to see a boom in the global economy. And there are a lot of way for investors to profit from that if they get in front of it.

And your latest book, by the way, has an ominous title. Real quickly, The Real Crash: America’s Coming Bankruptcy.

How to save yourself and your country. And if fact, America is already bankrupt, it’s just that most people haven’t figured it out yet. But by the time they do, it’s too late to protect yourself.

Related Reading:

Related Articles on MARKETS