Continuing with the transcription of Peter Schiff’s speech from 2006, here is part three.

You can view the second part of his speech on YouTube on the following link:
http://www.youtube.com/watch?v=qBk4PhdhCFQ

Read more for the transcript.

[And that’s just the Chinese…] The Japanese have a trillion as well, and of course every other country in the world is collecting reserves. These represent goods that Americans have imported, but that we have not yet paid for. And the way you pay for goods is by exporting. Right, nobody exports for the sake of exporting. You don’t export because you want to create jobs. The role of an economy is to eliminate jobs – people don’t want to have to work. But the reason you export is to import. It’s a comparative advantage. But the problem is, we are not offering the world anything except our IOU’s. And the promise that at one point in the future we will make good these IOU’s with a manufactured product. But in the meanwhile, our ability to manufacture is diminishing with each passing day. And the world is going to wake up and understand this.

But anyway, so getting back to where we are. So the consumer went into debt and spent a lot of money to keep this recession at bay. But all that consumption has a price of dramatic reduction of future consumption. You see, the only way a society can really increase it’s future consumption is to save. And by definition saving is under-consumption, it is a lack of consumption, it represents self sacrifice. But when you save and reduce your consumption today, and you have money that you can invest and you have compound interest and returns, ultimately you can enjoy enhanced future consumption. In America, we have indulged ourselves in the present at the expense of the future.

And a nation is no different than an individual. Just like if there is one individual who works hard and doesn’t take as many vacations, doesn’t buy new cars, doesn’t eat out a lot, saves for his retirement- you know he is building something for the future. You take another similar situation, a guy with the same income but saves nothing, takes out a second mortgage on his house, doesn’t have a retirement account, doesn’t save for his kids education, and just spends everything he earns – initially, that persons economy looks pretty good if you simply measure it based on consumption. Which is what we do when we measure our GDP. But you are not looking beneath the surface – at what expense is this consumption being funded? That is the big difference.

And also, I just want to digress briefly on government statistics. You know, it was mentioned by Barry that our inflation rate is so low compared to what it was in the past. The reasons for that, and probably the primary reason for that, is the way the government has changed how it keeps score of the statistics. Back in the 1970’s they took housing out of the CPI. Back in the 1970’s when we had that high inflation, housing prices were in there. They are not in there now. And in the mid 1990’s they introduced the concepts of hedonic adjustments and substitutions which basically rendered the CPI worthless. Because the government can do whatever they want with it. If the price of something went up, they don’t have to count it. It’s not a fixed basket anymore. And there is a lot of subjectivity in there. Where the government can take a look at something and say, “well the price went up 20% but we think it’s 30% better so the price went down 10%”. There is a lot of subjectivity that is in there now that wasn’t in there back then. So when you just look at these numbers and say “there is no inflation”, it’s like a government weather man telling you there’s sunshine, but you look out the window and you can see that it’s raining. Now, I’m not going to believe the government, I’m going to believe my own eyes.

And the same thing with the productivity numbers. The productivity statistics were the product of hedonics. If we were becoming so much more productive, where are all the goods that we are producing? And why can’t I see that in the balance of trade? If we are so productive, where are the exports? Why do we have to import so many products from the rest of the world if we are more productive then they are? So you can’t hide the facts. The government can lie all it wants with statistics but the facts speak for themselves. You don’t go from being the world’s wealthiest creditor nation to being the world’s poorest debtor nation and somehow claim that you are more productive than everybody else – it just doesn’t make any sense. And the difference of course – you know when the world was accumulating assets we were accumulating liabilities. We have to make payments on those liabilities.

And this is what is going to happen, and anyway, coming back to where we are as an economy. We had a real-estate bubble that blew up. Americans took on a lot of debt, we spent a lot of money. Where are we now?

Over the next year or two, you have about two trillion dollars of the just low rate mortgages that are going to reset. Now, where are the home owners going to get the money to make these mortgage payments? It’s not like they are sitting on a pile of cash. In fact, most people who own homes, when they qualified for their mortgages they bought the biggest monthly payment that someone would approve them for. Even at that low rate. So if they got a teaser rate at six percent or five percent then they maxed themselves out. They are spending 40% of their income on their mortgage, now at the low rate. How are they going to afford their payments when the rates are 8% or 9%? Well the first thing they are going to do is to cut back spending on anything else. No more eating out, no more shopping at Wall-Mart, no more cable TV, no more cellphone – “I got to make this mortgage payment”.

Well that doesn’t happen in a vacuum. The minute Americans stops pending, because all their surplus money is now going to make interest payments to the Chinese or Japanese or to pay higher costs for gasoline and food. That doesn’t happen in a vacuum. A lot of people in America earn their living on discretionary spending. In fact, most of us earn their [sic] money on discretionary spending. A lot of people are going to loose their jobs because a lot of Americans are struggling to make mortgage payments instead of spending money on what they are spending it on now. Of course a lot of Americans got their spending money from home equity extractions. As the real estate was going up, they kept borrowing against it. Well you can’t borrow against if all the equity has been borrowed out or real estate prices start to fall.

Interest rates on the long term are not any higher than what they were four or five years ago. But what is higher are the short term rates. And that is where these adjustable rate mortgages are all set at the short term.

Also, of course, a lot of people don’t realize this too, but one of the things the Clinton administration and the Bush administration is that we put the entire country on an adjustable rate mortgage. The US government used to finance its borrowing with 30 year paper. Now, the average maturity of national debt is under three years. That’s almost 9 trillion dollars in debt as an adjustment rate mortgage. So as interest rates rise that is going to affect the federal budget and there’s probably going to be quite a bit of tax increases in the pipeline because of the larger deficits that are in our future. Of course, that means that home owners are not only going to face higher mortgage payments but they are going to have higher taxes as well in addition to higher costs for food and groceries and things like that.

So, we are going to have a very severe depression as a result of that contraction in consumer spending. Also, Americans are going to have to rebuild their savings, replenish their savings. For the last five or six years, a lot of Americans felt, why save? I own a house, I don’t need to save. In fact a lot of Americans said I don’t even need a job, I have a house. You go to California about two years ago, the average person buying a home in California believed, that that house was going to appreciate by 20% a year for ten years. Now the average price at the time was 500 000 dollars. Which meant that that person, buying that house believed that he was going to earn 100 000 dollars a year for the next ten years. No, actually more than that, appreciation – 3 million dollars over ten years. Because that is what 20%, compounded for ten years would take a 500 000 dollar house and turn it into a three million dollar house. So the average person in California who might maybe make 50 or 60 thousand a year believed that by buying a house he was going to have an extra 250 thousand dollars a year in income. Just because he owned a house. Why even have a job?

You know people used to buy a house because they could afford it. Now they buy a house because they need the money. And if you need more money, you buy a vacation house. People forget that real estate depreciates. Houses have to be maintained. That they cost money. But they forgot that when they were speculating. In fact the people who bought real estates made the exact same mistakes as the people who were buying stocks. You know, when people were buying stock in the 1990’s, the reason they lost money is not because stocks are bad investments. If you buy a stock at the right price, then it’s a good investment. The reason they lost money is because they forgot. They overpaid for stocks. It’s over paying for stocks that makes them a bad investment.

How do you know that you’re overpaying? Well, you look at the dividend yield. If you don’t get a good dividend then you are overpaying for the stock. Well, how do you know that you are overpaying for real estate? You look at the rents. And the rents are not just supposed to cover your expenses – you don’t want to invest just to break even, you can get 5% at a government bond, right? If you can’t get 7 or 8 or 9% on a piece of property, then you are overpaying. Well, what’s been happening in California and other parts of the country – investors, you know the really speculators, were buying property and not only was there no investment return, but there was negative cash flow. People would buy a piece of property and pay a million dollars for it where the rents that they could collect were less than the mortgage payments on the property or the taxes. Less!

Now why were they doing that? Because they figured they would make it up on the appreciation. But they didn’t bother to ask themselves, why should an asset that’s so [overpriced that it produces a negative return, why should that asset appreciate? It should collapse.]