Dave Ramsey, Peter Schiff, and decline of U.S. Economy
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Dave Ramsey and Peter Schiff are two men that I respect because they exist within a group of little known “truth tellers,” speaking out on the perils of personal debt and a troubled U.S. Economy. But there are two distinct differences in their perspectives concerning our U.S. Economy and monetary policy that I find puzzling. To hear a podcast of this article in windows media player click here.
In a recent radio show (early January 2008) Dave Ramsey was asked about the state of the American Economy. He joked and said that the media had predicted “36 out of the last 2 recessions”, implying the media was anxiously reporting any negative news in regards to the state of our Economy. Ramsey then went on to mention that GDP and Net Worth figures were steadily rising - and pointed to these facts as proof that talk of recession is nothing more than ‘fear mongering’.
Since Peter Schiff (whom accurately predicted the housing bubble meltdown) is currently predicting the outright collapse of the U.S. dollar and our Economy, I decided to purchase his latest book ‘Crash Proof - How to Profit from the Upcoming Economic Collapse’ to harvest Peter’s thoughts on this very subject - and he delivers.
The Net Worth argument
Peter wastes no time attacking the Net Worth argument (smacks it down in the preface) stating that booming optimism “relies heavily on the familiar but erroneous argument that declining savings rates are belied by high household net worth figures, which we know reflect inflated housing and paper asset values.”
In other words, Americans have record low amounts of Savings (lowest since 1933) - but that’s supposed to be alright because they bought a house three years ago, which has doubled in ‘market value’, so the acquired equity represents Net Worth. As we are currently witnessing, Net Worth based on home equity is dropping sharply. Likewise, paper asset values such as stocks and investments will also drop, because they are based on a maintained global market ‘faith based’ value of the U.S. Dollar. The Dollar is on the way down, along with any markets based on its value. Since most American’s ‘paper assets’ are based on investments backed in U.S. dollars, the Net Worth attached to these paper assets are likely to crash and burn.
How does Dave Ramsey not comprehend this?
The Gross Domestic Product argument
Moving on to the ‘GDP is growing - so the Economy is great’ argument. Peter invalidates this fantasy on page 2 of Chapter 1. The problem “is that most Americans, including most economists and investment advisers, have confused conspicuous consumption with legitimate wealth creation. Our impressive gross domestic product (GDP) growth, dominated as it is by consumption, is not a measure of how much wealth we have created but of how much we have destroyed.”
Our inspiring GDP is based on borrowing and consumption (bad), not savings and production (good). It sounds wonderful to be able to say that life is good because people are spending money. But when you analyze just beneath the surface there is a horrifying catalyst: The Savings of American Citizens are gone, personal and national debt is at an all time high, and the money was used to purchase garbage.
If this is how you measure success - count me out.
Gold investments and the Gold Standard
In regards to monetary policy Dave Ramsey is not a promoter of Gold. Although Dave doesn’t mention hard money or a Gold Standard, he does degrade the precious metal as a poor investment. In Dave’s latest book ‘The Total Money Makeover’ he had this to say about Gold: “The truth is that gold is a lousy investment with a long track record of mediocrity. The average rates of return tracked as far back as Napoleon are around 2 percent gain per year. In recent history, gold has a fifty-year track record of around 4.4 percent, about the same as inflation and just above savings accounts………..It is important to remember that gold is not used when economies fail. History shows that when an economy completely collapses, the first thing that appears is a black-market barter system…” (pg. 55).
Although I don’t doubt that Ramsey’s facts are accurate, his assessment of Gold is backed by his above mentioned confidence in the U.S. Economy. If the value of our U.S. Dollar were to crash - Gold would remain a viable investment (protecting an individual’s wealth by maintaining value on the global market).
This is where Peter and Dave’s philosophies differ.
If Peter Schiff turns out to be correct about a Dollar meltdown - Dave’s investment strategies would fail (they’re based largely on Wall Street Economics). Peter’s attraction with Gold is reinforced by his admiration of the American Economy and Government when our currency was on a Gold Standard. The Gold Standard restricts the creation of credit and helps to keep Government Spending under control. Peter understands this and believes that the next dominating ‘reserve currency’ will be backed by the luscious Gold.
Dave Ramsey is on the right track regarding most of what he says. He encourages all Americans to get 100% out of debt immediately. Ramsey accurately explains that obligations to debt prevent wealth building.
However, after retreating from the debt trap I highly recommend adopting Peter Schiff’s investment strategies (based on foreign markets and precious metals). I know it’s difficult but let’s try and look beyond Wall Street, or as Peter would say “Nations are not served by citizens who refuse to face the truth. Blind optimism, shrouded typically in patriotism, abounds and is going to lead us to disaster.”