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Jeremy Brown Reviews Crash Proof

May 3, 2009
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Crash Proof: How to Profit from the Coming Economic Collapse by Peter Schiff explores the causes of today’s economic depression and how it affects the world. Crash Proof professes that people can survive and even profit from an economic meltdown. Schiff wrote Crash Proof over two years before the current economic downturn, and it was published at the beginning of 2008. Today, Crash Proof still holds value. It depicts many of the events that are happening and have happened, and, if we are to believe Schiff, events that will be happening in the near future.

Although many have predicted the current economic crisis, none have detailed it quite as well as Schiff. He explains how interest-only mortgages and the enormous U.S. trade deficit have contributed to the economic downturn. Crash Proof also explains how the U.S. economy has changed in the past 60 years, why it is destined to fail as an economy as it currently stands, and how people can protect themselves.

Schiff’s credibility as a financial writer is impressive. Schiff graduated from the University of California at Berkley in 1987 with a degree in finance and accounting. He is also a licensed stock broker and has been president of Euro-Pacific Capital since 2000.  He is a frequent commentator on CNN, CNBC, Fox News, and Bloomberg TV, where he provides counterpoints to “bullish commentators” (Euro Pacific Capital).  Crash Proof has proven to be Schiff’s most successful and most widely read book to date, and it is not surprising, given the smart, cutting-edge content of the book.

Schiff begins Crash Proof with an explanation of how the Asian economies are poised to upset the U.S. economy. Schiff emphasizes Western spending and consumerism versus Asian saving and producing. He states that the United States is service based, with nothing to produce or sell, while Asia is manufacturing based. Manufacturing economies are producing goods that we are buying on IOUs, creating a trade deficit. When foreign markets spend the U.S. dollars that they have been keeping, the U.S. dollar will lose value, leading to inflation, and the U.S. will have no manufactured goods to sell overseas to combat inflation. The economy would then enter a free fall, and the world would no longer use the dollar as the reserve currency, thus making nearly all U.S. investments worthless. Schiff, however, overlooks the fact that the United States is a modern manufacturer of sorts. We buy, sell, and export products over the Internet in the form of media, software, and ideas.

By strict definitions of manufacturing, the United States has gone from the largest producer economy in the world to the largest consumer economy in the world. Clothing labels that say “Made in USA” are becoming increasingly rare. Citizens are also spending at an alarming rate, as seen in the collapsed housing market. Interest-only loans allowed people to purchase homes that they could not otherwise afford. People assumed the value of these houses would increase, which they would sell at a higher price and pay only loan interest. Many people were able to make hundreds of thousands of dollars this way, but eventually, people stopped paying the inflated prices, and sellers were then left with excessive mortgages, no savings, and no place to live.

Crash Proof further elaborates on the ways that the U.S. economy is in trouble. Schiff also predicted that when the dollar began to lose its value, oil and gold prices would skyrocket. By April 2008, it seemed like the prediction was coming true. In less than six months, oil doubled in price to $150 a barrel, and gold increased nearly 30%.  Unfortunately for Crash Proof, the value of these commodities has not remained high.  Oil is back to approximately $50 a barrel, the price in 2007, and the price of gold is swinging wildly. In early 2008, gold peaked at $1,004.38 an ounce, but today, its current price is just under $900 an ounce. There is nothing to say that that these prices will not increase significantly, but the complete collapse of the economy does not appear to have occurred just yet.

With such a potentially bleak future, Crash Proof recommends several ways people can protect themselves. First, people should employ “real saving,” or funds that earn known rates such as savings accounts, CDs, treasury bonds, and the like. Housing, real estate, and the stock market do not denote real saving, as they require a buyer. Second, people should diversify as a way to minimize risk. Schiff suggests investing in foreign markets, natural resources, and energy companies. If the U.S. market were to collapse, investments in foreign markets would more than cover the losses, especially with the favorable exchange rates. Energy companies pay good dividends and are usually stable, mature funds, especially those in Canada.

This advice did not quite work for me; however, as I invested in Penn West Energy (NYSE: PWE), a Canadian energy company in October 2008. At the time, the stock was valued $20 a share and it was paying a $0.34 monthly dividend. Since then, the value of the stock has dropped to $10 a share, and the dividend has fallen to $0.23 a share.  The capital losses are potentially extraordinary, presenting a complete contrast to the prediction in Crash Proof.

Schiff provides insight into how the US economy works. He reinforces many topics such as the time value of money, how to value bonds, and the role of the stock market in the economy. Read Crash Proof as you would any other investment advice. I recommend this book to anyone in search of a different perspective; however, one must not lose sight of what is going on in the real world right now.

Bibliography

Euro Pacific Capital. (n.d.). Management Team. Retrieved April 13, 2009, from Euro Pacific Capital: http://www.europac.net/management.asp

Schiff, P. D. (2007). Crash Proof: How to Profit From the Coming Economic Collapse. Hoboken, NJ: Wiley.

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