Why We Should Listen to Peter Schiff’s Bad News

Correction Appended May 22, 2009

Peter Schiff is loud–a decibel or 12 above everybody else. And it’s hard to get him to stop talking. Ask the man a simple question and you get a 10-minute harangue in response. This harangue is likely to feature libertarian political opinions that are by Schiff’s own admission pretty extreme–inherited as they were from a father currently in prison (at age 81!) for refusing to pay income tax.

Yet Schiff, 46, is not just some opinionated boor. He possesses a self-awareness that renders him a bit less obnoxious than I’ve described, and he happens to have done a better job than just about anyone else of forecasting in 2006 and early 2007 what was about to happen in U.S. financial markets. This wasn’t a broken-clock-is-right-twice-a-day thing: Schiff appeared on the national scene just as the credit bubble was reaching maximum inflation and offered a critique of the nation’s unsustainably debt-fueled economic trajectory that is now–after the fact–widely accepted.

As markets collapsed late last year, Schiff, who runs the Connecticut-based brokerage firm Euro Pacific Capital, briefly got to bask in the glory of his spectacular call. He ran a victory lap of sorts on the cable news networks. A fan put together a 10-minute YouTube clip of his precrash predictions on CNBC and Fox News–complete with smirking and dead-wrong rebuttals from the likes of Arthur Laffer and Ben Stein–that has been watched more than 1.3 million times. (“What makes that clip so good is not so much me as everybody else,” Schiff says. “People like laughing at people.”)

This year, though, Schiff’s TV bookings are down 75% to 85%, says his younger brother Andrew, who handles p.r. for him. About the only things written about him lately have been negative–the result of financial blogger Michael (Mish) Shedlock’s pointing out that Schiff’s investment recommendations were money losers in 2008. How could a bear have managed to lose money last year? Schiff was blindsided when global investors piled into dollars and U.S. government bonds during last fall’s panic. But that rush to safety has already abated, and over longer periods, Schiff’s decade-old strategy of steering clients out of U.S. securities and into commodities and overseas stocks has been a big winner. His investment record surely can’t be the reason for his fall from media grace.

No, the main issue with Schiff seems to be that he hasn’t changed his tune–and it isn’t a pleasant tune to listen to. He thinks the “phony economy” of the U.S. is headed for even harder times. He believes that the crisis-fighting measures coming out of Washington are merely delaying the inevitable, debasing the dollar and loading future taxpayers with huge debts.

There is still demand for this kind of market-trashing talk. Schiff’s 2007 book, Crash Proof: How to Profit from the Coming Economic Collapse, is selling well on Amazon.com His many YouTube videos keep attracting new viewers. He says he’s getting more speaking requests than he can possibly satisfy, many from overseas. Euro Pacific still garners new clients. But with a few exceptions–Larry Kudlow brings Schiff onto his CNBC show occasionally, Liz Claman does the same on Fox Business Network, and I’m writing a column about him–he’s no longer invited to mainstream discussions of the economy and economic policy.

Of course, Schiff isn’t mainstream. His father Irwin decided in the 1970s that the federal income tax was unconstitutional and has spent the years since shuttling between courtrooms and prisons. Schiff’s parents divorced when he was 5, and he was raised by his mother. But it was his father who got him reading libertarian icons Ayn Rand, Ludwig von Mises and Murray Rothbard. And taxpaying Peter is wistful about failing to follow fully in Dad’s footsteps. “I’m taking the easy way out,” he says.

I happen to disagree with most of Schiff’s economic views. But there’s a thriving line of academic research showing that including divergent opinions and models of how the world works makes groups better at solving problems. Our society failed spectacularly this decade at solving the problem of how to price houses and mortgage bonds. It would have done better if people had paid more attention to skeptical voices like Schiff’s. “The fact that he was right this time doesn’t mean he’s going to be right the next time, but somebody will be,” says University of Michigan social scientist Scott Page. “All models are wrong, and that’s why you want a diversity of models.” Seconds Schiff: “You’re never going to get these correct calls coming from the mainstream. It’s not even possible.” Schiff’s current predictions may well turn out to be all wrong. But that’s no reason not to listen to them.

The original version had the age of Schiff’s father as 90. The correctage is 81.

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