Will governments default?

Peter Schiff is an American investment broker, author and financial commentator. Schiff has appeared as a guest on financial television shows and been quoted in major print publications. He is host of The Peter Schiff Show, an audio show broadcast on terrestrial and internet radio. Schiff is known for his bearish views on the US economy and US dollar, and his bullish views on commodities, foreign stocks and foreign currencies. Schiff also voices strong support for the Austrian School of economic thought, first introduced to him by his father.

Zentuccio: Have you heard about Hungary?

Peter Schiff: We have a lot of money invested in the world, European equities and bonds as well.

Well, many people are bearish on the bond market. How about you?

Well, I am also bearish on bonds in general globally for two reasons. But the shorter the duration the less bearish I am. I think there is a possibility of actual default, sovereign default in many nations. I recognize that largest democracies have politicians that simply promised voters too much in order to get elected. Most countries just don’t have the tax base that would make legitimate repayment possible. They don’t have the will to raise taxes to prioritize repayment of debt. I think bondholders are in a very risky position when it comes to getting repaid. There are governments that can print money. Those governments are borrowing in their own currency. Their risk of outright default is not zero but they could also default, even the US. The other risk is massive inflation. The temptation for the central banks could be to monetize the debt. We call that quantitative easing in the US. That is another form of default.

Which countries are you worried about?Germany for example implements a strict policy.

I don’t think that Germans are being strict enough. There should have been bailouts in the euro zone whatsoever. Greece should have been allowed to default. There is now a moral hazard in Germany. Lenders are willing to give money to garments that can’t pay it back. That creates bad incentives. Europe has done a better job than the US and Europe is doing a better job than Japan. I think the euro is going to gain against the dollar and the yen.

Do you think China is in trouble? Do you think there is a crisis coming in general? You don’t seem to be very optimistic.

Well, there is a crisis coming. The nations who are lending money to the nations that borrow the money will realize they can’t pay it back. China lends a lot of money to the US and to Europe. They are not going to get their money back. They don’t want to acknowledge how much they have lost. The current status quo is destabilizing for China because China has to keep printing money and inflation to prevent their currency from rising. I think they should be letting their currency rise in value even if they export less to the United States. China needs to export less to the United States because we can’t pay for the things they are selling us. The Chinese have a lower standard of living, why should they be making stuff for the Americans? China doesn’t need to export, they just need to produce, because their own people need to consume. Nations export to be able to pay for their imports. The US is not making anything that the Chinese need. Most of the stuff the Chinese need to being made in China. They don’t need to import it, they are producing it themselves. All they need to do is let their currency go up.

What is the implication of that scenario to the global world?

Well, that is very good for China and awful for the US but in the long run it’s very good. Right now the US is living in an artificially high standard of living, countries like China support us.