Consider this scenario:  The domestic manufacturing sector is all but gone.  Housing prices crash and billions of dollars of unrealized equity evaporate almost overnight.  Consumer spending drops and the US service economy, driven by consumer spending and propped up by foreign investment and trade deficits, crashes.  Foreign investors see the weakness and stop buying dollar denominated assets, furthering the dollar’s free-fall.  Our interest rates shoot skyward, and at the same time we suffer hyperinflation.  This catastrophic chain of events leads to a tremendous depression that leaves millions of Americans penniless and unemployed.

That is just one of the possible scenarios foreseen by Schiff and Downes in their 2007 book [1] Crash Proof: How to Profit From the Coming Economic Collapse. This book makes for an interesting read, though one to be taken with a grain of salt.  The book combines dire doom-and-gloom predictions with a healthy dose of mistrust for the government.  If the authors were not so absolutely correct about many of the points in the book, it wouldn’t deserve a second look.  The authors’ predictions are proving valid with each day that goes by, though, so I think this book is worth reading.

The book spends the first seven chapters discussing why the US economy is about to collapse.  The author delves into the shift from a manufacturing to a service economy and the possible consequences.  He examines inflation and convincingly explains why he believes that the government manipulates inflation indicators to hide the truth.  He predicts a sharp decline in the dollar for many reasons, including the possibility that the dollar may no longer be the world’s reserve currency after a few years.

He goes on to consider the chaos that has affected the stock market in recent years, and how the tech bubble never really burst but rather shifted into housing.  He predicts a decline in housing on par with or greater than the tech crash at the beginning of this decade.  He predicts that the same dollars will go towards creating a commodity bubble and result in even greater inflation.  Before giving us his answer to these problems, he caps his analysis with a coup de grace - the problem of debt in the US.  The author is very concerned about the levels of consumer debt, lack of home equity, and US government debt that threaten to overwhelm both US citizens and the economy as a whole.

Finally, we are given the answer to this impending crisis in three simple steps: move most of your investment dollars into foreign dividend-paying stocks and gold, and hold a reserve of liquidity (preferably in foreign currency) to allow you to take advantage of investment opportunities as the domestic economy comes crashing down around you. 

I liked this book for many reasons.  For one, it presents a worst-case scenario that deserves serious consideration given the veracity of some of the authors’ claims.  Second, it presents interesting reading.  I particularly enjoyed the authors’ analogy of the current world economy to an island on which six Asians work around-the-clock to feed, clothe, and shelter the sole American - who benefits the Asians by giving them a reason to produce.

Most interestingly, the author hit the nail on the head with respect to both housing and the declining dollar.  An investor in February, 2007 (when this book was published) would have done very well moving his portfolio to gold and foreign stocks. 

However, there were some major problems with this book, in my opinion.  First and foremost, the book ends with a shameless plug for the authors’ investment company.  If his ideas are that excellent, he should not need to plug his brokerage….clients will find him regardless.  Also, he presents his company as the single outlet for implementing his plan.  I would appreciate two or three unbiased options (low-cost foreign index funds, for example) - otherwise his entire book seems like a fear-based ploy to increase his own business with little regard for his clients. 

The authors also make a strong case for dividends over capital appreciation.  However, if you are a believer in efficient markets, singling out dividend-paying stocks will not result in a greater return than the market as a whole. 

Lastly, a major premise of the book is that the lack of manufacturing in America will lead to a decline in the dollar, inflation, and recession.  However, I think it is important to note that a declining dollar may serve to bolster our manufacturing sector by making our products more competitive both domestically and internationally.  So the very problem the authors present could potentially solve itself. 

Overall, the authors do an excellent job of considering the potential for a decline in the US economy, and present some interesting strategies to mitigate the effects of the crash.  Even if you disagree with the authors, some of their strategies (including investment in foreign securities and gold) have a place in almost every portfolio. 

[1] Crash Proof: How to Profit From the Coming Economic Collapse:  Read it and be ready!