The Federal Reserve is between a rock and a hard place, and it’s going to have to make a hard choice – inflation or economic implosion. Peter Schiff talked about it on his podcast.
Peter said we are very close to another financial crisis and it could be worse than in 2008.
“2008 was all about too much debt and the inability to pay. Well, we’ve got a lot more debt now, and we’re even less able to pay. The only thing that kept it going was the artificially low interest rates.”
The national debt has spiraled above $31 trillion. But of course, the federal government is alone. State and local governments are buried in debt. Corporations are levered to the hilt. And consumer debt is at record levels.
About a year ago, Treasury Secretary Janet Yellen said there was no reason to worry about the national debt because interest rates were so low. But since the Fed started jacking up interest rates, the cost of financing the national debt has increased by a factor of 16.
“So, if the debt wasn’t a problem because it was so cheap to finance it, well, it’s a huge problem now when the cost is 16-times higher.”
Other countries are already wrestling with the impact of rising interest rates. The Bank of England was forced to surrender and launch a quantitative easing program to rescue its pension system and the country’s bond market.
Peter reminded the audience that in 2018, the Fed was all about monetary tightening until the economy started to unravel and the stock market crashed. At that point, it pivoted back to rate cuts and QE (that they refused to call QE) – even before the pandemic. At that point, the Fed’s balance sheet was only at $4 trillion. Now it is closer to $9 trillion.
“If the Fed really couldn’t get interest rates above 2.5% back then — it’s already got them above that now…”
Peter said he thinks the markets are starting to question the narrative, but they still haven’t figured out that the Fed is stuck between a giant rock and a hard place.
“The Fed is going to have to pivot. But inflation is going to run out of control. They’ve got to make a choice. Do they want inflation? Or do they want economic implosion?”
Of course, if the central bank chooses inflation, we’re still going to have an implosion because we’ll ultimately end up with stagflation. It will just happen later.
“That’s good enough for the politicians. All they care about is that it doesn’t happen now.”
There’s only one way to legitimately fight inflation. They have to raise interest rates above the rate of inflation so real interest rates are positive. Right now, real rates are at -5%, Meanwhile, the US government has to make massive spending cuts.
“They’re not even considering that. Because right now, the way the government pays for spending is with inflation. Inflation is the stealth tax by which the government pays for everything. … How did we get all this government? We didn’t get it for free. We paid for it with inflation. They created money to pay for all this stuff. Now, if the government wants to get rid of inflation, they have to get rid of that money.”
That’s not happening. So, that brings us back to the choice.
“Do we want to have a financial crisis, and cut government spending, and allow bankruptcies and defaults and all these losses, or, do we want to have inflation?”
Peter said they’ll pick inflation.
“The reason the Fed is going to pick inflation is because that happens later. And, as we’ve seen, they can come up with a scapegoat — blame inflation on somebody else. They never accept responsibility for the inflation they create. So, if the Fed keeps hiking rates and everything implodes, well, hey, we did that to ourselves. If prices run out of control, we can blame OPEC. After all, they just cut production for oil. We could blame Putin. We could blame greedy corporations. We could blame capitalism, speculators. I mean, maybe they’ll even try to blame me. Who knows?!”
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