Peter SchiffThe 59-year-old has been on Wall Street for a long time. After working as a broker at Shearson Lehman Brothers, he and his partners bought an inactive Westport-based brokerage firm in the mid-1990s and renamed it Euro Pacific Capital. He later sold the firm, which was renamed Alliance Global Partners, and worked there as chief economist and global strategist. He’s also a master of our new multimedia world: he blogs, he writes books, he has a podcast, a YouTube channel, a radio show, and he’s an efficient Twitter user with nearly 705,000 followers. (Peter, please tweet there.)
More notably, Schiff was one of a small group of people who saw the troubles brewing in the years before the 2008 financial crisis and shouted at the top of the metaphorical mountain. “People like me, we’re just seen as ‘gloom and doom,'” he told me by phone this week in Puerto Rico, where he hangs out these days. Needless to say, Schiff was concerned—very worried– About the coming financial crisis. “We still completely deny the issue,” he said.
Over the years, I’ve interviewed my Gloom and Doomers.Me and Bill Ackerman, the hedge fund manager, as he bet that markets would collapse with the severity of the pandemic (he was right), and the Fed’s decision to bail out financial markets in a month or so (he was right then, too).i chat a lot Mark Spitznagel, founder of Universa Investments, a hedge fund that offers other hedge funds and institutional investors a form of portfolio insurance against huge losses in times like these. Both men were hedge fund managers who were paid handsomely to figure out how to profit from financial disruptions.
For what it’s worth, this doesn’t appear to be Schiff’s game. He was a prophet, and his vision of the near future was grim. According to Schiff, having several intertwined strands of DNA could cause a major blow.
“Are you going to shoot yourself in the head to get rid of your headache”?
First, the current version of the CPI “does a very bad job” of measuring our real inflation rate — it underestimates “by a few percentage points,” Schiff said. He told me that if we used the same CPI components as in 1980, real inflation would be between 15% and 20% instead of the current 8.5%.
And then, of course, the Fed has made multiple decisions over the past dozen years, some of which I record on file Earlier this week, such as the move to cut short-term interest rates to near zero and long-term interest rates to the lowest levels in human history. “The Fed needs to print money to prop up bubbles, prop up asset prices, prop up government finances,” Schiff told me. “There are a lot of people who benefit from artificially low interest rates. And the only way to keep them artificially low is to pretend there isn’t enough inflation so they can justify inflationary monetary policy.”
Mission accomplished, I think. The Fed’s decision to make money so cheaply with its ZIRP (Zero Interest Rate Policy) and QE (Quantitative Easing) policies has caused almost everyone to borrow a lot of money. “Individuals borrow money to buy a house, buy a car, go to college, take a vacation, remodel a house,” Schiff continued. “In many cases, companies are borrowing money just to buy back stock because it’s so cheap.” Because the money is so cheap, the government has also borrowed nearly $31 trillion. The money helped fuel the budget and Covid-19 recovery, and may have helped our government generously help Ukraine bravely defend itself from a Russian invasion. “It’s all on loan,” he pointed out solemnly.
Schiff has been warning about the Fed since it began implementing cheap money in the aftermath of the 2008 financial crisis. “Ultimately,” he said, “it’s going to be a disaster. Once they start QE and get the economy hooked on cheap money, there’s no way to get rid of the drug without a massive hangover withdrawal.” The decision to double down on quantitative easing at the start of the pandemic was especially wrong — not Increase The money supply at that moment, the Fed should change direction and compression currency supply. “Production is going down,” he said, describing the situation at the time. “People don’t have jobs. We don’t produce goods. We don’t provide services. We need less money, not more money. Oil.”
The conundrum we now have, Schiff argues, is that inflation “has already exceeded 2 percent” — the Fed’s stated (albeit artificially chosen) inflation target — and the Fed “has no ability to control it.” He said the Fed “pretends” it can fight inflation, “but in reality they don’t do it because they can’t.” High inflation is not a problem the Fed can fix, he said. “They may have tools,” Schiff told me, “but they won’t use them. It’s like you have a headache and your tool is a revolver, are you going to shoot yourself in the head to get rid of your headache? ”
In fact, he continued, “inflation is now so out of control” that the only way to “get it back down” is for the Fed to “get aggressive,” as the former Fed chair did Paul Walker Made it in the early 1980s. “We need real interest rates to be positive,” he said. What Schiff means is that interest rates need to be high enough to allow those living on fixed incomes to maintain their purchasing power in the face of rapidly rising prices. Using Schiff’s logic, and using the advertised 8.5% inflation rate, the Fed would need to raise interest rates to 9.5% for the real rate to reach 1%. However, if we use the CPI set in 1980, inflation is actually well above 8.5%, so the Fed needs to raise interest rates to what Volcker did in the early 1980s – 15% or more higher. “But that’s the problem,” Schiff told me. “We can’t do it.”
According to Schiff’s logic, if the Fed raises real interest rates to levels that respond to real inflation, the economy will plummet. He paints a very bleak picture with great certainty. For example, if mortgage rates are around 10% to 12%, or twice what they are now, then “how can people buy a house at the current price?” Real estate prices will collapse.
Or, if people stop making mortgage payments because they can’t afford higher rates, mortgage lenders will lose money and their businesses will likely end up going bankrupt. Companies that have borrowed all the money to buy back stock or pay huge dividends for private equity overlords, or are unable to refinance existing debt at the low interest rates expected over the past 13 years, will default on that debt, a race to the bottom. bottom competition.
Schiff then made a series of predictions about the consequences: Real estate prices would plummet. Stock prices will crash. Mass layoffs will come as companies grapple with rising debt costs. “What about consumers?” he continued. “They can’t borrow any more. Their credit cards are maxed out. They don’t have more home equity. They can’t refinance their homes…People have to cut back. Food prices all the way up. Gas prices all the way up. No money … So we went through this massive recession that was worse than in 2008 because we had a bigger debt bubble.”
Then there’s the nearly $31 trillion national debt. According to Schiff, about a third of the debt, or $10 trillion, must be refinanced annually. He said that if interest rates rose to 10% — the level he believes should be, not 1% today — the additional cost of paying interest on debt each year would rise from $300 billion today to $3 trillion a year, or $3 trillion a year An additional $2.7 trillion. In this case, the federal government would have some very unpopular options: It could cut benefits such as Social Security and Medicare. It could cut government pensions. It could fire government workers. It could raise taxes on the middle class “substantially”. It could activate a national sales tax.
But he thinks none of those things are likely to happen. “The most likely scenario is a default,” he said matter-of-factly, although he also doubted that would actually happen. In this case, he thinks the US Treasury will tell our biggest foreign creditors — Chinese, Japanese — “We defaulted, we have no money.” Creditors may be told that all their national debt is now 30 Instead of paying an interest rate commensurate with the 30-year debt, the interest rate would be very low, say 25 basis points, regardless of the actual maturity date — meaning the debt will not be repaid for 30 years. Such a move would destroy the value of its bond portfolio. “It’s going to be catastrophic,” Schiff believes, so “it’s not going to happen.”
His most likely scenario is for the Fed to raise interest rates enough to “hurt the stock market” and “push the economy into a recession,” but not enough to “stop inflation.” In fact, despite the rate hikes, inflation could get worse, he predicted. “What we’re seeing right now is just the tip of the iceberg,” he told me. “Prices are going to go up by double digits…inflation is going to keep getting worse.” He argued that the Fed “doesn’t want to do” what it would do to rein in inflation because of the potentially disastrous economic consequences. He noted that after the Fed raised short-term interest rates by 50 basis points at a press conference on May 4, Jerome Powell, The Fed chairman said how much he admired Paul Volcker not because he “raised rates,” but because “he did what he thought was right.” Powell only wants to “fight inflation, as long as he can do it without hurting the economy,” Schiff said.
Schiff disclosed that he is deeply concerned about the future of the economy and the American people. “We’re done, right?” he said. “The Fed made the bed, and Wall Street, academia and everyone sat down and watched it happen.” He became disbelieving when it was suggested to him that financial problems today are not as bad as they were in the 1970s. “That’s 1,000 times worse than it was in the 1970s,” he told me, before gushing about why: If measured properly, real inflation is actually higher now than it was in the 1970s; we can’t “put out the fires” like we did in the 1980s today , because then we were creditors and now we are debtors; then we had a huge trade surplus, now we have a record trade deficit; today, we have “huge debts” that we didn’t have then; we have a A service-sector economy “reliant on cheap money”.
In short, our economy is much weaker now than the last time inflation was at these levels. “This cannot be resolved without a financial crisis of an order of magnitude greater than that of 2008,” he concluded gloomily. “Unless no one gets a bailout. Imagine how bad 2008 would have been without TARP, no bailout, nothing, no QE—let the market work. That’s what’s going to happen this time, just It’s a bigger bubble.” Anyway, good luck and enjoy the rest of your day.