Introduction: Peter Schiff is CEO of Euro Pacific Capital and Euro Pacific Asset Management, and Chairman of SchiffGold (formerly Euro Pacific Precious Metals) and Euro Pacific Bank, his international bank and brokerage firm. He is an internationally recognized economist specializing in the foreign equity, currency and gold markets. Peter hosts a podcast, The Peter Schiff Show, available online at Schiffradio.com. Mr. Schiff is also the author of several bestselling books, including: Crash Proof 2.0: How to Profit from the Economic Collapse and his updated illustrated parable classic, How an Economy Grows and Why It Crashes – The Collector's Edition. His latest bestseller, The Real Crash: America's Coming Bankruptcy − How to Save Yourself and Your Country, which he fully revised and updated, was released in April 2014.
Anthony Wile: Hi, Peter. Thanks for speaking with us today. To begin, is the US economy recovering or isn't it?
Peter Schiff: Unfortunately, no. It's sicker than ever, thanks to the government. The reason the economy is so sick is because of the government, in particular, the Federal Reserve. I'm not going to let Congress off the hook. They've done a lot of damage with their regulations and their subsidies and their taxes but I think the Federal Reserve has been extremely complicit with its monetary policy because some of the biggest problems in the US economy result from interest rates being too low. The Fed is responsible for that and the reason that we had a housing bubble is because of the Fed. Yes, the federal government played a role with guaranteed mortgages, but we've had government guaranteed mortgages for a long time and we didn't have a housing bubble. It was a combination of that guarantee and the Fed's monetary policy. But when that bubble burst and the financial crisis ensued, that was the market trying to repair the damage that was done during the bubble.
The bubble was the unhealthy time period. The financial crisis was the free market trying to repair the damage that bad monetary policy had caused. But instead of allowing the market to function, the Fed came back with even more bad monetary policy to get the economy all drugged up again to prevent the healing process, because that process involved short-term pain that politicians lacked the courage to acknowledge. So they cut the healing process short and inflated an even bigger bubble with an even more reckless prescription of that monetary heroin, so now we are sicker than ever unfortunately.
All of the problems that led to the 2008 financial crisis now loom larger than ever, and I think we are now on the precipice of a much greater financial crisis than the one the Fed caused last time. And the Fed is the culprit in both, and it is very unfortunate and ironic that as a result of the last financial crisis that the Fed caused, the Fed was given even more power, which it wielded in an even more destructive manner. Still to this day, the Federal Reserve denies its own culpability. Janet Yellen has no idea that her monetary policies – and she was very much a part of that monetary program under Bernanke and Greenspan – led to that crisis. She doesn't understand that to this day.
Anthony Wile: You think she genuinely doesn't, or she says she doesn't?
Peter Schiff: Well, it is always possible that she's lying. I always talk about how Fed officials are either very ignorant or they're just liars. Those are the two choices, either incompetence or lying. Right now, I believe that Janet Yellen is misrepresenting what she feels when she talks about the US economy, because she must know how vulnerable the economy is and how phony the recovery is. Otherwise, the Fed would have raised rates years ago. The fact that they haven't done that yet really is an admission that the economy is not as strong as they profess it to be, because they are afraid of even a quarter-point rate hike.
Imagine being so worried about an economy, believing it is so fragile that it can't even withstand the weight of a quarter of a point interest rate increase, that you have to keep interest rates at zero. I think that they put a public smiley-face on the economy because they want to create the false impression that the economy is improving. Maybe they are hoping that if they just convince people that the economy is getting better that it will. Maybe they think that it's a confidence game, that if people believe in it – kind of like, if we build it they will come – if we just get people convinced that there is a recovery that will make it real.
They don't want to tell the truth because they don't want to scare anybody. But the truth is that there is no recovery. Again, this is the biggest bubble the Fed has ever inflated and the consequences will be catastrophic when the bubble bursts, so much so that they don't want it to burst. They think the bubble is too big to burst, but all bubbles eventually burst. The problem is the longer they grow the bigger they become, and the more devastating the healing process once they do.
The question is how big will this one get, and how much more damage will be done to the economy before it pops? But the price that we are going to pay for this borrowed time is going to be enormous to the extent that the Federal Reserve succeeds in postponing the day of reckoning. They already have succeeded for many years but that success comes at great cost because the longer we wait to fix the problem the bigger the problems get and the more painful the fix becomes.
Anthony Wile: Do you see a date on the horizon when they will raise interest rates or are they just going to carry on this policy indefinitely?
Peter Schiff: Yes, they will eventually raise interest rates, but it is not going to be because the US economy is strong and they decide to raise rates. It is going to be because the dollar is in free fall, the bond bubble is bursting, there is a complete loss of confidence in the dollar and inflation is running out of control. Then they are going to be forced to try to do something about it after the fact. But they are not going to be raising interest rates in the environment that most people believe. I think that we are more likely to have QE4 before the Fed is forced to raise rates.
Anthony Wile: As if it has worked so well before …
Peter Schiff: Well, it has only worked in the sense that it has postponed the pain while making the problems causing the pain worse. So yes, it is all about political expedience. If the stock market starts to crash and the real estate market starts to come down, how can the Federal Reserve stop that from happening? Well, they print a bunch of money and buy a bunch of bonds and mortgages. It has worked in the past and so they are going to keep on doing it until it doesn't work anymore. And when it doesn't work anymore that's when the dollar crashes.
It's like they are going to keep on taking drugs until it doesn't get them high, until they end up throwing it up. And that's what's going to happen because eventually the markets lose confidence in the Fed. The only reason that the Fed can do QE is because people think it is temporary and they believe the Fed's promise to unwind its balance sheet. The Fed can only get away with zero percent interest rates because people think it is temporary. Everyone expects rates to go back up.
If the markets sensed that it's a permanent policy that rates will stay at zero no matter what, and that the Fed's balance sheet will grow no matter what, then the game is over. Then the bottom drops out of the dollar and then they can't do QE anymore because if nobody wants the money that they are printing what good does it do them to print it?
Anthony Wile: Why do US stocks keep on rising even when the economic numbers keep coming in weak?
Peter Schiff: Weak economic numbers actually help the stock market. If you understand the main driving force behind the stock market, it's the cheap monetary policy – it's zero percent interest rates, it's quantitative easing and it's all the leverage that those monetary policies enable so anything that keeps the monetary spigots open is going to be good for the stock market. That's why the stock market responds positively to bad economic news, because it enables the game to continue and people think, oh, the party's going to end later. It's like you are at your high school prom and you find out that the chaperone is not going to be there for another hour so you can have more fun. You don't have to worry about any adult supervision.
It's never been about the economy. The stock market has been rising despite the fact that the economy is getting worse. And you think, well, what about corporate earnings? Well, a lot of those earnings are manufactured through creative accounting, leverage, and share buybacks financed by debt that is only affordable because of the Fed. So you have a lot of gimmicks that have been driving earnings, but it's really not about earnings.
Valuations are very, very stretched in the US stock market. This has been about liquidity and about the lack of viable alternative. The attitude has been what else are you going to do with your money? Bond yields are very low. The yield on savings is zero. There is a positive rate of inflation, so if you keep your money in the bank you are a guaranteed loser. If you buy bonds you will eventually lose even more. Stocks have been the only game in town so people have been playing it.
But the policy that the Federal Reserve is pursuing, to pump up the stock market, is actually the policy that is undermining economic growth. Because what the Federal Reserve is doing is redirecting resources and capital away from productive uses towards the market, so you don't have capital investment, you don't have savings, you don't create jobs. Actually, the stock market is growing at the expense of the economy. That's the reason that you see this big and widening gap between the very wealthy who benefit from a rising asset prices and average people who would benefit from a strong economy.
What the Fed is doing is basically a reverse Robin Hood, where they rob from the middle class and the poor and they give it to the ultra rich. Yet these are the policies that are being advocated by liberals, by President Obama. This is the policy that occurring under a Democratic president and he is trying to take credit for this achievement. Certainly if George Bush were still president, the Democrats would be all over this, blasting the Republicans for this phony recovery. It's a recovery for the one percent. What about everybody else?
When you generally hear the Left criticizing this, they say it's a function of too much capitalism, of not enough regulation, of, 'we need more taxes on the rich.' That's not what's causing it. It's not that the rich aren't being taxed enough. That's not what is causing this dichotomy and it's not an inherent failure of capitalism. Capitalism has nothing to do with this. Under capitalism interest rates are determined by the market not by the Federal Reserve. Capitalism doesn't have interest rates at zero.
All of these misallocations are the result of government price fixing. It's the result of socialism. It's the government superimposing its will on the market and all these distortions are because of government interference not because of market forces. The market would have prevented all of this. But the backlash is, 'Look at this widening disparity between the rich and the poor. This is some inherent flaw in capitalism and we need more government to solve this problem.' And so government interferes in the market, creates the problem and then blames the problem on the market, then uses the problem to justify even more government power to do even more damage. That's the vicious circle that we are trapped in.
Anthony Wile: It seems many people really just don't understand the definition or function of capitalism – especially in light of all the media propaganda that 'capitalism has caused this.'
Peter Schiff: Yeah, we give capitalism a bad name because we preach it but we don't really practice it, and then capitalism always gets blamed for the failures of government.
Anthony Wile: What do you expect to happen when the stock market does collapse? Or will it?
Peter Schiff: I think that the Fed will try to keep the stock market from collapsing by printing more dollars, and so instead of a stock market collapse, we will end up with a dollar collapse instead. Now, when the Fed is ultimately forced to save the dollar with much higher interest rates, then the stock market will eventually come down for that reason. But in the short-run, the Fed is willing to sacrifice the dollar to bail out everything else. They don't want the stock market going down, they don't want the real estate market going down, they've created an asset-based bubble economy. The "recovery" is based on inflated asset prices and the supposed wealth effect that follows.
People want to talk about trickle-down economics. This is trickle-down monetary policy. According to the Fed, if they just make some people rich by boosting the stock market and the real estate market, then that paper wealth will trickle down to the real economy. This is what those guys actually believe.
The irony of it is, you've got all these liberals at the Fed. Janet Yellen is very much a liberal, yet her policies are impoverishing the people that she supposedly cares so much about. The problem is Janet Yellen actually believes potentially that her monetary policy can help people. She actually thinks that the Fed can create jobs by creating inflation, that if she just prints enough money there's going to be prosperity. It doesn't work that way. All the Fed does is interfere with the prosperity that the markets would have created on their own.
You hear Janet Yellen talking about "our goal." "Our goal is to make inflation higher," right? How does that benefit the middle class or the poor if the cost of living goes up, if food becomes more expensive, if the utility bill goes up, if the cost of clothing or educating your kids goes up or if it's more expensive to go to the doctor? How is all this stuff getting more expensive helping anybody? Yet the Fed is pretending that inflation is a good thing.
Wealthy people can afford the higher prices but poor people really can't. Bill Gates doesn't give a damn what things cost. He buys whatever he wants. He doesn't even look at the prices. But that's not true for most people. Most people, if the price goes up, they might not be able to buy it anymore. They might have to buy less, or not buy at all. It's not a good thing.
As an example, I just got my renewal contract for the company that services my pool. They do it every year, and I don't change the package. I got my contract for this year and compared it to my bill from last year, and they have increased the price by ten and a half percent, even though nothing had changed. It's the exact same service I had last year. It's just going to cost me ten and a half percent more. I thought to myself, "Gee, it's a good thing there's no inflation."
With all the things that I experience, all the costs that I pay, prices are just going up, yet the Federal Reserve claims that they are not going up fast enough and they're going to do what they can fix this "problem." I guess they want my pool bill to go up twenty percent a year instead of ten percent a year. I don't know how much higher consumer prices need to rise for the Fed to be satisfied. I'm sure there are some people that are not going to take their service anymore. Generally, people that have pools here have a little bit more money than people who don't, but not necessarily. There are a lot of middle class people that have swimming pools and so what they might end up doing is saying, "You know what? Screw it. I'm going to do it myself. I'm not going to hire somebody. I'll clean it myself. I'll pour the chemicals myself because I'm getting priced out of the market." With some people that's going to happen.
Anthony Wile: A question about US economics and presidential politics. Rand Paul announced his candidacy and others have now, as well. Do you see the presidential race actually affecting any of what we've been discussing?
Peter Schiff: No, I don't think it is affecting any of it. The question is whether the outcome will affect any of it. I think the US is in a lot of trouble, and it doesn't matter who becomes president; we are going to have to deal with the consequences of all the mistakes that have been made by both the Fed and the government, under both Republican and Democratic administrations. But I do believe that there could be a difference in how we deal with that.
Anthony Wile: Explain what difference you'd expect or hope for.
Peter Schiff: Certainly, I think we'd be much better off with a President Rand Paul than most of the other, probably all the other Republicans or certainly Hillary, as far as doing the right thing in the aftermath of the crisis and helping to lay a foundation for market-based solutions. Because most politicians are going to look at a problem and see it as a failure of the market and of capitalism and their gut is going to be to come up with a government program or a government solution and that is why we are in so much trouble. It's all these government solutions; all this government "medicine" has been toxic.
Rand understands this and so he's going to be more inclined to try to remove government from the equation, to try to explain to the people that, no, we're in this mess because of what the government has done in the past and there is no quick fix that the government can provide. But we do need the government to do its part, which is to shrink and become as little a burden as possible. It needs to diminish its burden because the government needs to tighten its belt and we need to get out of the way. And we need massive reductions in government spending. Government has to become much smaller. It needs to reduce its workforce and its payrolls and we need to cut back on government programs. At least he's more likely to try to lead us down that path because philosophically he understands it and he understands the problems inherent in our fiat monetary system. Most of the candidates have no understanding at all of money and Rand has a very, very good understanding of money that he learned from his dad and so he would be a potential game changer in that he has a better chance of doing the right thing.
Anthony Wile: What gives you reason to believe Paul can actually make a difference?
Peter Schiff: It's not like he can just be elected and everything is just going to get better. It's not. Things have to get worse before they can get better. Now, that's probably not the slogan that Rand wants to run on. Nobody wants to run on a slogan of 'Vote for me and I will make you take that bad-tasting medicine that will eventually work.' So people want to pretend, 'Yes, just vote for me and I will cut taxes, eliminate waste, fraud and abuse, and the economy is going to be great.' It's not going to work that way. We need to cut government spending dramatically, restore sound money and then, after a painful recession, the economy will experience a real recovery – the type of recovery that has eluded us all of these years because we settled for pleasant tasting snake oil instead of real medicine
It's kind of like telling people who are on drugs, 'Yes, you are just going to stop taking these drugs and you are going to feel even better than when you were taking them.' But that is not true, at least not in the short-run. In the long-run, yes, your life will be better if you get off of drugs but in the short-run you are going to be in rehab and it's not like going to Club Med. So it's hard to try to sell an addict on how great rehab is. You've got to kind of sell them on life after rehab.
That's probably what Rand would want to talk about, but he doesn't want to deliver the bad news that, look, in order to get from where we are to where we want to be, things are going to get pretty bad but that is the reality. Unfortunately, politicians don't like to state the hard truth. For instance, George Bush came in just as the Clinton bubble was bursting and could have prepared the country for some tough years as a result of all the bad things that were done on Clinton's watch and all the bad things that were done by Alan Greenspan. He had an opportunity to be a president that let everybody know that, unfortunately, this has to happen because of how screwed up the economy is. But he didn't want to risk not getting re-elected so choose the path of stimulus and quick fixes that led to the 2008 financial crisis.
It's always better economically to allow a painful solution that is real rather than opt for a politically expedient false recovery that you get when you numb the pain, which is, unfortunately, what Bush chose, and it's what Obama chose and it's what, hopefully, the next president will not choose.
Rand's got a lot of the integrity that most politicians do not have and he's not really a politician. He had nothing to do with politics other than his father. He was a doctor until he got caught up in the wave in 2010 and ran for office, just like I did. We both ran for the Senate that year. He won, but prior to that he was a doctor. He didn't hold any prior political office. Most people who are U.S. senators have been in politics their entire lives and have no integrity whatsoever. If they actually had integrity, their political careers would not have been long enough to make it all the way up to the U.S. Senate.. You can't climb the political ladder and keep your integrity. You have to sell out. That is just the way it is. But he wasn't part of all that so he has got principles. If he were in the White House I have to believe that he would honor those principles. Of course, there is a history of power corrupting and maybe the presidency is enough power to corrupt absolutely. I don't know. It probably has corrupted a lot of people so I do not know that he wouldn't be corrupted by the office, but you have to have faith that he would be less likely than anybody else running to succumb.
Usually when you get elected all of a sudden the priority becomes staying in power. Even if my goal used to be to better society and change and fight for my principles, once I'm in office the job becomes to stay there. How do I stay there? I abandon my principles. I become pragmatic. I try to get votes and how do I get votes? I need to get money. I need special interests. Well, how do I do that? I have to sell influence. Once you get there things tend to change and the people that don't play ball tend not to stay there. There are people in Congress that have been there 30 or 40 years. It is no accident that they are still there. The ones that had any principle and tried to do the right things for the country lost their seats a long time ago or they left in disgust because they came there wanting to do good and they realized that they couldn't and they left on their own. …
Stay tuned … we'll publish the remainder of our extensive interview with Peter Schiff next week.