Don’t try to praise bestselling author, Peter Schiff, for accurately predicting the 2008/2009 crash.
That is, because in his opinion, the financial crisis wasn’t the REAL crash… It was only a tremor before the big one hits.
“Armageddon is inevitable,” says Peter.
So will 2015 be the year when we finally run out of fools willing to lend to us?
Founder, Wall Street Daily
Robert Williams: I have bestselling author of Crash Proof and The Real Crash, Peter Schiff, as my guest today. Peter accurately predicted the economic crisis in the United States, but whenever someone credits him with calling the crash, he’s quick to warn that what happened in 2008/2009 wasn’t the real crash; it was only a tremor before the earthquake. Peter, in your latest book, you assert that the United States is already bankrupt and should just declare bankruptcy and reorganize. In other words, take the pain for our debt sins now in a controlled fashion rather than risk a violent crash later. Do you still feel this way?
Peter Schiff: Well, I mean, I absolutely feel the same way, because the only way that we can avoid the inevitable is to keep creating more inflation and continue to blow air and acid bubbles that undermine real economic growth. So, right now the Fed is winding down QE4, and they’re pretending that they’re going to stop raising interest rates, but they actually can’t do that. Because of the enormity of the debt that we have, if interest rates actually went up, we lack the ability to pay. We can’t service the debt at a normal rate of interest. The federal government can’t do that, and so ultimately what’s gonna happen is the Fed is gonna end up doing QE4, and rather than raising rates, they are going to do more stimulus, because as they stopped quantitative easing, the economy is now heading back to recession.
I mean, people are looking in the rearview mirror when they look at these last couple of quarters of GDP growth. Most of the data that comes out about the U.S. economy has been negative, and it’s been very negative for months. And so, I think you’re gonna see a very rapid deceleration now that the Fed is no longer providing all the monetary support and people are starting to brace themselves for higher interest rates. So this whole bubble economy that the Fed inflates starts to implode without the air, and the big drag, of course, is it’s all debt, right? We’re all depending on American consumers to spend, but consumers are broke. They’ve borrowed too much money. The government’s borrowed too much money, and the only way to solve these problems is to allow the debt to be discharged. And people have to stop spending. They have to start saving. Government has to cut spending. The Fed has to let interest rates go up, but none of this is happening. All we’re doing is trying to delay the pain by exacerbating the disease that’s causing the pain.
Robert Williams: Yeah, but do you think our policymakers in this country have the guts to make such an unprecedented decision?
Peter Schiff: Well, it’s not even about guts. It’s just where their priorities lie. They’re concerned with getting reelected, and so they don’t wanna do something that jeopardizes their reelection, and dealing with these problems would do that, because in order to effectively deal with these problems, you have to admit that there is a problem. You have to admit what the source is, and politicians don’t wanna do that, I mean, because they basically have to admit that they’ve been lying to the public for years, that all the things that the government has done to help the economy have actually made it worse and that the tough medicine that’s required now is a result of all the snake oil that the politicians have been spoon-feeding us over the years, which has allowed the problem to get worse. So, their own self-interest is to pretend that the problems don’t exist or to try to get the Fed to cover ’em up.
And that’s what’s going to happen. You’re seeing this now. The oil market is going down and people are worrying, “Well, is this going to be a problem for the stock market?” It’s not that the oil price going down is the problem. It’s just indicative of the problem. Oil prices were propped up by the Fed. So were home prices. So were stock prices. And if the Fed is not gonna be there anymore, all the prices that were influenced by QE are gonna come down. And since the U.S. recovery was a function of inflated asset prices, as these asset prices deflate, then the recession is going to return. And, of course, what is the government’s response? It’s gonna be more QE, but the real issue is that the recession is part of the healing process. It’s part of what is necessary.
The reason we don’t have real economic growth, the reason that the poor are getting poorer, the divide between the rich and the poor are growing, the middle class is disappearing, people are reporting great dissatisfaction with the economy – look at the voters who voted Republican in the midterms, very upset about the direction of the economy – real incomes are falling. Household net worth is declining. Homeownership has plunged. The number of people living off the government has skyrocketed. Labor-force participation is only rising among older people who are coming out of retirement because they’re too broke to stay retired. Meanwhile, younger people, labor-force participation is plunging as young people can’t find jobs and they just go to grad school.
And student debt is skyrocketing, because so many people can’t find jobs if they’re just going to school, although a lot of the people that are borrowing money using college loans are just going to college so they can get the loans. They don’t even care about the education. They’re enrolling in online courses just so they can get government loans so they can pay their electric bills.
So, the reason that we’re having this real recession under this phony recovery is because the Fed won’t allow the recession to run its natural course, because the recession is kind of like a detox. It’s what’s necessary to make the economy healthy, to allow a restructuring that would facilitate legitimate economic growth. But instead of that happening, we just inflate financial bubbles. And superficially it looks like things are getting better, because the stock market goes up. The real estate market goes up, and there’s some increased spending as a result of all the extra borrowing, but all that is actually hurting the economy. But if we’re gonna allow the recession to run its course, then debt is gonna be defaulted on, because there’s no way around it.
I mean, if the government allowed the recession, banks would fail. People would default on their debts because they couldn’t pay the interest, let alone the principal, but that is more healthy. Allowing that natural, free-market restructuring, that process is healthier and more conducive to a return to legitimate growth than what the Fed is doing. Than trying to prevent that through inflation, through printing money and quantitative easing and zero-percent interest rates. But the Fed is going to continue to fight this battle until it loses the war, and that means the dollar collapses. And I think that’s ultimately where we’re headed.
Robert Williams: Peter, you were an original opponent of the bailout as early as a year before the Bush administration even proposed it. How would you have handled the collapse of the housing market and the ensuing credit crisis?
Peter Schiff: When I wrote my first book. You’ve been reading The Real Crash. When I wrote Crash Proof in 2005/2006, I wrote that book, and I wrote about the coming economic collapse. It wasn’t the one that happened immediately after the book came out. It wasn’t the ’08 financial crisis, even though that was a large part of my book. I wrote in detail about that coming crisis and what was gonna facilitate it, and I wrote a lot about the housing market and what was gonna happen when that bubble burst.
But the first book basically laid out the premise that after the housing bubble burst and it brought about a financial crisis and the greatest recession since the Great Depression and I wrote that we’d have trillion-dollar budget deficits and double-digit unemployment – I wrote about all the things that were gonna happen. I then wrote that in response to that, the government would make the mistake, the Fed would make the mistake of trying to stimulate the economy with cheap money and re-inflate the busted bubbles. So I wrote about the fact that they would do all this quantitative easing. I just didn’t know what they were gonna call it, but I just said this is what they’re going to do. They’re gonna slash interest rates. They’re gonna print a bunch of money, and they’re gonna start buying up debt.
And what I’ve said is that, that action was what was gonna bring about the economic crash, that it wasn’t this disease that I was diagnosing that was the real problem, but the government’s cure that I anticipated would be administered. And that’s happened. The only thing that’s happened that has surprised me from the vantage point that I was at back in ’05 when I was writing that book is the length of time that has transpired between the ’08 financial crisis and the economic collapse that I thought it would usher in, because it hasn’t happened yet. It’s taken longer. The financial crisis and the next crisis, the gap between them is longer than I thought, and I think it’s because I made the mistake of overestimating the intelligence and the ability of the rest of the world to recognize the problem even after the 2008 financial crisis.
It’s amazing the level of financial and monetary ignorance that still permeates the establishment. I mean, the academics and the big money managers and the economists still don’t get it even after having been so spectacularly wrong about the state of the U.S. economy leading up to the financial crisis. They’ve learned nothing. They haven’t questioned any of their premises or any of the dogma that they’ve accepted as fact. Their confidence wasn’t jarred by that. In fact, if anything, they have more confidence than ever in the Federal Reserve and their ability to micromanage the economy and save us, even though the Fed was so wrong and so instrumental in causing the last crisis and so completely ignorant in understanding it. But I think that crisis is coming, and I think what’s gonna start it is going to be as the U.S. economy relapses into recession officially, maybe as soon as next year, and if the Federal Reserve has to call off the rate hikes and replace it with QE4, maybe then the light bulb will start to go off in enough people’s heads to perceive the box that we are in.
And the reason that people have confidence that this is gonna work is because they believe that it’s all temporary, that the low interest rates are temporary, that the Fed can remove the stimulus, shrink its balance sheet and everything is gonna go back to normal. When people realize that this is permanent, that to maintain this artificial economy requires permanent zero-percent interest rates and permanent QE, that the Fed can never back way, that the balance sheet has to keep growing exponentially to prevent a collapse – and when people realize that, that’s what brings on the currency collapse, because if it’s true that the Fed can never raise rates and if the Fed has to keep on printing money forever and there’s no endgame, there’s no exit strategy, then there’s no way to stop the dollar from collapsing.
And that’s what people haven’t figured out. They think that the dollar’s already rising. It has been rising recently based on the anticipation that the Fed is going to raise rates, but they can’t raise rates without precipitating another financial crisis, which would mean that they would have to flash rates. But that also means that as the economy starts to weaken simply on the anticipation of higher rates, that the Fed is forced to cut rates or do another round of QE before they ever get to the rate hike. That’s the catch-22 that people just haven’t figured out.
Robert Williams: Peter, we’ll unveil what that coming crash will look like in Part Two of our discussion. As you say in The Real Crash, even if you don’t think of yourself as an investor, you need to start paying more attention to your wealth, because our economic predicament means there’ll be no easy way to protect your money. For Wall Street Daily, I’m Robert Williams.
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