When Will the Dollar Bubble Burst?
Against a backdrop of falling oil prices, the dollar has rallied by nearly 15% since June 30.
It’s now among the strongest currencies in the world.
But is it all an illusion?
In Part II of my interview with bestselling author, Peter Schiff, he warns that a rude awakening is coming.
According to Schiff, the dollar’s rally is nothing more than a government-sponsored bubble… and a dangerous one, at that.
So when will the bubble burst?
Founder, Wall Street Daily
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Robert Williams: Hi there. Robert Williams here, the Publisher of Wall Street Daily. I have bestselling author Peter Schiff with me today. Peter predicted the implosion of the housing market and stock market in his book Crash Proof, but warns in his latest book, The Real Crash, that an even bigger crisis is on our front doorstep. In Part 1 of our interview, Peter described how the United States is already bankrupt and that policymakers would be well-advised to take the pain of a bankruptcy in a controlled fashion now in order to prevent a chaotic crash later. Now, knowing full well that Washington won’t declare bankruptcy, today we’ll delve into what the coming crash will look like. Peter, I don’t want the dollar’s current rally to give our readers a false sense of security, so what’s really behind the rally?
Peter Schiff: Well, I mean, the dollar’s always strengthening because people expect the Federal Reserve to do things that it’s not gonna do, and because they have confidence in the legitimacy of the U.S. recovery, but the recovery is here only as long as the Fed is supporting it. And it’s not a real recovery, it’s a bubble masquerading as a recovery, but if the Fed is not blowing more air into it, it’s going to deflate, and people don’t understand that, at least the analysts, but you know, if you look at actual Americans who are living in the supposed recovery, from their vantage point, there is no recovery. Right? People are worse off – the average American is worse off today than when the recovery began five or six years ago. If it was a legitimate recovery, that would not be the case. There’s never been a recovery where people are worse off at the end of the recovery than at the beginning.
And what did we recover from? We got sicker. People’s incomes are down, their net worths are down, you know, people are losing good jobs and they’re having to settle for lousy, low-paying part-time jobs. This is not a recovery other than just looking at GDP, but GDP doesn’t tell the whole story. And, of course, I don’t even necessarily trust the GDP numbers because I don’t trust the source and I don’t trust the government’s inflation measure because the GDP only goes up if you believe that inflation is as low as the government claims, because they have to adjust the nominal GDP numbers for the inflation rate that they say exists, and if inflation is really 1.5% a year, then the GDP is growing by 2% a year. But if inflation is really, you know, 3.5% a year, then the economy’s not growing. And most Americans, you know, from their personal experience, would say that inflation has got to be, you know, closer to 3.5% than 1.5%. In fact, if anything, it’s probably even higher.
Robert Williams: Peter, what do you make of the analysts who are saying that the United States is a pretty good place to invest money right now? I mean, considering that we’re seeing cracks in the foundations of other world economies?
Peter Schiff: Well, I mean, it’s been a good place to have your money recently because of perception and expectation, but it won’t be a good place to have your money when those expectations are not met and when reality sets in and people realize that they were wrong. Yes, there are – other economies are having their problems, but the United States is gonna have even more problems. The reason that we’ve been temporarily spared the consequences is because of the confidence that people have. We’re able to borrow more money, and as we spend that money, that, you know, keeps those forces at bay. But, of course, spending more borrowed money just exacerbates the problem because now we have even more debt, and our capacity to repay the debt is diminished all the more. And so we become all the more vulnerable to the inevitable increase in rates, you know, and the day of reckoning gets worse and worse.
Look what’s happening in Russia right now. I mean, they’ve got a ruble currency crisis and they’ve been forced to raise interest rates thus far up to 17%. You know, I mean, the Russian economy is hurting but, I mean, nothing like what the U.S. would be going through if we had to raise interest rates to 17%. You know, and so we go through a currency crisis, you know, it’s gonna be a much bigger disaster because we’re much, you know, less prepared to withstand it. I mean, if we had to raise interest rates to 17%, the debt – that crisis would dwarf anything that the Russians are experiencing right now.
Robert Williams: Peter, is it likely that a credit crisis in another country is what will light the fuse on the United States’ crisis?
Peter Schiff: Well, you know, credit crisis in other countries to the extent that the Fed uses it as an excuse to do more QE. Like, you know, I mean, there’s the potential then, if this is a Russian debt problem, in the past when you’ve had problems, you know, the Fed has always been there to backstop the markets, and so they might – that might be a catalyst or an excuse to print more money but, you know, in general the thing that would hurt the U.S. economy the most would be prosperity and confidence in the rest of the world because we benefit from the fact that everybody seeks out the dollar as a safe haven. Well, what if there was – if there was nothing to worry about, then nobody would seek out the dollar for anything because we have huge trade deficits.
And so, you know, if there was economic prosperity and growth happening around the world, that would really undermine the value of the dollar, and that might precipitate our collapse on its own, but you know, it’s not gonna take that, you know, in order to, you know, kill the dollar. You know, the numbers are just getting too big and, as I said, you know, our economy’s not immune to what’s going on around the world, either, and as the Fed removes QE, it’s affecting all the markets. I mean, right now people are talking about oil prices which have dropped, you know, better than 40%. Well, one of the reasons oil prices went up so much was because of the Fed. Well, oil prices were not the only prices that the Fed helped to push higher. Stock prices, real estate prices, bond prices, all those prices are gonna come down without the Fed’s help. You know, just a question of time.
You know, and the Federal Reserve always wanted to claim credit for their policy’s positive effect on stock prices or real estate prices, but they never accepted responsibility for the similar effects and everything in oil prices because nobody was happy and, you know, unless you’re in the oil business, but the average American wasn’t happy about oil prices going up, but there were people that were happy about stock prices going up or real estate prices going up, but the Fed’s monetary policy affected all those markets and, you know, if they’re not gonna be there, all those markets are gonna come back down. That’s what people just don’t understand. The stock market is gonna collapse without the Fed, and if the recovery is built on a foundation of asset bubbles, well, when they deflate, what happens to recovery? It’s gone and we’re back in recession, which means they have to reflate the bubbles again.
Robert Williams: Now, Peter, in your book The Real Crash, you say that despite all the stimulus efforts, American companies are still not making capital investments. Is that another telltale sign of a coming crisis?
Peter Schiff: Yeah. In fact, that’s getting even worse. In fact, I recently read an article that almost 100% of all U.S. corporate earnings are being used to finance share buybacks and dividends. And yeah, the average age of our plant and equipment is the oldest it’s been in better than 60 years. So yeah, American companies have been sacrificing their long-term liability, you know, based on just trying to artificially enhance returns now. And a lot of U.S. companies are just taking on enormous amounts of debt, which is gonna make it that much harder to make these capital investments in the future, especially when interest rates rise and a lot of the debt, you know, is gonna have to be rolled over at much, much higher interest rates.
So yeah, that’s what’s going on in corporate America, it’s really a disaster, and the people are whistling by the graveyard and, you know, just focusing on share prices and not looking at, you know, what’s happening to boost those prices and how the actions that companies are taking today to boost their prices are gonna come back and bite them, and they’re gonna be the reason that prices are gonna fall so much, you know, certainly in real terms in the future.
Robert Williams: We’re even seeing some companies slashing their dividends. Is that yet another clue of what’s yet to come?
Peter Schiff: Yeah. I mean, you know, that shows that, you know, companies don’t generally like to cut their dividends, but they’re being forced to do it. And I think also the share buybacks. I mean, those are the things – you figure the share buybacks would be cut even before the dividends, but share buybacks have provided a lot of the momentum. But again, as I said, they’ve really screwed up corporate balance sheets.
Robert Williams: Okay, Peter. Let’s get to the big question. What’s this crisis gonna look like and how will it differ from the financial crisis? Your book describes a scenario that’s far, far worse.
Peter Schiff: Well, yeah. well, I think this next crisis, I mean, will be the dollar crisis and it’ll look like, you know, what they’re experiencing in Russia right now with the ruble dropping, only, you know, the dollar crisis will be even more problematic for Americans than the ruble crisis is for Russians. But I think that the Fed is going to have to, you know, as I said, come up with an excuse not to raise rates and to do more quantitative easing, which is the opposite of what the market expects but, you know, I think that people will figure it out. More people will start to figure it out, and I think as the economy weakens and the Fed is really forced to step it up when it comes to money printing.
And I think things that also might turn it around, I think the Japanese might have to recognize that QE has been a failure in Japan, and maybe they’ll discontinue it. That’s gonna be very negative for the dollar. And maybe the Europeans, and I think there’s a good chance, that the Europeans will not even undertake QE. Right now everybody believes that Europe is going to do it and they’re gonna start early next year, but I think there’s a good chance that the markets will be disappointed in that Europe does the right thing and doesn’t do QE. And that will be very beneficial for the euro. Of course, it’ll also be beneficial long term for Europe, you know, for European economies that they did not make the mistake that we did. But that could also help exacerbate this crisis when you get an unexpected rise in the euro and potentially the yen, as well, against the dollar.
Robert Williams: So what’s our readers to do with their money, Peter? Their 401(k) s, their retirement accounts, their savings accounts? I mean, the markets aren’t safe, the banks aren’t safe, and the dollar isn’t safe. How can someone possibly protect themselves?
Peter Schiff: Well, I mean, there’s no way to protect yourself really from the volatility, because, you know, you gotta be – the volatility’s here, but you know, long term, if you understand what’s gonna happen, then what – it’s pretty easy – what to do, and that’s get out of, you know, dollars, and own gold and silver, and own equity stocks in countries that have much sounder economies, you know, structurally sound economies underlying, you know, their markets and, you know, buy a lot of value. You can’t just buy a lot of hyped-up assets that have been propped up by cheap money and the bubble.
So you have to be in the right asset classes, be in the right currencies, be in the right countries, and I think, in the long run, you know, you’ll come out on top but it’s kinda difficult for a lot of people to do because, in the short run, you know, it’s the – you know, the people that are getting it wrong, that have been having their investment strategy validated by price auction because, you know, they have a lot of company. The cloud has got it wrong. There’s not many people in the scheme of things that actually understand what’s going to happen or, you know, if they do, they’re certainly not, you know, investing for that end game. They’re trying to – you know, they’re trying to finesse this and they’re trying to, you know, dance while the music’s playing, but they’re hoping that by the time it stops, they’ll have a safe seat somewhere.
Robert Williams: Thank you, Peter. In Part 3 of our conversation, we’ll cover some of the specific markets like oil, gold, and even Bitcoin, and discuss how Peter expects them to behave in the year ahead. For Wall Street Daily, I’m Robert Williams.
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