Financial guru Peter Schiff, who accurately predicted the recession of 2008, says the problems we face now are even bigger. We will live through another Great Depression if Schiff is correct. And one of the main concerns is something very few dare to even mention or show a concern about: the national debt.
Schiff’s podcast from a few days ago highlights a very important problem with not only the economy as we know it but the mainstream media as well. Unable to take their attention off gun control regulations for even a moment to focus on a much bigger concern, the national debt, the mainstream media is effectively trying to hide what’s coming down the pipe. The lack of coverage seems to be spurring a lackadaisical attitude about the almost $21 trillion debt.
“The bad news is, we are going to live through another Great Depression and it’s going to be very different. This will be in many ways, much much worse, than what people had to endure during the Great Depression,” Schiff says. “This is going to be a dollar crisis.”
“When you are talking about the magnitude of the debt we have, that extra money [raising interest rates] is big. That’s going to be a big drain on the economy to the extent that we have to pay higher interest to international creditors…a lot of this phony GDP is coming from consumption, while the average American who is consuming is deeply in debt and they are going to impacted dramatically in the increase in the cost of servicing that debt…given how much debt we have, and how much debt is going to be marketed the massive increase in supply will argue for interest rates that are higher.”
“The Fed thinks they create economic growth…by [saying] ‘let’s jack up the stock market and then the economy’s going to grow and people are going to go out and spend more money.’ It’s actually doing damage. If you create a bunch of phony wealth, and people end up spending money that they otherwise would have saved, you are undermining economic growth.”
“Everything the Fed has done has undermined real economic growth, that is why this coming collapse is going to be so devastating,” says Schiff. “It’s shrinking government that grows the economy. When you make government smaller and you free up resources back into the private sector, that’s what grows the economy.”
Jerome Powell came out pretty hawkish in his public debut this week (albeit with some flip-flopping this morning). The new Federal Reserve chairman said he sees little risk of recession and reaffirmed plans to continue tightening the money supply through interest rate increases and quantitative tightening.
But there are signals that Powell’s optimism is unwarranted and that the monetary blanket knitted together with nearly a decade of easy money may be about to unravel. In fact, the deceleration in the growth of the money supply orchestrated by the Fed matches the trend just prior to the 2008 crash.
Jeffrey Peshut at RealForecasts.com has composed several very illuminating graphs based on the Rothbard-Salerno True Money Supply (TMS). In one graph Peshut shows the collapse of the growth rate of TMS beginning at the end of 2016, which was caused by the Fed beginning to raise the fed funds target rate at the end of the preceding year. What is of great interest is that the recent deceleration of monetary growth (the second red arrow) almost exactly matches in extent and rapidity the monetary deceleration (the first red arrow) that immediately preceded the financial crisis of 2007-2008.
In a striking interview with Goldman's Allison Nathan, legendary trader Paul Tudor Jones argues that US inflation is set to accelerate sharply, making bonds a very poor investment, and that the Fed must act swiftly to tackle financial bubbles created by prolonged monetary easing.
If and when the Fed raises rates enough to stop and reverse the stock market rise, that virtuous circle predicated on increasing capital gains will reverse, and bonds and stocks will decline together like they did in the 1970s."
In my view, higher volatility is inevitable. Volatility collapsed after the crisis because of central bank manipulation. That game’s over. With inflation pressures now building, we will look back on this low-volatility period as a five standard- deviation event that won’t be repeated.
Let me describe to you where I think Jerome Powell is right now as he takes the reins at the Fed. I would liken Powell to General George Custer before the Battle of the Little Bighorn, looking down at an array of menacing warriors. On the left side of the battlefield are the Stocks—the S&P 500s, the Russells, and the NASDAQs—which have grown, relative to the economy, to their largest point not just in US history, but in world history. They have generally been held at bay and well-behaved, but they are just spoiling to show their true color: two-way volatility. They gave you a taste of that in early February. Look to the middle and there waits the army of Corporate Credit, which is also larger than ever relative to the economy, as ultra-low rates have encouraged it to gain in size, stature, and strength. This army is a little more docile right now, but we know its history, and it can be deadly when stressed. And then on the right are the Foreign Currency Fighters, along with the Crypto Tribe, an alternative store of value that only exists because of the games central banks are playing; the opportunity cost of Crypto is so low, why not own some? The Foreign Currency Fighters have strengthened by 10% over the past year. Compounding the problem, they have a powerful, ascending leader, the renminbi, to challenge the US dollar’s hegemony as the reserve currency. All of these forces have been drawn to the battlefield because of our policy experiment with sustained negative real rates.
So Powell looks behind him to retreat. But standing there is none other than Inflation Nation, led by the fiercest warmongers of them all: the Commodities. He might take comfort that he is not alone on the battlefield. But then he looks over at the Washington, DC, fiscal battalion and realizes they are drunk on 5% deficit beer. That’s what Powell is facing, whether he recognizes it or not. And how he navigates this is going to be fascinating to watch.
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