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Peter Schiff, Chairman of SchiffGold, Chief Economist and Market Strategist of Euro Pacific Asset Management. Welcome to " Competent Investor". Thank you for joining me. Oh, with pleasure. Thank you for inviting me. So, Peter, right now, or recently, you've really been emphasizing this cycle of rising deficits and what this feedback loop means for the current conditions of a weakening economy.
What will all this lead to? Well, I think it will lead to a sovereign debt crisis and, potentially, hyperinflation. That is, these are really the only two options that exist. And, you know, most people are completely unaware of these consequences, but that's exactly what's going to happen. And the only question is—when?
Are there weeks left until then ? Months? Or maybe a few more years? I don't know the answer to this question. We will find out about it after the fact, but we don't know now. Mhm. Well, it always seems like the Fed, the Treasury, the government always find a way to postpone the problem, and I think everyone is amazed by their ability to do that.
How much room do you think they still have left to maneuver, and do the debt and deficit numbers at this point mean a much less sustainable and shorter distance than they had before? Yes, I think it will become increasingly difficult to postpone the problem. I really think that, you know, we're running out of time.
You know, this is really a moment of reckoning for many nations that have borrowed too much money. It was inevitable that rates would rise, but the only thing that supported all this debt was the fact that rates were so low. And it actually encouraged more reckless borrowing because it didn't seem so expensive.
People were saying, "Hey, borrow as much as you can because the rates are so low." But I always warned that the problem is that the rates are not fixed. That eventually rates may rise, and then debt that was manageable becomes unmanageable. That is, we have already reached the point where we are paying $1.3 trillion per year in interest.
By next year, it will be 2 trillion. But what if in a few years the national debt will be 50 trillion, and it will be like that , you know, for another 3 years—and we will have 50 trillion. Um, what if interest rates are 8% in 3 years? I mean, it's not that much . That's 4%. That's $4 trillion a year in interest.
This is 80% of tax revenues. I mean, if we had to pay 4 trillion in interest, we would have to borrow money. So, that would mean our budget deficit would be 6 or 7 trillion a year. Is this even possible? Can this be financed? I...I do n't think so. So, I think between now and then, we have a crisis that we will not avoid.
It is clear that the bond market, which is approaching 5.5% for 10-year notes, is a decade-high. How effective has Kevin Warsh been in his position so far, has he managed to mitigate the situation or be effective in the market within the established mandate of the Fed? Well, I think so far he has managed to convince the markets that he is a "hawk" on inflation issues.
But that's not true. That he will do his best, that he is focused, and there is no doubting his determination. They are going to reduce inflation to 2%. I think he's just talking. He has been the chairman of the Fed for 5 months. What did he do? Raised the rate by 125 basis points? Big deal. Meanwhile, the money supply continues to grow.
The Fed's balance sheet continues to grow. Look at the producer price numbers we got today. Growth of 1.3% last month. In annualized terms, this is 17% per year. We are so far above the Fed's 2% target. But, more importantly, this figure is increasing. He does n't fall. So it's not as if the Fed is making less progress, or inflation is falling more slowly than they had hoped.
It doesn't fall at all. It is growing. They are significantly behind schedule. Even if we get another 50 or 75 basis points of increase over the next 3-6 months. It's too little, too late. Inflation is rising faster than the Fed is raising rates. So , this means that real rates are falling. The Fed is falling further and further behind the situation with each rate hike .
Which means the chances of a rate hike in November have increased dramatically, right? Oh, yes. I think November is almost guaranteed, because they'll probably miss October. So, by the time November comes, the midterm elections will already be over. So, political stakes, political stakes have already disappeared.
So they will probably start raising. So, But again, that won't be enough. They won't raise the stakes enough for it to have an effect. Well, to some extent they are trapped, because higher rates only mean bigger deficits, bigger interest costs, right? What quickly Yes, I mean, this is a trap they have put themselves in.
This is a trap I warned about years ago, before they created it. But by raising interest rates to fight inflation, they are actually making it worse. Because these higher rates are not only costs that are passed on to consumers, as businesses pass on rent, raw materials, and wages, but the higher rates themselves mean that the U.S.
government has to pay more interest to bondholders. And this is essentially a kind of incentive, because now you're giving more money to bondholders to go spend and push prices up. But these larger deficits, these higher interest costs, increase the budget deficit. So now the budget deficit is getting bigger.
And this creates more upward pressure on interest rates. This also puts more pressure on the Fed to monetize these larger deficits to prevent rates from rising, which creates even more inflation, which puts even more pressure on interest rates and the budget deficit. So, it's a kind of self-perpetuating cycle of disaster from which there is no escape.
Because if the Fed says, "Oh, well then we won't , we won't raise rates." Well, then the dollar falls, and because of that, prices rise rapidly. So, the Fed has put itself and the country in a hopeless situation. So all they will do is choose the path that will cause the least political damage in the short term.
And that's probably just creating massive inflation. Yes, more and more mass inflation. What was the market reaction to this higher-than- expected inflation rate? Well, you know, the reaction today was a little unexpected, although the market reacted to the CPI yesterday, which was only slightly worse than expected.
PPI was much worse. I mean, more than twice as bad, almost three times as bad. And yet the Dow rose 450 points today. And the Nasdaq fell about half a percent. It used to fall more. So, the market is responding well. And that's probably because the bond market isn't falling. I mean, the bond market initially fell when we got a high CPI, then it recovered, and today it seems to be almost unchanged.
So, it doesn't fall because of this bad data. But the producer price index is a forward-looking indicator. And if producer prices rise now, consumer prices will rise later. So if people think, "Oh , we don't need to worry about this . It's just about the manufacturer." Yes, until he translates it to consumers.
But if producers don't do this, they cover it from their profits. So the stock market should be worried if all these companies are stuck with higher costs that they can't pass on to others, because if they can't pass them on, it reduces their profits. So, this is bad for stocks. And for that matter, Peter, what proportion of stocks are hitting new highs compared to the proportion of stocks hitting new lows?
Oh, most of the stocks. I was just looking at this yesterday on my podcast. If you look at the entire stock market, there are thousands of stocks. But yesterday, there were eight times more stocks hitting 52-week lows than there were stocks hitting 52- week highs. And you know, Donald Trump likes to point to the stock market.
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