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Douglas Goldstein: Peter Schiff has a bank called The Euro Pacific Bank that specializes in dealing with non-Americans who want the banking services and brokerage services. He is also very-well known for his ability to explain concepts that most people don’t get and so therefore they ignore and he explains them in kind of human terms.
I want to talk to you about one of the human issues that I think people it’s so vast they can’t get their hands around it which is the US Government debt and how that actually might affect as why we should really care. How can the US Government actually create so much money to create so much debt? Peter Schiff: They create a debt by borrowing.
What’s amazing is that they can borrow this money in the first place because it’s impossible to ever pay it back. So normally if you’re lending somebody money, being repaid is the most important element of the deal. You’re not going to loan money unless the person who is borrowing it has a capability of repaying a loan and the United States Government has actually no ability to repay the debt but people don’t care or they haven’t bothered to think about it.
I mean sure we could print money and repay the loans but that might not do any good if the money we print doesn’t have any purchasing power because we’ve printed so much of it because we have so much debt that we can’t repay. Douglas Goldstein: Professor Krugman says that the US could go trillions of dollars more in debt.
How come he is not as worried about as you are? Peter Schiff: I think you have to flank a test in basic economics before they could even consider you for a Nobel prize in economics. Krugman has no idea what he’s talking about. In theory can a government go deeper in to debt? Sure because we are already 18.5 trillion in debt so I mean 20 trillion, 21 or 22, we’re going to get there anywhere and of course that’s just a tip of the iceberg.
The actual treasury debt outstanding is a small portion of what the US Government owes. If you look at all of their liabilities which would include Fannie Mae, Freddie Mac, the guaranteed student loans, guaranteed bank accounts, pension, social security, unfunded liabilities, Medicare, you add all that, you’re talking about in excess of 100 trillion dollars of liabilities that the US Government has committed to which of course it doesn’t have the slightest ability to actually pain in real terms meaning taxing the American public to repay the debt in money that has value.
Sure, they can print money as long as they are willing to print it into oblivion, wipe everybody out through runaway inflation but to repay the debt in real terms, it’s impossible. But Krugman doesn’t consider any of these, Krugman just said we can print as much as money if we want and it’s always going to have value and it’s just not true.
Douglas Goldstein: We always tell people as investment advisors that past performance is no guarantee of future returns but you know as well as I do say that to a client and he kind of ignores that fact and just looks at the past performance and assumes this is going to happen next year as well. The same thing is happening as people look at the debt.
They’ll say “This president has added more debt to the US economy than all the previous presidents combined.” It worked with Bush, Clinton and Obama and so to work with whoevers next also. It just seems that people why now. Is this something we should worry? Peter Schiff: Think about this, President Obama when he does leave office, he will have added more debt.
The debt would have doubled under Obama so he would have added more debt than all the presidents that preceded him from George Washington to George Bush and assuming that happens again, if that pattern continues, Bush doubled the debt, Obama doubled the debt, if the next president doubles the debt but you’re talking about taking the debt from 20 trillion to 40 trillion and at 20 trillion, the debt will already be larger than the US economy.
So obviously we can’t possibly double the debt again. Something has to change but the question is “what’s going to change?” Douglas Goldstein: What is the implication of this to regular folks? At one point it’s going to be a tipping point and all of a sudden, the whole thing collapses? Peter Schiff: First of all, the level of debt that we have and the fact that the Fed Reserve has kept interest rates to zero mainly because that’s the most we can afford.
The Fed keeps talking about raising interest rates but the reason they talk about it is because they cannot actually do it but they don’t want to admit that so they keep talking about raising rates as if they are really considering it but they have to keep it at zero because we’re so broke. But because the interest rates are so low and because nobody is saving and because the Fed’s debt monetization otherwise known as QE has enabled such an enormous growth in the size of government and the burden at that places on our economy, the economy is very weak.
We don’t produce, we don’t create good paying jobs so the standard of living for American people keeps falling as the cost of living keeps rising. So we’re already dealing with the consequences of the debt but ultimately, it’s going to be catastrophic because it’s going to produce a crisis where our creditors ultimately lose confidence in our ability to repay in money that still has value.
So just like investors have lost confidence in Greece, they have lost confidence in Puerto Rico, they are going to lose confidence in the US and we’re going to have a real crisis. We are going to have currency crisis, we’re going to have sovereign debt crisis and that’s going to dwarf the financial crisis of 2008.
Douglas Goldstein: How long until this crisis might actually hit? Peter Schiff: That you don’t know. We’re long overdue. It should have happened years ago but it’s hard to figure out when people are going to act rational after years of being irrational, after years of living in denial and in a bubble and that’s what we have right now in confidence in the Fed and in confidence in the US economy.
How long did it take for people to figure out we have a housing bubble? How long did it take for investors in subprime mortgages to realize that the mortgages were worthless or the same thing during the dot com mania of 1990s, people believe foolish things until they don’t and you don’t know what the catalyst is for all of a sudden people to come to their senses but inevitably they do and it usually takes longer than you would imagine.
From my experiences, the bigger the bubble, the longer it seems to take for people to figure it out because the bigger the bubble is, the more people are trapped in it and therefore cannot see it and the more the psychology is reinforced just by everybody agreeing with it. Douglas Goldstein: Let’s say the Fed begins to increase rates.
Now one argument is simply they could not do that because the US could not afford to support the debt that it has outstanding but that would only be dealing with new issues. There’s one the government borrows new money but the old 18.5 trillion dollars would still be at the lower rate. Couldn’t this slowly work this way out?
:Let the rates increase a little bit, let the government slowly stop borrowing so much. Isn’t there a possibility for a soft landing? Peter Schiff: That’s impossible. It’s just a crash landing. That’s why the Fed doesn’t want to land but the problem is they’re eventually run out of gas and we’re going down but the national debt is financed with mainly treasury goal so yes there are some 10-year and longer maturities out there but I think about a third of the national debt matures in less than a year so all that debt when it matures has to immediately be refinanced at whatever higher interest rates happened to be.
So it’s not just the new borrowing that is going to be subject to the higher rates is all the short-term debt that has to be rolled over will have to be rolled over at a higher rate. It’s like adjustment rate mortgage, if interest rates go up, the people will have 30-year fixed rate mortgages in America, they’re not going to see an increase in their bill but the people will have one year arms, they are going to see higher mortgage payments which of course is another reason the Fed doesn’t want to raise rate.
Freddie Mac just reported yesterday their first quarterly loss in four years. They lost about 500 million dollars and this is a big turn of events because Fannie and Freddie have been both generating profits and they have been paying those profits to the treasury which has been reducing our budget deficits but now that these government entities are now producing losses, they are going to be sending the government a bill rather than a check.
Think about this, if they are already losing money at Fannie and Freddie with interest rates still locked at zero, imagine how bigger the losses would be if interest rates rose because these guys have been underwriting some very risky mortgages. They have basically taken over the subprime market because all the private subprime lenders went out of business and so now all the subprime is being done by Fannie and Freddie and they are lending money to borrowers who cannot repay their loans with basically no down payments, very risk mortgages and if interest rates go up, a lot of these mortgages are going to go into default again and they are going to need a bail out again to the tune of hundreds of billions of dollars.
There are so many reasons that the Fed wants to keep rates low. Corporate America is levered up to the max. We’ve got a bubble in auto loans. We’ve got a bubble in student loans. Everybody has got all this debt. The only thing keeping it together is the fact that rates are still at zero and the other problem for the Fed is if they raise rates a little bit, 25-basis points, the market starts anticipating additional rate hikes.
So it’s not just the first quarter point that scares the Fed, it’s the market start anticipating more rate hikes after that which ultimately crash the stock market, crash the housing market and I believe that the Fed actually raise its rates, the economy will be back in recession much sooner at least officially.
We’re probably unofficially in recession, in fact we’re probably in a depression but at least the way the government cooks the books, they can still pretend the economy is growing but I think if they raise interest rates, they’re going to have to stop and pretend because I think we’ll be back in recession and that really scares the Fed because the Fed doesn’t want to raise interest rates slightly and then immediately have to bring them back to zero and launch QE4 because that will expose the Fed and expose the economy for what it is.
We’re totally addicted to this cheap money and we can never take it away. In fact, I don’t even think zero percent interest rates are low enough. We need negative rates. We need more QE because that’s how addicted we are, that’s how much debt we have. None of this is good. We need to go cold turkey like a drug addict needs more drugs just because he has built up such a big drug habit and he has a high tolerance.
I’m saying no, let’s go cold turkey, let’s get off the drugs, let’s go on to monetary rehab. Cut spending on the federal government but raise interest rates. Interest rates need to go up a lot, not just a little but we have to deal with the consequences of higher interest rates which are going to be default on a massive scale because we have too much debt.
It can’t be service, little loan repaid if we have normal interest rates. We have to cut government spending but that means a lot of people who have been promised money from the government are going to get it because we have to cut the entitlements. We have to cut social security. We have to cut Medicare.
We have to cut government pensions. That’s where the big money is. I don’t think the solution is higher taxes but higher taxes are better than these big deficits. I would argue that the damage to the economy would be less if the spending was being paid for by taxes and of course if the spending had to be paid for by taxes, the government could spend it because the voters wouldn’t allow it.
The only reason voters are allowing the government to spend all this money is because they think it’s free. They don’t think they have to pay for it but I think if the voters were told “Here’s how much these programs cost and this is how much we’re going to raise your taxes and pay for it” the voters would say “No, I don’t want the programs.” Douglas Goldstein: How can people follow you and follow your work?
Peter Schiff: You can go to my website for the bank, it’s www.europacbank.com. On social media, you can follow me on YouTube and my YouTube channel is Schiff Report. I do a podcast on www.schiffradio.com. You could go to my Facebook page or Twitter. Read number of my books that I have written, the most recent being The Real Crash: America’s Coming Bankruptcy -- How To Save Yourself and Your Country.
You could see many of my books on my website www.schiffbooks.com. There are all sorts of ways that people around the world could work with me, can follow me and educate themselves and help educate others to really understand economics and the true cause of economic growth which is freedom, sound money, capitalism, limited government and the biggest deterrent of economic growth and that’s government spending, government regulation, government is out there trying to claim that they are the solution to our problems, government is the cause of our problems and we are the solution to our problems, individuals.
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