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So, if the Fed continues to fight inflation, we'll have a housing crisis that will make the 2008 financial crisis look like a walk in the park. And then, when these banks start to fail, which they will, just like Silicon Valley or Signature Bank, when these banks start to fail, you'll have to liquidate their mortgage portfolios.
Liquidate, and now you have to realize those unrealized losses . So, that's going to put a lot of pressure on the Fed not to raise rates, but to cut them, even if inflation worsens. And when they do that, then inflation will get even worse. So it's a big problem, and the biggest problem is that there's nothing the Fed can do to stop it.
Nothing that is politically feasible, because we would have to raise interest rates so high and reduce the money supply and the balance sheet so much that we would collapse the entire economy, built on a foundation of debt and artificially low interest rates . So we are in a very, very precarious position at the moment.
You need inflation protection. You need to own things, not promises on paper, because you know, those promises won't even be worth the paper they're written on, because inflation will erode their purchasing power. Well, you know, we've been losing purchasing power since we abandoned the gold standard.
It's simply been accelerating. In fact, even the Fed acknowledges that its goal is for us to lose only 2% of our purchasing power annually. So, by design, we are losing purchasing power. But I think we're losing it much faster than that, and the Fed has lost control. Look at the numbers that came out today.
Yes, regarding producer prices. If you annualize the September increase, that 1.3% gain, that's 17% annualized inflation at the wholesale level . And obviously, it will affect the consumer, because companies always pass their costs on to their customers. And the CPI numbers we received yesterday were bad, but these numbers are worse, which means that future CPI numbers will be worse.
So it's a big problem, and the biggest problem is that there's nothing the Fed can do to stop it. Nothing that is politically feasible, because we would have to raise interest rates so high and reduce the money supply and the balance sheet so much that we would collapse the entire economy, built on a foundation of debt and artificially low interest rates .
So we are in a very, very precarious position at the moment. Well, housing construction companies certainly are , and the real estate sector is being decimated. Um, I think the banks, I don't know if they've all fallen by 20%, but I think the financial sector is being hit very hard. Many consumer brands are being severely affected.
You know, public services, the stocks that are doing well are related to technology, artificial intelligence, and energy. The energy situation is also good. But most S&P stocks have fallen more than 20% from their highs. So, by definition, most are in bear markets. And I think many of the smaller companies are having difficulties.
Higher interest rates are affecting them, as is consumer spending. Consumer confidence is at its lowest level in history. This is the lowest figure in 75 years of records. That means consumers are more worried now than during the Korean War, the Vietnam War, the Watergate scandal, the 1970s oil embargo , the Iran hostage crisis, or even the pandemic.
How is it possible that consumers are so worried? They must be very stressed with rising inflation, the increased cost of living, and such high interest rates that they are very worried about their situation. And, of course, this contradicts President Trump's false claim that we are living through the greatest economic boom in history.
Because consumers are behaving as if we were in the biggest economic crisis in history. Schiff begins with something that Americans recognize. Financial headlines may sound positive while your own budgets feel worse. Their explanation is that inflation and higher borrowing costs are suffocating households.
A number needs context. Their 17% figure annualizes the increase in the producer price for just one month. It is not a reported annual consumer inflation rate. His main warning goes further . He believes that controlling inflation would require rates that a highly indebted economy cannot comfortably absorb.
The next question is what happens when that pressure reaches mortgages and bonds within the banking system. Well, and it's not even just a recession. It is a full-blown financial crisis of spectacular proportions . Look, I just posted this on X today . During the entire global financial crisis from 2007 to 2010, losses from unpaid mortgages amounted to approximately 450 billion.
But because interest rates fell so much, 90% of the mortgages that did not default increased substantially in value. I believe the banks had unrealized unearned profits of over a trillion dollars in their mortgage portfolio. Today, unrealized losses on existing mortgages amount to $2 trillion. You have about $8 trillion in fixed-rate mortgages that don't mature for another 25 years, with an average rate of 4.6% .
But with a current rate of 7.5. And when mortgage rates reach 8.5 percent, unrealized losses will amount to $3 trillion . This is dramatically more than what was lost during the financial crisis. And this is without any breach of contract. This is how much they are losing on mortgages that do not default.
Of course, they will lose even more in those that do. But we've never been in this situation before. So, if the Fed continues to fight inflation, we'll have a housing crisis that will make the 2008 financial crisis look like a walk in the park. Yes, I think all the banks we bailed out in 2008 because they were too big to fail are now much bigger.
Yes. Because of the rescues. But I think they are in a worse financial situation. As I just said, they have all these mortgages. I mean, not all, but most of the $8 trillion in mortgages that have $ 2 trillion in unrealized losses are held by banks. But they don't just have trillions in mortgage losses, they have trillions in losses on Treasury bonds they own and other long-term debt instruments on their balance sheet.
And as rates continue to rise, those losses continue to increase. That's part of the problem with the Fed raising rates. The more rates rise, the more deteriorated the bank's balance sheet becomes, you know . And then, when these banks start to fail , which they will, just like Silicon Valley or Signature Bank, when these banks start to fail, you'll have to liquidate their mortgage portfolios, liquidate, and now you'll have to realize those unrealized losses.
So, that's going to put a lot of pressure on the Fed not to raise rates, but to cut them, even if inflation worsens. And when they do that, then inflation will get even worse . Well, eventually it will be a bond crisis, you know, a sovereign debt crisis. That, that's the only thing that's going to stop the debt train, you know, a collapse.
But until then, you know, we're going to keep going. Right now we're a little over 40 trillion, but we're going to get to 45 trillion, 50 trillion, 60 trillion, 70 trillion, until there's a total implosion. Perhaps that will happen before we reach 45 billion. You know, I don't know . I don't know where the breaking point is .
I only know that it exists, and eventually we will find it, because we will not stop until we find it , since there is no political incentive to avoid the crisis. All the incentives are designed to encourage waiting for the crisis. So the crisis is inevitable. Well , the dollar's reserve status is the reason we've been able to accumulate so much debt, and it's the reason we 've been able to do it with such low interest rates.
Now, that is in the process of changing. Well, yes, I think the days of the dollar as the world's reserve currency are numbered. I just don't know how big that number is, but it's much smaller than it used to be. So nobody is really asking these questions, because all these governments, particularly the US government, but not only it, have all this money that we have borrowed.
They are all in debt. And now, if all these companies want to borrow billions to develop AI, well, interest rates rise a lot, but who can afford these high rates? Uh, when you already have so much debt . The key to sustaining US debt . The US had low interest rates. That's why we could afford it, because the rates were very low.
Well, you know, we have a national debt of 40 trillion dollars. Let's say it reaches 50 trillion in a couple of years. What happens if interest rates are 8 %? That's $4 trillion a year. That's 80% of tax revenue. How can we spend $4 trillion a year paying interest on the national debt? The budget deficit would be six or seven trillion a year because all that money would have to be borrowed.
TRUE? The only way we can pay 4 trillion in interest would be by borrowing that 4 trillion. So that adds to the national debt. So look, there's a ticking time bomb here that could explode at any moment. This is where Schiff connects the banking warning to Washington. According to their analysis, higher rates put pressure on older mortgages while making government borrowing more expensive.
He believes that these pressures will eventually push the Fed to cut rates, even if inflation remains a problem. Their example of $50 trillion in debt at 8% is a hypothetical scenario, not the current federal interest bill. And he explicitly admits that he doesn't know the breaking point. For American households, his warning is about a potential chain reaction.
Financial stress leads to a political response that protects parts of the system while leaving purchasing power exposed. That is the central conflict in his forecast. Well, I think it's already a problem because I believe that the demand for energy is growing. And I don't think the offer is enough to cover it, at least not now.
We need to invest much more in capacity. But obviously, the current situation in both Russia and Ukraine, as well as in the Middle East, is complicating that. And there is no end in sight for any of those situations. Yes, well, again, I guess we don't know for sure if it's a bubble. I mean, it certainly seems like one, but we don't know because we don't actually know what the return on investment in AI will be.
So, if it turns out that the companies making this investment can earn enough money to generate a good return, then it's not a bubble. But it's possible they're overspending. That they won't be able to generate that much revenue. And there will be a lot of competition in the future that we don't yet know about, from companies that may be able to offer AI at a much lower cost because they didn't make such a large initial capital investment.
So , we don't know. I mean, there's this idea of: "Hey, if we don't do this, we're going to lose." So, there's an arms race to have as much computing power as possible and to build all these data centers. But, you know, we don't know. I mean, look what happened to all the railway companies that were founded.
And many of the assumptions that were made turned out to be false. Yes, the railroads revolutionized the country, but many people lost a lot of money on their railroad investments. And you know, the same thing happened more recently with the internet. I mean, look at all the crazy assumptions made by all those companies that ended up going bankrupt.
But the internet certainly changed our lives. AI has the potential to change them even more. But we'll see if the investments being made today will pay off in the future. Or whether many of these investments will turn out to have been a waste. We don't know. But in the meantime, what I do know is that, regardless of whether these investments will ultimately pay off or not , there is a current cost to making them.
And that cost must be borne by society. If we're going to commit trillions and trillions of dollars to this AI development, what are we going to give up? Where is that money going to come from? Because, you know, it doesn't just appear out of nowhere. What are we not going to fund? What are we going to stop doing in order to do this?
And what is the short- term burden we must bear before we get the results? Before reaching all that additional productivity. Yes , I mean, they have a similar problem. It's not identical, but look, look at France. Look what's happening there right now. France has almost as much debt relative to GDP as we do.
So there's a big problem there. And, you know, there are many other countries in Europe that have these problems. Look at Japan. Look what's happening there. Look at all the debt they have. Rates are rising. I mean, the consequences are coming for all the states that have lived off borrowed money and selling too much debt.
Everyone took advantage of the sunshine. It was great because interest rates were low, so they kept borrowing without considering the consequences they would inevitably suffer when rates rose. Because they weren't going to stay low forever. They had to go up eventually. And so, the crisis we are heading towards was inevitable from the beginning.
Final question, Beats. I read yesterday from one of the experts who said that we are in an inflation cycle that will be the longest in history. Projecting 10 to 15 years of persistent inflation. Do you think that's a realistic scenario? Yes, it's a very realistic scenario. The only thing that could change this would be if the improvement in productivity thanks to AI were so drastic that prices fell.
Well, I mean, obviously, you can have money. So , apart from precious metals, you can invest in real assets in general. You can invest in companies that are in the resources sector. So, mining companies, not only of precious metals, but of industrial metals, agriculture, energy. And to the extent that you can get good buys even in technology, well, you know, just real assets.
I think emerging markets look very attractive, and so do many of their companies . You need inflation protection. You need to own things, not promises on paper. In other words, because, as you know, those promises won't be worth the paper they're written on, since inflation will erode their purchasing power.
Schiff's answer is to own assets that, in his opinion, can withstand a weaker dollar and persistent inflation. Precious metals, resource companies and selected investments outside the United States. That strategy follows their forecast. It does not guarantee protection or returns. He also recognizes something that could change the landscape.
A significant improvement in productivity. The useful lesson is to examine what your financial future depends on . Does your plan assume that inflation will decrease, that loans will remain affordable, or that current market leaders will continue to profit? His warning challenges those assumptions. What worries you most?
The rising cost of living, pressure on banks, or the growing US debt? Tell us below and subscribe to see more interviews analyzed according to what they mean to American households.
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