Peter Schiff has been saying that the Federal Reserve is going to take interest rates back to zero and launch another round of quantitative easing in order to reinflate the bubble economy after the next crash.
The central bank successfully pulled this off after the 2008 crisis. By dropping rates to zero and holding them there for nearly a decade, and running three rounds of QE, the Fed has reinflated the real estate bubble, blown up a bond bubble and pumped up the stock market. But Peter said it’s not going to work the next time around. Instead, Fed monetary policy will tank the dollar and lead to an inflationary recession.
So, why can’t the Fed pull off another rescue? Peter explained why he thinks it’s not possible during an interview on the Tom Woods Show.
Peter admitted he didn’t think the Fed could rescue the economy in 2008.
“I underestimated the ability of the Fed to get away with quantitative easing and for the world to basically accept this and to enable this.”
So today, we have even bigger bubbles than we did in 2006-2007.
The question is — the Fed did it before, can it do it again? Peter said he wouldn’t bet on it.
“I would not want to bet that is possible given the enormity of the problem now.”
Peter said you just have to consider the sheer amount of intervention that would be necessary to reinflate the bubbles once they pop the next time.
“The next round of quantitative easing is going to have to be much, much bigger than the last one. They took the balance sheet up to four-and-a-half trillion last time. They might have to take it up to 10 or 20 trillion this time. They may have to do two or three hundred billion of QE every month as opposed to 85 billion. And when they were doing it before, we had a lot of support. The Chinese were big buyers. The Russians were big buyers. You know, I don’t see that kind of appetite for US debt anymore. I don’t think we’re going to have a whole lot of help from those other countries who are already trying to minimize their exposure to the dollar now. I don’t think they’re really going to step it up in order to enable QE4.”
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The other issue is federal government budget deficits. In the years leading up to the 2008 crash, Bush was running $250 or $300 billion deficits per year. During the crisis, the deficits ran up to over $1 trillion. We are already running $1 trillion deficits now. If the economy crashes, we could be looking at $3 trillion or $4 trillion deficits.
“Is there any way the Federal Reserve can monetize $3 or $4 trillion per year of government debt without the dollar falling and without igniting a bigger increase in inflation?”
Peter said he thinks the scale is simply too enormous.
“If the Fed tried to inject enough stimulus into this economy to try to reflate an even bigger bubble than the ones we already have I just think the economy dies of an overdose. We overdose on stimulus and we destroy the dollar. And then we have massive inflation.”
That will put the Fed between a rock and a hard place. Does it allow inflation to run? Or does it take action to stop it?
“But what would be required to stop it would be so politically damaging in the short-run that they may opt not to stop it, which is even worse. It just happens a little bit later.”
Peter and Tom cover a number of other subjects during the interview, including the trade war, Trump badgering the Fed, whether Peter’s predictions are a “broken clock,” and Peter’s investment strategy.
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