- Peter Schiff, the outspoken CEO and president of Euro Pacific Capital, thinks the gargantuan amount of debt the US is carrying is primed to default.
- He calls repayment “impossible” and sees this mess ending in either an “honest” or “dishonest” default.
- It’s a forecast Schiff has been making for years without success, but he doubled down yet again on a recent podcast appearance.
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For one reason or another, the towering amount of debt the US has racked up over the years seems to be of little concern to market participants and politicians alike.
Currently, that figure tops $22 trillion — and is growing fast. What’s more, as modern monetary theory continues to gradually inch its way towards the limelight, some are even questioning if it matters at all.
Peter Schiff, the outspoken CEO and president of Euro Pacific Capital, is passionately on the other side of that debate — and he thinks that the US’ frivolous spending and money-printing is going to culminate in a cataclysmic scenario.
“The economy is getting sicker,” he said on Off the Chain, a digital assets podcast. “And that’s what the central banks are doing when they cut rates and they print money — they’re actually making the underlying economy sicker, even though it doesn’t look sicker because they’re just measuring the spending that goes on and they’re ignoring the debt that’s behind it.”
But that debt is important. After all, it theoretically has to be repaid eventually — even if, to date, that repayment has usually come from the proceeds of new debt issuance.
Schiff says that in the event the US has trouble issuing that new debt, the Federal Reserve will have to print money to compensate. And that printing of money, he says, will result in runaway inflation, spurring a mass exodus from the greenback.
“If the inflation rate is 4% or 5%, compounding — and you’re getting 0% interest on your dollars — that’s a one way ticket to a disaster,” he said. “I think inflation is going to break out all around the world.”
Put briefly, Schiff thinks the US dollar could collapse at some point.
If he’s right, these inflationary pressures will have to be suppressed through the raising of interest rates. There’s only one problem: The market hasn’t proven itself capable of handling higher rates. The Fed tried normalizing interest-rate policy and it barely got off the ground.
Still, it’s also worth noting that if Schiff’s scenario was playing out in real time, rates would be skyrocketing. But instead, they’re dropping.
“That’s when it hits the fan — because now the debt bubble pops,” he said. “We’ve built an entire economy based on the perpetuation of this continuing — that we can run trade deficits forever and budget deficits forever and keep having low interest rates and consumer prices that aren’t going up.”
This is a key pillar underpinning his argument. To Schiff, this notion is unsustainable — and the longer the kick-the-can mentality manifests, the worse the unwinding will be.
“That’s why the Fed is back doing QE,” he said. “There’s just not enough private demand for all the debt the government is selling.”
Ultimately, this is a forecast Schiff has been making for decades, to no avail. Will conditions unfold differently in the future? That’s what he’s banking on.
How it ends
With that in mind, let’s get into the two ways Schiff thinks this mess will play out: An honest default or a dishonest default.
By his personal definition, an honest default is exactly what it sounds like: Creditors being paid back far less than they’re owed.
In direct contrast to this method is something he calls a dishonest default scenario. Schiff describes this method as just printing money, but according to him, that will result in hyper inflation. Not the outcome that anyone is looking for.
“The important thing to recognize is we’re defaulting no matter what,” he said. “It is impossible to repay the debt.”
Clearly, his perspectives are nothing short of extreme, but he views a default as necessary in order to rebuild an economy that is up to its neck in obligations it can’t meet.
Against that backdrop, Schiff sees only one way to getting the US back on track.
“We’re going to have to have a severe recession if we’re ever going to build a viable economy,” he concluded. “This bubble won’t go on forever.”
With all of that laid out, there are two key caveats worth considering:
1) Schiff is a noted market bear, and has been making arguments similar to this for decades — and they haven’t panned out per his expectations whatsoever.
2) Inflation is still well below the target established by the Fed, which is why the central bank has toyed with monetary tightening in recent years, before economic pressures forced them to ease further. Yes, signs of inflation have tanked markets. But we’re still well below target.
In other words, it’s probably best to take Schiff’s latest comments with a grain of salt.