Peter Schiff: Buy Less; Pay More

We got a much better than expected retail sales report for August. That sparked a selloff in gold and silver as the markets continue to anticipate Fed monetary tightening. But was this report really fantastic news? Peter Schiff breaks down the report and says it’s actually just telling us consumers are paying more to buy less.

Retail sales were up a healthy 0.7% last month. The expectation was for a 0.8% decrease. Taking out autos, retail sales rose 1.8%, and x-autos and gas, retail sales were up 2%.

The moment this report came out, gold and silver got hammered, and the dollar caught a bid.

People are excited because they think aha! the consumer is strong and therefore the Fed is going to tighten policy, which of course is complete nonsense. Because even if the Fed were to tighten policy, what they are going to do hardly constitutes ‘tighten’ in the traditional sense of the word.”

The Fed is only talking about tapering its quantitative easing program. Instead of buying $12o billion in Treasuries and mortgage-backed securities, the central bank will buy less than that number. How much less, we don’t even know.

All they’re going to do is be a little less easy than they are right now. But under no definition of monetary policy is less easy when you’re already super easy, and now you’re slightly less super easy — that’s not tight. That type of ‘tightening’ is not positive for the dollar. It is not negative for gold. But again, that is the way markets are reacting to it because they’re simply looking back at time, and they know, that oh, when the Fed is tightening you don’t want to fight the Fed. When the Fed is raising rates and fighting inflation you want to own the dollar. You don’t want to be in gold. Except the Fed is not going to do that in the traditional sense because it can’t because it’s inflated too big a bubble to actually do that.”

Peter said the Fed may not even be able to taper. The extent of the tightening may just be talking about tapering.

But even if they taper, the balance sheet continues to grow.”

Tapering doesn’t stop quantitative easing. Peter said by the time the Fed finally tapers to zero, the balance sheet will likely be at $10 trillion, if not higher.

Now what are they going to do? Are they going to try to shrink their balance sheet again? Are they going to do another quantitative tightening? How far are they going to get? Will they be able to go down to $9 trillion or $8 trillion before the wheels come off the bus again and they’re back to an even bigger QE program than they had before and then the balance sheet doubles to $20 trillion? … The point is the balance sheet is growing in perpetuity. It’s impossible to shrink it. Even if you temporarily manage to shrink it, all you’re simply doing is setting the stage for the next QE program that’s going to blow it up to new highs. Because the minute you try to take away the drugs, the economy goes into convulsions.”

So, there’s no sense in getting all excited about some economic data that may signal Fed tightening when it will quickly be reversed with a return to another round of easy money policy.

Peter made another important point regarding retail sales. Just because the number is higher doesn’t mean consumers are buying more stuff. Retail sales numbers are not adjusted for price.

There are two ways retail sales can go up.

1. Consumers buy a larger quantity of stuff.
2. The price of the stuff they’re buying goes up.

The question is: are retail sales up because consumers are buying more, or is it simply another sign of rising prices?

You can’t tell from the data. But obviously, if you’re living in the real world, it’s obvious what’s going on. I think the bigger component of the increase in retail sales is the price of the stuff people are buying. So, it is the fact that they’re paying more that is driving these numbers up. Not that they’re buying more.”

The huge, unexpected plunge in consumer sentiment in August backs Peter up. The culprit was inflation. Americans are putting off plans to buy big-ticket items such as cars and other durable goods.

If consumers aren’t buying household durables; if they’re not buying cars; why are retail sales so strong? Well, probably because the stuff they are buying is so much more expensive now than it used to be that retail sales are up because prices are up. But that is nothing to celebrate. That is not a sign of economic strength.”

And that raises a question: how much longer can over-indebted consumers keep paying these upward-spiraling prices?

They can’t. They’re going to have to start cutting back on a lot of what they buy because the stuff they do buy is going to be so much more expensive.”

In this podcast, Peter also talks about Sweden’s successful COVID policy and the cost of the Iraq war.