Will China Pull a “Switzerland” on the US Dollar? (Video)
In his first Schiff Report video of the year, Peter Schiff explains the Swiss news that rattled the foreign exchange markets this week. Peter had predicted that Switzerland would eventually be forced to drop its euro peg, just as he’s been warning that countries like China will be forced to abandon their ties to a weakening US dollar. If investors don’t want to experience even worse losses than Europeans were hit with this week, they need to start preparing for a dollar crisis. Gold has performed very well this year, even while the US dollar and stock market moved higher, which Peter sees as an indicator that a new bull trend has started in precious metals.
Follow along with this transcript:
Hi everybody. This is Peter Schiff. It’s Friday, January 16, 2015. Yesterday, Thursday, January 15, I don’t know if it’s a day that will live in infamy. But certainly, in the minds of some of the foreign exchange traders and some of the companies that allow people to trade [on] foreign exchange [markets] that may have went bankrupt yesterday, it will certainly be a big day in the global foreign exchange markets. Because yesterday was the day that Switzerland dropped the bombshell into the Forex market, surprising everybody by abandoning its peg to the euro, the 120 to 1 relationship that was established about three years ago.
Just recently, the Swiss dug in their heels and said, “We will defend this till the end.” Of course you have to say that, because if they’d shown any signs of weakness there would have been an avalanche of buying of Swiss francs. Of course, they had to act that way even if they were planning at that time to give up the peg. But this was also a part of the propaganda effort to get the Swiss not to vote for the ‘Save Our Swiss Gold’, because they wanted to keep this peg. They surprised everybody and they gave it up.
Now, of course, it didn’t surprise me. I mean, I was surprised that they did it yesterday. I didn’t know when they would do it. I knew they would. I’ve been expecting this from the very beginning. If you go back to the first day when the Swiss announced this policy, I said at that time, “It was a big mistake. Switzerland would regret it, and they would ultimately abandon the peg when they had thrown too much good money after bad. When they had lost enough Swiss francs, blown enough wealth buying up euros, they would eventually throw in the towel.” And that is exactly what they did. Of course, they have lost tens of billions on their foreign exchange reserves.
But why did Switzerland decide to bite the bullet now and accept those losses? Because waiting would mean even bigger losses in the future. The longer they waited, the more they’re going to lose. So they cut and run. They did what a lot of traders are reluctant to do. They limited their losses. They also did something that few central banks do. They admitted they were wrong. I mean, they didn’t come right out and say it. But if you read between the lines, it was obviously a mistake, because they did it to prevent the Swiss franc from rising. Well, it rose anyway. If they never had instituted the peg, the franc still would have risen, but they wouldn’t have lost all this money on their bloated foreign-exchange reserves.
It was a big surprise, and it happened. It was long overdue. I’m glad the Swiss did it. I’m glad for the Swiss people. We certainly own a lot of Swiss francs ourselves, a lot of investments in Switzerland. You know, the Swiss stock market was down Thursday, and everybody makes a big deal about that. Yes, it was down in Swiss francs. But since the Swiss franc’s gained so much value, the real value of Swiss stocks went up. In fact, for Switzerland, that’s the only nation this week where prices went down for things like gold. Gold went down a lot in Swiss francs. Even as it surged in every other currency. Gold was up about $50 this week in dollars. It was up more than that in euros. In fact, gold closed above €1100. It closed above €1000 just 11 days ago.
So gold went up another 10% in the last 11 days in terms of Swiss francs. In fact, it was rising in the days prior to that. So probably, I think gold has gone up every day this year so far in terms of euros. It’s done very well in other currencies, but Switzerland is better off because they can now buy things for less money. Their Swiss francs are more valuable. But this is a lesson. This is a lesson in why central banking doesn’t work, that these types of monetary policies are doomed to fail, that the central banks were trying to swim against the tide. And eventually, they had to give it up.
This is going to happen with all of these managed exchange systems. In fact, Switzerland is a small microcosm of the bigger pegged relationship that is going to end. When it does, it will be much more spectacular. This was a tremor. When the Chinese decide to abandon their peg both for the Hong Kong dollar and the yuan, that is going to be a 10.0 on the Richter scale of economic activity. That is going to be huge. This time, it’s going to be the dollar that takes it on the chin. Sure, the dollar sold off along with the euro on the announcement of the Swiss franc, at least against the Swiss franc. But this is going to be primarily a dollar story.
Now, why did Switzerland decide to give up this peg? Because they couldn’t continue to subsidize the Europeans. See? Initially, their goal was to stop the Swiss franc from rising, which didn’t make any sense, right? This is the problem where you have these central bankers who believe that weakness is good and strength is bad. They wanted to stop their currency from rising, and so they adopted this peg. But what it meant was that they were going to subsidize Europe. It’s difficult for such a small nation, even a wealthy nation like Switzerland, to subsidize 300,000,000+ people throughout the eurozone. After three years of trying, they gave it up. The longer they waited, the more expensive it would have been.
Well, China has been making the same mistake for a longer period of time with the United States. China has 4.5 trillion in foreign reserves, much more than Switzerland, although China is a larger nation. But the interesting thing is the average Swiss is wealthier than the average European. So you have wealthy people subsidizing people who are not as wealthy. But in the case of China and America, you have poor people in China subsidizing the American middle class.
How long can this go on? How many more dollars are the Chinese going to buy, before they give up just like the Swiss? Before they surrender? When you surrender in a currency war, your people are victorious. They win. You never want to win a currency war. You want to lose. Unfortunately, a currency war is the war the Americans are going to win to our own detriment. Now, when China does this, I don’t know if they’re going to float the Hong Kong dollar separately from the yuan, or maybe peg the Hong Kong dollar to the yuan and then float the yuan. But I think what the catalyst is going to be is QE4.
People think that maybe the reason that the Swiss timed the breaking of the peg when they did is because Europe is about to do QE, and the Swiss really were frightened at the prospect at having to back up all their toboggans loaded up with euros. Because if you’ve got a big QE, the big loser would have been Switzerland, because they would’ve had to buy up all these euros and print up all these francs. Maybe they decided “No-mas. We’re out here. We’re checking out. You do QE, you can do it on your own.”
Well, Switzerland isn’t the only country in Europe that’s against QE. Germany is against it too. Germany doesn’t want it.Goldman Sachs came out after this announcement and said, “Aha! The Swiss know that this QE program is going to be big, bigger than we thought. That’s why they want out, right?” Well, I wouldn’t be so sure. Because without the Swiss, it makes it even harder. I’m sure the Germans are going to be digging in their heels knowing that they don’t have the crutch provided by Switzerland. So I still don’t think we’re going to get the big QE program that everybody thinks about.
They floated some rumors today that the QE that they’re going to do, if they do it, is going be not at the ECB level, but somehow at the level of the individual central banks for each currency. So somehow, Germany isn’t on the hook for Greek defaults or Italians defaults, and so the ECB is going to somehow require the member banks to buy debt of their own sovereign nations. The Greek central bank would buy Greek debt, and the Italian central bank would buy Italian debt, and the Bundesbank would buy German debt to insulate the German taxpayers.
I don’t even know how you pull that off. I haven’t even seen the details of how this thing would even work. But again, to me, they’re trying to weasel out of it. They’re trying to negate the impact of this QE that everybody thinks is coming. I still think that the country most likely to do QE is the United States. Again, no one talks about it. I’ve mentioned it on my podcast. If you don’t listen to my podcast, check them out. You can get them on the same YouTube channel as this one, or you can download them.
But I’ve been talking about all the negative economic news that keeps coming out that nobody pays attention to it. Everybody is so wedded to this economic growth story that they ignore all the negative news that comes out that might cast out on that rosy scenario.
We did get some consumer confidence numbers that came out today. Consumer sentiment were the highest in 10 years, which I think is a contrary indicator. Consumers are so excited about the recovery they’ve been promised. That is probably reflected in these surveys. And probably, the low gas prices help when it comes to these surveys. But if you actually look at the economic data, the data doesn’t jive with the optimists. I think that you’re going to see a plunge in the sentiment when reality doesn’t meet expectations. People are going to be very disappointed, they have a lot of false confidence.
I think when the Fed comes up with QE4, China is going to be faced with a similar decision as Switzerland. Are they going to back up their trucks and load them up with dollars? Because if we do QE4, we’re going to expect the Chinese to bear the burden if they want to keep their currency from going up. I think Switzerland is going to show them the way. They’ll see the light. This is not going to be detrimental to the Swiss economy. On the contrary, this will be a positive for Switzerland, and it could be a positive for China if they abandon their peg as well. But that’s going to be even worse for America than what Switzerland did to Europe.
I mean, maybe this tough love might help. Maybe Europe now, maybe instead of QE, maybe it will have some real structural reforms, which actually might be helpful. That’s the irony. QE, everybody wants it, but it’s not going to help the economy. But for America, we’ve been relying on this Chinese crutch for so long. You take it away, and there’s a real implosion here. We’re going to suffer much more if the Chinese pull our plug. I mean, were going to go down the drain. This might not necessarily be the nail in the coffin for the Europeans.
I was reading this article today about QE in Europe and how they’re trying to proceed with it. The entire basis of the article was that they needed QE because they needed higher inflation. They didn’t even mention economic growth. The entire goal of the policy was to raise inflation. Inflation was too low and they needed to make it higher. Again, when did inflation become the goal, like the holy grail of economics? If you don’t have it, you’re doomed to failure.
If you went to the average men on the streets in Italy or Spain or Greece, and you say, “Hey, what’s your biggest problem?” Do you think he is going to really say, “A lack of inflation”? Do you think that’s what’s really bothering a typical guy in Greece? “Yeah. You know, it’s really tough. The problem is when I go to the store, the prices are too low. I really wish that the things that I needed to buy were more expensive. That’s my biggest problem. My cost of living is just too low. I wish there was something that the central bank could do to raise my cost of living. I just want prices to be higher. I want my rent to go up. I want my utility bills to go up, my clothing bills, my gas bills, everything. It’s just too damn cheap. Prices are just not rising. I’m dying here. I need some help.”
Is this what the economists think is going on down on Main Street? People are dying for higher prices? No, that’s the last thing they want. I mean, it’s like throwing a drowning man an anchor. Why would you want to do that? This whole thing is nonsense. They need inflation. Nobody wants to come clean and say, “They just want to wipe out their desks.” They want to sustain asset bubble. That’s who needs inflation, right? Not the average guy.
More inflation is just going to compound the misery. It’s going to make the problems worse, which unfortunately and ironically just leads to even more QE. When you do QE and the economy gets worse, you look for more QE. When you do QE and then the economy gets worse, you look for another cure. But at some point, they’re not going to be able to blame it on the absence of inflation. Because at some point, all of this QE is going to lead to a big increase in consumer prices, and they’re not going to be able to blame their economic malaise on an absence of inflation. In fact, high inflation is going to be the number one concern. Then the question is, what are they going to do about it? Now that inflation genie is going to be much harder to put back in the bottle, because it’s going to be so much bigger because of all this QE.
I know there are people who will say, “Oh, Peter, you’ve been saying this for years.” Well, I was saying for years that the Swiss were going to drop that peg, and they did. People who were shorting this Swiss franc were making money for years until they got wiped out today. Then they even lost all the profits, and now they went broke. Eventually, the things that are supposed to happen happened.
Yes, we’ve been waiting a while to see the real effect of all this money printing on consumer prices. Just because it’s taken longer than some people might have expected, it doesn’t mean it’s not going to happen. It is going to happen, and we’re going to have to deal with it.
The whole origin of this concept, this 2% inflation. Because inflation is less than 2%, that’s the problem, right? That the ECB is missing its target. This whole thing got started really with New Zealand. New Zealand was the first central bank that actually implemented an inflation target. Only, it wasn’t a target. It was a ceiling. When they went through their huge reforms in New Zealand, they implemented a 2% cap. The Reserve Bank of New Zealand had its mandate to keep its inflation below 2%. It wasn’t that they had to get it up to 2%. It’s just that if they got above 2%, they had to take action to reduce it. So 2% was like the upper end of inflation tolerance. They didn’t say that 2% was ideal or a goal. They just said, “Don’t let inflation get above 2%. Your goal is to keep it below.”
If it was 1%, it wasn’t like they weren’t achieving their goal. They were. In fact, they had a better cushion, because now they had a full percentage point below their ceiling. Zero percent was even better than 1%. If prices went down by 1%, fantastic. We are way below our ceiling. It wasn’t a problem if inflation was below 2%. The problem was if it hit 2%, because now you have to take action. That was the beginning. But somehow, this thing morphed into a target or a goal.
Why 2%? I would argue with anybody who claims that 2% inflation is ideal. I would say, “Why? Where did you get that number? What about 2 1/2%? I mean, if 2% is one better than 1%, why isn’t 2 1/2% better than 2%, and why not 3%? And if 3% is good, isn’t 4% better? And if 4% is good, wouldn’t 5% really be good?” Now, at some point they’re going to say, “Well no, 5% is too high.” It is? But what about 4 1/2%? See? There’s the point. How can you know? Where does inflation go from bad to good to bad? That is what economists want you to believe. That 1% is bad, 2% is good, but then 3% is bad again. How does that happen? It’s like the minimum wage. It can’t. Either inflation is bad or inflation is good. It’s not good is if it’s at a certain level, but bad if it’s in any other level. This is all nonsense.
Governments are cramming up. They can’t come out and tell the truth. “We want inflation because we don’t have the integrity to default on our debts, so we want to wipe them out. We don’t want to pay what we promised. So instead of defaulting, we’re just going to pay you back with cheap money.” They don’t want to say that. They don’t want to say, “Hey, we’ve inflated all these asset bubbles with our bad monetary policy, and so we need more inflation to keep the illusion alive. We need more air to keep blowing into these bubbles. They can’t say that. So they got to make up this cock and bull story about how inflation is necessary for economic growth and how deflation is an economic monster that will eat us alive if we let that happen. Under that pretense, they had to do what they want to do anyway.
The amazing thing is that people believe it. Even academics, Wall Street, everybody. People with Nobel prizes. Smart people are buying this government bias. They’re swallowing this hook, line, and sinker. Why are there so few people out there that are shining a light of truth on this charade?
In any event, I think people should look at this lesson of Switzerland and heed these warnings. Don’t just look in the rearview mirror at what happened in Switzerland, but look forward. Look through the windshield of what’s coming. Look at the relationship between the Swiss franc and the euro, and what are the implications between the dollar and other pegged currencies like the yuan and the Hong Kong dollar. All of these relationships are eventually going to crack. All of the countries that are subsidizing the United States, that are absorbing our trade deficit, that are piling up our treasuries, they’re all going to have that same problem that Switzerland had. They made a mistake and corrected it in three short years. These other countries have been making in a bigger mistake for a longer period of time, but eventually they are going to be forced to bite the bullet and cut and run.
I think it’s going to be the same decision that motivated the Swiss. It’s going to be a prospect of QE4 because everybody is expecting a tighter Fed. Everybody believes that we have a legitimate recovery, and nobody is expecting this recovery to implode and the Fed to come back with QE4. But that is exactly what’s going to happen. Just the way they were caught by surprise by what happened to the Swiss franc, they’re going to be even more surprised by what’s going to be happening to the US economy, what’s going to happen with the dollar.
One of the reasons that there is a lot of pressure on Europe to do QE is because people point to the American example: “Hey, we did QE, and everything is great.” It’s not great. People just think it’s great because that’s how QE works. It gives you the false feeling of health because you’re operating under a delusion. You’re all intoxicated on QE, and you think things are getting better when they’re actually getting worse. You find out they’re getting worse when you stop the QE. We’ve already stopped it, and things are already getting worse. People are in denial, but pretty soon they’re going to have to accept it. The fed is going to come up with its excuse as to why it can’t raise rates and why it’s going to do QE4. That is going to be the turning point.
Don’t wait for that to happen. Don’t be surprised. Don’t be bankrupted by the Forex traders or the Forex companies that were extending the credit to the leveraged speculators. Get your economic house in order. Understand that economic fundamentals always come through in the end. Sometimes it takes longer to happen, and sometimes people become emboldened. Because if something hasn’t happened, they think it’s never going to happen. Exactly when you get complacent, when you think it’s always going to be that way, believe me, that people that were levered up short to Swiss franc in their wildest imaginations, they could not see this day coming even though it should have been obvious that this day would come. Nobody knows when. That’s why I always tell my clients, we’ve got to be prepared in advance. It’s too late if you are a day late. You’ve got to be early.
If you woke up yesterday morning and you were short the Swiss franc, it was too late to cover. The market just gaps. It was a huge loop. There was nothing you could do. You had to be prepared in advance. You couldn’t time it. There was no way to know exactly when it was going to happen. Nobody can figure that out. You have to be early. You can’t be late. So when it comes to structuring your portfolio and preparing for a dollar crisis, you’re not going to see it coming. You’re not going to be able to do it at the last minute. You’ve got to be prepared in advance. There is plenty of warning signs that the day of reckoning is coming.
I mentioned earlier about the price of gold being so strong this week. In fact, it finished today, Friday, positive; up another $17, $18. Gold stocks are really breaking out. Even though on Friday, the dollar was stronger across the board even against the Swiss franc. But the euro hit new lows, it had a big down day, and gold still surged, and the Dow was up almost 200 points. That didn’t stop gold. We had a strong stock market, gold was up; a strong dollar, gold was up. When the market goes down, gold goes up. When the dollar was down, gold goes up. At this point, gold is going up no matter what. That is going to be an indication that we’ve had a change in trend.
Now, I member in 2014, it started the same way. Gold was very strong early on, and then it lost those gains in the second half of the year. I think this year is going to be different. I think gold is going to have a big first half, even bigger than the first half of 2014. But in the second half, that’s when it could really take off. Rather than giving up the gains it had in the first half, I think it’s going to compound those gains in the second half. This is an indication that confidence is being lost. The smart money is not buying the dollar, it’s buying gold. The dumb money is buying the dollar.
If you are worried about the euro, if you are worried about the yen, the last thing you should do is buy the dollar. That’s jumping out of the frying pan into the fire. It’s just that people don’t know it yet. A lot of people got burned short of Swiss franc, and they’re going to get burned along the dollar. They just can’t feel the heat because they’re too drugged up on all the QE. It’s too influenced and distorted, their way of thinking.
Again, that’s it for now. I haven’t been doing as many of the Schiff Reports as I’d like. I’ve been very busy but I have been doing more of the podcast. I mentioned it earlier; don’t forget the Peter Schiff Show podcast. I’m usually doing at least two of these a week, sometimes more. They’re easier to put up. I can get them up quicker. So for more frequent comments on what’s going on in the markets and the economy, don’t forget to listen to my podcast. Bye for now.
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