Cheap Money Is Driving the Economy – A Peter Schiff Exclusive (Part 2)
Back in September, Peter Schiff was interviewed by Anthony Wile of The Daily Bell. We posted a segment of the interview last week. In this second part, Peter elaborates on the true drivers of the American economy, his strategy for physical precious metals investment, the war on drugs, and the economic troubles of Europe.
Daily Bell: What’s driving the market – fundamentals? We think it’s almost purely monetary policy these days.
Peter Schiff: It’s just cheap money. That’s all that’s driving it. It’s inflation. You can say to some degree it’s about earnings, but earnings are a function of share buybacks. Companies are buying back stock and they only can afford to do that because they can borrow so cheaply, so it’s stock buybacks that are driving earnings from share growth, not topline revenue growth. And of course, the other thing that’s sustaining earnings is that corporate debt service is so low. Despite a record amount of debt on corporate balance sheets, their debt service costs are so low that’s adding to their earnings. That’s the same thing that’s happening with the federal government. Despite the fact that we have a record national debt, the interest payments that we make per year are lower than we made in Ronald Reagan’s presidency, even though the debt was a fraction of its current size and that’s because the carrying costs are so low. I recently completed a 30-page report on this topic called “Taxed By Debt”, with a lot more information than we have time to go into here.
So what would happen to corporate earnings if interest rates went up? They would collapse because now their debt service costs would go up. The same thing would happen with the US budget deficit. What would happen to the US budget deficit if interest rates went up? It would skyrocket because the cost of servicing the $17.5 trillion debt would skyrocket.
So it’s the cheap interest rates that are sustaining the government’s finances and sustaining corporate America. So you take away the cheap money and we’re in a massive bear market, which is why the Fed’s not going to take it away. Because remember, they’re basing their recovery on asset prices, on the wealth effect associated with rising stock prices and rising real estate prices. But the minute they take away the monetary support, those asset prices collapse, and the wealth effect works in reverse. So if you build a recovery on inflated asset prices, you have to keep inflating those prices to keep the recovery going. So all this talk about ending QE and strengthening the balance sheets by raising interest rates is just false. They can’t actually do it. In fact, they’re going to have to do more of it to maintain the bubble because as the bubble gets bigger, you need more air to keep it inflated. It’s like with drugs. As you get used to a drug you build up a tolerance, and you need a bigger and bigger dose to get high.
Daily Bell: Why have central bankers decided to create another asset bubble? We think they want to stimulate through 2015 at least at an aggressive rate. Your thoughts?
Peter Schiff: It’s because that’s all they’ve got. They also don’t want to make any of the necessary reforms that would be required to generate economic growth. So since we can’t have real economic growth, a fantasy is better than reality. All they can do is blow bubbles, so that’s what they’re doing. They’re oblivious, just like they were oblivious to the real estate bubble and the dot com bubble. It’s almost like the bigger the bubble, the blinder the Fed is to it.
Daily Bell: Okay. A crash is inevitable. Do you have a timeline for when it will happen?
Peter Schiff: If the Fed did the right thing there would be a crash but I don’t think that they’re going to do the right thing. They haven’t done the right thing yet, so why would they start? I don’t think they’re going to do the right thing until they’re forced to do the right thing, which means there’s going to have to be a dollar crash, which would bleed into the bond markets. I think you have to have a collapsing dollar and maybe a big drop in long-term bonds to force the Fed to finally do the right thing. But, of course, by then, it’s going to be so much more painful than having done the right thing earlier on their own terms instead of having to respond to our creditors in the foreign exchange markets. And, of course, right now the dollar is not under pressure. The euro is starting to fall because of all the bad monetary policy over there, so that’s kind of buying us some time. But again, the borrowed time is being used to just worsen our own problems.
Daily Bell: So are there some good opportunities you see right now, or are you nervous about everything?
Peter Schiff: Sure. There are opportunities outside the United States, outside the eurozone, outside Japan, in particular. There are a lot of countries that are not making nearly as many mistakes. They’re making some mistakes based on what we’re doing. We’re basically corrupting the monetary policy of the entire world. But some countries are less corrupted by it than others.
We’re still finding value in countries like Singapore and Hong Kong and Norway and New Zealand. There are areas to invest and there are stocks to own and currencies to own. Certainly gold is going to be a major beneficiary of all the inflationary monetary policies and silver, and companies that mine those metals, so there are a lot of opportunities that people can take advantage of. They can simply go to my brokerage firm, Euro Pacific Capital, if they’re in the US and find out what we’re doing, use the funds that we have, the strategies that we have that will hopefully produce superior returns in the market environment that I envision. And, of course, I still produce my free monthly Gold Videocast that I encourage people to watch.
Daily Bell: Do you think gold has another decline versus the dollar upcoming?
Peter Schiff: Not really. I think it has a big rally coming versus the dollar and other currencies, as well – the euro, the yen.
Daily Bell: What about silver?
Peter Schiff: Silver, too. I released a free report last year, “The Powerful Case for Silver,” which outlines why I’m bullish on the metal. Both gold and silver will go up. And all commodities, in general, too. We’ve had a pullback in oil prices but I expect that to be reversed and oil prices to move higher.
Daily Bell: Would you buy paper metals or stick to the physical? Would you take possession?
Peter Schiff: Physical. I think mining stocks represent some of the best values out there. If people are going to buy physical they need to be leery about it. I have a special report that anybody who’s going to buy physical metals should download. It’s a free download, at GoldScams.com. That will basically tell you all the ways people will try to scam you in the physical gold market. So before you buy physical gold, make sure you don’t get scammed. Be sure to get my free report on gold scams.
Daily Bell: One last topic, as we know you need to run. High Alert Investment Management, of which I’m chief strategist, has become involved in the cannabis industry. Your thoughts on this sector? Is cannabis a promising emerging industry?
Peter Schiff: I haven’t invested in it, though there could be some opportunities there. Personally, I think legalization of pot is a good trend. I wish they would legalize more drugs, not just state-by-state but on the federal level. I think the war on drugs has been a huge failure. As a result of the war on drugs, I think more people use drugs than would use them if we didn’t have a war. But more importantly, we’ve driven up the price of drugs and therefore the profits for the criminals who deal in them. As a result our police are much more corrupt. We’ve helped to corrupt governments around the world with all the drug-related money. We have all sorts of violence and murders and robberies as competing gangs battle it out for turf and market share. We’ve destroyed the inner cities. We’ve imprisoned tremendous percentages of men in this country, particularly young African-American men or other minorities who are locked up because of the War on Drugs. And probably 90% of the robberies in America are committed by drug addicts who are only stealing to afford the drugs that would easily be affordable if they were legal.
So not only is the drug crime there because of the war on drugs, but almost all crime in American can be directly attributable to the war on drugs. So if we legalize drugs we’ll eliminate most of the crime and also eliminate most of the money needed to fight the crime. We wouldn’t have to pay all this money to keep people locked up. It would be a huge boom for the US economy if we can end the war on drugs.
To the extent that somebody could profit now in the states that have legalized it, where there will be legal businesses, I still think it’s pretty risky though because the government can come seize your bank account. Even though state by state it’s legal, the federal government still says it’s not legal. So you have conflicting rules, and I think as a business you expose yourself to some liability. And it makes it harder to actually invest in it. Maybe if you’re a mom-and-pop business and you’re dealing in all cash and you don’t have a bank account. But then again, you’re still subject to having your cash seized by the government. The very corrupt federal government that we have probably increases the risks even for the legal entrepreneurs.
Daily Bell: Is there something in particular that might happen that would make you more likely to invest, something you would watch for?
Peter Schiff: Well, it would just depend on the investment. I mean, you can’t invest in everything. I’m doing my own thing right now. I don’t know how many barriers to entry there will be. I think there will be a lot of competition in that sector. I don’t know what the opportunities might be. If somebody could come up with some really interesting brand and have a premium for their brand, perhaps. It’s just nothing that’s really on my radar right now.
Daily Bell: Any last comments on the EU/ECB?
Peter Schiff: I just think the problem in Europe is not that interest rates are too high, obviously. Rates are the lowest they’ve been in hundreds of years and lowering interest rates from .15 to .005 isn’t going to change anything. It’s not like businesses are thinking, ‘Gee, if interest rates were only a little lower I’d go out and hire people.’ The idea that we need to create more inflation, as if the problem in Europe is that prices aren’t high enough, that if they can only make the cost of living higher that’s going to solve their problems – it won’t. None of this is going to work.
The problem in Europe is that there’s too much government. Government is regulating too much and spending too much and taxes are too high. What government needs is to repeal regulations, specifically those that create all this unemployment. They’ve made it even more expensive to hire people in Europe than we’ve made it here, and so there are even greater incentives not to hire people. So they need to deal with those negative incentives that are the byproduct of their rules and regulations, and they’ve got to get rid of those rules and regulations. They’ve got to lower government spending. But no politician wants to promote that because these bad regulations get votes. They’re lousy for the economy, they’re lousy for the job market but they’re great at the ballot box. So instead of actually doing something politically dangerous that might work, what do they want? They actually want to just rely on the ECB to print money and create inflation so they can wipe out all of their vote-getting, job-killing, growth-stifling obligations. That’s really what Europe wants to do. They want the central bank to inflate away their debt.
And they’re trying to solve the political problem of too much debt. But none of that is going to solve the economic problem of too much government and too much regulation. This is not going to solve their problems, just like it’s not going to solve our problems. Creating inflation and this whole idea that they’re fighting deflation – there is nothing wrong with falling consumer prices. That’s what grows the economy. That’s what makes living standards higher. All consumers want prices to come down. In fact, all businesses want prices to come down because that means they can sell more stuff. If you produce something, you want the cost of what you produce to come down so you can lower your prices so that more people can afford it.
Look at the cell phone companies – isn’t it better, can’t you sell more cell phones for $100 a piece than for $2,000 a piece? Do they sell more flat-screen TVs now or did they sell more when they were $10,000 a piece? Henry Ford made a lot of money because he dramatically reduced the price that he was selling cars for. Why did he make so much money? Because he dropped the price of the Model T. So entrepreneurs want low prices because they sell lots of product. This idea that nobody will buy if prices go down is absurd.
They’re basically saying, hey, the economy is bad in Europe. People are unemployed. Okay, great, let’s make the cost of milk go up. That will really fix it. Let’s just make sure those poor, unemployed people have to pay higher prices at the grocery store and that’s going to solve their problems. That’s going to make their problems worse! Now they’ll have unemployment and inflation instead of just unemployment and no inflation. People think the inflation’s going to give them a job. No, it’s not. You know what people get jobs from inflation? Older people who are retired because inflation means they can no longer to stay retired because their savings are no longer adequate to buy them food and energy, so now they have to get a job. But they don’t want a job. Inflation creates jobs for people who don’t want them because they’re forced to work when they’d rather not because it’s the only way they can survive.
Daily Bell: Thank you very much.
Peter Schiff: You’re welcome.
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