Peter Schiff: The Great Inflation Debate

Peter Schiff recently appeared on Newsmax The Income Generation with David Scranton to talk about the impacts of the coronavirus government shutdown on the economy. The segment turned into a somewhat contentious debate about inflation. Guest host Jeff Small insisted we aren’t going to see price inflation, despite the Federal Reserve creating trillions of dollars out of thin air. Peter said Small’s ideas are divorced from economic reality.

The interview started off on a less contentious note. Scranton pointed out that as of last week, nearly 22 million Americans had filed for unemployment. The jobless rate is estimated at around 17% and climbing. So, what does this mean for the stock market and the economy?

In a nutshell, both are in a lot of trouble.

Probably the economy even more so than the stock market because what the Federal Reserve is doing may artificially prop up the stock market, but they’re not going to have as much success with the real economy. In fact, the reason the economy is so sick is not the coronavirus. I mean, that’s probably making it worse, no question about that. But even before the coronavirus came on the scene, the economy was ill. And that’s because of what the Fed did leading up to this disaster. So, what we’re really going to be suffering from is the hangover from all of the stimulus of the past – all of the zero percent interest rates and quantitative easing. And what the Fed is doing now in the aftermath of this crisis is only going to compound the problems that it created before the crisis.

Peter has been saying that all of this Fed money printing will ultimately result in inflation – perhaps even hyperinflation. Small took issue with this line of thinking, saying that the Fed has been trying to create inflation for more than a decade. As Peter pointed out, inflation is, by definition, money printing.

That’s what’s being inflated is the money supply. So, we’ve never seen the central bank create this much inflation in its history. To think that it’s not going to affect consumer prices, I think is completely ridiculous. I mean, it already is. Prices are already rising for the things people are really buying like food.”

Small came back with the typical Keynesian mantra that money-printing doesn’t cause price inflation absent demand and said some of Peter’s viewpoints are “divorced from economic reality.”

Peter came back swinging.

It’s your opinions that are divorced from economic reality. Mine are grounded in reality. When you create money, you are creating inflation. Now, that inflation will manifest in various ways. I mean, when the stock market went up a lot, when the real estate market went up a lot, it was inflation that was driving those price increases, not the real increase in the value of the businesses, but the nominal price. And prices are going to rise. The Fed is putting money into the economy at a time where production is actually going down. What’s happening as a result of the coronavirus is businesses are not operating. Goods are not being produced. Services are not being provided. Yet, we are creating more demand by flooding the economy with freshly printed money. You’re just focusing on certain prices. Yes. Airline tickets are down. Nobody is flying. OK. Gas prices are down. Nobody is driving. This is only temporary. But look at what’s happening to other prices. They’re already rising. And they’re going to rise even faster in the days, weeks and months ahead.”

Scranton asked if the inflation could show up in another asset bubble as opposed to consumer price inflation. Peter said the inflation benefits debtors, particularly people who borrow money to buy productive assets. It hurts wage-earners and savers.

So, that’s going to happen. But remember, all of the stimulus, all of the bailouts, have to be funded. They have to be paid by something. And if the government is not going to pay for it with taxes, they’re doing it through inflation. The government is funding the stimulus and the bailout by stealing the purchasing power of savers and spending it into the economy. There is no free lunch.”

But why not more asset inflation like we’ve seen since 2008?

That bubble has popped. We’re not going to fund trillions and trillions of dollars of government spending simply by propping up the stock market. The public is going to have to pay the price of these bailouts. And it’s going to come from the reduced value of their wages, the reduced value of their savings. The cost of living is going way up. The government is not taking people’s money, but the government is taking the purchasing power from people’s money and they’re going to feel that every time they try to buy something.”