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Peter Schiff on GOP Hypocrisy, the Bond Market and Gold

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The Babylon Bee captured the current state of the Republican Party in all of its hypocritical glory. The satirical website proclaimed “Republicans announce plan to pretend to be fiscally conservative again the moment a Democrat takes office.”

The GOP said it would begin to decry deficit spending and the $20 trillion debt in order to win votes as soon as political power swung back to the opposing party.

“‘The second a Democrat is back in the White House, we will once again start yelling about fiscal responsibility,’ Speaker Paul Ryan said in an address to the House of Representatives Friday. ‘For now, we will continue to vote for unsustainable and irresponsible budgets that your children’s children’s children will pay for for centuries to come.’”

The Bee was poking fun at the budget passed by the GOP Congress last week – the budget that added some $300 billion in deficit spending and raised the mythical debt ceiling. According to the Committee for a Responsible Federal Budget, $300 billion in additional spending will ensure the annual budget deficit will exceed $1 trillion in 2019.

In his podcast Friday, Peter Schiff made the exact same point.

If you really were against the deficits when Obama was president, then why aren’t you doing something to rein them in when Trump is president? Why are you actually voting in even bigger deficits now than the ones you opposed when you were the minority? And this is all hypocrisy. I’ve said this all along – that the Republicans are only fiscal conservatives when they’re in the minority and they can’t do anything about it. But the minute you turn over government to Republicans, they can run up the debt even faster than the Democrats.”

Peter noted that the US Treasury Department plans to auction off about $1.4 trillion in Treasuries this year to finance all of this spending. That raises an interesting question: Who is going to buy all this paper? The last time the Treasury sold more than $1 trillion in bonds, the Federal Reserve was buying. Supposedly, the Fed is now in the process of shrinking its balance sheet. In fact, the Fed plans to allow billions in bonds to mature and fall off its books. That means the government will have to sell even more Treasuries to make up that difference.

Good luck. How can anybody think it’s not going to be a problem to sell all that paper? Especially given how low the yields are. I mean, yeah, if this was like the Reagan administration and we were offering 15% yield on long-term bonds, yeah, maybe people would line up to buy them. But at 3% for 30 years? I mean, are there really that many buyers?”

Meanwhile, the entire world is already holding onto a pile of low-yielding, overpriced US Treasuries. Now they know that the US government is about to sell somewhere in the neighborhood of $2 trillion more.

What do you think they’re thinking? Do you think they just want to hold on? No! They want to get out from in front of that freight train … Everyone is going to want to get out the same door. So, there is no way to stop the bond market from just imploding.”

That means interest rates are going to have to go up.

Now, consider the context here. The bond market is teetering on the brink, meanwhile, the “fiscally conservative” GOP is adding billions to the debt.

Think about it. We’re going to be trying to borrow more money than we’ve ever tried to borrow before – by a massive magnitude. Why would that not push interest rates up?

Peter made the point that the rising interest rates – particularly long-term bond rates – is actually good for gold.

People still believe, falsely, that rising interest rates are bad for gold. And they’re not. But where they’re really not bad for gold is rising long-term interest rates. I mean, you can make a better argument that rising short-term interest rates are bad for gold, but there’s no way that you can argue that if the 30-year bond is going up then somehow that is bad for gold. Especially when long-term interest rates are mainly a function of inflation expectations. And if long-term interest rates are rising, it’s because people expect more inflation in the future. And if you expect more inflation in the future, that’s bullish for gold, because gold is a hedge against inflation, and it’s a much better hedge than a 30-year Treasury that gives you 10 or 20 basis points more in yield.”

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