Peter Schiff: A Massive Fiscal Time Bomb

Federal Reserve Chairman Jerome Powell knew fighting inflation would cause big problems in a bubble economy loaded up with debt. He put it off as long as he could, calling inflation “transitory.” But once inflation became a huge problem, the central bank had no choice but to get into the fight and start tightening monetary policy. The problem is, the Fed’s plan won’t work. And one reason it won’t work is the massive national debt.

Peter Schiff talked about it in this clip from his podcast.

The federal government already spends about $500 billion per year on interest payments on the $31 trillion debt. Peter noted a CNBC discussion where they speculated that in 10 years, the US government could be paying $1 trillion per year on interest alone.

Ten years? We could be paying $1 trillion in interest in one year! How are these guys getting 10 years?”

Four percent of the $31 trillion debt is $1.25 trillion. The average maturity on the debt is under five years. A third of the debt will mature in the next year. Meanwhile, the debt continues to skyrocket. The national debt grew by $1 trillion in just eight months even with pandemic spending programs winding down.

Five years from now, the national debt will be over $40 trillion, and we’re going to have to pay an interest rate probably more than 5% on that. So, a $1 trillion tab for interest on the national debt isn’t a decade away. It’s a year, maybe two away. That’s how close this crisis is.”

That raises an important question: where is the government going to get the money to pay for this? It will cost something like 30% of all tax revenue just to pay the interest on the debt. Huge interest payments will mean even more borrowing.

This is a massive fiscal time bomb.”

During a hearing in January 2021, Janet Yellen was asked if we should be worried about the national debt. She said, no. Instead, she said we should be focusing on how low interest rates are and how inexpensive it is to service the debt. In other words, the debt didn’t matter because financing was cheap.

At the time, Peter asked, “What happens when rates go up?” He compared it to adjustable-rate mortgages. When rates go up, homebuyers often can’t afford the higher payments.

The Treasury wasn’t taking advantage of low 30-year borrowing costs. The Fed was borrowing for six months, for one year, for two years. So, they were rolling the dice and gambling that interest rates stay low. Well, they’re not low. They’re much higher. I wonder if Janet Yellen is worrying about the national debt now that interest rates have moved up so much. Or, is she going to start worrying? Because we already know that they’re going to move much higher.”

For years, the government justified borrowing money because interest rates were low. Peter said that argument might have flown if the government was locking in the low rates for 30 years. But not when the Treasury was rolling over the debt every 30 days, 90 days, or even every year.

I often said, ‘Wait a minute. Just because something is cheap doesn’t mean you should do it. I would say, ‘Hey, if heroin was free, if they were giving out free heroin, would you say, hey, heroin is free! I might as well use it.’ If something is bad, just because the cost goes down, that doesn’t mean you do it. And taking on all this debt was bad. Just because it was temporarily cheap, it wasn’t a reason to do it.”

But the government did it. And now we have to deal with the consequences.

The Federal Reserve deliberately created inflation since 2008 to postpone the pain. Why did it do quantitative easing? Why did it keep interest rates at zero for so long?

Because the Fed did not want to allow a bad recession, or allow a bad recession to get worse. The Fed wanted to prop up stock prices. The Fed wanted to prop up real estate prices. So, in order to do that, we created inflation. We put interest rates at zero. We did quantitative easing. Well now, we’ve got a huge inflation problem. And now the Fed has to fight a monster that it created. But the Fed can’t fight and create inflation at the same time.”

And the US government can’t service its debt, much less maintain its borrowing and spending without the Fed creating inflation.

That’s why this inflation fight is doomed to fail