Peter Schiff: A Soft Landing Is Impossible

The latest buzzword in the mainstream financial media is “soft landing.” Everybody seems convinced the Fed has beaten inflation, and that it has completely avoided pushing the economy into a recession. According to the mainstream narrative, we may see a bit of an economic slowdown in the months ahead, but a recession is pretty much off the table. In his podcast, Peter Schiff explains why a soft landing is impossible.

Wall Street is booming with the growing belief that the inflation war is over, and not only is the Federal Reserve finished hiking interest rates, but it will begin to cut them in 2024.

The markets are excited because their drug pusher is going to show up with more supply. They’ve been away from the drug for a while. The Fed has been hiking rates and that’s not what the markets want. But now the markets are convinced that exactly what they need is going to be supplied as early as next year.”

Another factor driving market optimism is the idea that the economy will avoid a recession and we will enjoy a “soft landing.” It’s a Goldilocks scenario that features rate cuts in the absence of any kind of major economic downturn.

This raises a question: Why would the Federal Reserve start cutting rates and loosening monetary policy absent a significant economic downturn?

Peter speculated that with a lot of economic data weakening, the markets anticipate that the Fed will proactively cut rates to preempt a recession and prevent a crash landing. The thinking is as soon as it sees the economy coming in for a landing, it’s going to cut rates to ensure that landing is soft.

Peter called this “wishful thinking” at best. In fact, he said he expects a hard landing no matter what the Federal Reserve does. But if the central bank doesn’t try to preemptively cut rates, it will be an even harder “hard landing.”

Peter said that it’s difficult to understand why people think the Fed can raise rates from 0 to over 5% and get away without plunging the economy into a recession.

Why would that be if you look at the recent experiences with the Fed having rates too low and then raising them? Go back to the late 1990s and the decline we had in the economy, the recession, the stock market in 2000-2001. Look at the experience in 2008. And look at what happened even before COVID in 2018 when the Fed tried to raise rates from a low level and had to abort it very quickly when the wheels started falling off the bus in the fourth quarter of that year.”

History makes it clear that the Federal Reserve has a hard time normalizing rates. In fact, the attempt to bring rates from around 1% to just over 5% in 2007 led to the greatest recession since the Great Depression.

So, why would anyone believe that the Fed can normalize rates now and not have a similar consequence? Because, after all, the rate hikes expose all of the malinvestments and the misallocation of resources that take place when rates are artificially low.”

When rates are pushed lower than they otherwise would be by artificial means, people act irrationally. The decisions seem rational, but they are based on misconceptions. This drives people to make economic calculations that are not supported by the fundamentals.

Absent monetary central planners, interest rates would naturally fall if people saved money and put off purchases. In that world, economic decisions would be supported by naturally low interest rates. But we don’t live in that world. Americans want to buy now and pay later. We don’t have an economy naturally disposed to low interest rates. That means when the central bank forces rates down, it creates all kinds of problems.

Unlike a situation where rates are low for legitimate economic reasons and where the investments based on those interest rates can be supported long-term, when they’re artificially low, they can’t be. So, all those mistakes are made because rates are too low.”

In the early 2000s, artificially low rates drove a lot of mistakes in the real estate market. When that period came to an end, everything collapsed. As the Fed tried to normalize rates, the markets came in and tried to correct all of the imbalances that built up over the years of artificially low rates.

If that rate hike produced the Great Recession, why would people think that this time we’re going to get away with not having a recession at all even though this time the Fed didn’t stop at one? It went all the way down to zero. And it left rates at zero for more than a decade. So, rates were lower for much longer than they were back then.”

Add quantitative easing on top of that — three rounds before COVID and the mother of all rounds after COVID. Today, on top of rate hikes, the central bank is shrinking its balance sheet and pulling liquidity out of the financial system. That didn’t happen in the period leading up to the ’08 financial crisis.

We had rates lower for longer. We had all that quantitative easing. Now the Fed has raised rates and it’s reversing with quantitative tightening. This is a much bigger shock to the system than what the Fed did in 2008. And we built up over the years that the Fed kept rates at zero far more malinvestment and misallocations. Much bigger mistakes were made for a much longer period of time during this period. So now, there’s a lot more that needs to be fixed. A lot more mistakes need to be corrected. Misallocations need to be undone. So we have to have, by definition, a much bigger recession now than the one we had then. If that was the Great Recession, this is the even greater recession because we have a lot more mistakes to fix, a lot more sins to atone for. “

Despite this, most people believe were are not going to have a recession at all.

It makes no sense that anybody would believe that!”