Peter Schiff: It’s the Beginning of the End of This Whole Phony Economy

Interest rates continue to push relentlessly higher. As Peter Schiff explained in his podcast, that’s a big problem when the entire economy is built on a foundation of cheap money. But most people in the mainstream don’t seem to grasp the gravity of the situation. They don’t realize that we are at the beginning of the end of this whole phony economy.

In a nutshell, the economy is buried under trillions in debt. The cost of the debt is rising. The economy simply isn’t built to handle an even moderately high interest rate environment.

But here we are.

Every day, we’re getting closer to a major stock market crash, or a financial crisis, or both.”

And he emphasized that the crisis is inevitable. Nothing can derail it in the long run. He said Federal Reserve Chairman Jerome Powell could put off the implosion in the short run by doing something drastic to change the narrative. That would entail at least hinting at interest rate cuts.

Otherwise, this is going to happen. Whether it’s tomorrow, the next day, or the next week is hard to tell. But what seems apparent to me is that we’re about to go over a cliff. I just don’t know how much more distance there is between where we are now and the edge of that cliff. But we’re going there.”

What is going to push us over the edge?

The rise in interest rates as the bond market continues to collapse.

Peter pointed out that he’s been warning about this for years. And he’s not alone. In July, Jim Grant said we could be heading toward a generational bear market in bonds.

Bond yields are now at the highest level since before the 2008 financial crisis with the yield on the 10-year Treasury approaching 5% (currently 4.56%). The last time it was that high was in 2001.

There is one big difference between then and now. In 2001, the national debt was $3.3 trillion. Today, it is over $33 trillion.

We have a lot more debt now than we had back then. So, this is a much bigger problem.”

Peter said the mainstream financial media doesn’t seem to appreciate the fact that they are looking at the beginning of the end of this whole phony economy.

The economy is built on a foundation of cheap money. It’s not just the economy; it’s every facet of it. The government, the deficits, the government budget is built on cheap money. And it’s not just the federal government that’s been gorging on this cheap money. A lot of the state governments, municipalities — they’ve all issued a tremendous amount of debt over the last 15 years.”

This was by design. The central bank wanted to “stimulate” the economy. With that goal in mind, they held interest rates at close to zero for nearly 15 years. People were incentivized to borrow and spend. So, they took advantage of the cheap money and levered up.

And what was I saying for years? This is a mistake. I said just because it’s cheap doesn’t mean you should do it. My analogy was should you do heroin if it’s free? … No! Just because it’s free doesn’t mean you want to inject it into your body. Because eventually it’s going to cause a problem, and that’s exactly what is happening now.”

Now the proverbial chickens are coming home to roost. All of that cheap money is coming back to bite the people who borrowed it because interest rates are going up and the debt is still there.

It is a disaster in the making.”

It’s not just bond yields. All interest rates are rising. Mortgage rates are approaching 8%. The average credit card interest rate is close to 21%. Meanwhile, credit card debt has spiked to well over $1 trillion.

An economy built on borrowing easy money can’t keep chugging along when the easy money is gone. It’s like trying to run an engine without oil.

Meanwhile, the mainstream hasn’t come to grips with the fact that the dynamics have changed.

As yields rose with the Fed’s rate hikes, a lot of people bought bonds thinking that a 4% yield would make them a lot of money when rates quickly fell back toward zero. The easy money of the last decade-plus made everybody believe that was the norm. Peter said it’s not going to work that way this time around.

Peter also pointed out that there are still inversions in the yield curve. Long-term yields remain well below where you would expect given short-term rates. With a 6-month Treasury yielding at 5.5%, a 30-year bond should be over 7%. But it’s currently only at 4.7%.

That’s not how a yield curve works. It’s positively sloped. Usually, at the beginning of a recession, you’ll get an inversion of the yield curve, where the long end will be below the short end. But under normal circumstances, when you’re not in a recession — and everybody claims that there’s no recession, that we’ve got this resilient economy, that maybe a soft landing but not a real recession — if that’s the case, the yield curve needs to normalize.”

The reason long-term bonds come with higher yields is investors are taking on more risk with more time. So, what is the biggest risk?

The real risk is inflation — that your money will be worth a lot less in 30 years.”

And what is the biggest factor driving that inflation risk?

It’s the size of government deficits. Because the bigger the government deficits are, the more inflation the government is likely to create. So, when you have large fiscal deficits, you would expect to have a higher premium on longer-term bonds.”