Peter Schiff: Jerome Powell Making Promises the Fed Can’t Keep

Jerome Powell was on 60 Minutes Sunday to reassure us that everything is great and the economy is in fine shape thanks to the Fed. He went on to guarantee the Fed’s indefinite economic support while downplaying inflation. Powell made a lot of promises, but as Peter Schiff breaks it down in his podcast, it becomes clear they are promises the Fed can’t keep.

Powell closed out the interview with a guarantee. The Fed is will support the economy for as long as it takes to complete the recovery. But Peter said there’s a problem with this promise. The Fed doesn’t have the power to do anything but create inflation.

The idea that the Fed can create economic growth, can create prosperity, when it boils down to it, the only thing that it can do is print money. However you want to describe it, that does not create prosperity.”

Saving and investment, and the production that it drives create prosperity.

The Fed doesn’t do any of that. All the Fed can do is temporarily create the illusion of a recovery by creating inflation. But eventually, the illusion wears off and all that’s left is the dark reality of stagnation. And in fact worse, depression, which is where we’re headed.”

Peter reminds us that in the early days of the 2008 financial crisis, the Fed also assured us that everything was fine. The problems in subprime were contained, and we had nothing to worry about.

And Powell made the same assurances to the nation … on 60 Minutes – that we don’t have to worry about inflation. To the extent that we see a pickup, it’s transitory. Inflation is not going to stay above 2% for long. … Powell is assuring everybody that there is nothing to worry about. Well, inflation is every bit as transitory as subprime was contained. The Fed was wrong then and they are even more wrong now.”

Powell painted a rosy picture of the economy moving forward with 6 to 7% GDP growth and a drop in unemployment to between 4 and 5%.

So, how are we going to evade inflation during this rapid boom? Powell said we have a new kind of economy. It’s different this time. We’re not going to see inflation as we did in the 1960s and 1970s. Powell said with global competition, companies really can’t raise prices.

Peter said that’s not really true. US companies have been able to avoid raising prices created by Fed monetary policy by moving manufacturing overseas where production costs were lower.

So, it was the increased reliance on foreign production that enabled US businesses to offset the price increases that otherwise would have resulted from the inflation that the Federal Reserve was creating. But the result of that was huge trade deficits. It was America moving from the world’s biggest creditor nation to the world’s biggest debtor.”

Peter said he thinks that process has pretty much played itself out.

In other words, we’re not going to have this ‘get out of jail free’ card when it comes to the impact of inflation on prices. Because we’re not going to see more manufacturing jobs, or a lot more moved abroad because most of them already moved abroad. And the fact of the matter is our trading partners already have way more US Treasuries than they want, especially considering they don’t even have any yield anymore. So, I think our ability to export inflation is much smaller now than it was in the past, and there’s a lot more inflation that we need to export. The amount of money that the Fed is creating is far greater today than it has been in the past, so we have to be able to export even more dollars. We have to run much bigger trade deficits in order to offset it.”

In a nutshell, the world is not going to support this indefinitely. In fact, it may already be coming to an end.

Powell seems to think the lesson of the past couple of decades is that it doesn’t matter how much money we print. It won’t lead to big increases in prices. Peter said, “He’s sorely mistaken.”

The entire discussion on 60 Minutes missed the point that we already have massive inflation. Inflation is the Fed policy. We have an unprecedented increase in the money supply. That’s the true definition of inflation.

So, the real discussion is when will this inflation come back to bite Americans in a way that really hurts?”

Part of the problem is inflation has primarily shown up in asset prices. Americans don’t mind when the value of their stock portfolio or their real estate goes up. The problem is when your cost of living starts going up – when it makes food, clothing, and energy more expensive.

That’s when it’s a big problem, and we’re about to experience that problem in spades.”

During the 60 Minutes interview, Powell was asked if the Fed would use models and raise rates to head off forecasted inflation. Powell said, no. The Fed has no intention of trying to head off inflation before it starts. The Fed will wait to see a real, sustained increase in prices before it takes any action. In effect, rates will stay at zero until the central bank is satisfied that inflation is high enough. Powell said the Fed has the tools and it can be as patient as necessary. It will use those tools if it becomes necessary.

Of course, it’s not a question of whether or not the Fed has the tools. The question is will they use them? And the answer is no. They will not use them. Because in order to fight inflation, especially inflation as high as it’s going to be after the Fed is finally satisfied that it’s high enough, the degree to which they would have to raise interest rates, the degree to which they would have to shrink their balance sheet and reduce the money supply would destroy this recovery. And the Fed again promised to support the economy for as long as it takes to keep the recovery going. Well, that means indefinite inflation. The minute the Fed starts to fight inflation, the recovery is over and the depression begins, which means they will resist picking that fight as long as possible. But again, eventually, it’s not just depression that we’re going to get, but massive inflation, and we end up in an inflationary depression or hyperinflation.”