Peter Schiff: The Box That the Federal Reserve Is In

Jerome Powell and Janet Yellen testified jointly before the US Senate last week. Inflation was a big topic of conversation. The Fed chair continued to insist that the central bank can fight inflation if necessary, but that it really isn’t a problem we need to worry about right now. In his podcast, Peter Schiff said the truth is inflation is a problem. And when it comes to dealing with that problem, the Fed is in a box. It will never pick a fight that it can’t win.

The Federal Reserve balance sheet has swelled to a new record of over $7.72 trillion. It was up another $26.1 billion on the week last week. Peter said he expects this number to continue increasing at an even faster rate in the near future.

I would not be surprised to see the balance sheet hit $10 trillion by the end of 2021 because we have a lot of deficit spending in the pipeline and there is no way to pay for it other than the Federal Reserve.”

One of the questions directed toward Powell was about the Federal Reserve’s independence. Powell talked about how important it is. But Peter said the actions of the Fed chair show there’s really no independence at all.

There’s independence in form only, but not in substance. We pretend we have an independent Fed, but in reality, the Fed acts as if it’s just a branch of the US Treasury Department. The fact that both the secretary of the Treasury and the Fed chairman are testifying together shows a degree of cooperation. They’re working together and it seems that they are trying to coordinate their policies.”

The reason the Fed is keeping interest rates so low and expanding its balance sheet is to accommodate the US government as it spends more and more money.

So clearly, the Federal Reserve is acting in concert with the Treasury to advance the Biden agenda, which is exactly what they were doing when Trump was there.”

Ron Paul made a similar point in a recent article, sounding a chilling warning. “Unless the government changes course, America will experience a crisis greater than the Great Depression.”

Peter said this notion of Fed independence is “laughable.”

When you get down to it, none of them really act as if the Fed is independent and none of them are willing to deliver the bitter-tasting medicine that will actually cure the economy of what truly ails it.”

Inflation was also a topic of the Q&A with Powell and Yellen. One senator asked the Fed chair what tools the central bank has if inflation turns out not to be transitory. Powell gave the standard answer, saying the Fed can raise interest rates and shrink the balance sheet by selling Treasuries in the open market.

Yes, those are the tools. The problem is there’s no way they’re going to use the tools.”

It’s a shame nobody asked what would happen to the economy if the Fed did use these tools to fight inflation. Keep in mind, the Fed is currently supporting the US economy and its trillions in deficit spending by keeping interest rates at zero and buying billions in US government bonds. Peter said if the Fed was to reverse this policy to fight inflation, it would spark a massive recession.

In fact, we’d be in a worse recession than the Great Recession of 2008.”

That raises the key question: would the Fed really put the economy in a recession to fight inflation? Peter said he doesn’t think Powell would actually admit that he would do that.

And in fact, I actually think the next recession is going to be caused by inflation. The reason we’re going to slip into recession is because of inflation. Because rising costs are going to put a lot of pressure on businesses to reduce those costs by laying off workers. And rising prices are going to put a lot of pressure on consumers to cut back on their total spending. I mean, they may spend more money because prices are higher, but they’re going to buy less stuff. So, some of those businesses that are selling less stuff are going to have to lay off workers. So, I think inflation can be the reason the economy goes into recession. So, it’s not that, ‘oh, we have this booming economy and we have inflation, and so the economy is so strong and the Fed could raise rates to fight the inflation without interfering with the strong economy.’ It’s my thesis that we’re going to go into recession because of inflation. So, we’re going to have inflation and recession simultaneously — stagflation.”

If the Fed actually does the right thing and uses its tools, it would quite possibly turn that inflationary recession into a full-blown depression.

And what is the Fed and government playbook for an economic downturn? Stimulus! That means more borrowing and spending. How would they pull that off if the Fed is trying to tighten monetary policy to fight inflation? And if they were willing to do the right thing – why not do it now? The longer the Fed waits to normalize monetary policy, the bigger the bubble gets and the more debt the government piles up.

Because the Fed is not willing to do the right thing now, I don’t believe it’s ever going to be willing to do the right thing. So, no matter how high inflation gets, they’re going to make an excuse as to why it’s transitory, or as to why it’s not important, or maybe they’ll find a way to recalculate the numbers so they can pretend that inflation isn’t there. But the one thing they can’t do about inflation is fight it. And when the markets finally figure out the box that the Fed is in — then that’s it.”

President Biden and the Democrats are selling all of this stimulus by claiming the rich will pay for it.

The reality is all of the Biden spending is going to be paid for by the middle class and the poor through inflation. The inflation tax is going to hit every American hard, in particular, the Americans that don’t have a lot of financial assets that will rise with inflation, and that simply have their paychecks and their savings. They are going to get decimated. This is a huge tax. The government is not for free. This government is going to cost a lot of money, and the people who can least afford to pay for it, they’re going to be the ones who are stuck with the bill.”