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Peter Schiff: The Fed Can Never Take the Easy Money Drug Away

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The Federal Reserve is creating a massive amount of money out of thin air and injecting it into the economy. Pretty much everybody believes this is the only choice given the economic emergency we face. But we’re told once the emergency is over, the Fed will take the excesses away. In his podcast, Peter Schiff explains why this will never happen. Once the drug addict is hooked, you can’t just take the drug away.

Peter started the podcast saying he thinks the bear market relief rally is coming to an end.

The Fed can only buy so much with its QE and rate cuts.”

The stock market rally in April created a lot of optimism about the economy. The prevailing mindset was “if we can turn it off, we can turn it back on.” Peter said now that the fog is starting to lift a bit, people are starting to realize that narrative wasn’t true and that this is going to be a much deeper and protracted recession.

But people still don’t realize just how weak the economy was before the coronavirus pandemic. Now the government and the Federal Reserve are engaging in the same policies that undermined the economy in the first place.

Pundits and analysts keep talking about how the Fed is “injecting liquidity into the economy.” That translates to inflation. The Fed is creating money out of thin air and spending it into circulation.

But that does not help the economy. It’s never helped the economy. What it does do is help to sustain a bubble.”

During a recent interview, Fed Vice Chair Richard Clarida talked about how the Fed is supporting the economy through this pandemic. How does a central bank “support an economy?” Peter said it really can’t.

What can the Fed actually do? Just print money, right? That’s all they can do. They can artificially suppress interest rates so that we can take on more debt, and they can create money. They can rob people of their purchasing power through inflation and allow the government to spend that stolen purchasing power into the economy. But does that help the economy? No. The Fed has no tools to support the economy. You don’t support the economy by printing money. Now, the Fed could try to support the bubble. It can try to prevent the bubble from deflating or have it deflate more slowly. But that’s actually hurting the real economy.”

In a nutshell, by enabling the government to borrow and spend even more money, by monetizing the massive debt, the Fed is hurting the economy over the long-term. Peter said that there’s a lot the Fed can do to undermine the economy, but there’s nothing it can do to support the economy other than extracting themselves from interfering.

They have to undo the damage they’ve done. They have to allow interest rates to go up. They have to stop monetizing debt. That would help the economy only because they stopped hurting it. That’s what they could do to help – stop hurting!”

During that same interview, Clarida also claimed that the Fed would withdraw and remove all of the excesses it’s injecting into the economy. We’ve heard that promise before. When the Fed launched quantitative easing early in the 2008 financial crisis, Ben Bernanke told Congress it was temporary. He insisted the central bank was not monetizing the debt. He swore that the Fed would sell all of the bonds it was adding to the balance sheet.

It never happened.

Isn’t that the same BS line they fed us after the 2008 financial crisis? QE was a temporary emergency. They were going to eliminate it or unwind it as soon as the emergency was over. They weren’t monetizing the debt. It was all temporary. They were going to normalize rates, shrink the balance sheet. That’s what they said before. It was a lie before. I knew it was a lie before. I told everybody that would listen that the Fed was lying.”

Peter said this is an even bigger lie. It’s impossible for the central bank to remove the support from the economy.

They are basically giving a drug addict drugs. And if you’re high on drugs, you can’t say we’re going to take away the drugs when you don’t need it anymore when the drugs are the source of the high. When you’re high on drugs, you constantly need those drugs. You can’t take the drugs away. So, all the Federal Reserve does when it intervenes in the way that it has, and it comes in with all this cheap money — it can never take the cheap money away. Again, that’s the monetary roach motel that I’ve talked about.”

Peter said the reason gold didn’t go higher after the 2008 financial crisis is because the Fed managed to convince everybody that it wasn’t a monetary roach motel. People actually believe the extraordinary monetary policy in the wake of the crash was temporary, that the Fed could unwind its balance sheet and raise interest rates.  That’s why gold had its big downward correction.

It was gold discounting the normalization process. All of the rate hikes, all of the quantitative tightening was priced into gold before the Fed even started.”

If you recall, gold’s decline ended at the same time the Fed raised rates for the first time.

It was a sell the rumor, buy the fact. They were selling gold for years based on the anticipation of the Fed returning to normal. And then the minute they took their first step on the road to normalcy, that’s when gold bottomed and they started buying gold. Except the Fed never completed the journey.”

Now the Fed is doing the same thing again. They are giving a bigger dose of the same drug that they couldn’t get the economy off before. Keep in mind, the Fed was cutting rates and doing QE before COVID-19.

This is like a rerun of a bad movie. We have Clarida tossing out the same old lines. “This is temporary — for the emergency.” When it’s no longer needed, we’ll take it away. But as Peter said, it’s always needed.

I mean, if you want to keep the bubble going. If you want to let the bubble pop, if you want to let the whole house of cards collapse, sure, you can remove the policy. But if you’re determined to keep the bubble going, which is what the Fed is, then you can never stop.”

Peter said the difference this time and the reason he thinks gold will keep going up is that nobody is going to believe the Fed this time.

They can’t fool anybody. Fool me once, shame on you. Fool me twice, shame on me. The market’s not going to get fooled again by the exact same lie. Especially on that is so much more preposterous now because the debt is so much bigger. The size of the monetary stimulus is so much larger. We have a much bigger drug habit than we ever had. And if we couldn’t kick the last drug habit, how are we going to kick this one?”

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