Peter Schiff: The Fed Is Fighting Fire With Fire

The US dollar has been showing significant weakness over the last several weeks. The dollar index closed at 90.814. Just two weeks ago, it was in the 94 range. Compared to the Swiss franc, the dollar is at a 6-year low. In his podcast, Peter talked about the dollar weakness and the Federal Reserve policy that’s causing it. The crazy thing about the rising inflation expectation is that the Fed appears poised to try to fight it with even more inflation.

Peter said recently dollar weakness is just the harbinger of much weaker days to come.

I think it’s going to finish out the year particularly weak and it is going lead to an even weaker 2021, which I think could be the weakest year ever for the US dollar.”

Then again, 2021 might not be the weakest year ever. The year 2022 could prove to be even weaker.

It is a long way down, and I expect the dollar to complete this journey and ultimately end it in a crisis.”

Dollar-denominated bonds are also falling and yields are creeping up. Although Treasury yields aren’t high by historical standards, they have crept up a long way from their lows just a few months ago. Last week, we saw weakness in the bond market even with a relatively bad jobs report.

Normally, when you get weak economic data, you get a rally in the bond market. But today [Friday] we got a sell-off. And what that tells me is that the bond market is worried about stagflation. They’re not just looking at the economic weakness. They’re looking at the monetary policy response to that economic weakness, meaning that if the economy gets weaker, that means we get more money printing. We get more inflation. And that is what the bond market is afraid of.”

Inflation expectations are hitting two-year highs. That means investors are more concerned about inflation now than before the COVID-19 pandemic started. When the economic shutdowns first started, everybody was talking about the pandemic as a deflationary event. At the time, Peter was saying, no, this is inflationary.

Because what the pandemic is going to do is disrupt supply chains. It’s going to lead to less production of goods and services. At the same time, it’s going to lead to even more money printing by the Fed as they try to compensate for the decline in the economy by printing more money.”

In fact, the money supply has been growing at record rates for months.

Investors have gone risk on and the stock market has soared. In the early days of the pandemic, investors moved into gold because they wanted a safe haven from the market volatility the response to coronavirus caused. But gold has shown weakness of late and has not responded to the growing inflation pressures because the stock market has been soaring.

Nobody wants a safe haven from the market. Everybody wants to be in the market. And so, therefore, they can sell their safe-haven assets to get more exposed to the markets. So, they want to take risk on so they’re taking the safe havens off. But ultimately, people are going to realize that they need a safe haven from inflation. They don’t need a safe haven from the stock market going down. They need a safe haven from the dollar going down. And ultimately gold and gold stocks are going to be a much better inflation hedge than just having industrial metals, or energy stocks, or agriculture stocks, or other types of cyclical stocks that people think are going to benefit from inflation.”

Another reason for gold’s weakness is a reflexive move out of gold when inflation gets warm because of the expectation that the Fed will fight it with higher interest rates and tightening the money supply. Peter said that’s not going to happen.

The Fed is not going to respond to an increase in inflation expectations the way it typically has because it can’t. The Fed is not going to fight inflation. The Fed is going to surrender to inflation. Inflation is going to win. And that means the dollar is going to lose, so gold is going to take off.”

Peter said he finds it amazing that investors have simply accepted the idea that the Federal Reserve is not going to let rates go too high even in an inflationary environment. Most people expect that even if rates start to rise due to fears of increasing inflation, the Fed will step in and keep rates from rising by increasing the amount of quantitative easing.

So, we don’t have to worry because unlike increasing inflation expectations in the past that may have led to a backup in interest rates that would be problematic for the market, or the housing, or the economy in general, we don’t have to worry about that anymore because the Fed is committed that it is going to keep interest rates down no matter how high expectations rise. Now, this is a huge problem.”

Conventional wisdom tells us that the Fed should lean against any increase in inflation by raising interest rates and tightening policy.

But if the Fed is going to respond to inflation by creating even more inflation, if the markets are worried about inflation and because they’re worried about inflation they’re selling Treasuries which is putting upward pressure on interest rates, if the Federal Reserve response to investors’ concerns about inflation is to create more inflation — is to print even more money to prevent those increasing inflation expectations from bleeding over into higher interest rates, well, now investors are going to be even more concerned than they were before. The inflation expectations are going to get higher. So, instead of dampening those expectations, the Fed is basically throwing gasoline on the fire. And now investors are going to expect even more inflation, so that’s going to put even more downward pressure on bonds and upward pressure on yields, which means now the Fed has to create even more inflation to try to artificially suppress those rates. So, this is a massive spiral. The markets should be scared.”

What this really shows is that the Fed is at the end of its rope.

This is the end of the line for the Fed. We are on the verge of a monetary crisis, of a sovereign debt crisis. Because when the Fed has to acknowledge that it can’t fight inflation, that it has to surrender and inflation wins, you know, they’re done.