Peter Schiff: The Fed Makes Life Easier for Politicians

The Federal Reserve makes life easier for politicians by pursuing monetary policies that shield them from the consequences of bad economic decision-making. By keeping interest rates low and printing money, the Fed hides the nefarious impact of government spending, trade wars and other bad policies.

Peter Schiff talked about this in a recent podcast.

In an op-ed by former Fed member Bill Dudley said that the Fed should not be enabling Trump’s bad trade policy by cutting rates. Dudley said the president should have to suffer the consequences of bad policy. Peter called Dudley a hypocrite.

What does he think the Fed has been doing, including what was the Fed doing when Dudley was a member? That’s all the Fed has been doing is trying to take the sting out of bad policy. I mean, number one is the monetization of debt. It is buying up of US government bonds to enable larger deficits than the private sector could finance. And also keeping interest rates artificially low so the government could keep accumulating more and more debt.”

Ironically, the Fed recently began buying US Treasurys again a couple of weeks ago.

Peter reiterated that Fed monetary policy is enabling bad government fiscal policy.

It has insulated the economy from the pain that should have immediately resulted, which are higher interest rates. If the government wants to run bigger deficits, it’s going to crowd out private sector investment. It’s going to force up interest rates, which means mortgage rates and other rates and the consumers aren’t going to like it and maybe they are going to vote out the incumbents. So, what the Federal Reserve has been doing, and has pretty much been standard operating procedure since Alan Greenspan, is they are enabling bad policy, fiscal policy, and now bad trade policy, but they’re enabling it by keeping interest rates artificially low and not allowing rates to rise.”

As Peter noted, if rates rose due to deficit spending, there might be some political pressure to cut spending. But with the Fed intervening and monetizing the debt, Americans don’t feel the pain.

Instead, the Federal Reserve makes it easy for the politicians because they don’t have to make any of the hard political choices because they’re keeping rates artificially low.”

Keep in mind, the central bank kept interest rates at zero for nearly the entirety of Obama’s presidency.

Peter said the Fed shouldn’t be enabling bad policy from any administration.

The Fed should simply be concerned about the purchasing power of the currency. They should be looking for price stability at a minimum, which is what the Fed was created to do. The inflation rates that we already have, as far as I’m concerned, are already too high … The Fed should not be working in conjunction with the White House to make things easier, to make the economy appear better so that whoever’s the incumbent can get reelected. That’s been the cozy relationship. They basically try to reelect any incumbent regardless of party. So, it’s not that the Fed has been partisan. They have done bad things for Republicans when Bush was in charge, and they did bad things when Obama was in charge. They did bad things when Clinton was in charge. The Fed has been helping every president regardless of party by keeping interest rates too low and by printing too much money.”

Peter recorded this podcast last Friday as Hurricane Dorian was barreling toward Florida. He took the opportunity to develop an analogy, saying that the coming economic hurricane is going to be a category five.

Peter started off the podcast talking about the silliness of those who claim the damage from a hurricane is good for GDP. This is just another version of the “broken window fallacy.”

You have to look at the unforeseen consequences, which means that any resources that are going to be devoted to rebuilding whatever the hurricane destroys, those resources are now not available to do something else. So, we have to go without something else that we would have had in addition to the stuff that got destroyed. Now, all we have to do is rebuild what we lost and we’re no better off, right?”

Peter went on to talk about the markets, noting that August was a pretty stormy month. He said most investors probably want to forget last month unless they were invested in silver and gold.  Every stock index was down on the month. Bond yields tanked with the 30-year Treasury hitting a record low yield. There was significant volatility in the currency markets.

My feeling is that September is going to be even more volatile. I think we’re going to have even bigger moves and more surprises in the month of September, so people really need to prepare.”

Peter said historically, September hasn’t been a friendly month to the stock market.

Peter also broke down the recent GDP revisions and consumer spending numbers.