Peter Schiff: The Road to Debt Monetization Is Paved With Good Intentions

Jerome Powell testified on Capitol Hill last week. He said the central bank plans to hold the course on rate hikes and monetary tightening despite the global chaos caused by the Russian invasion of Ukraine. He also continued to dodge any responsibility for rampant inflation. In fact, he repeated a lie Ben Bernanke told in 2008 and insisted the Fed isn’t monetizing federal government debt because it doesn’t intend to hold those Treasuries forever. But as Peter Schiff said in his podcast, it doesn’t matter what the Fed intends to do. All that matters is what it actually does.

As the war in Ukraine rages, the dollar has enjoyed a strong rally. Peter said to enjoy it while it lasts.

Everything that’s happening is going to put the dollar’s reserve currency status into jeopardy.”

Think about it from China’s perspective. They’re watching the US use the dollar and its status as the global reserve currency as a weapon. The US has locked some Russian banks out of the SWIFT system and seized dollar reserves.

The idea that we might do something similar clearly is not going to sit well with the Chinese, who have trillions of US dollars invested in US Treasuries or other assets that we might just decide to seize or default on if we don’t agree with something the Chinese are doing. And it doesn’t necessarily have to be invading another country. We could flex this muscle whenever we want. I don’t think China enjoys basically putting a noose around its neck and throwing the other end to the United States.”

Peter said he thinks the Chinese will step up selling US dollars and US Treasuries in the coming months to reduce that risk. This would create a big problem for the US government since the Fed is still saying that it plans to shrink its balance sheet. That means the US central bank will no longer have its thumb on the Treasury market, creating artificial demand for dollars.

It’s going to be very difficult for the US government to unload these Treasuries in that environment because we’re still running these record deficits.”

Meanwhile, food and energy prices are soaring. Oil touched $130 a barrel over the weekend. A lot of people call this inflationary, but it isn’t. As people spend more on food and energy, they spend less on other goods and services causing those prices to go down. So, there is no net overall increase in prices.

What makes the prices go up is when the central bank responds to rising energy prices or rising food prices by printing more money, which is what they are going to do. Because as consumers have to tighten their belts because food is so expensive, because home heating oil and gasoline are so expensive, and they cut back spending on everything else, that causes a recession. And that results in the Fed printing more money, and that’s what’s inflationary.”

Recession signs are already flashing a warning. Last week, the Atlanta Fed lowered its Q1 GDP growth estimate to zero.

During his testimony, Jerome Powell said the central bank plans to move forward with a 25-basis point rate hike at the March meeting. Rate hikes were going to be a problem for the US markets and the broader economy before things blew up in Ukraine. All of the turmoil will make the hikes even worse.

So, the problems that the US market had before Russia invaded Ukraine, those problems exist now only now we have another problem on top of that.”

During the State of the Union, President Biden blamed inflation on greedy corporations. This was also a common theme among Democrats during Powell’s testimony.

The Democrats want to use high inflation as an excuse for even more government and even more regulation when it’s government that’s actually responsible for inflation. Which is the whole ridiculous part of the testimony where you have the chairman of the Federal Reserve that’s printing all the money fielding questions from the congressmen who are spending all the money the Federal Reserve is printing. So, these are the two partners in crime that are 100 percent responsible for inflation, and they spend the entire hearing talking about how bad inflation is, what a horrible problem it is, and trying to point fingers at who might be to blame, without anybody accepting responsibility that inflation is not here by accident and inflation is not here because some businesses got greedy. Inflation is here for one reason and one reason only. The government isn’t spending money that it collects in taxes. It’s spending money that the Federal Reserve prints.”

The only way to slay the inflation monster is to cut government spending so the Fed can stop monetizing the debt. That’s not going to happen. So, inflation will continue to get worse.

During his testimony, Powell was directly asked about the Fed monetizing government debt. Powell repeated a Ben Bernanke lie. He claimed the Fed wasn’t monetizing the debt because the central bank has no intention of holding on to it. This is exactly what Bernanke said when he launched quantitative easing in 2008. He told Congress the Fed was not monetizing the debt and that QE was an emergency measure. Once the crisis was over, Bernanke said the bonds would be sold. The balance sheet would shrink back to normal.

So, shall we review history?

The Fed pumped the balance sheet to $4.5 trillion after the financial crisis. When the Fed finally got around the shrinking the balance sheet in 2018, the markets threw a fit and the central bank went right back to QE. It got the balance sheet down to $3.8 trillion and gave up.  Most of the Treasuries the Fed bought in the first rounds of QE remain on the balance sheet today — plus trillions more.

As Peter put it, the road to hell is paved with good intentions.

Who cares about what you intend to do? What matters is what you actually do. And clearly, the road to debt monetization is paved with good intentions because that’s what the Fed is doing. It doesn’t matter if they intend to shrink the balance sheet. What matters is it’s not shrinking. It continues to grow. And even if they start shrinking it like they did when it was four-and-a-half trillion and they shrunk it down to about three-and-a-half trillion, what difference does that make if now we’re at nine trillion? If you only shrink it a little bit and then you expand it even more, you are monetizing the debt.”

Then Powell went on to claim debt monetization doesn’t cause inflation anyway. Powell said inflation is caused by strong demand and supply shortages. But where is all of this demand coming from? It’s coming from money creation. It’s coming from debt monetization. That’s the entire point of this monetary policy – to pump up the economy by pumping up demand.

In this podcast, Peter also talked more about Biden’s State of the Union speech, the jobs report, and some of the other answers Powell gave during his testimony.