Peter Schiff: There Is No Ceiling on Inflation

Gold closed out the week before Christmas above $1,800 an ounce, despite rising bond yields. The $1,800 level has been viewed as a ceiling for the price of gold. In his podcast, Peter Schiff said people need to start thinking of $1,800 as a floor. And he said they will once they realize there is no ceiling on inflation.

We got the personal income and spending data for November last week. Incomes grew at a slower pace than projected — 0.4%. Meanwhile, spending was up 0.6%. Obviously, if spending is outpacing income, the difference has to come from somewhere. It appears Americans are dipping into their savings to cope with rising prices. The savings rate declined to 6.9%. That is the lowest level since December 2017.

We also know that consumers are turning to debt to make ends meet, with credit card balances growing at a fast pace.

The savings rate shot up and Americans paid down their credit cards when the government showered them with stimulus. Peter said it appears the stimulus has run out.

Obviously, Americans have now exhausted that windfall. They’ve depleted that savings war-chest that was built up with stimulus money, and now it’s gone. And so, they’re having to go into debt.”

Consumers have a double problem. They’ve run out of savings and consumer prices keep going up. That is robbing people of their purchasing power.

That robber is the government, because it’s the government that’s creating the inflation that is causing the cost of living to go up. But the cost of living is going up, yet consumers have even less savings to afford that increase in the cost of living.”

Given this scenario, one of two things has to happen. Either the government needs to come up with another round of stimulus or we get a recession. Because at some point, consumers will have to cut back on the spending.

Either the government is going to have to supply the money or the spending is not going to happen. So, either we have a recession, or we have even worse inflation. Because if the government has to print more money to fund more stimulus spending so that consumers can afford to keep buying stuff at higher prices, well then we have an even bigger inflation problem on our hands.”

The Fed’s favorite inflation metric is the Personal Consumption Expenditure index (PCE). The central bankers like this metric because it understates inflation the most. The year-over-year PCE number came in at 5.7% in November. That’s the biggest PCE increase since 1982.

The Fed’s target for inflation is 2%. And even if you measure inflation using the most dishonest of all government indexes that sugar-coats it the most, you’re still way over double what the official target is.”

Keep in mind, consumers aren’t buying more stuff. They’re buying less and paying more.

And yet, the Fed is doing nothing about this inflation problem.

Of course, the central bank did announce a taper of asset purchases in November and then committed to speed up that process during the December FOMC meeting. And they are apparently poised to start raising interest rates from zero a few months sooner than initially expected.

But how is that going to make any difference to an inflation problem that is already so big?”

When the PCE was at this level back in 1982, the Fed funds rate was at 14%. Today it is at 0%.

That’s how a Fed fights inflation. You’re at 14%. How can anybody talk about the Fed fighting inflation now when rates are at zero when the last time it was this bad, rates were at 14%?”

At this point in 1982, real interest rates were positive. Today, they’re deeply negative. Back then, Fed was bending the inflation curve with real positive interest rates.

As long as the Federal Reserve is maintaining negative interest rates, it is worsening inflation.”

Nobody is even talking about raising interest rates to the point that real rates become positive.

Of course, it can’t happen because we have so much debt that it is impossible to actually service that debt if the Fed were to raise interest rates to an appropriate level.”

There’s no way out of the predicament.

If the Fed raises rates high enough to actually fight inflation, it won’t just cause a deep recession. It will likely precipitate another financial crisis. Peter said this is why the Fed won’t do it.

They are going to pretend they’re going to do it. And they may in fact raise rates slightly if they can get that far along in the process. But somewhere along the way, the market is going to fall. The economy is going to slip.”

When that happens, the Fed will almost certainly reverse course and go back to its ultra-inflationary policy.

This isn’t even close to peak inflation. If anything, this is trough inflation compared to where it’s going.”