If It Was Game Over for the Fed Then Where Are We Now?

In a speech at the Cambridge House Vancouver Resource Investment Conference back on Jan. 19, 2020, Peter Schiff said it was “game over” for the Federal Reserve. It’s interesting to look back at his remarks in context with what’s going on over at the central bank today. If it was game over then, where are we now?

Peter opened the speech by pointing out that going into 2019, everybody expected the Fed to raise interest rates three times.

Well, they got the number right. The Fed did move interest rates three times. Except the direction was the opposite of what everybody thought. Instead of hiking interest rates three times, the Fed cut interest rates three times.”

Why did the Fed do a complete about-face? Why did the Fed end the tightening cycle and hit the Powell Pause in January 2019? Why did we see rate cuts instead of hikes during that year?

Because the markets were reacting to the previous tightening in the way anybody should have been able to predict. After the Fed took small steps toward normalization in 2018, the stock market tanked in the fourth quarter. In fact, the US stock market had its worse December since the Great Depression that year.

The Fed pricked its own bubble by raising interest rates the first time. It just took a while before the air really started to come out in a way that made everybody scared.”

During his January 2020 speech, Peter said had the Fed not taken action, we would have probably seen a much deeper stock market crash and entered into a recession. In other words, the Fed’s pivot back to loose monetary policy blew some air back into the leaking bubble.

But the Federal Reserve did not cancel that recession or market crash. It simply postponed it by reverting to the very policies that inflated the bubble in the first place.”

Peter said it never made sense to him how anybody every believed that the Fed was going to be able to normalize interest rates with the enormous amount of debt in the economy.

I knew that this journey was impossible to complete before the Fed even embarked on it.”

The central bank was able to raise rates a few times in 2018 thanks to the election of Donald Trump and the optimism about the economy he generated, along with tax cuts and government spending increases that gave the economy a boost of stimulus. But just before the Fed raised rates for the final time in December 2018, Peter appeared on Fox Business and predicted it would be the last hike. During that same interview, Peter also predicted that the next move for the Fed would be rate cuts and a return to quantitative easing. Sure enough, late in 2019, the Fed announced a bond-buying program to increase its balance sheet. Powell and Company refused to call it QE, but that’s exactly what it was.

The reason the Fed is back to quantitative easing, the reason the Fed is cutting interest rates, is because they helped create an economy that was completely addicted to cheap money.”

But as Peter pointed out last January, the Federal Reserve can’t do this indefinitely. He has been saying for years that ultimately, this policy will lead to a dollar collapse.

So, why didn’t the dollar implode when the Fed embarked on this extraordinary monetary policy in 2008? Because everybody believed the central bank could reverse it. Everybody believed that the Fed would eventually raise rates and shrink the balance sheet.

Even before the coronavirus pandemic, Peter said the world should have known this was impossible.

Once the dollar starts to fall on the acceptance that rates are never going to normalize, that’s when you have a crisis. Because inflation is going to rear its head in a very, very ugly way.”

Enter the coronavirus pandemic and the accompanying government shutdown of the economy. The Federal Reserve has put the policies that were pushing us toward a crisis on hyperdrive. We now have interest rates at zero again. Some analysts say negative rates will be next, although Powell says that’s not in the cards. We have the central bank running QE infinity. Companies that were overleveraged to begin with are taking on even more debt.

If the Fed couldn’t exit from the extraordinary monetary policy it launched in 2008, how does anybody expect it to exit from the extraordinary monetary policy on hyperdrive that it is engaged in now?

Federal Reserve Chairman Jerome Powell even admitted that the central bank has “crossed a lot of red lines,” but he insisted he’s comfortable with the actions given “this is that situation in which you do that, and you figure it out afterward.”

He may be comfortable with that, but should we be?

The bottom line is that we were on an unsustainable path even before the pandemic. Peter made this case in his January speech. And we’re still on that path. In fact, we’re driving down the path at breakneck speed.  As Peter said in a recent podcast, the Fed got away with all of this in 2009 and the years following. It managed to blow up a bigger bubble.

We’re repeating those mistakes on an even grander scale and we’re doing it in an even weaker economy because we never really recovered from the recession of ’08. We papered that over with a bigger bubble. So, instead of correcting the imbalances that existed, we made the imbalances bigger. We went even deeper into debt. And so now that this even bigger bubble has popped, the Fed is back to the drawing board doing exactly what it did before, only printing a lot more money, running much bigger deficits, and so this time there is no way to kick this can. We are now going to experience everything that I assumed we were going to experience back then, only much worse. Only a much deeper collapse. Even more inflation than we had then.”