Peter Schiff: Debt and the Mother of All Dollar Bear Markets (Video)
President Trump wants to scrap the debt ceiling. A lot of pundits and politicos think this is a great idea. Just scan through the mainstream media reporting and you’ll see headlines like this one from New York Magazine. “Trump Wants to Eliminate the Debt Ceiling. He’s Right.”
Peter Schiff sees this whole thing in a different light. He believes eliminating the debt ceiling will just push us more quickly down the road to the mother of all dollar bear markets.
Peter built the case for a dollar crash in his most recent Schiff Report video.
Why do we even have a debt ceiling? It actually goes back to World War I. Originally, the Federal Reserve was prohibited from buying US Treasuries. But in order to finance the war, Congress amended the Federal Reserve Act to allow the Fed to buy US debt. The debt ceiling was passed in an attempt to rein in the government’s ability to borrow from its own central bank.
Now they want to obliterate the debt ceiling altogether so that we even remove any pretense that there’s some limit on how much money we’re willing to borrow. And as if this is supposed to be some kind of panacea. The people who are in favor of this think this is great because they think the problem has always been the threat not to raise the debt ceiling. That’s never been the problem. The debt is the problem. The ceiling is the solution to the problem.”
Peter is going against the conventional wisdom here. The mainstream – especially those who lean to the left – see the debt ceiling as a political obstacle that needs to be removed. It’s a roadblock to good, efficient government. Consider this from the New York Magazine.
The existence of the debt ceiling is simply an appendage; it opens the possibility of a cataclysmic accident in which Congress authorizes debt through its budget that it refuses to back through the debt ceiling. If Congress fails to lift the debt ceiling when needed, the Treasury literally would not be able to pay its debts, which would wreak economic havoc and permanently raise interest rates. The threat of such a cataclysm is what right-wingers have leveraged in the past.”
Peter said the notion that eliminating the debt ceiling is the responsible thing to do is a bunch of bunk.
In recent years, the political spin has always been that lifting the debt ceiling is the politically, fiscally responsible thing to do – that America always pays her bills – and because we always pay our bills, we have to raise the debt ceiling. Ironically, they have it backwards. The reason we have to raise the debt ceiling is because America never pays her bills. If we paid our bills, we wouldn’t have any debt. We have all this debt because we don’t pay our bills.”
Now, you might argue the debt ceiling is useless. After all, the federal government managed to run up an unimaginable tab even with the ceiling in place. But Peter argues it has probably created at least a speed bump to slow down unrestrained spending. At least Congress has to consider some limits from time to time.
We have $20 trillion of debt, and we’ve got all that debt with a debt ceiling. Can you imagine how much more debt we would have racked up if we didn’t have a ceiling?”
But Peter goes on to make an interesting point. Even without the debt ceiling, the government isn’t going to be free and clear to just borrow endlessly.
You know what? It’s not going to work, because just because we decide that we have no debt ceiling, and we’re going to borrow as much money as we want – it takes two to tango. We need a lender in order to borrow. And if we get rid of the debt ceiling, we are sending a very powerful message to our lenders that we are never going to get our fiscal house in order – that the sky’s the limit as far as how much we’re willing to borrow. And now the lenders are going to say, ‘Wait a minute! We don’t want to lend anymore. We already own enough US Treasury bonds. And if you’re telling me your throwing all fiscal prudence out the window, and you’re just going to borrow as much money as possible, well we don’t want to lend in that environment. Certainly not in this ridiculous low interest rate.'”
So where does the government get the money? It will have to borrow more from the Fed.
And that means the dollar is going to fall through the floor.”
The dollar has already dropped about 12% on the year, and it’s on track for its worst year since 1985. That was the beginning of a decade long bear market for the dollar. Peter says he thinks this one will be worse.
I think this one is going to be the mother of all dollar bear markets, and I think the dollar is going to fall much further than it did in any prior bear market.”
There are other pressures on the dollar as well. The Chinese recently announced a gold-backed, yuan-denominated oil futures contract that could set the stage to push the US petrodollar off its throne.
It appears the stage is set for a major currency crisis. The debt ceiling debate is just another prop in a plot that looks a lot like a Greek tragedy. The US economy is teetering on the brink. All it needs is the spark to set of the explosion. Peter argues that the destruction from Hurricane Harvey and Irma could be the catalyst that pushes the US into a recession and sets the dollar collapse in motion. That remains to be seen, but it appears pretty clear the greenback is in a dangerous place right now.
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