Schiff w/ Bodrovics: We’re in a Debt Spiral

Peter recently joined The Competent Investor podcast to lay out his assessment of where U.S. fiscal and monetary policy are headed. He walks through the mechanics of a looming sovereign debt crisis, explains how the Federal Reserve has backed itself into a corner, and details how rising interest rates are quietly wrecking the housing market. He also takes aim at Republicans for claiming credit for tax cuts that were really just more borrowing in disguise.

Peter opens with a stark warning about where this all ends. He says there are really only two outcomes on the table, and the timeline is the only real mystery:

I think it leads to a sovereign debt crisis and potentially hyperinflation. I mean, those are really the only two possibilities that are out there. And most people are completely oblivious to those outcomes, but that’s what’s going to happen. The only question is when? Are we weeks away? Are we months away or are we still a few years away?

To make the math concrete, Peter runs through a simple projection using numbers that aren’t far off from current trends. He shows just how quickly interest payments alone could consume the federal budget:

But what if in a couple of years the national debt is 50 trillion, which it will be in another three years will be at 50 trillion. What if interest rates are 8% three years from now? I mean, that’s not that high. I mean, that’s $4 trillion a year in interest. That’s 80% of tax revenue.

From there, Peter explains why the Federal Reserve doesn’t actually have a good option left. Raising rates crushes the government’s ability to service its debt, but cutting rates tanks the dollar and sends prices higher anyway:

So this is a self-perpetuating doom loop that you can’t get out of. Because if the Fed says, oh, then we’re not going to raise rates, well, then the dollar crashes and then prices soar for that reason. So there’s no way that the Fed has put itself – put the country– in a no win situation. So all they’re going to do is pick the route that does the least political damage in the short run. And that’s probably just to create massive inflation.

Peter then turns to the housing market, where he says the damage from higher rates is already baked in, even without a wave of defaults. He points to the gap between old mortgage rates and today’s rates as a hidden crisis sitting on bank balance sheets:

But just without any defaults, if you just look at the 8 trillion or so mortgages that are outstanding, the fixed rate mortgages, I’m only talking about the fixed rate mortgages, they have an average duration of 25 years right now and an average coupon of 4.6. Some are lower, some are higher, but the average is 4.6. Current mortgage rates are 7.5. The unrealized mark to market losses are $2 trillion. That is like four times more than the actual losses during the financial crisis.

This sets up what Peter sees as an impossible bind for policymakers. Inflating away the debt might make mortgages more affordable in nominal terms, but it comes at a steep cost to the currency itself:

So the only way out of this is for the Fed to create massive inflation because if the Fed creates a lot of inflation, then people can afford to buy those homes because their salaries go up. Not in real terms, but they just make more money because there is more money. But then the price of everything goes up. But massive inflation is going to destroy the dollar. It’s going to make the affordability crisis critical. So there is no easy way out of this. There’s just the hard way and the harder way.

Finally, Peter shifts to fiscal policy and criticizes Republicans for patting themselves on the back over recent tax legislation. He argues that what they’re calling a tax cut is really just more government spending pushed onto future generations:

The big beautiful bill was a big disaster. It was very ugly. And it always frustrates me to hear Republicans taking credit for cutting taxes because they signed it. They didn’t really cut taxes. They raised taxes because the cost of government is measured by what it spends, not by what it collects in taxes. And the big beautiful bill increased spending.