Schiff on Palisades Gold Radio: Fed Returns to QE While Metals Climb

Last week, Peter joined Palisades Gold Radio to argue that the recent Fed moves mark a return to balance-sheet expansion and that the implications for bonds, the dollar, and precious metals are profound. He walks listeners through the mechanics of what the Fed is doing, the risks of yield-curve pressure, why he thinks the current gold rally is only beginning, and how an ever-growing debt burden compounds the problem.

He starts by saying the headline rate cut misses the real story: the Fed quietly resumed quantitative easing and is expanding its balance sheet again, which changes the policy landscape and market incentives:

Well, more significant than the rate cut was the announcement that we’re basically back to quantitative easing. Now, the Federal Reserve didn’t officially say what they’re doing is a new QE program, but that’s exactly what it is. The Fed announced that it’s going to purchase $40 billion worth of T-bills over the next month to expand its balance sheet, and that on an ongoing basis, it’s going to continue to buy T-bills to continue to grow the balance sheet. So it just stopped quantitative tightening. And as soon as it stopped, it went right into quantitative easing.

He then warns listeners about the next phase of the Fed’s playbook: rate cuts only control the short end, but pressure on long-term yields could force a form of yield-curve control that’s dangerous for bondholders and for savers:

Well, yield curve control will be when they go out in duration, when they try to keep the yield on the long term treasure. I mean, obviously they control the short run. That’s what these rate cuts are all about. They’re trying to bring down the short term yields. But the problem is going to happen when the long term yields start to spike up, which I believe they’re going to do. In fact, what the Fed is doing right now is bearish for bonds, you know, even though they’re buying short term bonds, that’s bearish for long term bonds.

He ties the financial plumbing to geopolitics and monetary status, arguing that the United States is especially exposed if the world begins to shift away from the dollar toward hard money like gold. That would make importing goods and financing deficits much harder for America than for other countries:

I think the US is probably in the worst position, given the fact that we’re the ones that are about to lose the privilege of creating the world’s reserve currency. And America, more than any other major economy, is completely dependent on imports and foreign capital to survive. We have to import the goods that we can’t produce and we have to borrow the money that we don’t save. And we won’t be able to do that anymore once the world is using gold instead of dollars.

He points to a concrete sign of a structural shift in client advice at major firms: if big broker-dealers start recommending selling bonds and buying gold, that could force the Treasury to rely more on the Fed to fund deficits, which in turn fuels inflation and strengthens the case for owning precious metals as a hedge:

And so this has significant implications if this is actually going to be implemented at Morgan Stanley and not just at Morgan Stanley, but if Morgan Stanley is doing it, well, maybe Merrill Lynch does it. And maybe a lot of these other big firms are going to be telling their clients to sell their bonds and buy gold. And that’s a game changer. Of course, that means the U.S. government is going to have to find new buyers for those bonds. And it’s probably going to be the Fed, which means even more inflation, which of course is another reason to buy gold and buy silver.

Finally, Peter brings it back to fundamentals: the national debt has grown to the point where interest payments themselves are one of the largest federal expenses, and that rising interest makes it harder each year to “outgrow” the obligation without painful policy changes or inflationary finance:

I mean, the bigger the debt gets, the harder it is to outgrow it. So if we couldn’t outgrow the national debt when it was 5 trillion, or 10 trillion, or 20 trillion, how are we going to do it when it’s 40 trillion? It’s just the bigger it is, the harder it is, because now the interest is the biggest driver. I mean, just interest alone on the national debt is the second biggest expense we have other than social security. And, you know, even if we could, you know, balance the budget, I mean, we still can’t even do that; we have to borrow the money just to pay the interest.

For Peter’s solo analysis of the latest Fed rate cuts, check out his latest podcast!