Schiff on Redacted: The Housing Market is Doomed to Crash

On Wednesday, Peter joined the Redacted podcast for a discussion on the US government’s spiraling debt, the illusion of wealth propping up the housing market, and the political games being played ahead of the midterms. He closes with a sharp explanation of why rising bond yields, contrary to popular belief, are actually bullish for gold and silver.

Peter starts by laying out the basic mechanics of why a heavily indebted government becomes a riskier borrower, and why that risk gets priced into higher interest rates:

The more money you owe, the less credit worthy you become. And when you have a lot of debt, lenders typically want higher interest rates for the extra risk of lending to you. And there is risk in lending to the US government. You have two risks. One is inflation. And when governments have a lot of debt, they tend to create inflation.

From there, Peter walks through just how quickly the national debt is compounding, and why there are really only two paths forward once the numbers get this large:

How can we possibly finance that or repay that? Because now the national debt is going from $50 trillion to $60 trillion in under two years. And then $70 trillion to $80 trillion. Before you know it, it’s $100 trillion. It’s impossible to repay the debt. So it either has to be defaulted on or inflated away.

Shifting to housing, Peter pushes back on the idea that home values exist in some fixed, independent sense. He reminds listeners that a house is only worth what somebody is actually willing and able to pay for it:

And so, housing prices are set by affordability because a house is only worth what the buyers can pay. And if buyers can’t buy your house, then what’s it worth? I mean, what’s a house worth that you can’t sell? Right. Who knows? It’s worth what somebody will pay you when you need to sell it.

He connects this directly to the political incentives at play, arguing that the push to keep home prices elevated has little to do with helping ordinary Americans and everything to do with maintaining the appearance of wealth among homeowners who vote. Peter also warns that this illusion is set to collide with reality:

He doesn’t want home prices to come down so that young people can buy. He wants home prices to stay up so that older people can feel rich. But they’re not really rich if they can’t sell their home, they just have a home. But I think what’s gonna happen when real estate prices collapse, which they will, you’re gonna have a big increase in defaults.

Peter then pivots to gas prices and the broader political theater surrounding the midterms, pointing out the convenient timing of promises about economic relief:

Of course, because he wants people to vote Republican because they’re expecting gas prices and come way down after the midterms. See, everything’s gonna get great after the midterms as long as the Republicans win. But if the Democrats win, Trump has said it’s gonna be a 1929 style depression. So these are the stakes, either it’s a boom or a depression.

Peter wraps up the interview by correcting a widespread misunderstanding about bond yields and precious metals. He explains the actual mechanics behind why rising yields, far from being a headwind for gold, often signal exactly the opposite:

Everybody believes that rising bond yields are bad for gold and silver. But they’re not. Bond yields are rising because bond prices are falling. Bond investors are losing money. So if they wanna stop losing money, they have to sell their bonds. Well, what are they gonna do with the money? Well, they’re gonna buy gold.