Schiff on Trading Trends: America’s Debt Bomb is About to Go Off

Peter recently joined the “Trading Trends” podcast for a wide-ranging conversation about America’s deteriorating fiscal position, the enduring appeal of gold, and why he remains bearish on Bitcoin. He also touches on why the dollar continues to attract capital despite its obvious flaws, and lays out how the ongoing conflict with Iran reveals cracks in America’s global standing.

Peter starts by putting America’s debt problem in stark historical context. He explains that the sheer size of the national debt today makes the US a much riskier borrower than it was less than two decades ago:

But, you know, anyone who’s ever borrowed money or lent money for that matter knows that a very important criteria is how much debt the borrower already has. And when borrowers have a lot of debt, they are a bigger credit risk. And so they would generally pay higher interest rates. So the fact that we’re now $40 trillion in debt, whereas in 2007, we may have been $5 or $6 trillion in debt, we are much worse credit risk today.

From there, Peter reflects on his own history as a gold bull, recalling just how far ahead of the curve he was when he started recommending the metal to clients. He remembers being mocked on national television for his views, long before gold’s more recent surge validated his thesis:

I first started really buying gold for my clients and recommending that people buy gold in the late 1990s. And I started talking about it on television in the 2004, 2005 timeframe. And, you know, back then it was like $400 an ounce. You know, by the time I was on CNBC and they were calling me Dr. Doom. And people were making fun of me. They were laughing at me thinking this was ridiculous.

Naturally, the conversation turns to Bitcoin, where Peter remains skeptical that the token has any real fuel left in the tank. He argues that the pool of new buyers has largely dried up, setting the stage for a wave of selling from speculators rather than diehard believers:

But I expect Bitcoin to roll over and make new lows. I just don’t see where the catalyst comes from to drive in new buyers. I think all the new buyers have already bought. So I think the big move is for the current Bitcoin owners to get out. And I think the first out are going to be a lot of the speculative money, not the hardcore Bitcoin maxis.

Peter then circles back to gold, laying out the math behind negative real yields and why rising inflation makes gold more attractive even when nominal interest rates climb. He walks through a simple example to show how savers can fall further behind even as the Fed hikes rates:

If inflation is 5% and I’m getting paid 4%, I’m losing 1%. But if inflation goes up to 8%, even if the Fed goes up to 6%, now I’m losing 2%. I’m worse off despite the nominal increase in rates. So there’s even more of a reason to get out of dollars or treasuries and buy gold when you have a negative 2% real yield than when you only had a negative 1% real yield.

Despite all of these warning signs, Peter acknowledges that the dollar still benefits from a lack of credible competition among fiat currencies. He points out that global investors are effectively stuck choosing among a group of flawed options, with the dollar often looking like the least bad choice:

Yes, we got plenty of problems in the US, but where are they going to go? The euro? Are they going to buy the yen? Are they going to buy the Chinese R&B? They’re kind of stuck by default because as bad as we are, the alternatives are worse.

Finally, Peter turns to geopolitics, arguing that America’s prolonged and inconclusive involvement in the Iran conflict is exposing the limits of US military and political power. He notes that promises of a quick resolution have given way to a drawn out stalemate, undermining confidence in Washington’s ability to project strength:

I also think the Iran war is providing the world with an example of the fact that we don’t have as much power as we claim because we haven’t even been able to win that war. Trump promised a two week victory. It’s been six months. The war started at the end of February. Victory is nowhere in sight. In fact, I’d say that victory is further away than it was when we started the war.