Schiff on Triangle Investor: The US is Turning Into Japan

Earlier this week, Peter joined the Triangle Investor podcast to break down the latest inflation data, the deteriorating state of the mortgage market, and the inevitable reckoning awaiting the US government’s addiction to debt. He also weighs in on crypto’s political fortunes and draws parallels to Japan’s own debt troubles, warning that sovereign nations worldwide are running out of room to maneuver.

Peter opens by pointing to fresh producer price data that paints a troubling picture for future inflation readings. He explains why wholesale price increases are a leading indicator of what’s coming for consumers:

Look at the numbers that came out today on producer prices. If you annualize September’s increase, the 1.3% gain, that’s 17% annualized inflation at the wholesale level. And obviously, it’s gonna, you know, come down to the consumer because businesses always pass on their costs to their customers. And the CPI numbers that we got yesterday were bad, but these numbers are worse, which means future CPI numbers are gonna be worse.

From there, Peter turns to the mortgage market, where rising rates have created a mountain of unrealized losses that dwarfs anything seen during the 2008 financial crisis. He lays out the math behind this time bomb:

Today, unrealized losses on existing mortgages are $2 trillion. You’ve got $8 trillion of fixed rate mortgages that don’t mature for another 25 years with an average rate of 4.6, but a current rate of 7.5. When mortgage rates hit 8.5, the unrealized losses will be $3 trillion. This is dramatically more than was lost during the financial crisis.

Peter connects this mortgage market stress to the broader picture of unchecked federal borrowing. He argues there’s no political will to stop the spending until the sovereign debt crisis simply breaks the system:

It’s going to be a bond crisis, a sovereign debt crisis. That’s the only thing that’s going to stop the debt train, is a crash. But until then, we’re going to go, right now we’re a little over $40 trillion, but we’re going to owe $45 trillion, $50 trillion, $60 trillion, $70 trillion until there’s a complete implosion. Now, maybe that’s going to happen before we get to $45 trillion. I don’t know.  

He runs the numbers further, showing how quickly rising interest rates could cripple the federal budget even without any new spending programs. The math, in Peter’s view, is simply unsustainable:

We have a $40 trillion national debt. Let’s say it goes to 50 trillion in a couple of years. What if interest rates are 8%? That’s 4 trillion a year. That’s 80% of tax revenue. How can we spend $4 trillion a year paying interest on the national debt? The budget deficits would be 6 or 7 trillion a year because all that money would have to be borrowed. The only way we could pay 4 trillion in interest would be to borrow the 4 trillion. So that adds to the national debt. So look, there is a ticking time bomb here that could go off any minute.

Finally, Peter widens the lens beyond the United States, pointing to Japan as a cautionary tale for what happens when a government binges on cheap debt for decades. He warns that the same fate awaits any sovereign that ignores the eventual cost of borrowing:

Look at Japan. Look what’s going on there. Look at all the debt they have. Rates are rising. I mean, the chickens are coming home to roost for all the sovereigns that have been living on borrowed money and selling too much debt. They all were making hay while the sun was shining. It was great because interest rates were low. So they kept borrowing and borrowing and borrowing without any consideration for the consequences that would ultimately befall them when interest rates inevitably rose because they weren’t going to stay down forever.