Schiff on WTFinance: The Fed Is Trapped and Gold Is Winning

Last week, Peter joined the What The Finance podcast to break down the deteriorating state of the housing market, the credibility problems plaguing the Federal Reserve, and the growing parallels between today’s economy and the stagflation of the 1970s. He also explains why gold, not Bitcoin, has emerged as the real beneficiary of the dollar’s ongoing decline.

Peter starts with a warning about mortgage rates and what they mean for the housing market and the economy’s growing divide. He explains that rates once considered normal are now far more punishing given how expensive homes have become:

Now we’re probably almost at 7 and a half percent on a 30 year mortgage, will probably be at 8% within another few weeks. Yes, 8% was doable 20 years ago or 25 years ago when homes were a third of the price they are now, but given how expensive houses are, 8% is a real game changer. Very few Americans can afford to buy if they have to pay an 8% mortgage, and 8% isn’t where the mortgage is going to stop. We’re going to go higher. It’s going to be double digits.

From there, Peter turns to reports of a phone call between Fed chair Kevin Warsh and the president ahead of a rate announcement. He points out that either version of events raises troubling questions about the Fed’s independence being trumped by politics, or the president’s grip on reality:

So if that conversation actually took place, I have a big problem with it, because you basically have the Fed chair consulting with the president before the announcement, letting him know what the board’s going to do and asking for permission to vote with them. But of course, if the conversation is a complete fabrication, if it never actually took place, the question is, is the president delusional in imagining that the conversation took place? Or is he just lying that it took place? Because it has to be one of those possibilities.

Peter then digs into the deeper problem facing the Fed, arguing that policymakers are stuck performing a balancing act they can’t sustain. He says the central bank is bluffing about its willingness to fight inflation because the real cure would be politically and economically devastating:

The Fed is in a box here because they can’t raise rates high enough to bring down inflation, but they can’t admit that. So they’re trying to walk this line where they try to pretend that they’re committed to reducing inflation and that they possess the tools to bring it down to 2%, even though they have no real intention of using those tools, because if they did, they would collapse the stock market, the real estate market, cause a recession and increase in unemployment, and put a lot of pressure on the government to cut spending.

Naturally, this leads Peter to draw comparisons with the last time America faced runaway inflation: the 1970s. He explains why today’s fiscal position, with deficits pushed to their highest levels, is actually far weaker than it was back then, meaning today’s inflationary spiral could be even more painful:

Well, it could be a lot worse than the seventies because we were in a lot better shape than we were in the seventies. You know, the debt to GDP was 30%, not 120%. We still had trade surpluses back in the seventies, not the deficits, a huge trillion dollar deficits we have now. In fact, America was still the world’s biggest creditor nation in the 1970s. Now we’re the world’s biggest debtor nation.

Finally, Peter turns to the dollar’s ongoing collapse in purchasing power, and points to gold, not foreign currencies whose falling value goes unmentioned or crypto, as the real barometer of the damage. He notes that gold’s meteoric rise over the past few years tells the real story that exchange rates against other paper currencies can’t:

Gold’s replacing the dollar. That’s already obvious because over the last few years, the dollar hasn’t lost much ground against the Euro or the pound or the Aussie dollar. The real loss of purchasing power is against gold, that’s where the dollar has taken it on the chin. You used to be able to get an ounce of gold for $2,000, which was a high price, but that was the price two or three years ago, and now it’s 4,300.