Schiff w/ Cole: Debt-Fueled Living Can’t Last

Earlier this week, Peter joined Harry Cole to warn listeners that the U.S. economy is running on promises it cannot keep. He lays out how trade deficits, mounting government obligations, and post-Covid spending have accelerated inflation and pushed long-term interest rates higher. Along the way he touches on the social safety net, the risk of a confidence-driven collapse in bond markets, and even the mixed effects of artificial intelligence on the labor force.

He begins by explaining why the American standard of living depends on borrowed prosperity and promises that are increasingly fragile:

We live well beyond our means, and the rest of the world makes that possible by providing us with goods that we didn’t produce and that we can’t afford. And everybody is relying on government promises that can never be kept. You’ve got so many people that want to get paid interest and principal on government bonds, that want to get paid Social Security and Medicare and government pensions. And the money is just not there.

Peter says modern governments can respond to fiscal strain by printing money, and that shortcut is already feeding price growth and driving bond yields up:

They can print money and give everybody worthless money. And that is basically where we’re headed. I think that’s why you’re seeing this acceleration in inflation and long-term bond yields. I think this is going to be a much bigger deal than what happened during the 1970s when you had something similar, and this is going to end a lot worse.

He traces the recent acceleration to pandemic-era policy, arguing that promises made during Covid were never unwound and that both parties have kept spending elevated:

It’s been building for a long time, but it accelerated because the government made even more promises during Covid to take care of everybody, to replace everybody’s income, to give everybody extra income, even though they weren’t working. Deficits really exploded during Covid. And the bigger problem is they never reined them in after Covid. You know, all the increase of spending has been sustained. Even the Trump administration, the Republican Congress, refused to do anything to take back the big spending of the Biden era. They just added to it and made it worse.

He warns that people recognize the promises are hollow, but complacency can persist until a surprise shock exposes the reality, just as the subprime mortgage market did in the last crisis:

People know that these are empty promises. They’re never going to get fulfilled. The only thing too is that the problem has been building for so long without a crisis that there is some complacency that we can keep getting by. But I think at some point, reality is going to set in. The same way it did with the subprime mortgage market. All of a sudden, the bottom dropped out of the market, even though it should have been obvious for years before that, that these mortgages were no good and they would ultimately collapse, but people were in denial.

Peter also addresses the impact of automation and artificial intelligence on jobs, noting that the displacement itself can be neutral or positive if labor reallocates, but it becomes dangerous if people are pushed into unproductive dependence on government transfers:

That in and of itself is actually a good thing. The fact that we can free up labor and operate more efficiently so that those people could do something else, that’s progress. That’s a good thing. If those people who lose their jobs because of A.I., if they don’t get other jobs, if what they end up doing is going on some government program where the government just gives the money and they don’t work and they’re not productive. That’s a problem.

He closes by returning to the core analogy: the national debt system depends on ever more buyers of government paper, and when confidence evaporates the structure fails like any Ponzi:

A lot of it depends on when our creditors come to that conclusion and don’t want to lend us more money because it’s all about the willingness of the world to keep lending us money despite the fact that we’re broke and can’t afford to pay it back. The only way we could pay back our current investors, our current bondholders, is to get new bondholders. It’s just a giant Ponzi scheme, but it’s all based on faith and confidence. And once that goes, then the whole thing implodes just like any Ponzi.