Schiff w/ Lutz: Washington Can’t Bail Itself Out This Time  

In his latest interview on Kerry Lutz’s Financial Survival Network, Peter lays out out a sober warning about the macroeconomy and the world’s preferred reserve currency. He frames our economic situation as the inevitable result of decades of fiscal and monetary mismanagement, and he urges listeners to think about capital preservation now rather than waiting for a government rescue that may never come.

He opens by reminding listeners that the buildup to crisis has been years in the making and that most people still don’t see what is coming:

Most people are still asleep. They have really no idea what was happening. And I think we’re getting closer and closer to a day of reckoning that I’ve been warning about, as you know, for more than 15 years. The problems didn’t happen overnight. They’ve been building and building over time. And the problem is instead of dealing with them, we kick the can down the road because the pain, the political pain, certainly an economic pain, associated with dealing with them is so great that nobody wants to do it.

He says markets, not politicians, will force the adjustment — and that adjustment will show up as trouble for sovereign debt and the dollar itself, a risk even establishment figures are beginning to acknowledge:

And it’s ultimately going to be the markets that decide this. And that’s going to take the form of a sovereign debt crisis and a U.S. dollar crisis. And even former Secretary of the Treasury, Hank Paulson, just last week came out and said that we need an emergency break-the-glass plan to deal with the situation where there is no longer sufficient demand for Treasuries.  

But Peter is skeptical of Washington’s contingency plans. He argues that preparing for the aftermath is not the same as preventing the collapse in the first place — and that some so-called “plans” amount to self-destructive measures:

The problem is, I don’t think there is an emergency plan that would work. I mentioned on my own podcast, the plan is that behind that glass is a revolver and you break the glass and then you shoot yourself in the head. That’s basically it. What Paulson should be doing now, instead of telling us that we need a plan to deal with the crisis, what he should be saying is we need a plan now to try to avert the crisis. Let’s try to do something before it happens, right?  

He points out an important mindset shift for savers when the safe asset isn’t so safe anymore: preservation of capital must sometimes outweigh chasing yield. That applies to Treasuries, too. They are not an absolute refuge:

It makes total sense because you stop worrying about return on investment and you start worrying about return of investment. And that applies to Treasuries too. Everybody just assumes, ‘Well, the U.S. government will never default.’ I wouldn’t make that assumption. I mean,  we defaulted before when U.S. dollars were redeemable in gold and it was a promise to pay a fixed quantity of gold. And then we defaulted on that promise and paid nothing for our notes.

Finally, Peter returns to the central danger: this crisis will be centered on the government’s own balance sheet, consisting of treasuries and dollars, and that makes traditional bailouts ineffective. He warns that if listeners expect another blanket government rescue like 2008, they will be sorely disappointed:

The government was able to bail people out of that crisis. So even if you didn’t see it coming, the government bailed you out if you held on. But this crisis is not a crisis where the government could bail you out because this crisis is going to be focused in the government, its own debt, not subprime mortgages, but Treasuries, the U.S. dollar. And the government can’t bail us out of a dollar crisis because all it could do is create more dollars.