Peter Schiff: Inflation Beat the Fed

On Friday’s episode of The Peter Schiff Show, Peter walks listeners through the fiscal and monetary forces that make inflation all but inevitable. He ties together soaring debt service, a bubble-driven stock market, wartime spending, and misguided corporate Bitcoin bets to argue that sound money and precious metals are the sensible hedge right now.

He begins by explaining why the Federal Reserve is fundamentally unable to tame inflation no matter how hard it tries:

The Fed has lost the fight against inflation. And it’s not that it has to fight harder to win, it’s that it can’t win because it can’t fight hard enough. It is impossible. The Fed cannot raise interest rates nearly enough to rein in runaway inflation. That’s why inflation is going to run away because of all the debt. I just mentioned we’re spending $1.6 trillion and rising annually on interest with interest rates where they are.

Peter then connects today’s market mania to the long era of ultra-low rates and easy money, arguing that modern tech titans are riding the mother of all bubbles:

Because back in the John D. Rockefeller days, we didn’t have a stock market bubble. So his shares of Standard Oil weren’t valued anywhere near where the market values SpaceX. Not only is that valuation based in large part on what people hope was going to happen, but just based on the overall excess valuations that we have because of years of monetary excesses, artificially low interest rates, and money printing that have created the mother of all stock market bubbles, and SpaceX may be the epitome of that.

He shifts to geopolitics and explains why war becomes a direct tailwind for gold and other precious metals because governments pay for conflicts with deficit spending and central bank monetization:

The war is very bullish for precious metals because wars are inflationary. They’re inflationary, not because they make the price of oil go up, it is because of the way that governments pay for wars. They pay for wars with deficit spending, and those deficits get monetized by the central bank, and that’s where the inflation comes from. So this is actually bullish for gold. Traders just haven’t figured that out.

Peter lays out how maturing Treasury debt and higher interest rates force a sharp rise in debt service that pushes annual interest costs toward and beyond the $2 trillion mark:

I said we would be at $2 trillion before Trump finished his term. We’re going to get there because we’re already more than halfway there at $1.6 trillion. What happens is every month you have low yielding debt that matures, money that the government borrowed when interest rates were at rock bottom, when rates were at zero. As this debt matures and the government has to roll it over, it has to re-borrow the money to pay back the old lenders, it has to refinance at the now much higher rates, somewhere between four and five percent. That adds tremendously to the debt servicing cost.

Given that rising cost, he warns a sovereign debt crisis and a dollar shock are likely before policymakers can fix the problem, and he points to calls from former officials for emergency plans once foreign buyers balk at U.S. bonds:

We will have a complete meltdown, a sovereign debt crisis, a US dollar crisis before we get there, which means that crisis is not too far off. That’s why Hank Paulson said that the US needs a ‘break the glass’ plan to deal with the situation when foreigners no longer want to buy our bonds, because looking at the data, they should already be balking at buying our bonds. They should already be dumping our bonds across the board, given the trajectory of the debt.  

Finally, Peter turns to corporate finance and shareholder value, using Strategy and Michael Saylor as an example of how treating Bitcoin like a corporate treasury reserve can actually harm shareholders:

If Saylor were really trying to manage his book and optimize shareholder value, he would sell Bitcoin and then buy back stock, which is at a discount to close the discount. That would actually increase the Bitcoin per share if he sold some Bitcoin and bought back his shares. But he can’t do that because he’s already proven he can’t do that because he tried to sell 32 and the market imploded. So he sold the only thing he could sell, which was strategy common stock, despite the fact that it was dilutive and reduced Bitcoin per share. So strategy shareholders are worse off despite this Bitcoin buy.