Peter Schiff: The Trade Truce Won’t Save the Dollar

On Thursday’s episode of The Peter Schiff Show, Peter unpacks the recent stock market rally that followed news of a temporary truce in the US-China trade war. He warns that investors are misreading the situation by ignoring deeper threats to the economy, such as the ongoing global move away from the US dollar and misguided government subsidies that risk driving personal debt even higher.

Peter opens the show with a skeptical look at the so-called win for the Trump administration in its standoff with China, pointing out that the underlying threat was never properly addressed:

Okay, well, we’ve had a pretty good relief rally in the stock markets over the last several days. Ever since we got a truce in the trade war, or maybe more appropriately a surrender than a truce, although that’s not the way the Trump administration is promoting this so-called win. But when you strip off all of the jargon, that’s basically what happened. I mean, Trump diffused the bomb, but it’s a bomb that he set. And the fact that he diffused it has caused investors to enthusiastically buy stocks.

Peter sees the market’s optimism as misplaced, arguing that the economic reality is far weaker than many are willing to acknowledge. He believes that the trade tensions may have eased, but only because the US quietly stepped back from its most aggressive tariffs:

The reality is they’re expecting too much, because I think the economy is going to be a lot weaker. Yes, we’re not going to have the worst case scenario. The 145% tariffs aren’t going to stay in place, or even anything close to that on China. And I doubt the reciprocal tariffs that were unveiled on Liberation Day on the rest of the world are going to come back. I mean, it seems to me that what Trump is aiming for is about a 10% tariff on most countries, and maybe a little bit higher than that, on stuff coming in from China.

He cautions that, while the tariff news has stolen headlines, investors are ignoring the real threat: de-dollarization. Peter highlights that American policies especially sanctions and aggressive financial measures have encouraged other countries to reduce their reliance on the dollar as the world’s reserve currency:

But I think investors are missing out on the big picture here because the tariffs aren’t really the problem. I mean, they were a problem, but they’re not the problem. The real problem is the trend of de-dollarization and the dollar’s status as the world’s reserve currency is in jeopardy because we have certainly brought the dollar status to the forefront. I think in a bigger way than Biden did with the Russia sanctions. I mean, that was certainly a slap in the face, an alarm bell warning to the rest of the world, hey, you got to get out of dollars because that is your vulnerability.

Turning to the world of speculative assets, Peter notes that Bitcoin has failed to rally alongside stocks, suggesting a shift in investor appetite for risk. He uses the example of Coinbase s brief surge after its inclusion in the S&P 500 to illustrate that, even with  good news,  the broader crypto sector appears stagnant:

I mentioned on the last podcast that Bitcoin didn’t seem to be going along for the ride and that’s continued. Even though the stock market has rallied over the course of the week. Bitcoin has not. And Bitcoin right now is around 103 and change, and that’s where it’s been. It hasn’t made a new high and it’s kind of been going sideways and maybe it’s about to roll over. It got some good news in that Coinbase was added to the S&P 500 and rose about 20, 30% over the first couple of days, although it was down today quite a bit.

Peter wraps up his analysis with a warning about the economic consequences of government-subsidized debt. He singles out a new potential tax provision that encourages Americans to borrow even more for car purchases. Rather than fostering real economic growth, he argues, this policy inflates prices and increases household indebtedness, all risks that taxpayers ultimately bear:

One of the provisions of this bill, which I think is a very bad idea, and it’s an idea that Donald Trump came up with, is the 10% deductibility for you up to 10,000. You can deduct on your income tax the interest that you pay on an auto loan, as long as the car was assembled in the US, then not to be manufactured here. It’s got to be assembled here, right? A lot of the parts are imported. But you can deduct the interest on the car loan. Now, why is that? Why does the US government want to subsidize people to go out and borrow money to buy cars? That’s a bad idea. It’s bad economics. 

For more analysis of recent monetary policy – the other side of this disastrous economic equation– check out Peter’s response to last week’s FOMC meeting.