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Feb. 18, 2016 - Freedomain Radio - Stefan Molyneux
52:35
3206 The Death of Economic Recovery | Peter Schiff and Stefan Molyneux
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Hi everybody, Stephen Molyneux from Freedom Aid Radio.
Hope you're doing well.
Back with our good friend Peter Schiff, an economist, financial broker, dealer, author, frequent guest on national news, the host of the Peter Schiff Show podcast, the CEO of Euro-Pacific Capital and chairman of Schiff Gold.
Peter, as always, a great pleasure to chat.
How are you, my friend?
I am doing well.
How are you and how was your holiday weekend?
Ah, it was very nice.
I actually was...
I was going to go skiing.
Minor story.
I was going to go skiing.
Woke up in the morning, checked the weather with the windchill.
Yes, yes.
It clocked in at a balmy Mars-style minus 51 degrees with the windchill.
So I declined to go skiing and had some hot chocolate instead.
But it was very, very close to some bracing exercise for me.
Well, imagine how it would be if we didn't have all the global warming.
So...
And of course, this was President's Day weekend, right?
It used to be Washington's birthday, but no, we don't want to celebrate a great man like George Washington.
We want to celebrate people like Barack Obama, right?
We just want to lump all the presidents into one as if they're all the same.
So it makes it harder to really enjoy the holiday when you realize it's lost all of its significance.
Yeah, true, true.
Now...
You know, you're seated at the moment, which I really appreciate.
I assume at some point you may get up during our conversation and give a bit of a victory lap for some of the first faint stirrings of, and you had a great point where you compared the success of gold, which of course you've been touting as a good hedge against fiat currency for decades now, versus the stock price of Goldman Sachs.
I wonder if you can help people understand why you might be smiling a little wider than usual today.
Well, I just did that earlier today because, you know, Goldman Sachs came out last week and then again yesterday when the U.S. markets were closed to encourage their clients to short gold.
And you can think of all the potential shorts out there.
I mean, why even short gold?
I mean, if gold's at 1,200 and Goldman thinks it's going to 1,000, I mean, if a stock's at 12 and you think the downside is 10, I mean, there's really not a lot, you know, So why is Goldman picking on gold when there's probably so many good shorts out there?
Most likely it's because Goldman Sachs is either short gold itself and needs to cover or just wants to buy gold and they want to push the price down so they can get a better price.
Telling their clients to do the opposite of what they want to do.
But where I tried to rub a little salt in Goldman's wound was that if you go back to October of 2007, since then, as of today, the price of Goldman's share stock is down by better than 40%.
But during the exact same period of time, the price of gold is up.
By 50%, even with the declines of the last few years.
So it seems that if you're going to short something, it's better to short Goldman Sachs than gold.
Well, this is something that I remember from years ago when I first got into the business world.
I guess I got on some stock traders' call list.
They call you up and they're like, this stock is going to the moon.
And I'm so sure of that, I'm going to call some anonymous guy and try and sell it to him rather than just buy it myself.
And this idea that financial advisors, you know, I think if they're into sort of Austrian macroeconomics like you guys do, it's one thing.
But just guys who like, you've got to buy this stuff.
It's like, but if you were so certain of it, why would you be telling me?
Yeah, well, that's the point.
I mean, a lot of people, you know, they're not making money because of their advice.
They're just selling whatever it is their firms are employing them to sell.
And certainly with firms like Goldman Sachs, that's often the case because you don't really understand who's on the other side of your trade.
And Goldman Sachs and other Wall Street firms have so many different departments that what the retail investor is hearing may serve the purpose of some other client of Goldman's or Goldman itself.
So you really have to be very skeptical of a lot of what you hear, especially from someone on the other end of the phone who you have no idea who they are or anything about them other than the fact that they called you up.
Although those cold calls don't take place as often today as they used to with all of the do not call lists that are out there.
But of course, not everybody in this industry is bad.
Obviously, I'm operating in the same industry.
And so if you have an advisor that you can trust who's not wearing two hats simultaneously and they have some integrity, chances are they can give you some investment advice that they actually believe in.
The only question is, is what they believe in?
True, or are they confused?
Because so many people today get confused by the monetary policy, by the effects of cheap money and what that does temporarily to distort asset markets.
So there's probably a lot of advisors out there that are telling their clients to buy stocks, and they actually believe that buying stocks is the right thing to do because they don't know any better.
Yeah, and as I said, if people have, I think, like yourself and other people like you, we have Mike Maloney on as well, if they have a good understanding of the role of fiat currency, the role of gold as a hedge against that, and some of the macroeconomic stuff goes, then you're actually working with a theory, but I'm always concerned about financial advisors who are just like, well, I think this sector is doing good, and I think this stock is going to do good, and it's been proven repeatedly that, I mean, stocks are a pretty random walk.
You're better off just throwing a dart at a financial paper or whatever, but if you have a larger theory, Then I think it's more consistent and coherent and you're sort of bound by that theory rather than pushing the hot stock of the day.
Certainly, too.
I may have all the gold that I feel that I need.
Going out and advising other people to buy it isn't going to affect the market at all.
But a company the size of Goldman Sachs, certainly they have the clout.
If there's a particular stock that they think is very undervalued, just by talking about it, they're going to make the price go up.
So why not just buy it?
They have access to some Endless amount of credit.
If they really think a stock is really inexpensive, they don't have to find people to buy it.
They have plenty of resources to buy it themselves.
So there's a good chance that if they are touting a stock, it's because they want to sell it and what they need is another buyer.
So what are some of the things, Peter, that you got out of Janet Yellen's recent two-day love fest in Congress, the art of misdirection while seated?
Because I think you and other people coming from where you come from from financial advice standpoint have said that there's really been a recession that kicked in last quarter of last year, sometime around that.
And Janet Yellen seems to be putting a pretty sunny face on some of this data.
Yeah, well, you know, the Fed doesn't want to acknowledge how weak the economy is because, A, then they have to acknowledge that their cure didn't work, that the economy is still sick, right?
They want to pretend that everything is healthy and they can't keep up that pretense if they acknowledge that we're back in recession.
And they also want to validate their decision to raise interest rates in December.
Because if it turns out we were in a Recession when they did that, then clearly, based on the way the Fed would evaluate its own performance, it's made a mistake.
So the last thing the Fed wants to do is acknowledge that.
So they want to continue to pretend that everything is fine.
The problem, of course, is the markets don't like that because I think some people can sense that it's not fine.
If you look at all the economic reports, look, we got two more economic reports today.
They were both lousy.
They were both below consensus.
And this has been par for the course all of the fourth quarter.
One data point after another was consistent with recession, not an economy that's growing, yet the Fed remained blind to all that data and hiked rates anyway, simply pointing at a really meaningless unemployment rate of 4.9%, Which means nothing when you look beneath the surface and find out the only reason it's so low is one because so many people have left the workforce and are therefore not counted.
And so many other people now have part time jobs, many of them multiple part time jobs.
So they don't really have a decent job.
They can't make ends meet, but they have some type of work because this economy is in a major transition.
Thanks in large part to President Obama away from full-time employment to part-time employment and by definition there's going to be more part-time jobs than full-time jobs because when you're working part-time you're not working as many hours and so your boss needs to hire more people because really we're sharing the jobs is what we've got is this job sharing economy and we count all those shared jobs as if they were a full job.
And so all Janet Yellen is doing is looking at that headline number and the fact that jobs are being created without any regard to whether they're full or part-time.
And she raised rates anyway.
So she doesn't want to come and admit that she made that mistake.
And so she has to pretend that everything is OK, but that the Fed continues to monitor the economy and they remain data dependent.
You know, in case it turns out that the economy is weaker than they thought and the Fed has to come to its aid.
With some more stimulus.
Well, and I think as some people have pointed out, the only bump, really the only good news that's come upon the market recently is a minor bump in salary, which I think has a lot to do with raising minimum wages.
And I think as people fall more and more into the part-time wagon, which is, of course, generally lower wage positions, there is going to be a push to increase the minimum wage to cover up the job destructiveness that's coming about to a large degree, I would say, under Obamacare, whether it's 30 hours or less, you're not subject to it.
Yeah, you know, the biggest irony is you hear people who are proponents of raising the minimum wage and they say, well, how do you expect our college graduates to pay off their student loans if we don't raise the minimum wage?
Which is so ridiculous on so many levels.
I mean, why are we sending kids to college and spending a fortune, you know, getting them, you know, liberal arts degrees if we then expect them to work at McDonald's flipping hamburgers?
and then demand that they get overpaid for doing it.
Because, you know, it doesn't matter if you have a degree, if you're doing medial work that somebody could do dropping out of high school, you shouldn't be paid extra just because you were dumb enough to go into debt thanks to, you know, the government indoctrination.
Well, of course, it's the general idea that the government says, well, people who earn degrees tend to make more monies.
So if we get more people to earn degrees, they'll make more money, which, of course, is ignoring every basic fact of economics.
It's sort of like saying, well, tall people are on basketball teams, so we'll take a short guy and put him on a basketball team and make him taller.
Yes.
It's bad logic, right?
They don't look at it.
The reason that college grads earn more money in most cases is because the smarter, more ambitious, harder-working kids are the ones that choose to go to college.
And so they would make more money anyway.
And then even if they skip college, they never do a study.
I'd love to see a study where you take people from similar economic backgrounds with similar...
You know, GPAs and similar, you know, SAT scores and then study the ones that chose to go to college versus the ones that chose to skip college and just go directly into the workforce and then see whether or not the college degree ended up making them more money or if it ended up costing them money because they wasted years that they could have been in the labor market acquiring real skills and instead, you know, they wasted those years running up a bunch of debt, you know, just getting drunk and going to frat parties.
Well, a friend of mine who teaches economics lost his temper once at his class because people weren't showing up and they weren't even coming.
He had free office hours, you know, free, free, you know, come, we'll talk economics and it's all free.
And people weren't showing up and they weren't doing the work and he basically just lost it.
He went to the whiteboard and he drew out everything that it was costing them to be there.
And it was like $250,000, $300,000 in like direct fees and opportunity costs for not being in the marketplace.
He broke it down as like, I can't remember how much it was per class.
It was quite a lot of money.
This is what you're paying and you're not even showing up.
Of course, he got the glassy-eyed stares.
A few people did change their behavior but for the most part, his office door remained ajar for the foreseeable future because people don't get what it's costing them to be in college.
It's not just high school with a visa.
It's something quite different.
It might have been the same when you went to college, but, you know, I went to college, you know, they had these note services.
And what would happen is, you know, instead of going to lecture, you would just buy the lecture notes.
And they had companies where they would, you know, send a guy in to the lecture and he would take notes and then they would make copies and you would, you know, you would buy, you know, a copy of the notes so you could skip class.
And, you know, I'd skip a lot of classes and I would just skim through the notes and I would just cram for my midterms and my finals.
And that's what a lot of people did.
I mean, some of these classes were empty because nobody actually was there.
They didn't really care because all we wanted was to get the degree.
The idea is you're in college for that piece of paper.
What you learn is immaterial.
You just have to graduate with a degree because that opens up all these doors that otherwise will remain locked.
And so nobody really cares if they actually retain anything.
They just have to regurgitate enough of the information that they cram into their minds the day before the midterm or the day before the final so they can get a decent grade and graduate.
Right, right.
Now, when you were watching some of the Janet Yellen testimony to, or not testimony, but interrogation, I guess, by Congress, congressional representatives, you pointed out, and I'd like to spend a little bit of time on this, the degree to which the black congressmen and black congresswomen the degree to which the black congressmen and black congresswomen were grilling Janet Yellen on what she, with the giant club of the Fed, was doing to fine point increase the employment of blacks, and in particular black young.
Men.
A kind of a jaw-dropping thing, because, I mean, it's not a laser.
It's a giant, you know, massive set of levers.
You can't do any fine-tuning of the economy with the Fed, and how they expect Janet Yellen to focus on young black male unemployment seems beyond me.
Well, first of all, even if you accept the premise, and I don't, that the Federal Reserve creates jobs by printing money or lowering interest rates, even if you accept for a moment that they do, how could they possibly target it to an ethnic group, or to a sex, or to an age group?
None of that can be taken into account.
And these black congressmen and women really want the Fed to try to make monetary policy decisions based on how the policy affects a subset of the population, which is impossible to do.
But what really infuriates me is that why do black congressmen or women feel that every question they ask has to be about blacks?
I mean, don't they have any white people in their districts?
I mean, they represent everybody.
I mean, if you're a black congressman, you can only talk about blacks.
I mean, can you imagine if a white congressman was saying, well, how is this policy going to affect white people?
And I want it to affect white people positively at the expense of other groups.
I mean, you'd be like run out of there at the pitchfork.
Blacks, they want to make a big deal about racism.
But why do they want to act like this?
If you're a black congressman, why don't you see yourself as a congressman and not a black congressman?
White congressmen, black congressmen, you're all there to supposedly do good, to represent your district, regardless of the race, of the composition of the people.
Don't talk about what the policies are going to do for blacks if you're black.
Just talk just like a white congressman.
It should be that if I close my eyes and I listen to these questions, I shouldn't be able to tell which of the congressmen are black and which of them are white based on their questions.
But of course I can't.
Because the minute you hear a question, you know exactly the race of the congressman.
And that's not the way it should be.
If you're going to talk about, hey, let's not have any discrimination, let's treat everybody equal, well then it's got to start at the top.
The congressmen have to basically abide by what they're advocating.
Well, but I would argue that they're probably just playing to the economic ignorance of their black constituents, which is not to say that blacks would be any more economically ignorant than the average person, who probably view the Fed as this giant magic machine that produces wealth and we just want to get some of whatever it's spitting out.
And, you know, the ultimate irony, and one of the congressmen was really upset because there were no black heads of the member banks at the Fed.
And he believed that the reason that the Fed wasn't working for the black community is because the black community wasn't a part of the Fed.
And that if there are only more blacks at the Fed, that the Fed would make policy that benefited blacks, which is completely ridiculous.
Again, that's the racism that only a black banker can help out blacks.
Black people.
And somehow a black banker would behave differently because of his blackness than a white banker.
But you know, the last time I checked, the president was black.
And so if these black congressmen are going to be mad at somebody, how about being mad at Barack Obama?
Because theoretically, he is black, so why aren't his policies helping blacks?
And the reason is because they're the bad policies.
And the most ironic part of it all is the reason that there's so much black unemployment is because these black congressmen and women, and a bunch of white congressmen and women too, Are passing laws that make it more expensive to hire young men, particularly young black men.
We have a minimum wage that should be abolished.
We have all sorts of things.
And all these congressmen, I'm sure these very congressmen, who are scolding Janet Yellen for not doing enough to help young blacks who are unemployed, yet they're leading the charge to raise the minimum wage to $15 an hour.
That's the reason that these young men are unemployed.
It's not because of Janet Yellen.
It's because of Congress.
And the only way Janet Yellen can theoretically help these young black men get around the minimum wage is to create so much inflation that the value of the minimum wage goes down, and so it's no longer as big an obstacle to employment.
But that's no way to run an economy.
Well, and it's interesting because you said black bankers should act the same as white bankers.
Actually, what's interesting is the studies that I've read, Peter, show that black bankers give loans to black families at a lower rate than white bankers.
And of course, this goes way back to the 90s when there was this supposed argument that banks were discriminatory in their lending, particularly to minorities.
And it turned out the methodology of the study was flawed and they didn't take into account basic things like income and so on.
But this created this giant panic and this had the government strive to get banks to lend more to underqualified or the liar's loans unqualified minorities who could put down whatever they wanted on their application with no verification.
And there's a strong argument as to this is one of the things that drove the housing crisis was lending to underqualified people boosting up the demand for housing.
And of course, the idea that these racist bankers are just refusing to make loans to otherwise qualified black applicants simply because they're black is a bunch of nonsense.
Because this is a free market.
If there were a bunch of creditworthy blacks that were being denied loans by a racist bank, another bank would compete for that business.
I mean, it would be ripe for the taking.
I mean, even if there is a racist banker, Most likely, his greed for money trumps his racism.
And so even if you think that there's a black applicant, and even if you don't like blacks for whatever reason, but you think they can repay the loan, you're going to make it.
And it's not like you're going to lend money to a white person.
I mean, just because a banker happens to be white, if there's another applicant who's also white, but it doesn't look like that applicant is creditworthy, the guy's not going to say, yeah, but because he's white, I'm going to make the loan anyway, because that banker would go out of business.
I mean, you have to make decisions regardless of the race or the gender or the sexual orientation or whatever you want.
People just look at the numbers.
You know, in many cases, they may not even know the race.
I mean, certainly they don't know the sexual orientation, whatever it is, but they're just looking at the numbers.
And if it turns out that a disproportionate number of blacks are a lower credit quality and at greater risk of default, Then those loans need to be denied for the benefit of the bank and for the benefit of the borrower.
I mean, why would you want to encourage a borrower to get in over his head, to borrow money that he can't afford to repay?
The best thing a bank can do for an applicant that can't afford the loan is to turn it down.
And say, you know what?
Come back when you're in better fiscal shape, right?
Learn how to manage your budget, save some money, get your spending under control, come back here when you're in a better position.
Because if I loan you money now, I'm not doing a service to anybody.
I'm doing a disservice to my depositors because I'm putting their money at risk.
I'm doing a disservice to the taxpayer, ultimately who's behind the bank with the FDIC, and I'm doing a disservice to you, uh, And to our shareholders, everybody loses when the government forces banks to make loans based on anything other than the credit quality of the borrower and the likelihood that that borrower is going to be able to repay that loan.
Yeah.
Banking is a very margin business.
If you're going to make three points on a loan, if you have a loan that craters, that means you have to have 30 others that work almost perfectly just to break even.
It's a very dangerous business in the banking world, giving out loans to underqualified people.
I think we can see all of those distorted market forces and misallocation of precious capital through the government hurting people to lend to underqualified people.
That's a complete disaster.
I mean, I don't care how racist you are as a banker.
Your favorite color is always going to end up being green.
You know, of course, during the housing bubble, right, when home prices were going up, the fact that so many blacks were being denied loans was seen as a problem because it was preventing them to strike it rich from being a homeowner.
Because all you needed during the housing bubble was to have a house and then you were going to be rich because your house was just going to magically appreciate every year.
And so blacks were being turned down.
They wanted in on the action.
They were being kept out of the casino.
Now, as it turns out, you know, the ones that were kept out probably did better than the ones that were allowed in.
But there was a lot of pressure at the time to let everybody, you know, take place, take part in the mania.
You know, but of course, now once the bubble burst, it's not as, you know, as important because now, you know, you've got homeownership rate at a 50 year low.
And, you know, there are plenty of white people now that are renting houses that were suckered into buying them during the last housing bubble.
Well, and I think it's also in America because there's this peculiar situation.
It's not just peculiar to America, but of course where government schools are funded by property taxes, so the poorer neighborhoods have much worse schools.
And so for the minorities or anyone coming from those poor neighborhoods, one of the reasons they do want to pay more for a house than they probably should is just to try and claw themselves into a better school district.
And that can be solved with things like vouchers and so on, but unions stand a little in the way between that.
The government also gives you a tax deduction on your mortgage interest and your property taxes.
So they create an incentive for people to want to buy a home rather than to rent, even if renting would be an economically better alternative.
But sure, you know, the government takes all this money from people forcibly to use it for the schools.
I mean, 80 to 90 percent of your property taxes go to the schools, and the schools are lousy.
If we didn't have all these government schools, if the homeowners got to keep the money that's otherwise paid in taxes, they can use that money to shop around for a good school.
Because now you'd have competition.
Now you'd have multiple schools bidding for your business.
And they'd be bidding for it, promising the best possible education at the lowest possible cost.
And the focus would all be on the kids.
Instead, in government schools, no one cares about the kids.
It's all about how to make the most money for the government-run school system, for the bureaucrats, for the teachers' unions, for the administrators that run the program, because the customers are forced.
They have no choice because the money is taken from them and they're forced into these schools.
And the only way they can go to a private school is if they can afford both.
If they can afford to overpay for a government school and then still have enough money left over not to even go to that government school and to pay for a private school on top of it.
A while back ago, I did a video on China's economic woes and challenges and, you know, the rumblings from over the eastern seas seem to be getting a bit louder and higher.
I'm not seeing it as much in the media.
Where do you think China is at the moment and where do you think it's heading?
Well, look, I think China has a prosperous future, a bright future.
It's obviously a rocky road.
But look, they made a decision to move away from capitalism and to embrace free market principles.
They recognized, unlike Bernie Sanders, right, that socialism does not work.
And so they moved away from it.
And the people in China are much prosperous as a result of the fact that they're no longer feeling the burn, right?
They've got a lot more freedom than they used to have, and now they have a lot more prosperity.
But obviously they've got...
I mean, there's still a big state there.
They're still involved in things that they shouldn't be.
But I believe the United States government is more involved in things that they shouldn't be than the Chinese government.
There, it's just more overt.
But in the U.S., it happens.
It happens more behind the scenes.
But I think, to a large degree, the average American businessman...
Feels the weight and the burden of the U.S. government far more than the typical businessman in China does.
I think there are fewer barriers to success, fewer obstacles put in the path of potential entrepreneurs in communist China than there is in supposedly free market America.
I think you're going to see a continued growth in their standard of living.
I think the big transition is going to be when they're no longer pegging their currency to the dollar.
I think this has already started.
It isn't totally freed up yet.
And right now you have a lot of speculators betting that there's going to be a big devaluation of the Chinese currency against the dollar.
I actually think it's the opposite.
And it's going to be a significant revaluation, upward appreciation of the Chinese currency that's ultimately going to deliver a huge increase in living standards to the Chinese population.
And of course, at the same time, deliver really a death blow to the American consumer who has really been getting a free ride on the Chinese gravy train.
And even further afield, I guess, Japan seems to me one of these really instructive It's really instructive how bad a central bank can mess up an economy.
What is going on, like a 25-year recession?
I mean, it's almost a generation-long recession now where they've tried to prop up these zombie corporations, infuse the economy with magic money, and the thing is just staggering along in a truly disastrous, demographically disastrous.
There's almost no young people left who want to have kids, but people don't seem to see it.
You know, the government created a solution for a non-existent problem, and as a result, the non-existent problem has become a very real problem, and it's getting worse and worse because of what the government is doing.
Look, yes, Japan had a bubble in the 1980s in the stock market and in their real estate market.
The source of that bubble was the cheap monetary policy at the time that was being used to prop up the U.S. dollar, to prevent the dollar from falling too rapidly against the yen.
The Japanese pursued a very weak monetary policy.
Despite that weak monetary policy, the yen appreciated anyway.
It just would have gone up even more.
But all that cheap money went into the stock market, went into the real estate market.
I mean, you know the story.
Central banks have been doing this over and over again.
And then when that bubble burst, instead of just letting the market fix the problem, They started to do their bailouts and their stimulus.
And here we are, how many generations later or decades later, and they're still trying to put out the same fire with more gasoline.
And it's not going out.
Meanwhile, the Japanese had a prosperous economy.
They had tremendous savings.
They were a huge net creditor.
Big trade surpluses.
Yes, if the population was aging, that would have been fine.
They had plenty of savings.
They weren't dependent on a Ponzi scheme like the United States.
But what happened is they went after this holy grail of consumption and debt and borrowing and inflation and somehow thinking that their economy was a failure if people weren't running up debt and going out and spending money.
And they decided to try to fight this supposed boogeyman of deflation.
Which they should have welcomed with open arms in Japan, just like any place else, because that is the mark of a successful economy.
The fact that it can deliver valuable goods and services for less.
That is the goal of economics.
How to make more things available at lower prices.
That is how standards really go up.
But the idiots over at the Bank of Japan decided to fight that.
But, you know, instead of letting the market fix the problems that the Bank of Japan created, the Bank of Japan has now created much bigger problems that now ultimately have to be dealt with.
And, of course, they're doing the same thing in Europe.
We're doing the same thing over here.
I don't mean to yank you all over the globe, but since we are going international, I keep getting requests for more information about Brazil, and I keep saying, no, no, no, I'll just wait and talk to Peter, and he will explain it all to us.
Brazil's economy seems to be in the news quite a bit.
What do you think is happening over there?
Well, I think a lot of markets like Brazil.
See, Brazil is very much a resource-based economy.
I mean, most of their big industries are resources, whether it's industrial materials, mining, right, agriculture.
They export a lot of raw materials and with the strong dollar, which has been based on the widespread belief that the US economy is growing and it has a real recovery and that the Fed is going to be raising rates, all of that has strengthened the dollar, which has depressed commodity prices, which has hurt the balance of trade for countries like Brazil.
In addition, a lot of Brazilian companies borrow in US dollars.
Because that's the international reserve currency.
Nobody wants to lend in the real.
They loan in dollars.
And so now these dollar-denomited debts are more a burden to repay now that the real has lost value.
So now the cost of Surrey's those debts go down.
In the meantime, the weak real means that even though commodity prices might be falling for Americans, they could be rising for Brazilians because their paychecks are in real.
And if the commodities that they're buying are priced in dollars, so the economy is under pressure, companies are under pressure because of the artificial value of the dollar.
What I think is going to happen to relieve that pressure is that the dollar is going to fall.
Once people figure out that the U.S. economy is in much worse shape than they believed, and that rather than following through with rate hikes, we're going to get more rate cuts, we may even go to zero, I mean negative, right, lower than zero.
We're going to get more quantitative easing.
Then I think it's a dollar that's going to tank.
I think commodities are going to rise.
You're going to reverse this decline, not just in oil, but in all these commodities that Brazil produces and exports.
And I think that their economy is going to benefit as well as a lot of other economies that are right now suffering from the high value of the dollar.
Do you think some of the death spiral that I think is going on in some of the municipal bonds and in particular in Puerto Rico, as you've pointed out, the politicians buy votes with money that they borrow, but when the borrowing begins to dry up, they turn to the Fed to create money so they can keep buying these votes.
Where do you think that's going to take these kinds of markets?
Yeah, well, Puerto Rico is a perfect example of what not to do, but that's what we do anyway.
And, you know, why was it so easy for the Puerto Rican government to borrow money?
Well, because the U.S. government, through the tax code, made Puerto Rican debt tax-free in all 50 states.
So all these municipal bond funds wanted to buy Puerto Rican bonds.
They couldn't get enough of them.
In the meantime, there was a lot of demand for higher yielding debt because the Fed had interest rates at zero.
So people were looking for yield anywhere they could get it.
They didn't care about the risk involved in getting the yield.
It was just the short-term yield that they wanted.
So this was perfect because there was massive demand for Puerto Rican government bonds, which the Puerto Rican government was eager to create because they could use that borrowed money to buy votes.
And they could promise all sorts of benefits to Puerto Rican voters, people who worked specifically for the Puerto Rican government, which is the largest employer on the island, one of the main employers there.
And so they can give everybody raises and Christmas bonuses and they can borrow the money to do it.
And then, of course, your employees who you just gave a raise to, well, they're going to vote for you when it comes time to vote in the voting booth.
So this was an insidious process or a sensuous process that continued until finally it became apparent that the money that was borrowed was so enormous that there was no way that Puerto Rico could pay it back.
Now, we are already in that situation in the United States, but nobody cares that we can't pay it back because they believe the Fed can print the money.
You see, the Fed doesn't specifically print money for Puerto Rico.
But they do for the U.S. Treasury.
So even though America is even in greater debt than Puerto Rico, Puerto Rico's creditors are nervous and America's creditors are still oblivious.
But eventually, they're going to figure this out and they're going to demand a higher rate of interest on Treasuries, just like they demanded a higher rate of interest on the GOs of Puerto Rico.
And of course, when we get to that predicament, we're just as broke.
And either we print money and everybody gets wiped out to massive inflation, or we default.
But those are the only two choices.
Now, of course, I'm calling in from Canada.
I actually remember years ago being in one of the oil-rich cities and seeing a bumper sticker which said basically, Dear Lord, please give me one more oil boom and I promise not to piss it away like last time.
And now, of course, with oil plunging down below $30 a barrel, incomprehensible, at least for most of us.
I sort of grew up under the Cotter years and all that.
What the what?
What is going on with oil?
Yeah.
Well, again, it's the mirror image of the dollar.
And, you know, I didn't expect oil prices to get this low because I actually expected the Fed to abandon its tightening bias, you know, years ago.
I didn't even think they would finish the taper.
I thought the Fed would be able to acknowledge the underlying weakness in the economy.
But instead, they ignored the weakening economy and everybody believed them.
So the whole world ignored it because the Fed ignored it.
And so because the Fed continued to tighten and because the dollar continued to rise on the anticipation of that, The commodity markets were crushed.
But look, go back to the 1990s.
The same thing happened then.
Oil prices were below $20 a barrel.
They got into the teens.
People were talking $5 in oil in 1999-2000.
And then in 2008, it was $150 a barrel.
That's because we had a dollar bubble.
You know, back in the 1990s.
Why did we have a dollar bubble?
Because people believed a phony dot-com bubble was a new era, right?
And that this was some, you know, it was this time that was different, and they believed that we were going to have surpluses as far as the eye can see.
Remember, we had these accounting surpluses under Clinton.
Well, they were looking out into the future and saying, this is going to go on forever.
We're going to pay off the national debt.
They were talking about Hey, how's the world gonna handle no treasury debt?
Because we're gonna pay it all off with all these surpluses, right?
This was the fantasy that people were operating under, this delusion.
And so the dollar was strong, and commodities got crushed.
And not just oil, but all commodities.
Agriculture commodities, industrial metals, everything was crushed in the 1990s, and it all reversed when the dollar bubble popped.
And I think the same thing's gonna happen this time.
I think this is a bigger dollar bubble than the one we had before.
The question is, When is the Fed going to acknowledge the problem?
I mean they're still talking about a recovery as if it's still there.
They're still talking about rate hikes that they really have no ability to deliver unless they're gonna put us through another financial crisis that's worse than 2008.
So when are they gonna fess up?
I mean the question is Does the Fed know, right, that they can't raise rates anymore, that we're in recession, and they're just lying to us?
Or are they actually dumb enough to believe that this is a real recovery?
And you don't know.
Because even if the Fed believed we were in a recession, the last thing they would do is tell us.
Because the Fed is very concerned about perception and about psychology and expectations.
And the Fed doesn't want to say the economy is weak because they're afraid that by saying that, it will be even weaker.
Because if the Fed comes out and says, oh, we're in a recession or we're heading to a recession, people will react to that.
Businesses might say, well, I better not open up that new plant or I better not hire those new workers because we're about to have a recession.
And consumers might say, hey, I better not buy that new car because, hey, I might lose my job.
I better build up my savings.
So Janet Yellen doesn't want people preparing for a recession because she believes by preparing for it, they will create it.
So what Janet Yellen wants to do is get everybody to believe that there's nothing to worry about.
Because everything is great.
But that actually makes it worse.
Because a recession would be shallower if people were prepared for it.
It's when you're caught completely off guard that it makes it so bad.
A businessman, oh, I just expanded.
Oh, I shouldn't have.
That was a mistake.
Now I'm going to lose even more money.
Or if you go out and buy a car just before you lose your job, wouldn't it have been better if you just didn't buy a new car?
So by lying to the public, the Fed actually makes the recession that they're trying to avoid by lying to the public even worse.
Well, but I think it's the government called five more minutes.
The idea that an economy is now being held aloft by the leprechaun heavy breathing of wishful thinking is just completely bizarre to me.
I mean, don't we have anything real left in our society anymore that we've just got to keep saying that something's great in the massive hope that we can get people to believe it for five more minutes?
No, that's why Sanders and Trump are getting all the votes.
I mean, look, it's hard to tell the truth and get support because the truth is not very pleasant to a lot of people.
They don't want to know the truth.
And so they want to pretend that we can have a great economy without paying the price.
It's like somebody wants to believe that they can kick a drug habit without rehab, without having any problems.
Or worse yet, they want to believe they can kick a drug habit by taking even more drugs.
Well, and, you know, if you're driving the wrong direction, you kind of want that uneasy feeling.
You know, I'm pretty sure we should have hit the town by now.
Let's check the map or whatever.
You want that uneasy feeling and you want to embrace it because the longer you go in the wrong direction, the...
The harder it's going to be to get back to where you were.
Okay, so I think we're on the same page as far as that goes.
Now, we talked about oil, but volatility in the price as well seems to be, you know, crude oil volatility index at its highest and wildest level in about seven years.
Do you think people think it's going to change the direction?
And where's this volatility perception coming from?
Well, I think there is a lot of speculation in the market, and probably that's where the volatility does come from.
People are trading it, and so the volatility increases as a result of so much money coming in and out.
And of course, there's all kinds of speculation, all kinds of rumors.
Is OPEC going to cut production?
Is OPEC going to make a deal with...
With Russia, what's going to happen?
What's going to happen with the U.S. rig count?
Are we going to slow down production?
There's all kinds of noise that comes out.
There's news.
There's rumors.
And the markets are swinging all over the place.
But I do believe that we are trying to find a bottom somewhere in here.
But I think the bottom is going to be made as a function of the dollar.
Because everybody wants to pretend that this is about excess supply.
I don't think so.
And that is the main reason why the price is down, not because of the glut that's been brought about by fracking.
I mean, that might be responsible for $10 or $20 of the decline, but not the magnitude of the decline we've experienced, and nor does it explain why all commodities are tanking.
I mean, we're not fracking for soybeans or copper, but those commodities have crashed too.
It's not just...
So it's across the board and it's about demand.
It's not about supply.
And that is going to change in a big way, just like it changed in 2001 when the dollar bubble popped and crude oil went on that huge run from under $20 a barrel to $150 a barrel.
When I look at the movement, and it's largely under the carpet movement of gold around the world.
I was just noticing in December of last year, China imported 217 tons of gold.
They had a very big overcoat and made it through customs.
Do you think that people are recalling gold because they are aware?
You can never read people's minds.
I don't know the degree to which Janet Yellen is aware and lying or not aware and pretending or just thinks she knows what's going on.
But it seems when you sort of follow the movement of gold, it seems like people are feeling, governments at least, are feeling a little bit nervous and are kind of calling a lot of their gold back home.
Well, yeah, I would be nervous.
I mean, especially if my gold was stored at the New York Fed and I was worried that it wasn't there anymore, that maybe they had loaned it out.
And if I needed it, they weren't going to be able to return it for me.
Remember what happened?
Germany asked to get some gold back a couple of years ago and they didn't get it.
And they eventually stopped asking.
But I tell you, you know, I would be very nervous.
So that's why we tell our clients, you know, we, you know, at Schiff Gold, Take physical delivery of your gold.
Own it.
You know, have it yourself.
Don't rely on somebody else.
Now, I do believe in having some gold stored offshore.
That's why, you know, we partner up with people like the Perth Mint in Australia to have some metal stored there.
But you've got to be very careful about who your counterparty is and who's storing your gold.
And of course, I tell people, don't put your gold in a safety deposit box in a bank, because if the government ever tries to confiscate it or outlaw the ownership, that's the first place they're going to look.
I mean, if you have any gold in a safety deposit box, kiss it goodbye.
Because your bank's, you know, there's going to be a government agent in every vault.
And you open up your safety deposit box, if there's any gold in there, they're going to take your gold and they're going to send you right to jail.
Yeah.
All right.
Now, in the truly bizarro world of 2016, we now have to talk and turn our attention to negative interest rates, which is so far from anything that I grew up with.
I remember in the 80s, interest rates were clocking in at truly visa-style rates at 18%, 20%, 22%.
Now we're thinking about the banks are thinking of paying people to borrow.
It's like paying someone to go on a dinner date and thinking you're a great dater.
I mean, Do you think this is going to happen?
Is this incipient?
I know some of the European governments are working with it, and it's not working very well, as you can imagine, but negative interest rates, do you think they're going to land in North America?
Yeah, well, you know, there's a good chance of it, right?
I mean, but, you know, you're talking about you're going from the sublime to the ridiculous, right?
I mean, this is the ultimate in the extreme, right?
Government pushes rates to zero, which is already an absurdity on its, you know, on its own.
And then they want to go beyond absurdity, right, into a whole new dimension, right, of negative rates, right?
It's like going to ludicrous speed, you know, from ridiculous speed, right?
Because here's the idea behind interest rates, right?
Because interest rates are supposed to determine time preferences.
They're supposed to reflect the desire to have something today versus into the future, right?
Everybody wants, at least if it's a good thing, right?
If it's a bad thing, we don't want it today.
We want it in the future.
But if it's something we want, we want a new cell phone, we want a new computer, we want a new car, we want to take a vacation, we all prefer having it today rather than in a year or in five years or in ten years.
I mean, one reason is we may not be alive.
You know, so we want to enjoy it right now, not in the future.
And so interest rates basically, you know, are determined by how much you want it now, right?
If I said, hey, you can have a brand new car today or you can wait and I'll give you $1,000 in a year and then you can buy your new car and you'll have this extra $1,000, right?
That's a rate of interest because instead of taking your money and buying the car right now, you can earn some interest on it and buy the car in the future and you'll have this extra money.
Some people would say, nah, I don't want the extra $1,000.
I want that new car right now.
It looks so nice.
I can't wait to drive it, right?
But maybe, all right, well, what about $5,000?
Would you wait for $5,000?
Well, yeah, maybe then.
Maybe I'll drive my old car because I could use $5,000.
That's the idea of trying to determine people's time preferences.
Well, what negative interest rates is basically saying is, what would you rather have?
A car today plus $1,000 or a car in a year without the $1,000?
I mean, it's obviously.
I mean, you want it now anyway.
So now you're going to get it and you're going to get extra cash.
You know, who's going to choose?
Yes, I'll have it for a year and I'll pay $1,000 not to get it right now.
Nobody is going to do that.
You're turning economics on its face.
And see, the important thing about interest rates is it determines so much in a free market.
The interest rate is sending out signals to producers, to consumers, to businessmen, to investors, and capital investors.
Needs to be allocated around a specific rate.
Decisions are made based on a rate.
When the government interferes and they take the rate and make it artificially low, they send out all these bad signals that cause the economy to do all sorts of things that are wrong.
We make all sorts of mistakes and the mistakes aren't corrected until rates go up and we have a recession.
And that's the cleansing part.
But if we make all kinds of mistakes with interest rates being low, Imagine the enormity of the mistakes that would be made if they were actually negative.
I mean, all the dumb things that we did when rates were 1% under Greenspan, and the even dumber things that we did when they got to zero under Bernanke, how much dumber would they be?
How much bigger would the mistakes be if the rates were negative?
I mean, I don't even want to find out, right?
But the consequences are going to be enormous.
Interest rates need to be determined by the free market.
Not by a bunch of bureaucrats.
I mean, maybe Bernie Sanders doesn't know this, right?
But everybody else is supposed to.
That socialism doesn't work.
That central government planning doesn't work.
It didn't work in the Soviet Union.
It didn't work in Cuba.
It didn't work in North Korea.
It didn't work in East Germany.
It's not going to work in America, right?
And it's not working in the central banks of Europe or Japan either.
We need free markets because the price of money is too important to get it wrong.
And it's too important to let the governments pick it.
We need to let the market discover it.
Okay, so let's leave my listeners – I'm sure your listeners know, but we got like 100,000 new subscribers the last couple of months.
So let's leave my listeners with your pitch as to why gold?
Ever since people don't put it in their teeth as much anymore and young people aren't getting married and buying them for the rings and so on, gold seems like, I don't know, like you're asking people to buy a medieval falcon for hunting rabbits or something.
Why would people want to be interested in gold as part of a saving strategy?
Well, because gold is real money.
I mean, first of all, governments can't create gold out of thin air.
Gold has to be mined, and it's very expensive.
And before you can mine it, you have to find it.
And, you know, it's not easy finding gold, right?
Just, you know, just try, right?
But paper money, the government can create as much of it as they want.
They can put as many zeros as they want on money.
And so when you're saving in dollars or euros, you know, now they're talking about eliminating the $100 bill.
The Europeans want to eliminate the 500 euro note.
At least the Swiss said that they're not going to eliminate the 1,000 franc note.
But, you know, they want to make it harder for you to actually have any privacy and to keep, you know, keep money, you know, in your own safe or, you know, keep it in a way where it's private.
But they want to make it harder and they want to keep creating inflation.
The government now is saying Janet Yellen has redefined the Federal Reserve's mission.
It used to be price stability.
Now, according to Janet Yellen, her mission is to create 2% inflation every year.
Her mission is to fight price stability.
Well, if the government is telling you that they're going to make sure that paper money loses at least 2% of its value every year and you don't even get any interest for putting that depreciating currency into the bank and they may even charge you a negative rate of interest, why own it?
Gold is real money.
So this is a way to protect yourself from government-created theft, i.e.
inflation, from the potential of negative interest rates.
So everybody around the world should own gold.
But I want to mention something, too, about YouTube.
Because when it comes to YouTube, you are the 1%.
And I am the 99%.
You have way too many subscribers.
I mentioned this before.
Yeah.
See, if Bernie Sanders would only promise, he could get my vote if he promised to take some of those subscribers away from you and give them to me.
Because I don't have as many.
And obviously, I work just as hard.
I have a YouTube channel, too.
But you're hogging all the subscribers.
And so we need to tax on you.
We need to redistribute some of your YouTube subscribers over to my channel at Schiff Report.
And if Bernie Sanders can get on that, if that can be one of his talking points, he can get my vote.
Well, and I think that's a very fair proposal.
I would only put the footnote in that they have to live at your house.
That would be...
Your subscribers don't live at your house.
All right.
Well, listen, so we can get you a shift gold.
Is that right?
Shiftgold.com?
You can get me at shiftgold.com as my gold company.
You can get me at europac.com is my brokerage firm where I help people invest internationally in countries like Switzerland and Singapore and New Zealand and places that I think are in much better shape than the United States.
And there's good quality assets that you can buy.
And of course, you can subscribe to my YouTube channel at Shift Report.
You can listen to my podcast at Shiftradio.com.
There's all sorts of ways that you can find me on the internet.
Yeah, and listen, I mean, you really can't do much more profitable than throwing a Shift podcast in your car, on your iPhone, listening to it.
Jaw-droppingly great financial analysis.
I mean, I'm fairly well-versed in this stuff, but I learn at least 12 new things every time I listen to one of your shows.
So I really want to recommend people go out and consume what you have to offer.
Thanks, of course, as always, Peter.
I hope that you have a great rest of the week, and I'm sure we'll talk again soon.
Okay, thanks for having me on.
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