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May 22, 2018 - Freedomain Radio - Stefan Molyneux
52:22
4099 The Next Financial Crisis | Peter Schiff and Stefan Molyneux
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Hi everybody, Stefan Molyneux back with a good friend Peter Schiff.
He is an economist, a financial broker and dealer, an author, frequent guest on national news, the host of the Peter Schiff Show podcast and the president and CEO of Euro Pacific Capital.
You can see that little logo on his left shoulder like a parrot on a pirate.
And he's the chairman of Schiff Gold.
You can check him out at Schiff, that's S-C-H-I-F-F-gold.com.
Schiff Radio is at SchiffRadio.com and EuroPAC, that's E-U-R-O-P-A-C dot com for Europe Pacific Capital.
Peter, thanks so much for taking the time today.
Well, thanks for having me on.
And let me just correct one thing in your bio because it's a little old.
I'm no longer a frequent guest on any kind of mainstream media outlets.
You know, I used to be on CNN and Fox News and CNBC and Bloomberg and Fox Business and MSNBC. I was on every week for years, but I don't know.
Over the last couple of years, no one will let me on.
So I think I've been officially banned from the mainstream TV. So the only way to hear my perspective is through alternative sources of information like your podcast.
Well, you've graduated to alternative media because we get more views than those guys anyway.
So this is, you know, who wants to go back to primary school?
Who wants to go back to the mainstream media?
So... So, Peter, for a long time you've talked about the economy being in a weak spot, but according to a lot of the Republicans I talk to, pretty much everything has been solved.
The economy is roaring along, and, you know, I just wanted to give you the space to make a formal apology for any kind of doom and glooming you've been doing for the last little while, because I hear, you know, everything's pretty much turned around.
Yeah, you know, that's what the Republicans would want you to believe.
But I think this is going to turn around and bite them.
I think that they're making a bigger mistake now than they made when George Bush was president, because a lot of Republicans were claiming success when Bush was in office.
And of course, everything fell apart.
At the end of his second term, and that's what paved the way for Barack Obama, because George Bush and the Republican Party were blamed for the crisis of 2008.
Well, the crisis that we're heading towards is going to be much larger than that one.
The causes are similar, but the blame is once again going to be laid at the feet of Republicans, particularly Trump and the Republican Party.
And they're going to blame the tax cuts.
They're going to blame the rich.
The corporations, the bankers who supposedly benefited from the cuts.
And I think the next wave of hope and change is going to come from the left, and it's going to be socialists who are now mainstream.
Bernie Sanders did a lot.
To take the stigma away from being a socialist.
And it's now acceptable.
And I think that that is what's going to carry the day in 2020.
So Republicans better be very careful to claim credit for what is going to be a huge disaster.
Well, it's funny, Peter, because...
The people on the left, like the Democrats and so on, they're saying, aha, you see, capitalism is failing, even though it's no longer capitalism and hasn't been for quite some time.
But the people on the right are saying capitalism is working when it is, in fact, largely socialism and has been for quite a long time.
And so there's this weird cross pattern where the left are mistakenly identifying what we have as capitalism, and so are the right.
And I think that the left may end up with more credibility when the shite does hit the fan.
Absolutely. Look, capitalism doesn't fail.
I mean, it's a glorious success.
I mean, we know that just from looking at history.
It's government that fails.
And when government encroaches into capitalism, it inevitably causes problems.
But the larger problem is whenever government interferes with capitalism and causes a problem, it's the capitalism that gets the blame.
And often the solution is, well, we just need more government involvement, more government oversight.
And now the government uses the crisis that it creates as an excuse to get even bigger.
And so the next time it creates even more damage, which again lays the foundation for an even bigger power grab, which is exactly what's coming, I think, for the 2020 elections when we may finally go all in on socialism.
Well, come on, Peter. You know as well as I do that we're only one giant regulatory agency away from economic paradise.
Like the next one, okay, the last couple of dozen have been, there have been a couple of hiccups.
There have been a few things to iron out.
But the next one is going to be a glorious gateway to a golden paradise because magic can happen, willpower can happen, and fantasy can become reality.
Yeah, and it's not just the next program.
It's the next guy or gal who's going to be administering it, because each politician acts like they can somehow use government more effectively than the person that preceded them.
We just need the right guy in office, and we can make all the problems go away.
Right. Now, there's been a lot of focus on this $21 trillion national debt.
And people look at that and compare it to, I don't know, what is it, $16 or $17 trillion of GDP and say, well, it's a little bit more.
And, you know, if I have $100,000 a year income and I owe $140,000, you know, I can find some way to pay it down.
And people try and translate it into household stuff.
But it's kind of like when you're hiking and you go over one hill and you think you're at the top and then there's this big giant mountain you've got to get over because for me it's like unfunded liabilities is where the big money is.
This national debt is actually fairly inconsequential relative to that monster.
That is true, but it's the national debt that needs to be funded.
The contingency liabilities, the unfunded liabilities, they're here, and each year we're going to be realizing more and more of them.
But there is no immediate interest payment associated with those liabilities, like there is the $21 trillion national debt, which of course is now closer to $21.2 trillion and rising rapidly.
The problem there is not just the enormity Of the debt, but the cost of financing it and the method You know, one of the things that candidate Trump promised was to take advantage of these ultra-low long-term interest rates by locking them in and moving the debt more towards long-term rates.
Well, he actually did the opposite as president.
He's actually shortened the maturity, even shorter, where we're relying even more heavily now on short-term financing than ever before.
But as interest rates are rising, the cost of servicing this debt is exploding.
And that is one of the principal drivers of the deficits now being over a trillion dollars a year is the extra cost of paying the interest on the money that we've already borrowed.
Not the money we're borrowing now to fund the current deficit, but the money we have to constantly borrow to fund the 21 trillion of debt that we already have.
And so this is why we're going to see an exploding interest component in the debt in the months and years ahead.
And so this is not a disaster for the future.
This is a disaster that we're going to be dealing with in the here and now.
Well, there's some data that I'm sure you're aware of, right?
So January through March of this year, 2018, 488 $47 billion from the U.S. Treasury in net borrowing.
That's $47 billion more than their estimates.
And a record, yay, number one, a record for first quarter borrowing.
I guess I just want to question, Peter, who are the lunatics out there snapping up this debt?
Well, apparently, it's not supposed to be the Fed because they said that they're not expanding their balance sheet anymore.
I don't know who it is.
I mean, I do think there are some foreign central banks that are still buying.
I don't know why. They should be selling.
But obviously, somebody is buying that paper.
And maybe it's the Fed through some secret accounts.
I mean, there's no way of knowing where the buying is coming from.
But eventually, it's going to dry up.
Eventually, it's going to be overwhelmed.
We still haven't hit a record for quarterly borrowing because the all-time record was, I think, the fourth quarter of 2008 at the height of the financial crisis.
But I think we're going to take that out, if not this year, next year.
And we're just going to break that record quarter after quarter because the borrowing needs of the government are increasing exponentially.
The only question is, when do we hit that wall?
When do we have a crisis?
But we are careening towards one now.
And it's not going to be a mortgage crisis where the government can bail anybody out.
It's going to be a sovereign debt crisis.
The crisis is going to be in the bond market, the treasury market, and obviously the government can't bail us out of that crisis because it's the government's debt itself that is the epicenter of the crisis.
And the only thing they can do is print money.
The Fed can print money to try to buy all the treasuries that nobody else wants.
But then nobody's going to want the dollars either, and the dollar is going to collapse, which ultimately renders the treasuries worthless anyway, because they're just IOUs for dollars.
And if the dollar implodes, then what good are your treasuries?
And there's this weird thing.
This is the old Keynesian theory, right?
That when there's a recession, when there's a dip, when there's a depression, it's okay for the government to borrow some money to kind of prop up demand.
But then it's supposed to cut back and pay that off when there's this big boom.
Now, in America, I mean, there's no big giant new war.
There's no huge recession.
There's no housing crash.
There's no student loan crashes yet.
I mean, car stuff is kind of shaky.
And still, federal government's running $100 billion a month deficits, despite the fact that there should be no reason for this massive amount of borrowing other than just accumulated democratic inertia.
Yeah, you know, if you look at the deficits we have now, these deficits are as large or larger than they were at the height of the worst recession since the Great Depression.
So the question has to be, if the deficits are so big, During good times or what is being told to us are good times.
Where are these deficits going to be during the next recession?
Now, of course, conveniently, the government, the Congressional Budget Office, is confidently forecasting that there will not be a recession at all over the next 10 years.
They don't forecast when it's going to be.
They're just saying that the coast is clear for another 10 years.
Despite the fact that the current expansion is already the second longest in US history, so if we went another 10 years without a recession, it would be the longest by at least nine years of amount of time that we haven't had a recession.
But assuming we do have another recession, the budget deficits could be two to three trillion dollars if they're this high now, because what happens in a recession?
Your revenues are declining because fewer people are paying taxes because they've lost their jobs.
Maybe fewer people are realizing capital gains because maybe the market's gone down.
So the government's not collecting a lot of taxes.
Meanwhile, more people are collecting benefits, extended unemployment benefits, disability, food stamps.
So, what they're spending goes up.
But more importantly, this next recession is going to be particularly problematic for the budget for two reasons.
One, the new tax codes opened up a lot of loopholes that I think Americans are just figuring out or starting to figure out how to exploit.
And so, I think a lot of people are going to go about changing the way they earn their money to qualify for the lower rates.
And so, I think the tax cuts Are going to cost the government a lot more than they envisioned.
Plus, I think the states are going to be altering the way they tax their citizens, and that will also deprive the government of some revenue that it had anticipated.
And then, as the recession hits, You're also going to have the interest rates continuing to be a big problem, whereas a lot of the short-term debt matures, and now it has to be rolled over at the new higher rate.
The extra cost to the government is going to be enormous, and that's just going to be added to the extra expenditures that you normally have in the downturn in the business cycle.
So these debts are going to explode, which is the main reason why the government wants to pretend we're never going to have another recession, because the minute they have to acknowledge that one might happen and they have to start figuring where the budget deficits would be, the numbers are so high that they can't afford to acknowledge it because the financial markets would probably panic just by considering the possibility.
Now, let's see. That's right.
There's not going to be a recession for the next 10 years.
And next year, my hair is totally growing back.
That's my forecast as well there, Peter.
Now, for a lot of people, let's bring it down to the household level for the listeners, because for a lot of people, it's like when they hear about, you know, interest rates or rates on U.S. Treasuries, it's like, I don't know, the King of Gondor is printing more doubloons.
It's kind of abstract for them.
But the effect that this is going to have on interest rates, on mortgage payments, on loan payments for students and cars and All of that kind of stuff, credit card payments, how is this going to translate into upward pressure on the interest rates, which is what triggered the last one?
Well, the interest rate upward pressure is already there.
The pressure is going to be downward on the economy as people who have to spend more money servicing their existing debts have less disposable income for other things that are the lion's share of US GDP. Just yesterday, one of my clients had called in to close their account.
And I talked to this individual about why they were closing their account.
And the guy told me that the interest on his home equity loan, which he has a $200,000 loan, which until very recently was about just over 3%, and now it's just over 5%, he said he needs to pay this thing off because the cost is rising so rapidly.
And so he at least had a brokerage account he could sell off.
To pay down the loan, what my thought was, what about the guy that has the home equity loan but doesn't have the asset to sell off to pay it down?
There are a lot of people living paycheck to paycheck who have mortgages, and now the cost is going way up.
And one of the other elements of the new tax code is that you can no longer deduct the interest.
So if you had a 3.25% If you had a 5.25% loan that was deductible, and now you have a 5.25% loan that's not deductible, you're talking about maybe doubling the cost of that loan.
And it ain't even over yet because rates are going a lot higher.
So where is this money going to come from?
If people have to spend more money paying interest on the money they borrowed, what are they not going to be buying?
And now what's going to happen in those sectors of the economy when all of a sudden people who used to be spending money aren't spending it anymore?
And so what happens to employment in those sectors?
I mean, this is what was part of the big downturn in 2008 because people were spending money on adjustable rate mortgages that had reset.
Other people had lost their homes and they lost the ability to tap into that household ATM. So a lot of consumer spending has been driven by the artificially low interest rates because it's freed up a lot of discretionary spending.
Well, a lot of that spending is going to go away because the interest rates are going to go up.
Meanwhile, American savings rates are at all-time record lows.
So it's not like there's going to be a big windfall there for people who have savings because people don't have savings.
Well, when interest rates have been kept low, what's the point of putting your money in the bank?
And let's talk a little bit about this convergence of an aging population with the unbelievable lack of saving for retirement.
One-third of Americans, less than $5,000 in retirement savings.
Nearly a quarter of Americans have a retirement savings of zero.
Zero! 33% of baby boomers, who, you know, had a pretty good run for a lot of economic years, have on average between $0 and $25,000 saved up.
And of course, the boomers say, or a lot of people say, well, the government took my money, it should be in Social Security and so on.
But that money's gone. All that's in the Social Security vaults are a bunch of dusty IOUs from the 1980s.
I mean, how are people going to be able to retire again and have to strap on these Japanese Terminator exoskeletons to continue lifting boxes in warehouses until they're 112?
Well, there's the answer.
How are they going to retire?
They're not.
You know, most Americans are never going to retire.
I would say that the majority of Americans who are currently retired will not be retired five years from now, certainly not 10 years from now.
I mean, if they're still alive, they're going to be working.
I don't know what they're going to be doing.
But they're not going to be able to survive on Social Security, assuming the payments are still being made, but they won't be able to survive on them, or their own personal savings or investments.
A lot of people who do have money for retirement have got it in the casino of the US stock market.
And you have record high valuations.
Stock prices could implode.
And so people have a lot less money saved up for retirement than they think because their retirement savings are now in the stock market.
But if a lot of the retired people need to sell their stocks to actually spend the money, well, there may not be that many buyers.
And the market could implode.
I think retirement in America is going to vanish.
The same way that the single income household has largely vanished, certainly from the American middle class.
And that was a consequence of the last major dollar depreciation.
That happened in the 1970s, right?
The dollar lost two thirds of its value during the 70s.
Consumer prices responded by rising, oil prices the most noticeable, but all prices went way up in the 70s as a result of the loss of value of the dollar.
And of course, The dollar's destruction, the seeds of that destruction were sown in the 1960s with the big deficits to fund the war on poverty and the Great Society and the moon missions and the Vietnam War and all that.
But during the 1960s, Very few married women with children had jobs.
I mean, their husbands were able to support them.
But by the 1980s, millions and millions of women were forced into the labor force because their husband's paycheck could no longer cover their cost of living because the dollar had lost so much value.
And so you had all this big influx of women into the workplace so that the family could survive because now you needed two incomes to Maintain the standard of living that you used to get with one.
So today, I mean, it's just normal that married women with children, even if they're brand new, they've just been born.
They're still working.
Well, I think the same thing is going to happen to retirement.
I think retirement is going to get wiped out with this next dollar crash.
And retirement is going to be something that people read about in books.
Or maybe if they watch an old TV show, they'll see an old person playing golf.
And maybe some kid will say, hey, why isn't he working?
What's he doing? What's he doing? And he's always retired.
Oh, what's that? Oh, well, that's something that people used to do way back when.
But yeah, it's just not going to be part of the American lifestyle anymore, the American experience.
I mean, yeah, if you're super rich, you could retire, just like there are still people whose wives don't work, right?
There are still women.
If the guy makes enough money, the woman doesn't have to work.
But that's the minority.
It's not the rule.
It's the exception. And that's what's going to happen with retirement.
It's going to go into the way-back machine like a decent education and gold-backed currency.
Now, why are companies borrowing so much money and why is that not being reflected in the stock price?
Well, companies have borrowed a lot of money, and they've used the borrowed money to buy back stocks.
I mean, that's one of the main reasons that the stock market has gone up so much.
Stock buybacks have been a big part of this rally, and they're going to be a big part of the collapse, because eventually, the companies that were buying Their own stock with borrowed money are going to have to sell those shares to raise the money to pay off their debt, right? Because the debt's going to get more and more expensive to service.
And just like my client wanted to sell out his account to pay off his home equity loan because it was getting too expensive, at some point, corporate America is going to need to deleverage.
They're going to have to pay back their creditors.
And they have to do that by selling stock.
And chances are, they're going to be selling the stock at a loss, right?
Everybody's going to be selling. The market will be depressed.
I mean, the only thing that might stop that from happening would be hyperinflation.
Obviously, if there's hyperinflation, nobody has to pay back their debt at all.
I mean, you don't have to worry. I mean, your debt is inflated away.
It gets wiped out. And so maybe that's going to happen to corporate America.
But that's an even bigger disaster than the one where companies have to sell their stock in a declining market to actually repay their loans with legitimate money.
Well, if there's hyperinflation, I mean, people will say, yay, my dad got wiped out, but so has your grocery store got wiped out.
So that makes things just a little bit more tricky.
Yeah, so does your wages, your salaries, any savings you may have, any annuities or cash value and life insurance or any obligations that were in dollars, pensions, Social Security.
I mean, a lot of stuff gets wiped out.
And sure, let's say your mortgage gets wiped out and you still own your house, but try to repair it.
Something goes wrong, the cost of doing so also goes through the roof.
You know, so, you know, you could have people living in, you know, in homes that are worth, you know, hundreds of millions of dollars.
But what good is that if, you know, you don't even have any electricity because you can't afford the electric bill?
Well, and it's strange, too, with this big corporate tax cut, you'd think at least the corporations would have some kind of infusion of capital.
Maybe they could invest in some capital machinery or some upgrades in worker productivity.
But as of March, we've got Chapter 11 bankruptcies up.
63% year over year, 770 companies filing for Chapter 11 protection in March.
That's the highest level since April 2011, in some ways, in the very trough of that Great Recession.
Do you think it's because of interest?
Do you think it's because of just people aren't spending?
Or what do you think is causing all these bankruptcies?
Well, interest rates are going up, and that is a negative effect.
I mean, so you have lower taxes.
I mean, most companies have lower taxes, not all companies.
I mean, some companies actually will have higher taxes.
But in general, companies will see tax cuts.
But they may see other costs going up.
I mean, their labor costs are going up a bit.
Their energy costs are certainly going up quite a bit.
Their debt costs are going up.
And if a lot of companies end up operating at a loss, remember, tax savings only affects your profit.
So if you have a profit and you owe a tax, then you'll have a lower tax.
But if your costs go up sufficiently, you have no profit.
If my energy costs and my interest expenses go way up so that I don't have a profit, The tax cut doesn't do me any good.
It doesn't matter what the tax rate is if you have no income subject to tax.
So the cost side of the equation can be much worse for a corporation because those costs have to be paid, whether there's a profit or a loss.
I got to pay my rent.
I got to pay my utilities.
I got to pay my employees.
Now, of course, I can fire some if I can't afford to pay them.
And that's probably going to happen.
The question is, when is it going to start?
Well, and of course, firing people is gutting a business when you've spent a lot of time training people and getting them up to speed and getting customer relations and having them understand your business and getting a working relationship.
You can't just swap people in and out like Japanese dolls or something.
I mean, when you fire people, it's hard to rebuild afterwards.
Right, but your employees aren't going to work for free.
So if you can't afford to pay them, you've got no choice.
Yeah, that's right. So let's talk about auto loans, which is something that's below the radar of a lot of people.
We've got a delinquency rate for auto loans more than 60 days past June.
Again, this is March, 5.8%, the highest level in 22 years.
And the default rate in the peak of the financial crisis came in at around 5%, so we're closer to 6% default rate.
For auto loans.
And this is all stuff that's not really being reported as much as I'd like, I guess because people don't want to goose stock prices or consumer confidence, you know, the magic that keeps lead balloons afloat.
But that seems pretty alarming.
Yeah, look, this is another byproduct of 0% interest rates and quantitative easing.
We had a auto bubble.
And first of all, the government wanted the auto bubble because the Obama administration early on made the mistake of bailing out the US auto companies.
And so they wanted to make them look good.
They wanted the bailout to appear successful.
So they wanted to help US automakers sell a bunch of cars.
And that's exactly what they did.
By allowing people to borrow money practically at no rate of interest to buy cars that they really couldn't afford.
And so US automakers for years were selling people cars they couldn't afford.
And in order to make the payments, they were stretching out the terms, six, seven year financing where the loan is actually longer than the warranty.
A lot of people were turning to leasing.
We had record amounts of cars being leased, and leasing makes no sense.
Unless you're a business and you're writing off the cost of the lease, for your typical wage earner, leasing a car is the worst way to have a car.
But if you're trying to minimize your upfront cost without any regard to your long-term costs, it is the cheapest short-term way to get into a car that you can't afford.
And so a lot of people were leasing cars, and this drove the boom.
Well, now we're just starting to bust because a lot of the cars that were purchased and leased are either coming off of lease or they're showing up on used car lots.
There's a glut there.
We're getting downward pressures.
Now, the companies that did the leases are experiencing losses because they're not getting the residual value from the used car that they assumed.
And so lease rates are going up.
Of course, finance rates are going up.
And this is letting the air out of the bubble.
And this is going to be a complete collapse.
And I think a lot of the big US car companies are going to be struggling to find customers for many, many years because their customers already bought More cars than they can afford, a lot of people actually were rolling over negative balances on their trade-in.
I mean, so they're so upside down in their car loans that there's no way they're ever going to be able to afford another one.
So it's like they've cannibalized future car sales.
So this is going to be terrible for the automobile companies and the dealerships in the US. And there's going to be a lot of losses financially for the companies that underwrote the auto bubble.
People that took the other side of that, people that owned the loans that are going to go bad, and the people that owned the leases that are going to lose a bunch of money.
Average auto loan has hit a record length of 69 months.
If you want to buy a used car, for a while there's going to be some good deals on used cars.
Well, if I remember rightly the last time I was in the States, Americans could use some good walking.
So maybe that will help in terms of keeping people's health up and running.
Now, another thing which we've mentioned before, let's dig into a little bit more, Peter, is this ratio of workers to retirees, which again, in a free market system wouldn't really matter because you'd be responsible for your own retirement.
And oftentimes that would be called having children who love you.
But we've got 58% say they rely on Social Security to get by.
So 1995, you got just under five workers paying into the program for every retiree.
By 2020, that's 3.7 workers per retiree.
2040, we're hitting a Japanese-style top-heavy ratio of 2.75 workers to every one retiree.
Boy, that is a whole lot of unfunded gray power.
Oh, yeah. And you also have to look at the quality of the workers and what their potential incomes could be, so their capacity to pay the taxes.
And I also think that these numbers are actually painting a rosier scenario than the one that we're likely staring at, assuming the current trends stay in motion.
I mean, the labor force participation rate It has been imploding, particularly younger men, people in their 20s and 30s who are not working.
And if you're not working in your 20s and 30s, there's a good chance you ain't going to be working in your 40s or 50s either.
You're not developing the skills early on that would be necessary.
And I'm looking at the birth rates now in the US are hitting all-time record lows.
So we're not having children to grow up to be tomorrow's workers.
So the demographic problem is actually much worse than I think the statistics you're looking at.
I think we're going to be at a point where maybe it's one to one between workers and retirees.
Everybody's going to have one person that they're responsible for.
But of course, that doesn't work, right?
I mean, it's like you got all these people Trying to ride in a wagon and they're relying on just a few people to pull it.
Well, it becomes harder and harder for the people that are pulling to do it.
But as they look back and they see all the people getting a ride, their motivation is, what am I doing breaking my back?
Let me jump in the wagon with everybody else.
So all of a sudden, it just implodes because nobody wants to pull.
Everybody wants to be in the wagon being taken for a ride, which means they're not going anywhere.
Because if nobody's pulling, then it's not going to move.
Well, but there is always cannibalism.
So we can hold that in our back pocket as the next solution.
And it's funny, too, because with immigration, you know, I'm not sure how long it's going to take your average 30-year-old from Somalia to become as productive as the average person who kind of grew up in the United States.
And also, of course, there's this deferral of marriage that comes from...
You know, a really extended education that makes up for declining quality of education, particularly in high school.
Like now, a college degree seems to give people roughly the same skills, but with added anti-capitalism than a high school degree used to give.
So then people are delaying their marriages, which means fewer children in the future.
Absolutely. And look, young people are staying in school into their late 20s, early 30s.
And then by the time they graduate, they've got so much debt.
They can't get married.
They can't have a family.
And to the extent that You know, that they do get married, right?
They delay when they have kids.
And they reduce the number of kids that they have.
I mean, maybe they have one or two.
I mean, people aren't having four, five, six kids anymore.
My father was the youngest of eight.
I mean, big families were very common.
And my grandfather was a carpenter.
I mean, he was lower middle class.
I mean, upper lower class or whatever.
He wasn't even in the middle class.
But, you know, and my grandmother didn't have a job.
I mean, my grandfather had no problem supporting His wife and eight children.
My father was the only kid, I think, that went to college, but he worked his way through waiting tables.
It didn't cost my grandfather a nickel, and my father graduated with no debt.
That type of America really doesn't exist anymore.
Yeah, it's actually very sad to think about that.
Like when I sort of think about the 1950s, which gets a pretty bum rap from the leftists, when you think of, you know, one guy driving off with his wife, he had like four, five, six kids, you could do it comfortably on a non-workaholic middle class salary.
And it's really quite tragic just how the basic joys of life, like a reasonably decent sized family, a lack of stress, a lack of pressure.
I mean, the average saving in America, like the average bank balance is just over $12,000.
That's how much money people have in the bank for emergencies, for crises, for the inevitable hiccups of life.
Yeah. And people don't even necessarily see the benefits of marriage.
I mean, back in the day, the benefit to the man of getting married was he would have a woman who could stay at home and take care of his house and raise his kids.
But that's not the case today for the guy.
He gets married, his wife's going to have to be working.
I mean, he's still cooking his own meals and cleaning the house himself.
I mean, he doesn't really have that type of domestic partner.
And as for the woman, I mean, a woman, it used to be a great deal.
Let me get married. I get a guy to support me.
I'm going to be able to spend time with my kids and stay at home, and I won't have to go to work.
But I mean, women don't get that anymore from marriage.
They still have to work. So it's like nobody really sees the benefit.
It's just a liability.
And so the reasons.
For getting married. They don't exist in a way that they used to for people, so they're just not getting married and they're not having kids.
And if you build this intergenerational Ponzi scheme instead of a free market system where individuals save for their own retirement, And where people take care of their own parents, not the parents of people they've never met.
When you socialize this whole retirement system, you need to have more and more people.
The problem with Bernie Madoff is he ran out of people to buy out the people that wanted their money back.
Well, the same thing is going to happen with the Social Security Ponzi system, and it's going to fall apart much sooner than people would think, partially because of these demographic trends that are in place.
I do think that the value of treasuries around the world is considered to be a significant asset by both public and private institutions.
And one of the reasons I think people are holding on to these treasuries is they don't want to find out what the floor price is, like what the basement price is.
Because China's, you know, March, they sold two and a half billion worth of treasuries, but they have like, what, $1.2 trillion worth of US treasuries.
But it's only $1.2 trillion.
And valued at current prices.
And I think that there's kind of a basement down there that could keep on going that nobody wants to find out what these assets are actually worth, that they consider to be worth a lot.
Well, that's because people forget they're only an asset because they're also a liability.
And so the question is, whose liability is it?
And it's America's liability.
It's the liability of the US taxpayer.
We're the ones that are supposed to make good on all those treasuries.
Well, not me. I live in Puerto Rico now, so it's not my debt anymore.
But the Americans still living in the 50 United States, they are on the hook For these liabilities.
Swinging back to what we were just talking about, about the young people, one of the other problems we're going to have is young people in America who are staring in the face.
They have a huge chunk.
I mean, their student loans are small compared to their share of the national debt.
And we had these tax cuts recently, but they're simply a down payment on future tax hikes that are going to be necessary to repay the debts that were the byproduct of these cuts.
So a lot of young Americans are going to be staring at confiscatory Tax rates, not just Social Security, but income taxes.
And what can they do?
It's a big world. Leave, right?
They just start emigrating.
I mean, forget about immigration.
It's emigration. And who is likely to emigrate?
The hardest working, the most ambitious, the smartest young people are going to say, you know what?
I'm not going to stay here and give the US government 50%, 60%, 70% of what I earn.
I'm out of here. Now, the US government, we could try to keep people in by increasing the cost of the form to renounce their citizenship, but a lot of people won't care.
They'll just leave and never come back.
They won't even bother with the forms.
They'll just go someplace else and work.
As that happens, that just accelerates the trend because now there's fewer people left to tax.
And then the ones that are left, well, they have to turn up the heat on those because they have to carry a bigger share of the load.
And so now that just encourages more people to leave.
That's what you're seeing right now in the states.
A lot of people in high tax states are leaving because they can get a better deal at a low tax state.
That's going to happen on a bigger scale.
I mean, it's easier to move from one state to another, but it's not impossible to move from the United States to another country.
Look, all four of my grandparents emigrated to the United States.
I mean, and they had to come across on these boats.
It took like a week or two to come across from Europe, yet they all made it.
They came here, and the irony of it was they left Europe in search of freedom.
And they wanted to escape big government.
And that's going to be the same reason that future generations of Americans are going to leave.
They're going to be trying to escape exactly what my grandparents tried to escape.
Right. Fiscal 2019, Peter, we have...
Treasury Department's trying to sell $1.2 trillion of new bonds.
Fed is trying to dump $600 billion of bonds in the same market.
So, $1.8 trillion of federal debt floating around that is going to have to try to be absorbed.
Now, the Fed is trying to lower its balance sheet.
We've got Japan and we've got China, who are going to be propping up.
You know, the old enemy from World War II and the great enemy of the Cold War are now riding to Uncle Sam's rescue.
I can't imagine they're going to keep doing this.
I mean, Japan's debt to GDP is ridiculous.
China is facing some significant demographic issues because they can't get people to have more than one baby very easily.
I don't know. I think there could be a freefall, and let's help people understand what can happen with that.
Yeah, look, when we did quantitative easing one and two, the biggest buyers were A, the Federal Reserve, and B, the Countries like China and Russia and Saudi Arabia and a lot of Latin American countries, everybody was loading up on US Treasuries.
And that's the only reason we were able to get away with selling as many as we did.
But if the Federal Reserve actually did what it is claiming it is going to do, not only would the Treasury not be buying bonds, because remember, we were doing a trillion dollars a year of QE. So just the Federal Reserve was buying all by itself more bonds than the Treasury was selling.
But if the Treasury now is selling a half a trillion a year of Treasuries, not only does the Treasury not have the Fed to buy, but it has to compete with the Fed as a seller.
Your biggest buyer becomes another seller of exactly what you're selling, although technically what happens is The Federal Reserve simply allows the bonds to mature, and now the Treasury has to sell extra bonds to repay the Fed.
But it just ends up meaning that we have massive selling, and there are no buyers.
And I don't believe that the foreign central banks are going to be there the way they were the last time around.
So who is going to buy all of these low-yielding treasuries?
Nobody. It is impossible.
So either one of two things have to happen.
Interest rates skyrocket to the point where we attract some buyers.
But of course, if interest rates rose high enough to attract buyers, we couldn't afford to pay, and we'd have a worse financial crisis than the one we had in 2008.
The alternative is that the Fed doesn't do what they're saying they're going to do, but does the opposite.
Instead of shrinking its balance sheet, it blows it up even bigger.
We have QE4, which is what I think is the actual scenario that is going to take place.
And when the markets figure this out, it is a game changer.
The bottom is going to drop out of the dollar.
The dollar is going to tank, and the price of gold is going to go ballistic.
And people are going to realize, finally, what they should have realized all along, that this policy was an abysmal failure, that it wasn't a success.
It was a disaster.
Oh, it's horrifying, Peter.
I mean, it's like having a convenience store, running up your visa bill, buying stuff in your store and claiming that you're becoming rich.
I mean, it is just horrendous.
You end up poorer. So let's talk about inflation.
Ooh, inflation. So...
They say, well, we don't want it to get much above 2%, but maybe it'll get a little bit above 2%.
Most recent measure I've got here, 12-month inflation growth in March, came in at 3.13%.
That's the highest rate in almost 12 years.
And, you know, I guess 3%, it doesn't sound like a lot, but man, that accumulates pretty quickly over time.
ED HARRISON Oh, yep. And it's going to get a whole lot worse.
For a while, the Fed was saying, we need to keep inflation.
We got to get it back to 2% because it's below 2%.
And of course, there's no reason to try to make inflation higher.
If inflation is 1%, that's not a problem that needs to be solved.
I mean, if anything, I would say if it's 1%, then it should be zero.
Let's try to make it lower.
But the Fed was like, no, no, no, it's not enough, right?
The cost of living is not rising fast enough.
We want to make sure that consumers have to pay even more money for the goods and services that they need and that they want.
But now the Fed is saying, well, we're OK with inflation that's symmetrical around 2%.
And what they mean by that is that, well, for a long time, it was below 2%.
And so now we can have it above 2% for the same amount of time because it'll all balance out to an average of 2%, which, of course, I had been saying for years the Fed was going to eventually do.
They were going to make that excuse because they don't want to do anything I think we're good to go.
Under Nixon, they imposed wage and price controls when inflation got as high as 4%.
So we're not that far below 4% now.
And if 4% is so bad that you're going to have wage and price controls, if it's 2.5%, 3%, why take any chances?
You would think the Fed would be more aggressive.
When we had 4% inflation under Nixon, we had a totally different CPI back then.
It was far more honest.
In fact, if we calculated prices today, our price increases using the exact methodology that was used when Nixon was president, we would find that the prices are already rising faster than 4% a year.
So we're already beyond the point in reality where wage and price controls were tried.
And obviously, they failed because they attacked the symptom rather than the cause of the disease.
But this is something I thought the Fed would do.
Inflation is going to get a lot higher.
And ultimately, the markets are going to realize that when it comes to inflation, the Fed is all bark and no bite.
And the dollar is just going to implode, as I said before.
And there's nothing really, I think, left in the chamber.
Because if this kind of spending, this kind of debt accumulation and these kinds of distortions are happening right at the height of an economically strong time, when the recession hits and this idea that it's going to just stretch out forever – I mean, the U.S. is right now in the second longest recovery in history.
If it goes on for just over...
A little over a year, it's going to be the longest one.
The previous one was then in the 1990s when, you know, arguably there was this massive evolution in computer technology that helped out a lot.
So, yeah, U.S. has a recession every six and a half years.
And this one's stretching out and the idea it's just going to keep going is ridiculous.
Right. And people make the mistake of believing that a recession will somehow put the brakes on inflation.
It won't. I mean, they forget about the 1970s when we had stagflation.
Well, we're going to have stagflation again, only more inflation and a weaker economy.
It's going to be a much bigger dose than what we suffered during that period of time.
And of course, the Fed, when the Fed is confronted with the dual problem of inflation and recession, they don't know what to do because their traditional Keynesian remedies are diametrically opposed.
If you're fighting inflation, you are raising interest rates, right?
You're tightening up on money.
But when you're fighting recession, you're cutting rates and loosening up on monetary conditions.
Well, what if you have inflation and a recession happening at the same time?
I mean, you know, you can't.
Ease and tighten at the same time.
You got to choose. And politically, what is the choice that's going to have the least amount of resistance?
It's going to be, let's try to stimulate the economy.
Let's try to create employment, create growth.
Of course, it doesn't actually work.
But they're going to say inflation be damned, and they're going to cut rates, which is basically fueling the inflationary fire that is already probably burning out of control.
ED HARRISON Well, this is the thing, right?
So you got the 2000 recession, you got 2008 recession.
The Fed cut interest rates 500 basis points.
But right now, Fed rate is still under, Fed funds rate is under 1.75%.
So you get some new recession, they get 175 points cut, and you got a zero interest.
And I mean, are they going to go to negative interest rates?
Are they going to try and pimp us a hooker so ugly she'll pay us to go on a date?
I mean, this is just completely bizarre.
But they're going to be, in real terms, interest rates are negative right now.
They're just not negative nominally.
But if you look at where even the official inflation rate is right now, it's higher than the Fed funds.
And I think that when the next recession starts, inflation is going to be even higher than it is now.
And so when they cut rates back down to zero, the real negative rate of interest is going to be even higher than what it was the last time we had rates at zero.
And of course, you're talking about a minimal amount of stimulus for a massive collapse, because the bust is normally proportionate to the boom.
And this was, even though it didn't feel like it, this was a huge boom based on the amount of stimulus that the government needed to create it.
And the damage done to the economy is also proportionate to the stimulus that is artificially injected.
That's where you make all these bad malinvestments and misallocations of capital and resources and all kinds of excess speculation.
So all this stuff has to be unwound.
But then in order to try to stimulate us out of that, remember, in order to stimulate us out of the bursting of the dot-com bubble, they had to blow a housing bubble.
The housing bubble was bigger than the dot-com bubble, and that allowed us to mitigate the severity of the recession, and we had another big boom.
And then when that bigger bubble bust, we inflated the bubble that we got now, which are bigger than the dot-com bubble and the housing bubble combined.
And the amount of stimulus that would be required to create a bubble bigger than this one, I think, is impossible, because I think you end up overdosing on it.
You end up destroying your currency, which is exactly where we're headed, because that's what they're going to have to do when you can't Stimulate with 200 basis points of rate cuts, assuming they get one more or two more rate hikes in before they have to go back to zero.
So it's just going to be quantitative easing.
That's going to be the only arrow left in their quiver.
And it's going to have to be much bigger than what we got with QE3. They were doing $85 billion a month.
What are we going to have to do?
$150 billion a month?
$200 billion a month? And at some point, people are going to figure out that the Fed keeps reversing course without explanation and never going to trust it again.
So let's close off with something that was floated recently politically.
And, you know, like you, I love taking my economic advice from someone who looks like he combs his hair with a balloon.
But Bernie Sanders was talking about – Everybody gets a job.
It's the Oprah Winfrey Jobs program.
Look under your chair. There's a free job, 15 bucks an hour.
You get health care. Everybody gets a job.
And this should be, I don't know, like this should be like somebody proposing the flat earth map of navigation and the amount of pushback from the media wasn't nearly as great as it should have been.
And I know you've talked about it before, but for those who didn't get access to your pearls of wisdom regarding this job program, what do you think would happen?
How would that play out, Peter?
Well, I mean, first of all, the scary part is this guy was almost president.
I mean, he could have beat Hillary Clinton.
I mean, if he had a fair shot, I mean, if the Democratic Party wasn't so rigged, right, if it wasn't so beholden to the Clintons in a fair primary, Sanders would have won.
Now, in a Sanders-Trump election, I don't know.
I mean, he might have won, right?
And he's a socialist.
So this guy with this idiotic policy could have been the leader of the free world.
I mean, free in quotes.
But I mean, the fact that he can even have a policy like this as a senator, which is really just a blueprint for socialism, it's about government employing all the people, because that's basically what the effect of this plan would be.
Everybody would work for the government.
But of course, when the government employs everybody, there's no productivity.
I mean, everybody had a government job in the Soviet Union, but you want some bread, stand on an eight-hour line.
I mean, it is not efficient to have governments allocating resources and making decisions over who does what and deciding who to hire and what they're going to do.
But that's basically what the consequence of this idiotic plan would have been.
But not only was he not laughed out of Washington, But he got a bunch of other people that go sponsor this bill.
And you read articles about it, and taking it seriously, it should be completely condemned.
I mean, you shouldn't have a sitting US senator that can propose something so completely crazy, yet, hey, it's acceptable.
And I'm telling you, it's going to be a lot more acceptable in 2020 when a Sanderite is in the White House.
I mean, maybe it'll even be Sanders himself.
Who knows? Well, you know, for a guy who didn't get his first job until he was 40 and then in government, I would expect him to know a little more.
So I just wanted to remind people, certainly check out shiftradio.com, an excellent podcast also available on YouTube.
Shift Gold for your gold purchasing needs is a great site, shiftgold.com and europackwithac.com.
If you want to take the place of the guy who had to pull his money to pay his loan, I think there's a slot open.
Peter, as always, a great, great pleasure to chat.
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