Peter Schiff recently appeared on RT News and laid out how he sees gold prices and the US economy moving into 2017. Inflation vs. interest rates, the stock market bubble, and downturns in mortgage/auto financial markets were a few of the topics Peter provided insights and predictions about. He also dispelled four economic myths surrounding the Fed’s positive outlook, Trump’s fiscal plans, and how inflation impacts gold prices.
Myth #1: Fiscal stimulus means no more monetary stimulus.
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The fact is, the more fiscal stimulus we get the more monetary stimulus we need. There is no way to finance government deficits unless the Fed continues to print money. Higher deficits mean the Fed can’t raise rates significantly because the government couldn’t afford to pay the interest on the national debt and would default.
Myth #2: Only Trump is good for the stock market.
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Trump’s impact on stock prices is no different than Clinton’s would have been. Many of the investors who saw Trump’s ascension as the beginning of the market’s descent are now buying stocks. It’s a perverse irony that suggests the irrational exuberance of the current asset market, a place where any event can be seen as a justification for a move up.
Myth #3: Interest rates will rise proportionally to inflation.
If Trump follows through with his proposed tax cuts, fiscal spending, and regulatory easing, inflation is likely to move higher faster than interest rates. Trump’s fiscal spending will increase deficit spending, increasing the cost of servicing the national debt. The Fed knows this means it must keep interest rates manageable for the government’s massive balance sheet. Therefore, we’re not likely to see aggressive moves on interest rates enough to adequately combat rising inflation.
Myth #4: Higher inflation is bad for gold.
The idea goes against the economic realities of inflation and gold as a store of wealth. Inflation means an increase in the money supply, which devalues a currency’s purchasing power and pushes prices higher. As a safe harbor for wealth, gold works because of its finite amount. Unlike fiat currencies, which can be printed anytime, gold has historically performed as a reliable store of wealth precisely because you can’t just make more of it. If your currency is being devalued, transferring it to gold helps maintain its value as more money is printed and inflation rises.
Highlights from the interview:
“If you go back over the last 15 years, gold’s had a pretty good track record. The reason so many people have turned bearish on gold is because they believe we’re going to have more inflation under Donald Trump. That we’re going to have larger deficits as a result of tax cuts and increased government spending, and that because of the higher inflation the Fed is going to get more aggressive and raise interest rates. Somehow the increase in interest rates is what’s going to be bad for gold.”
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“This is ridiculous. Higher inflation is good for gold. Even if the Fed is raising rates slightly, even if it manages the three hikes that were coming next year … inflation is going to rise much faster than interest rates. Real interest rates are going to fall. That’s when gold shines brightest.”
“The idea that higher inflation is bad for gold is preposterous. They’re right, we’re going to get more inflation, but it’s not a negative for gold. It’s a huge positive. The markets were wrong about gold at the end of last year. They sold it off when the Fed raised rates. It bottomed out in January, and then had a huge run. I think we’re going to have another big run next year, but I think next year we’re going to finished the year strong as opposed to having this Trump-related sell off.”
“GDP growth for this year is going to end up below 2%. The Fed is only forecasting 2.1% for next year. I think they’re too optimistic. We’re not getting 3%. We’ll be lucky if we get 2%. We may not even get that. We could be on the cusp of a recession right now. It wouldn’t surprise me to have a recession early in the first year of the Trump term.”
“The reason the Fed waited until December to raise rates by a quarter is because, in contrast to their claims to have confidence in the economy, they have no confidence in the economy. That’s why they waited so long, and that’s why they raised rates so little.”
“The bond market bubble has already burst. Interest rates are rising and that is going to compound the problems for an already weakening economy. If the economy was weak last year, it’s going to be even weaker next year.”
“The housing and auto sectors are completely depending on cheap money … The 30-year fixed rate has basically gone from about 3.5% when Trump was elected to 4.5% now. It could be over 5% when he’s inaugurated. It could easily be close to 6% next year.”
“Nobody can afford these rates. We already have homeownership near a 60-year low because people can’t afford the low rates we had. Obviously, they’re not going to be able to afford the higher rates we have now or the rates we
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get in the future. You’re going to see a drop there. You’re going to see a complete end to the refi market, so that lifeline is gone. People were able to afford their payments with refi’s. No one can do that anymore. With higher costs to borrow money to buy houses, real estate prices are going to start to fall, so that means more foreclosures again.”
“The auto bubble has all been about 0% down, letting people roll the negative equity in their trade-ins into an even bigger loan with cheap money. It’s been about leases and extending the payments. This is a huge subprime bubble, and the air is already coming out of that. All the things the government propped up with cheap money are going to topple as you take the cheap money away.”
“The same stock traders that were so worried about what would happen to the market if Trump won, were the ones who began buying the minute he won. All they want to do is justify a move up. Believe me, had Clinton won they would have said, ‘We dodged a bullet. Let’s buy stocks!’ This market is feeding on itself. It’s like a horse with a bit in its mouth, and it keeps on going. People are ignoring that the things that they think are going to happen are impossible. There is no way to finance these deficits unless the Fed steps up and does it.”
Reprinted from SchiffGold.
