Peter Schiff: America the next Greece? (video)

there's all sorts of talk now all around the world about how governments have to stimulate the economy I mean you've got probably more of it now in Europe but certainly in the US as well and it's kind of really ridiculous that even people who look at the European situation will acknowledge that the problem is that governments have too much debt I mean after all it's a debt crisis it's a sovereign debt crisis countries have borrowed all this money governments have spent all this money that they've borrowed and for a while they were able to borrow the money but now the lenders have woken up and they realized that you know many of these countries simply have borrowed beyond the capacity of their tax payers to repay and people are worried about rest the creditors are worried about risk they don't want to loan any more money to these governments and so there's a crisis that has been brought about by excess government spending and borrowing and what is everybody demanding the government do to solve the problems spend even more borrow even more I mean wasn't there enough stimulus going on running up all these debts I mean Greece helped think of all the stimulus that was in the Greek economy how did the Greek government become so indebted they spent all this money wasn't that stimulus isn't Greece so sick specifically because of all the stimulus that made them sick how can more stimulus be the cure for a disease that is the consequence of the same stimulus obviously it can and it should be obvious in Europe what the answer is but the politicians there I mean the Keynesian --zz there's only one play in their playbook that's all they know it doesn't matter what the consequences are so they keep saying it you know stimulate stimulate stimulate although now they recognize that the government's can borrow or maybe they want to substitute the higher quality of German credit they want the Germans to come in there so more money could be borrowed or they want more money to be printed but the truth is that there are real problems in the European economy there are structural imbalances within that eurozone you have certain people that are living beyond their means particularly let's say the Greeks and you have other Europeans the Germans that are making it all possible that are living beneath their means that are producing all the things that the Greeks can't afford but yet by anyway so you have these huge imbalances structurally within Europe that need to be resolved and the reason that there are these imbalances is because of government stimulus and the only way to allow the market to restructure the Europe in a way that is feasible and viable is to withdrawal the stimulus and let the market function but you now have a battle between you know the people who want more stimulus and those who want austerity and we'll see how that plays out but in the United States you can see the impact of stimulus because it's you know it should be so obvious when you look at the the crises that have happened in the United States and it's amazing that Europe wants to you know follow this example in fact you know you've got Obama is you know trying to put some pressure on Angela Merkel and others in Europe to provide that's stimulus you know it's kind of like you know a kid you know being a bad influence on his friends maybe you got one kid who's trying to convince the other kid to ditch school and go to the beach because it's a lot more fun to go to the beach rather than sitting in a classroom all day but Europe should resist the temptation to follow America's example because it's a lousy example and it's an example that has just decimated the US economy and now you know we've got calls for QE 3 in in the United States and no I I remember when they first announced the qe2 and I was opposed to it at the time and I said it wouldn't work and I said if we do qe2 then we're gonna be launching QE 3 because QE 2 is not going to work and there were so many people that said no no QE 2 is the end of it there's not going to be a QE 3 well now it seems it's almost inevitable that we're gonna have QE 3 which means QE 4 because it doesn't work you know the first annotated these and it doesn't work didn't work whatever you know which key we want because the problem is the stimulus is the source of the problem so QE isn't gonna work anymore than you can put out a fire with gasoline I mean you have some cans Ian's like Paul Krugman one of the most probably famous of the group who says the problem is the QE just wasn't big enough that was the only only problem well it doesn't matter how big it is I don't care how much gasoline you pour on a fire it's not gonna go out see the problem is that there's not enough gasoline the problem is you're throwing gas on the fire you got to put it out with water but the keynesian don't understand that all they know is that you put a fire out with gasoline despite the fact that it makes it worse and if you really want to you know go back to the origin of the problem maybe not the the the the very beginning but in recent past why did we have a stock market bubble in the United States why did we have a technology bubble what what fueled that what made that possible it was monetary stimulus during the 1990s you had Alan Greenspan and he had a particular policy which was anytime something threatened the economy or the stock market he was there with monetary stimulus he would ease and and put more money into the banking system and create inflation and whatever was and there were a lot of things that went wrong during the 1990s you had the the Russian debt defaults you had the bankruptcy of Orange County California you have the the Asian economic crisis you had fears over y2k you know towards the end of the decade and so there are various things you had a long-term capital management and a lot of things happened but every time something happened there was a Federal Reserve to stimulate in fact Greenspan was involved so much in protecting the markets that they called it the Greenspan put everybody believed the Fed had their back and that resulted in a lot more risk-taking than would normally have been the case if market forces had been left to bear and people thought there was more risk to what they were doing and a lot of that sheet money ended up going into the stock market and much of it went into the riskiest part which was the internet stocks at dot-com stocks and so you have this huge bubble in the market and eventually interest rates rose I mean when they didn't you know they and when they got to about 6% or something like that the Fed succeeded in pricking the bubble that had had inflated and there was a lot of air in that bubble and and it came out and we started a recession now the problem is the recession never really ended it was cut short by more stimulus you see what a lot of the Keynesian don't understand is that if you look at the business cycle which is a byproduct not of capitalism but generally government meddling in a money supply because whenever you get the stimulus this monetary stimulus you send a lot of false economic signals to the various players in the market and the result is that you get a inefficient allocation of resources labor capital they become you know engaged in ways that they wouldn't had the government not interfere because what happens when they create more money as it looks to the market as if there's more savings and therefore there's more money to to fund investments because it looks like people have deferred you know their their time preferences to consumption in the future rather than consumption today and so you you you have mistakes you have a projects that aren't really shouldn't be funded that end up getting funded and of course you know when you have all the cheat money out there you know people you know they don't they don't necessarily act rationally it's almost like they're they're under the influence of a drug they're intoxicated in fact when we had the housing bubble George Bush one of the things he kept saying was that Wall Street got drunk and that's why we had a housing bubble this Wall Street was drunk and I acknowledge that plenty of people on Wall Street were drunk but it wasn't just Wall Street Main Street was drunk the whole country was drunk but what George Bush didn't do or he didn't bother to ask the question why why were they all drunk I think it's a drunk weird they get all that alcohol right well they got it from the Federal Reserve hey Alan Greenspan was the bartender who liquored everybody up and sure yeah when you're drunk you do a lot of foolish things you know just like you know in real life you could get drunk and go out and you know do crazy things at a party and you don't realize it till the following morning and then you sober up and you you know you can't believe the things that you did well that's what happened and that people were like you know I can't believe I bought that Comstock how can I paid that much for this company you know people start thinking clearly the stimulus wears off you know and the mistakes are revealed and so the recession is where the market tries to undo the damage that was caused during this phony moon and when that happens some people have to lose their jobs because they got jobs they never should have gone because companies you know shouldn't have hired them people rent real estate that they shouldn't have rented they didn't need the space so you know you have an economic downturn spending declines because people now you know they were that there's people unemployed people thought they were getting rich now they're not as rich as they thought so you have a contraction but instead of allowing the contraction to run its course which is the right thing to do economically the politicians can't resist a quick cure because that's how they get votes they don't get votes telling people hey you know we got to swallow this bitter tasty medicine but it'll you know the economy will heal and eventually it'll get better what gets elected is promising something right like just like you know what's the more popular diet you know if you want to lose weight the diet and the exercise but it's a no I got a miracle cure I just got some cream you just got to rub it on your thighs right that's what the public wants to hear and they don't they don't they don't want to hear the truth so you get more stimulus and the politicians want to take credit if ever if the stimulus creates any kind of Bounce even if it's not real even if it's ultimately gonna collapse and that's what happened with the housing bubble the housing bubble was created by government stimulus and it was created it started you know with the stock market bubble because the cheap money of the 1990s also went into housing I mean the housing prices started rising in 96 97 so if they didn't start in 2000 but when the real estate bubble in the stock market bubble burst all that liquidity just flowed into the real estate market and since it was already rising it just fueled the bubble even further and as real estate prices rose the effects on the economy were far greater than in the stock market because people were much more likely to spend real estate wealth than they were stock market wealth because it was so easy to extract it and since there was so much leverage homeowners were making a lot more money on their houses than they were making on their stock portfolio so it had a much bigger impact on consumer spending and the psychology of the market and of course the the other big difference and I pointed this out you know in my original book crash proof was that when people were buying stocks they were mainly buying it with their own money but when people were buying real estate they were buying it with somebody else's money and therefore was gonna be a credit crisis because I knew that the institution is lending the money weren't gonna get it back and the greater problem was when people were buying stocks there were no government guarantees yet when people were buying houses you had government guaranteeing these loans so this was a bigger mess cuz the taxpayer was gonna be on the hook but we got I don't know 5 6 years of phony economic growth following the bursting of the stock market bubble and George Bush thought this was great everybody thought this was great yet all kinds of people talking about how great the economy was a lot of you know the Republicans conservatives were defending this phony economy I was out there criticizing it for years because I recognized it for what it was it was a housing related mania it was a bubble there was imaginary wealth and all we were doing was having a huge party as we were spending this borrowed money and I knew that eventually the bubble would burst that home prices would fall and that the losses to the economy would be enormous but when it happened did the government learn anything No did-did-did ben bernanke learn anything from Alan Greenspan did he did he looked at him did he make the connection did he see G Greenspan lowered interest rates to 1% and he kept them there for years and then he raised him to slow and because of that he fueled a housing bubble which has done tremendous damage to the economy I better not make that mistake again did / - say that no Bernanke actually went up to Bernanke lowered interest rates to zero zero think about that look at all the damage we did to the economy with a 1% interest rate imagine how much more damage we're gonna do with 0% and what about the fiscal side did Barack Obama take a look at the big deficits under George Bush and say gee that was a big mistake I don't want to repeat that you know know his deficits are many times it's large our deficits are now a trillion and 3 a trillion and a half a year and that's just the tip of the iceberg it's just a funded portion so we have a bigger dose of Keynesian stimulus now then we had under under Bush and and Greenspan so therefore the hangover when the stimulus wears off is gonna be worse so imagine that I mean think about how bad it was in 2008 not thinking about how much worse is gonna be when this round of stimulus wears off because usually - the bigger the boom the bigger the bust and the bigger the Buffs the more stimulus you actually need to try to generate you know a phony high to the economy and you know we the US economy is now so hooked on cheap money so cooked on this we're so addicted to it that we the economy's built up a tolerance because you need so much of it now but you don't even get the same effect I mean we have we have thrown more stimulus at this economy now yet the unemployment rate can't even get below 8% this is at the height of the expansion we can't even get below 8 percent and that's and that's not even the real number the real number is about 15 percent and the government reports that number I'm not making it up I mean they report a number called u6 which is people who are given up looking for work and people who are just working part-time but are still looking for full-time work there when you count them as being unemployed which of course they are then the number is about 15% you know the labor force participation rate in America is about the lowest it's been since I think the early 70s and if you look at it from men because you know before the 70s women didn't work anyway because their husbands can afford to support them but they had to go into the labor force in in the 70s because the taxes were so high and inflation was so high their husbands couldn't afford to support them anymore but if you just look at men labor force participation among men I think it's the lowest it's been since the 50s or the 40s and into the Second World War why are all these men leaving the labor force in America is it because they're in time they're retiring early because they're so wealthy no it's because there's no jobs the jobs have been destroyed a lot of them have gone on disability you've got millions and millions of American men probably able-bodied that are now collecting disability but they're not really disabled it's just that the job market was disabled but they don't you know they don't show up in a statistic so even though we've had all this stimulus we've got officially over 8% unemployment and unofficially 15% interest rates didn't even rise we never even raise rates they're still at zero and we're rolling over into another recession so imagine that we're starting a recession with the statistics that are closer to where you are at the bottom of a recession we've just had the recovery and that's this is how low we are it's like you know we were in a building and we took the elevator to the basement now we're gonna go down how are we gonna go down from where we are right now we did we didn't we didn't get any kind of phony economic growth and I say it's phony but we did have some GDP growth in the US and a lot of people think aha you see America's stimulus is working that's why Europe should follow our example because we do have this GDP gross well so what so what do we have GDP growth at what cost how much did we pay for that growth we have maybe two percent growth in the GDP but we increase the debt five times that amount does it make sense to borrow a trillion dollars to get 200 billion dollars of GDP what about what happens when you have to pay the money back then what happens to your GDP what about the interest yes you know Europe doesn't have that little bit of phony growth because they have some elements of austerity but doesn't mean the austerity is wrong it just means it hasn't have enough time to work you know it's if you're sick and you need to take some medicine you know there's a good chance that the medicine isn't gonna taste good but that's assuming that you don't swallow it see the Europeans have now got a taste of that medicine and they don't like it and everybody is saying well spit the medicine out because it doesn't taste good well you spit it out you're not gonna get better that's what we're telling him we're telling you up to spit the medicine out to follow our example see we're not taking any medicine all all we take is novocaine because we don't want to feel the pain but we let it get worse and so that that's where we are right now and you know the only reason I think that the US economy is not already ain't imploding because when I wrote crash-proof I figured that the real crash would have already happened now I didn't think the real crash was the the recession that we had a no aid I mean I saw that coming and when I wrote crash proof I basically said we have this huge housing bubble government created it created by the Fed Fannie and Freddie created it Geron by and you know by the way I'm testifying in front of Congress on Thursday for the second time if you want to see my first congressional testimony it's up on youtube you can just Peter Schiff congressional testimony and there's about 35 minutes of it you can you can see on YouTube this one will be on YouTube too so you should look for it it should be interesting because I'm going there to testify on whether or not the Fed should expand the FHA from single family homes to multifamily guaranteeing mortgages and of course I'm gonna testify that not only shouldn't they expand into multifamily but they should get out of single-family that in fact the whole agency should be shut down and I'm gonna you know give Congress a lesson on what they've done to help destroy this economy particularly the housing market so it'll be it'll be an interesting discussion but when I when I wrote crash-proof and I said okay we're gonna have the housing bubbles gonna burst this would be a huge recession because people are gonna stop spending because their home equity is gonna vanish the banks are gonna be in trouble because the collateral for all their loans are gonna collapse and so banks are gonna fail Fannie and Freddie are gonna go bankrupt it's gonna be a huge recession I said it's gonna be the worst recession since the Great Depression but that wasn't the crash that I was preparing people for that was the event that was gonna set the crash into motion because in that book I then said the government is going to make the same mistakes again they're gonna repeat the same mistakes that it blew up the bubble they're gonna try to reflate the economy they're gonna try to stimulate with cheap money with trillion dollar a year deficit spending and it was the consequence of that that was going to bring on the real crash right that it wasn't this disease that I was diagnosing that was gonna kill us but the government's cure for that disease that was ultimately gonna be lethal and I thought it probably would have happened during the Obama term his first term I think I think the one thing that I didn't really factor into and when you're forecasting the future there's always so many events that you don't know because after all it's in the future and so things can happen to screw up your timeline and I think the thing that happened was was Europe and it's not that I I didn't recognize the European problems I did from the very beginning and I was talking about this crisis in Europe the minute they formed the eurozone the minute I saw the terms of that treaty I knew it was a disaster waiting to happen I just figured the disaster would happened later than ours and it still might because there's still a that they could still find a a temporary solution and buy some more time because you do have a lot of wealthy economies in Europe that can subsidize these poor economies if they want to I think it's a mistake but they might make those mistakes because politicians often do those things they want to you know kick the can down the road rather than deal with it and so they can do that in Europe they can afford to there's enough wealth there I mean if you look at the situation in Europe Europe as a whole of community that the countries and share the euro currency collectively are in much better shape than the United States and and so they do have the the wealth to postpone this if they if they want to and I think the difference and the reason that Europe is now in crisis is because the markets are forcing the issue right now and America I think as a result has got a bit of a reprieve I think we've got more time now because people are so worried about Europe that they are buying dollars right there they're buying Treasuries and so because of that interest rates are lower we could borrow more money consumer prices in America are lower because it's keeping the dollar up all this is benefiting our phony economy I mean benefiting in that it keeps it going a little longer and so it's kind of ironic when you hear a lot of politicians pointing to Europe as the cause of our problems they don't realize that Europe is the best thing we got going for us right the fact that people think Europe is in worse shape than America that's all we got that's our ace in the hole right now I mean the worst thing that would happen to the US economy is all this a big resolution to the problems in Europe because that would put downward pressure on the dollar upward pressure on on interest rates but you know it doesn't make any sense to me that people are buying the dollar or US Treasuries as a safe-haven especially if what they're worried about is European debt because as I said we got more debt than Europe so I mean you're jumping from the frying pan into the fire so I think it I think at some point and people are gonna realize they made a mistake I'm probably a good analogy would be Facebook and you know I think the the Treasuries are gonna be the Facebook of safe havens you know the way Facebook worked everybody wanted to buy Facebook it was the most highly touted IPO probably ever and huge IPO 20 20 billion dollars you know massive deal everybody was lining up to buy it and most people just wanted to buy it because they figured that they can sell to somebody else everybody figured it'd be this big pop because so many people wanted it and everybody wanted a piece of the action they didn't really care about the valuation because they were gonna sell it to somebody else who didn't care about the valuation right they were gonna look for that greater fool well the problem is the deal was so big that all the fools bought on the IPO and there were no greater fools left they were all in and and then you know when they didn't get the big pop right they actually bothered to look at what they own oh say I got these shares of Facebook and they they looked at the earnings they looked at the fundamentals and they realized that it wasn't what it cracked up to be and they wanted to get out but of course who were they gonna sell to because all the people who wanted it owned it so price goes down I think the same thing is happening people oh no the euro is in trouble let's buy the dollar let's buy US Treasuries it's a safe haven okay until you actually take a look at what you own and realize that you have just loaned money to the most indebted entity on the planet as fact as far as I know in the universe if they're if they're if there's if there's a government anywhere else in the universe I doubt that it's as broke as America so how could you how could it possibly be a safe haven and you know I hear and hear this comparison all the time people say look you know America is not Greece because America has a printing press yeah I know that's what's so scary people act as if a printing press is this is our salvation and somehow it's a get-out-of-jail-free card hey you don't have to worry about buying Treasuries because America has a printing press that's exactly why you have to worry people act as if well you know if we print money that counts as paying oh it doesn't because what if the money doesn't buy anything what good is that you know if you if you can't repay what you've borrowed there are two things that you can do right because you by definition you can't repay so you can either default right which is the risk in Europe that people are worried about or you can inflate but either way the creditors don't get their money back I mean in one one way they get their money back they just don't get all of it back right they get a portion like originally Greece Greece's creditors agreed to a 50% haircut on the debt so they get half of what they loan and who knows you know by the end of the day they'll end up with a crew-cut because I don't think Greece can even pay half of what it borrowed but in the alternative right there is no default the government pays everything but it prints the money in which case the money loses value and the purchasing power is gone and you you might end up losing more purchasing power it might be better to get 50 cents on the dollar where your 50 cents still has value then they get a hundred cents on the dollar where it feels like you got 10 cents because that's how much prices have gone up because the currency has collapsed and eventually creditors are going to look at the the fact that America can't pay its bills and are gonna start to be concerned about inflation and purchasing power and the dollar and and when that happens I mean that's when we're gonna have our real crisis in the United States in the meantime the Fed continues to stimulate the economy trying to delay that day of reckoning but of course you know the more stimulus we have the worse the situation ultimately gets and you know there are a lot of people if you look at the US economy now because supposedly were about three years into the recovery you know and interest rates are still at that emergency level rates are still zero and the Fed has promised to keep them at zero I don't know four years and a lot of people are thinking well the Fed is making a mistake now they're being too easy they should tighten a little bit or at least they were up until recently and the analogy that I would often hear on television people would say they were equated the stimulus with training wheels on a bike and and they said gee no we needed we needed those training wheels for a while because the economy was a real mess and so we needed the training wheels to get the bike moving but now the bike is rolling along on its own it doesn't need the training wheels anymore the Fed needs to take off those training wheels and you know I heard that a lot and I think the analogy was wrong because I don't think this stimulus were the training wheels and I think the Fed knows that the stimulus is not the training wheels the stimulus are the only wheels and the economy is coasting on stimulus that's what's going on and the Fed knows if it takes the stimulus away right the bike that's your metaphor it's gonna fall over because it can't go without the stimulus wheels but that doesn't mean the Fed shouldn't remove the stimulus see a lot of people who were saying removed the stimulus had no idea what the consequences would be because they didn't they thought it was training wheels they didn't know the stimulus were the only wheels but the problem is the bike is is going over a cliff we're pedaling towards the edge of a cliff with those stimulus wheels and so if we don't take the stimulus away we're going to go over that cliff and you know we're not going to survive the impact so it's better to take the wheels off now and just let the bike fall over maybe we'll get you know beat up a little bit black and blue but we'll survive that is what is needed but the Fed knows that it can't let interest rates go up and and here's why this is list I'll give you a little bit of a picture of what's gonna happen and of course you say well you know why don't we just leave interest rates low forever if the economy is gonna be such a mess if interest rates go up well the Fed can just keep interest rates low indefinitely well you can't do that it's impossible the markets will not allow you to do it indefinitely but one of the things is people just don't seem to understand is that the main problem in the United States is it interest rates are too low I mean that is the source of our imbalances rates are just too low and because they're too low we don't save it off we don't produce enough we spend too much we borrow too much the government is too big we have huge imbalances we we have what 50 billion dollar-plus a month trade deficit so we're 600 billion dollars a year that's enormous the amount of goods that we import that we can't afford I get the world lends us the money to buy it but why doesn't the American economy produce the things that Americans need because it's too screwed up because all of the malinvestments that are the result of interest rates being too low what most people will accept even the Keynesian economists will accept in general although sometimes they even don't get this right that the market should set prices that bureaucrats shouldn't just pick prices because if you pick a price you're probably gonna pick the wrong one and the result is gonna be a shortage or surplus and you know you need to discover the price through the market that's the only way to really have an equilibrium and you know to allocate resources effectively is through a market-based price well in America we have markets determining a lot of prices not all prices but most prices are determined by the market and it works works really well but what about interest rates right interest rates are the price of money and you could argue that probably the most important price is the price of money and because money is on one side of every transaction in America so you got to get the price of money right which would mean that we need the market to discover the price of money but it doesn't the government sets it it price fixes it right in America interest rates are set the same way the Soviet Union used to set the bread price well obviously it doesn't work and the the Fed is also under a lot of pressure to set rates low lower than the market would have them because of the the the debtors because a the government is the biggest debtor and the government needs low interest rates but most Americans are in debt the average American voter is a debtor he has a mortgage he has a student loan he has car loans he has credit card debt he needs low interest rates so the Fed is under intense political pressure to keep interest rates artificially low and that is why the US economy is so screwed up and until interest rates are allowed to rise we're never gonna have a real recovery it doesn't matter what they do as long as they keep interest rates too low we'll never restructure the economy along the lines that would be necessary to create real economic growth so the best we can do is blow up bubbles that will keep bursting and and with stimulus and keep digging the US economy into a greater and greater hole borrowing more and more money in the process now the Fed knows right now how completely addicted we are to its stimulus to the cheap money that's why it's got interest rates at zero but I said it can't keep them there forever because one of the byproducts of zero percent interest rates right is the inflation that is you know created in order to buy up all those bonds and you know the Fed lies about inflation the Fed pretends there is no inflation it hides behind government statistics that really do a good job of masking the inflation because of the methodology for calculating it but the Fed has a lot of help in hiding inflation because it has foreign central banks all around the world that buy up a lot of the dollars that we print and in the process they send goods into America see America and our trade right we import things and we export paper we export dollars and import real things so Goods come into America and the money flows out so that keeps a lid on American prices but of course it makes prices in other countries like China go up so that's one of America's greatest exports is inflation and we export a lot of it to countries like China who have to deal with it but that's one of the reasons that we're able to delay it but eventually look all that money is gonna come back they're not going to take our inflation forever and you have tremendous distortions in China and other emerging markets that are just drowning in a sea of dollars right now that have huge foreign exchange reserves and it's costing their people a fortune to accumulate these reserves you know the real the real threat to the global economy is not America collapsing that's actually going to be its salvation the real threat is the enormous cost of propping us up that's the problem as American economy weakens the problem for Asia is that they're foolishly trying to prop it up and it's not easy and it drains them of a lot of resources that could be used more productively in their own economies but eventually inflation is gonna show up in a bigger way the Fed is not gonna be able to lie about it the Fed is gonna have to do something about it what can the Fed do about inflation well in reality nothing because if it raises interest rates that's gonna destroy the economy which of course needs to be destroyed because it's phoning we have to destroy the phony economy in order to rebuild a viable one but the Fed looks as its role as trying to perpetuate you know it's created this monster and it wants to keep it alive right and so it has to keep rates down but of course it has to it has to maintain the myth that it's an inflation fighter not an inflation creator so it says you know I'm ready to raise interest rates the Fed us the minute we see inflation we're gonna raise rates well you know no they're not I mean it's all it's all bark there's no bite there but they have to say that they can't acknowledge the predicament that they're in because then it's all over then you know people you know they'll dump the dollar but eventually rates have to go up and here's the reason that the Fed won't let rates go up what would happen to the US economy if interest rates were allowed to seek their market level well we know that the market rate would be a lot higher than the current rate I mean if the Fed wasn't buying all these bonds if we had a stand on our own credit quality the US government without the Fed buying and if the US government was constrained by its ability to tax and repay its loans if the Fed was tightening it wasn't the buyer of you know only resort right now where would interest rates be who knows I think they'd be higher than they are in Spain or Italy France but even if they just went to the same level Spain they're about 7% right now and 7% wouldn't even be historically high for the US it's been a lot higher whole rates got to 20% in 1980 when America was in much better financial shape than it is today but what would happen if rates went to 7% well I mean it would be Armageddon I mean you think things are bad in Spain you ain't seen nothing yet compared to what it would look like in America if interest rates were 7% first let's look at the banks what happened to the banks I mean JP Morgan had a two billion dollar loss right now I just read this morning that it's now up to four and a half billion and who knows you know where it's gonna be by the time they close the trade because they're still stuck in their position but that's nothing compared to how JP how much money JP Morgan is gonna lose if interest rates went to 7% and not just JP Morgan Morgan Stanley Citigroup Bank of America I think is 7% Fed Funds rate would pretty much bankrupt all those banks the failure would be bigger than they were in 2008 and of course there'd be no bailout next time around because a bailout presumes the Fed is easing because the Fed has to supply the money for the bailout if the Fed is tightening there's no bailouts for anybody so all the banks we bailed out are gonna fail even bigger more spectacularly a bigger losses then what would it had been the case had we let him fail in o8 which was what we should have done right the government should have let the banks fail in 2008 now wouldn't that have brought on a bigger crisis if they did that of course just like we would have had a bigger recession had they not intervened and after the stock market bubble burst but that doesn't mean they shouldn't have done it two wrongs don't make a right because the government makes the mistake of creating a bubble doesn't mean they should compound the mistake by trying to you know intervene to prevent it from deflating but we made that mistake in in 2008 and so we kept making that mistake so all these banks would we fail with rising interest rates in fact I think it was ironic or not even how ironic maybe was not the word but it was deliberately deceitful that the the Federal Reserve asked banks and this is a couple months ago to submit some stress tests to prove to the world that our banks were healthy and the Federal Reserve asked the banks to stress test two things basically the bursting of the stock market bubble and the bursting of a real estate bubble well those bubbles already burst what's the point of stress testing those hey the one bubble that they didn't ask the banks to stress test was the bond market bubble why didn't the Fed ask the banks to see how their balance sheets could handle a big spike in interest rates well I think the reason is obvious because they knew the banks would all fail that test and they didn't want anybody to know that they would fail that test so they didn't ask him to do it but the banks are loaded up with long term Treasuries long term mortgages and how are they financing it they borrow from the Fed at practically nothing and they turn around and they reload the money to the Treasury to the housing market but when interest rates go up the profits become losses because now it costs them more to borrow the money than what they're earning on their assets so their their income turns into huge losses and their collateral collapses their their balance sheet implodes because those bonds now have lost a lot of value and what about all the real estate loans right right now real estate prices in the US are the lowest they've been nationwide since the bubble burst the peak in oh six and that's despite record low interest rates I mean mortgage interest rates now are in the 3s and I think inflation the real rate of inflation is higher than that which means they're paying people to buy houses and they still won't do it and the prices are falling so imagine what's gonna happen to real estate prices if Fed Funds rate went to 7% and in mortgage rates for 8 or 9% imagine where the housing market beat where were the banks be I mean it's gonna be a complete collapse but probably one of the biggest factors that the Fed understands is what about the US Treasury what happens to the US Treasury if interest rates go to 7% know the same thing that happened to Greece we default or restructure because we can't afford to service the debt at seven percent it's not possible and that's just servicing it I mean we can't even think about repaying it and you know I hear this argument all the time because I sleep you know we can't possibly repay our debts and the conventional wisdom is well we don't have to pay our money to best back only we don't the pain back I mean is what we just borrow forever it will do the lenders know about our plans you know because if we can borrow without without ever having to pay it back that means the world is willing to lend and never get their money back you know which by the way is the most important part of the whole lending process it's getting your money back but basically we say no no no because you know people people get their money back because they roll over the debt see this is this is how America runs it's it's it's balance sheet right now or it's debt you see we sell bonds and then we mean that when they mature we borrow the money to pay off the principal and we usually borrow it from the same people who loaned it to us in the first place and when interest is due what we borrow that money from the people who loaned it to us well I mean what kind of a weight or to run a you know a business I mean can you think of anybody else who had the exact same business plan as the US government yeah Bernie Madoff that's why you're laughing he's in jail right that was Bernie Madoff's plan oh use is that why you're standing up our job give me a few more minutes but anyway but but anyway so I'll try to you know five minutes but anyway so so um yeah Bernie I mean that was his plan it was the greater fool right we we always figure that there's gonna be somebody else willing to lend because we obviously can't repay the principal I mean the US has about five trillion dollars in debt that comes doing the next year I mean we just no way we can we can get that money in fact if you think back a year ago or two years ago we had our crisis regard revoir regarding the debt ceiling there was actually talk that we were gonna default if we didn't raise the debt ceiling I pointed out at that time that that was an admission that we were running a Ponzi scheme what did we say we told the world we were running a Ponzi scheme and in general if you're running a Ponzi scheme that's not what you want to do you want to keep it real quiet you don't want to admit it but we told the world if we can't borrow more money but we're not gonna pay back the money we've already borrowed right we didn't say we didn't tell our bondholders don't worry we'll raise taxes to make good on our debts or don't worry we'll cut spending no no what was what we said we said if we can't pay our debts the first people who are gonna suffer are the bondholders cuz we're not gonna pay well that's an admission that eventually if the world doesn't want to lend us money we're not gonna pay and if we try to keep interest rates artificially low if inflation is 10% and we're asking the world to lend us money at 0 1% 2% they're not going to do it and if interest rates went up 7% which is what I said when I started this analogy and if we had let's say a 20 trillion dollar debt when it happened let's say this happened two years from now and the national debt is 20 trillion let's say well what 7% of 20 trillion and the reason I'm taking the whole budget the whole is because it's all financed like an adjustable rate mortgage it's all t-bills I mean there's some long term Treasuries but most of the debt is short term so let's say interest on the national debt goes to 1 trillion dollars a year which is half of the government's tax receipts but of course how much revenue with the government be collecting when interest rates for 7% housing was tanking banks were failing I think the government's revenues would plunge so under this scenario you know we could have 3 trillion dollar or more annual deficits trying to finance them at ridiculously high interest rates there is no way the government can pay and politically it's going to be impossible for the US government to make interest payments to the Chinese interest payments to the Saudis or the Japanese while slashing the pay of government workers slashing the the benefits of people on Social Security you think the Americans are gonna are gonna take that any better than the Greeks are taking it when they're being ask the sacrifice so the Federal Reserve knows this the only thing standing between the fault is the Fed and his printing press but the only thing that's enabling that is that the world hasn't figured out this predicament yet but it's coming and and the real crash is coming and that you know that is the subject of my latest book and we need to prepare for that and understand and I don't really have a lot of time obviously or any time so I guess I'll just end it there and I see cuz I see this guy standing here at my peripheral vision and it caught it keeps interrupting my train of thought so finally I succeeded I know I know and it's believe me it's distracting cuz I'm trying to think on one side of my brain I'm so what's this guy doing on the other side yeah yeah so it didn't work out that well for Japan did it and of course look at the debt-to-gdp that Japan has now I mean that's obviously a problem just because you know it hasn't you know been felt yet I mean what's gonna happen when interest rates rise in Japan I mean that's not gonna be a pretty picture but I think Japan has given America a false sense of confidence in that we look at Japan and see how long they were able to keep interest rates in zero and we say you see we could do it too well you have to look at what was Japan's debt to GDP when they started it was very very low number one and number two during the entire period that Japan was borrowing money their own citizens were saving money so the Japanese government was simply borrowing from Japanese citizens and during the same time the Japanese economy was so productive that they've run persistent trade surpluses in fact if it weren't for China Japan would be the world's largest creditor nation I mean Japan is sitting on over a trillion dollars of Treasuries so they could certainly pay off a lot of their debt if they could sell those Treasuries so the thing is Japan is in much better shape fiscally then America they're solvent you know and they can afford to make these stupid mistakes I mean they shouldn't be making them it's to their own detriment their economy would be in much better shape had they not amassed these huge deficits had they simply allowed the economy to restructure allowed companies to fail allowed the yen to appreciate more they would have been in much better shape but they decided to go this stimulus route this Keynesian route and so they have suffered but you know they were a wealthy nation and they're not as wealthy as they would have been had they not done it but you know they're still wealthy America is night and day from Japan we're the exact opposite situation we're already broke all right we don't have the domestic savings pool to tap into we're borrowing from abroad right we have huge trade deficits not surpluses we're the world's biggest debtor nation we owe more than all the other debtor nations combined so you know we can't make these mistakes we're not Japan you know we don't have all that time right you know we don't have all that rope to hang ourselves with this so it says short short work so I think that's deceptive to think that we can do that because there's no way the world is going to make that possible I mean think about how much money we would have to borrow because remember our phony economy needs more and more debt to maintain itself so the deficits have to keep getting bigger and bigger and of course we keep having to borrow more and more money to get a smaller amount of GDP growth so who does eventually we might have to borrow a trillion just to get a hundred billion of GDP and then maybe two trillion just to get 50 bit I mean the numbers are just so enormous the world can't afford us so it we don't have it can't possibly go on for anywhere near that length of time before before the whole thing implodes can it go on another six months yeah you know but maybe you can't I don't know it's like how many you know straws can you put on the camel's back I don't know but eventually it's one too many and you know our camel is you know is you knows pretty much you know ready to go I mean you know how many more but a year two years but I think it's I think it's gonna happen you know we're gonna have a sovereign debt crisis a currency crisis in America all right what's happening in Europe all right warm event if in fact if you go back and remember the subprime crisis right the big word everybody said back then was contained hey everybody said don't worry about the mortgage market or the housing market it's just subprime it's contained in the subprime market the same people are saying the same thing about sovereign debt hey it's contained to Europe don't worry it's just a few of these countries in southern Europe it's not gonna come to America well it is gonna come to America we're not going to escape the consequences of this profligacy especial we're in worse shape than Europe and it's not just America the federal government look at the states we have states that are broke too and it's the states in the government they're all trying to fund themselves from the same taxpayer who's also broke and many of them are unemployed and they're up to their own eyeballs in debt so how was it how was it indebted nation gonna pay its bills by tapping into an indebted citizenry it's impossible yeah yeah unfortunately one of these guys is gonna win and you know same ole same ole yeah I mean not you know I was a Ron Paul fan still am supported Ron but you know unfortunately there weren't enough of me and you know so you know Mitt Romney is gonna is gonna run so you know I think it's it's a race between somebody who doesn't really understand capitalism and someone who doesn't believe in capitalism you know I so how do I mean I think on the margin Romney is not gonna be as bad as as Obama so I guess we got that going for us if he wins but is he gonna be better than Bush right are we just gonna dial back to the to the Bush era because Bush was a disaster and does Romney recognize what a disaster Bush was how think so he surrounds himself with the same type of people that were surrounding bush he's supported bush he thought the bush you know he liked bush when he ran in Oh 8 you know I don't know he was he was recently asked in a press conference if he would support the Ron Paul plan to cut a trillion dollars from the deficit in year one and he said no no I wouldn't support that plan because we can't afford to take a trillion dollars out of the economy as if government spending puts money into the economy it takes money out of the private sector and diverts it to the public sector but that undermines the economy if you cut a trillion dollars of federal spending you return that trillion into the private sector and it grows the real economy you have to strengthen government to grow the economy it's one or the other and unfortunately he doesn't really seem appreciate the significance of that so you know I don't I don't know that there's much hope III you know I said rather have Romney you know you know at you know at the helm when we know when we hit the iceberg then Obama does he might you know he might have a better chance of learning on the job understanding the market given the fact that that philosophically I think if you asked him guess you know capitalism free markets you know they're the way to go see I don't think Obama actually feels that way I think he's a socialist whether he'll he'll he might not admit it because socialist generally don't like to admit that that's what they are because they know that it's not popular but if you look at what they believe in and you can't differentiate it from what a socialist would believe but yeah but but yeah Oh anyway but answer my point is so I think that you know when there are big problems I think Obama will jump on the opportunity to blame it on capitalism and and look for big government solutions which will only compound the problem yes yeah you know we have you know in the state governments you have a situation where you have a governor that's trying to rein in the excesses of spending and particularly against you know government unionized employees which you know it's unfortunate we shouldn't have anybody who works for the government being a member of a union it's all it is is legalized extortion because the the union members help elect the politicians and it's the politicians that pay their salaries and and so they it's a very incestuous process but the taxpayer isn't anywhere involved he just gets stuck with the bill and so a lot of these government workers earning an enormous amount of money in fact the highest-paid people in America now work for government it's you know it's they're not really public servants anymore it's the public that serves the government we all exist to serve them they're like in America it's it's it's almost like a new nobility right our Constitution says that there's no titles of nobility yet the civil servants the government is now the nobility and the con she's just a bunch of peasants that have to support their their lavish lifestyle but you have a governor trying to rein it in slightly I mean you know just you know and it's it's you know the they've they've mobilized all the troops to recall the governor yank him out of office right because he has the nerve to admit that they can't afford to pay these lavish salaries and benefits so I think it's a very pivotal election that potentially can have a chilling effect on other states but again it's similar this the same thing that's playing out in Greece right nobody wants to get off the dole everybody wants something for nothing and it's interesting that whenever we call for sacrifice now you've got you've got people riding in the wagon and you've got people pulling the Ragged the people that are white riding in it or working for the government or collecting a check then you've got people that are that are that are that are working and pulling the wagon and it seems like when the politicians want sacrifice they want the people who are pulling to pull harder right they never ask the people in the way I gonna get out right and help everybody else pull it and that's what's happening in Wisconsin and the people in the wagon are all getting together and saying we love this ride and and and we want it to keep on going but eventually the people who are pulling the wagon they're all gonna drop dead of exhaustion and then the wagon ain't going anywhere and and that's where the u.s. is headed if we want we don't do something

Channel: The Fraser Institute

Views: 778,145

Rating: 4.5985174 out of 5

Keywords: Peter Schiff, United States, USA, government, economy, deficit, debt, recession, housing crisis, stimulus, Greece, Europe, Keynesianism, Fraser Institute

Id: 0WhDs7-MXKc

Length: 57min 28sec (3448 seconds)

Published: Wed Jun 06 2012

Reddit Comments

[u/[deleted]]

Is America the next Greece? No.

1. We can print our own money.

2. We are, for the foreseeable future, the world's reserve currency. Therefore, people will still want the money we print.

Now, I do actually oppose Keynesian stimulus and I strongly believe in austerity and long, hard work to reduce our national debt. However, these are longer term problems than this title editorializes IMO.

[u/HotSoup_77]

Ha! Please, America was the first "Greece" in the collapse. The US just had enough sway to convince other nations that they weren't out of money. hahaha, no but it is truly scary.