The first two weeks of 2018 have seen the stock market continue to surge higher, seeing only one down day since January 1st. With consumer confidence near 17-year highs, many are bullish on the US economy, but not Peter Schiff. Peter Schiff is an economist, investment manager, and was an economic advisor to Ron Paul’s 2008 presidential campaign. Schiff is best known for his mainstream media appearances in which he was laughed at and mocked for his scarily accurate predictions of the housing market crash and ensuing financial crisis.
In a recent interview, Schiff expressed his sentiments on the US economy. “Investors are oblivious. They are really whistling past the mother of all graveyards. This is the best start since 2006. And of course, people who were buying stocks in 2006 had no idea of the magnitude of the financial crisis that would hit the market in 2008. Well, the same people are even more clueless today, because the crisis that we’re heading for is going to be much, much bigger – much worse – than the one in 2008.”
And with China planning on slowing or completely halting its purchases of US Treasuries, the US bond market won’t be getting any help. This will add to upward pressure on interest rates as the Federal Reserve attempts to normalize rates and eventually begins to unwind its balance sheet.
And rising interest rates means facing reality for the US economy, which could be problematic, as Schiff touched on. “Interest rates are going way up, and people are oblivious to what that means. Because we have more debt than ever before in this country. You know, we had a crisis in 2008 because we had too much debt. Now we have much more. So the economy is in much worse shape. It is very vulnerable to a backup in interest rates. The whole justification for the stock market bubble is based on the fact that rates are low. But what if they’re not low anymore?”
“If interest rates go up, the government can’t afford to pay interest on the national debt, which is exploding. Corporations can’t afford to pay interest on their debt. Individuals can’t afford to pay interest. The states can’t afford to pay interest. I mean, nobody can afford interest rates if they go up.”
Those who are bullish on the economy, Schiff says, are overestimating the benefit to the economy from the tax cuts. With inflation increasing, which we are beginning to see in oil prices that are nearing $70 per barrel, in gold prices that have rallied from $1240 at the start of December to $1330 currently, and in the dollar index which has hit a three-year low, Americans will find themselves increasingly strapped for cash. “Even though they are going to get a tax cut, they’re going to spend that money on gas, they’re going to spend it on food, they’re going to spend it on insurance. So, they’re not going to have anything left over to buy anything extra.”
Following the Great Recession of 2008-2009, the US economy went on to experience a 9-year bull market. This was due to all the monetary stimulus, 0% interest rates, and quantitative easing that was pumped into the economy, which reinflated all the bubbles that burst. Many Americans bought into the propaganda that their government and their central bank had successfully saved the economy, but the reality is no one can centrally plan and save the economy. Recovery has to happen on its own, without government interference.
It is dishonest to say that the economy has fully recovered before the stimulus has been fully taken away. With interest rates and the Fed’s balance sheet far from normalized, the verdict is definitely still out. With debt at never before seen levels, with rising inflation, and with rising interest rates, one should meet the economic narratives coming out of Wall Street, the Federal Reserve, and DC with heavy, heavy skepticism.