By Schiff Gold
Peter Schiff recently appeared on Alternative Media Television (AMTV) to discuss the so-called "Trump effect" on the US economy. So far, the stock market has gone through some downs after the president-elect's surprise win and now back up with the Dow Jones average nearing record highs.
There's also been last week's bond rout, which sent long-term yields soaring as bond prices dropped. The yield on the 10-Year Treasury saw its largest two-week increase since 2001, up 5.9 basis points to 2.337%. The selloff was driven by "rising inflation expectations and the market's near-certainty that the Federal Reserve will raise interest rates in December," according to MarketWatch.
Trump's "effect" on expectations of higher inflation come from his infrastructure projects and fiscal spending promises while Janet Yellen's recent comments have a December hike at an almost certainty. However, fiscal spending won't be the magic bullet many are hoping for given the impossibility of servicing the national debt. Higher rates will only serve to uncover the current "recession masquerading as a recovery" we've had since 2008, according to Peter:
"Tighter money will drain so much revenue from the US Treasury because it's going to sink the economy in recession and it's going to cause government outlays to go up because the cost of servicing the enormous national debt will skyrocket."
In the end, the Federal Reserve will be forced to monetize government debt by buying up high-yield bonds, and higher long-term interest rates will have devastating effects on the housing market, as homeowners struggle to pay their rising monthly mortgage payments.
"Regardless of whether or not [Yellen] nudges rates up another quarter-point in December, the Fed is soon going to be reversing course and cutting interest rates and doing another round of quantitative easing. In fact, long-term interest rates are already spiking up on the potential that she might raise rates, and that's going to be enough to really prick the bubble in the housing market."
While the anticipation of Trump's administration is currently affecting markets, the economic realities of an over-leveraged government and an over-regulated market will render the actual effects of any fiscal stimulus and tax breaks as little more than an economic band-aid applied to the amputated arm of the average American.
For Peter, the real effect of Donald Trump's rise is how he's served as the proverbial canary-in-a-mine-shaft signaling the presence of a recession many in government and mainstream media have denied. But for voters living with higher prices and unemployment, denial isn't an option:
"I knew Trump's message was resonating with the average voter because I knew that the recovery that the president was bragging about and Clinton was trying to take credit for, was an illusion. It was a fantasy. Reality was the opposite. I knew that people were struggling in what was really a recession masquerading as a recovery, and I knew a lot of these people would vote for Trump. And that's exactly what they did."
Highlights from Peter's Interview:
"The only way that we can try to have larger deficits is if the Fed really puts the monetary pedal to the metal and does a round of quantitative easing that's much bigger than anything it's done in the past."
"So far the stock market is remaining oblivious to the spike in bond yields because they think the stimulus that might result from tax cuts and spending increases will be enough to offset the drag of higher interest rates. I think they are woefully mistaken."
"I think this rally in the dollar, this sell-off in gold is a head fake. It is an opportunity to take the opposite side of these trades. The people who are betting on the dollar and betting against gold have no idea the impact of higher interest rates. People are saying that if we get all of this fiscal stimulus then we no longer need the monetary stimulus. The reality is if we get the fiscal stimulus, we need the monetary stimulus even more. Without the monetary stimulus, the fiscal stimulus can't work. In fact, it can't even be done."
"There's no way to counteract the damage of this bubble that will result from a big spike in long-term interest rates. In order to avoid that, the Fed is going to have to ease, especially if we're going to get the tax cuts and the spending hikes; somebody has to buy all of the bonds to finance those huge deficits, and I think the only one that could do it, or would do it, would be the Federal Reserve."
"We've never had a real recovery. The economy is sicker now than it was in 2008, and rising interest rates will prove that."
"We're at record highs, but interest rates are still near record lows. That's what's propping it up, but rates are rising rapidly, and they've got a long way to go up. That means the stock market has a long way to come down unless the Fed comes to the rescue by reversing course on rates."
"Before we can have real economic growth, we have to deal with the problems created by the years of phony economy growth. Before we can kick this drug habit, we're going to have to go through withdrawal, and nobody has prepared the electorate for that withdrawal; therefore, I don't think anybody has the stomach for it. I don't think President Trump does. I don't think the Republicans in Congress want that to happen, so I think we're going to get cooperation between the government and the Fed to try to monetize these debts so we can postpone the pain of dealing with the consequences of what's already happened."
"All of this is a mistake. None of this should be done, but it will all be done in the name of political expediency. Nobody has the stomach to really endure what it needs to endured and to level with the American public about the inability of the US government to keep the promises that politicians have been making for years in order to secure their re-election.
"You've got all sorts of people who believe the government is going to pay all of these benefits, but the government is broke, and that includes bond holders who think the government can actually repay the money that they borrowed. They can't because the American public is broke. There's no way they can afford to pay the taxes that would be necessary to legitimately repay what we've borrowed."