The Federal Reserve is in the midst of inflating its third big bubble. During an interview with Greg Hunter last month, Peter Schiff said the third time isn't going to be the charm.
It started with Alan Greenspan and the dot-com bubble. When that one popped in 2001, the Fed got busy, dropped interest rates and inflated the housing bubble. When that one burst, we got the Great Recession. At that point, the Fed went to work again. It plunged rates to zero and launched three rounds of quantitative easing. That led to a tepid recovery marked by lackluster growth. But in the process, the central bank blew up a whole slew of bubbles - the biggest being the US stock market. Even today, it continues to climb ever further into the stratosphere. Which snowflake will set off the next avalanche? That remains to be seen. But Peter said another crash is certainly coming.
This is the third gigantic bubble that the Fed has inflated, and when this one pops, it's not going to be 'the third time is a charm.' It's going to be 'three strikes you're out.' Because I think this bubble is too big to pop. I think it's the mother of all bubbles, and when it bursts, there is not a bigger one the Fed is going to be able to inflate to mask these problems, meaning we can't kick the can down the road anymore.
Peter said he thinks the next crisis will be much worse than the financial crisis of 2008-2009. He said it will be a dollar crisis and a sovereign debt crisis. He said the bonds people will be worried about the next time around won't be some subprime mortgages. It will be much more fundamental.
It's going to be the US government that people are worried about, and the solvency of the government and the Treasury bonds. Because if it's a dollar crisis and people are worried about the dollar, the only thing worse than owning a dollar today is owning the promise of being paid in dollars in the future. So, if there is a dollar crisis, there is a bond crisis, and that is going to be profoundly more impactful on the US economy, on the average American than what happened in 2008.
Greg brought up Puerto Rico and its debt problems, and asked if the massive US debt would lead to a cascade of defaults. Peter pointed out that when you borrow more than you can repay, default is inevitable. The question is the form of default. In the case of Puerto Rico, it likely won't repay its loans. The bondholders simply won't get their money back. Peter said Treasury debt would eventually be wiped out, but not in the same way.
I don't think we have the courage to default - to admit to our creditors that we don't have the money and we can't repay. I think we'll create all the money that we need so we can pretend to repay, but what we end up doing is wiping out the debt with inflation, meaning you get your money back, but you don't get your purchasing power back because your money loses its value.
So, how long can it go before the air starts coming out? How high can the national debt get? Peter said there's no way to know.
How many straws can you put on a camel's back? You don't know until you put that final straw - that one too many - and you break his back. So, can we go to $25 trillion? Maybe. But can we go to $30 trillion? We're not going to know. At some point, we are going to break the back of the camel with all this debt and then we are going to find out how much debt we can pile on, and it's not going to be pretty, because then we're going to have a crisis… Everybody is going to lose. Everybody is going to get wiped out who has been partying in the stock market, particularly in the bond market and the real estate market. The dollar is going to tank, and purchasing power is going to get wiped out.
By the same token, Peter said at some point, the price of gold is going to explode.
How long can they keep the price of gold suppressed? We will know when we get there. At some point, the price is going to explode because there is real physical buying, and all that paper selling can't camouflage that… People don't trust fiat currencies - they don't trust a dollar, euro, yen. They're looking for an alternative, and believe me, the real alternative is gold. And more and more people are going to embrace it. And when they do, it's going to overwhelm the central banks' ability to suppress the price. In the meantime, enjoy the gift that they are giving. Because if you haven't already bought your gold, whoever is selling it is doing you a favor. The fact that the price still doesn't reflect the fundamentals means that it's easier to accumulate gold now.