Episode 76: GoldMoney’s Andy Duncan talks to Peter Schiff about the upcoming “fiscal cliff” in the United States, and how precious metals investors should manage their way through it. They also talk about Peter’s view on gold stock investments, China, as well as both the short-term and long-term outlooks for gold. Peter Schiff is CEO and Chief Global Strategist at Euro Pacific Capital; CEO of Euro Pacific Precious Metals; and author of several financial books, including How an Economy Grows and Why It Crashes (2010); Crash Proof 2.0: How to Profit From the Economic Collapse (2011); and The Real Crash: America’s Coming Bankruptcy—How to Save Yourself and Your Country (2012). He’s also the radio host of The Peter Schiff Show.
This podcast was recorded on 28 November 2012 and previously published at GoldMoney.com.
Shiff responds to the danger of not going over the ‘fiscal cliff’ now as being either hyper-inflation or permanent QE money printing.
The hyper-inflation comes from higher interest rates,
But the Fed is able to manage interest rates by paying interest on reserves – which negates hyper-inflation.
And without hyper-inflation, the major problem for QE is that it is a Central Back action that never “trickles’ down to the real economic world of aggregate demand. Therefore, it is ineffective as policy.
So, what is he really saying?
Hi Joe
Hyperinflation does not “come from higher interest rates”, it comes from issuing too much currency.
When more currency chases the same amount of goods and services, then prices rise. If prices rise too fast, then people come to distrust the power of the currency to act as a store of wealth. In these circumstances a mad panic ensues, where everyone gets all their available money and tries to spend it as quickly as possible. This is so that they can at least get something of value for the rapidly degrading currency they have in their possession. This coordinated action causes a tidal wave of money to hit the market, which causes prices to spiral upward and to rapidly destroy any residual value that the currency may have.
Raising interest rates when inflation starts getting out of control is a means of stemming the tide of money. This is because: if the interest rate offered is equal to the degradation in purchasing power of money, then there is no need to spend all one’s available currency as quickly as possible, as the purchasing power of the money will be retained by the addition of the interest earned.
Kind regards
Simon
Simon, thanks.
I realize I did lose a phrase there.
It was the higher interest rates that caused the printing of ‘too much currency’ that led to inflation.
The link that Shiff made was markets would eventually cause interest rates TO rise. The CB was left with no policy option except massive printing, as they say, and this was going to cause the inflation.
That is consistent with what you said here as well.
Except that the CB would not be increasing the interest rates as a policy tool, it is the markets that would cause rates to rise.
My point was only that the CB more or less controls the interest rate – not by FOMC actions but by paying interest on excess reserves – and that sort of negates the path that Mr. Shiff has laid out.
Thanks.
joe: Mr Schiff contends that interest rates cannot be held at near zero forever. Consider not only gov debt, but also the 67 trillion in shadow bank debt built on low interest rates. Eventually rates will increase and all that borrow short & lend long will be crushed. The FED is trapped. Default or inflate.
Hyperinflation is repudiation of the currency. When the demand for the currency eventually collapses, usually because the currency is oversupplied to the point that it is not worth holding. When the currency is oversupplied and no longer demanded its value goes to zero. We have massive inflation (over supply of currency), that it is currently mainly being diverted into sovereign bonds and prices outside the bond market are relatively benign, does not mean that there is no monetary inflation. At which point currency devaluation becomes currency repudiation , is anyone’s guess, but the transition is usually very swift and very deadly.
Peter Shiff’s latest book (bought from Amazon of course) was excellent! So good for him.
However he refers to his new bank in St Vincent and how its a classic “Austrian” deposit
bank. Where, therefor, are the funds held?
The de facto bankruptcy of the United States is now inevitable.
It will not be LEGAL bankruptcy – as the Federal Reserve will create (from nothing) money for the government to “borrow” (indeed it is doing this, on a massive scale, already – and has been for quite some time), “borrow” either directly from the Fed or (as now) via the banks and bank-like-entities (hence “Shadow Banking” and so on).
However, the ecomomic breakdown that is comming will be de facto bankruptcy – even if, legally, the governmnt is “not bankrupt”.
2013 will be terrible, and 2014 will be worse.
Almost, but not quite, needless to say.
Higher taxes (and the so called “fiscal cliff” is mostly about higher taxes) will not save the economy – quite the contrary.
Every prediction made by Schiff has turned out to be wrong. See:
http://mikenormaneconomics.blogspot.co.uk/2012/11/schiff-austrians-got-everything-wrong.html
I do not need to go to a smear Ralph – I remember watching Peter Schiff make predictions (and being laughed at) on Fox News. Everything I heard has proved be true.
Please remember to close the door on your way out.
Actually it was the low interest policy (by the Fed under Alan Greenspan) (not “high interest rates”) that led to the expansion of the money supply.
However, Joe is not making a mistake (as he knows perfectly well that what he is saying is not true) – he is just trying to pick a fight.
Fair enough.
None of us can do anything else now – the table is set, the economy (internationally) is doomed.
We might as well fight each other – to pass the time, before the economy finally collapses.
The politicians baked “going over the fiscal cliff” into the pie before the last elections so it would not matter who won. We are going over. Taxes will rise, and the military will be cut. In an excellent strategy to kick the can down the road, USA will lower its budget, raise its income, and citizens will begin to pay some on the elective wars they never resisted. Yes, most pensioners will get hurt, but if they don’t like it, it’s the Liverpool Pathway Protocols for them! By going over the cliff the powers that be will prove to the world USA can still squeeze the taxpayers, making our currency still # 1.
Of course, this means the end will be all the worse, but we have time. Don’t fight, “loaf of bread, jug of wine and a significant other” is the way to pass the time. If you want to survive this, you better be actually providing a value by your work, not earning by your investments. If you are not customer-employed, and kicking into taxes, then it will get ugly.