Ali and Frazier, Laurel and Hardy, Mayweather and Pacquiao,
Liesman and Santelli, and now Schiff and Maloney.Peter and
Mike join clash of the titan-like to discuss their investment
strategies and expose the
charts the government doesn't want you to seeas
"people like Bernanke are taken seriously still and the people that
did predict [the crisis] are dismissed as lunatics half the time."
The wide-reaching conversation covers everything from gold and
stocks to The Fed and The Dollar -
Bernanke "took the coward’s way out because all he did was
exacerbate the problems to postpone the day of reckoning."
The air is coming out of the bubble, they warn,
"Bernanke and Greenspan have absolutely destroyed America.
People don’t realize what is coming..."
Full interview here:
Full transcript below:
Mike:I was in Puerto Rico a little while back and
Peter Schiff invited me over to his house and we were just amazed
at how we are exactly on the same page when it comes to everything
economically. And so he just made a trip out to California near my
offices and we decided we’d get together and discuss some of this
stuff. So on your travels Peter lately you were just at a show you
were speaking. Where were you at?
Peter:I was in Las Vegas. It’s great to see you
again Mike. I was speaking to a very main stream audience of hedge
fund managers at an annual conference there. And what was very
interesting is even though the audience was, as I said, very main
stream, and I was on a panel with a lot of very high profile, main
stream individuals, the only person that really got applause was
me. I also got some laughs because I told a few jokes, but I think
people really got what I was saying and I had maybe 50 to 100
people come up to me afterwards and shake my hand. And really
appreciate the candor with which I spoke and I really agree with
what you had to say and I was saying some things that the
mainstream never really hears about the real problem in the US
economy and I blamed it all on the Fed and everybody else was a
cheerleader there for the Fed. In fact, Ben Bernanke spoke at the
same event as me and he was introduced as being the savior of the
US economy and I think he damned it.
Mike:I absolutely agree. I saw you had your
picture taken with him right?
Peter:Yes, we were at a cocktail party following
the event and I thought people would get the irony of the
juxtaposition between the two of us kind of having a glass to
drink.
Mike:I think that
he and Greenspan have absolutely destroyed America. People don’t
realize what is coming from the stored up energy from the
manipulations that they did.
Peter:And speaking of him, this was really the
first chance I had to have a conversation with Ben Bernanke.
Speaking of him, I really got the sense that he has no idea of the
Fed’s culpability in the housing bubble or the ensuing financial
crisis, he really doesn’t know. And he denies that the Fed had
anything to do with that, that maybe it was pure happenstance or
coincidence that we had a housing bubble and these very low
interest rates. And
because Ben Bernanke still doesn’t get the connection
between the Fed’s mistakes of the past and the last crisis he
certainly doesn’t understand the coming crisis, which is going to
be far worse because the mistakes the Federal Reserve made in the
aftermath of that crisis are far worse than the ones and far bigger
than the ones that caused it.
Mike:Right.
Ben Bernanke’s overreaction was far bigger than Greeenspan’s
reaction to the NASDAQ crash.
Peter:And as a result the crisis in our future
unfortunately is going to be far larger than the one that we just
experienced.
Mike:I wanted to show you a couple of things
because I have a feeling that you and I will be exactly on the same
page here. You know how indicators…there’s all these different
factors in the economy and they’ll be going up at different rates.
Suddenly one or two indicators start to point down when you’re near
a top and then more of them start to point down and then things
roll over and then there’s a crash and everybody thinks that nobody
saw it coming.
But there’s a few people that are watching this stuff that
do see it coming.
Peter:That’s exactly what they said about the last
crash that nobody could have possibly predicted this except there
were people who did predict it.
Mike:You predicted that we were in a real estate
bubble. I predicted that we were in a real estate bubble.
Peter:Ben Bernanke denied that there was a real
estate bubble. Even after it burst, he still couldn’t figure it
out.
Mike:And
what amazes me is people like Bernanke are taken seriously still
and the people that did predict it are dismissed as lunatics half
the time. It really burns me up.
But this is manufacturing new orders for consumer goods
and this is from the Fed’s website and you can see this big plunge
that it took in 2008. And there’s a big plunge that’s happening
right now. That suggests to me if people aren’t ordering new goods
it feels like this could be this summer maybe..
Peter:Remember,
the air is coming out of the bubble because the Fed halted or
paused it’s quantitative easing program.
Most people think they ended it but I think it’s just a
pause because now everybody expects the Fed to raise interest rates
because they think the recovery finally has enough traction that it
no longer needs the emergency life support of 0% yet your chart is
showing and a lot of other economic indicators are showing that the
economy is already rolled over and is rapidly headed back to
recession even though the Fed hasn’t raised them yet. All they’ve
done is talk about raising them in the future and we’re already
rolling back into recession.
So I believe that the Fed is going to have to do another
round of quantitative easing, that they’re not going to raise rates
and that’s going to be a shocker. It’s going to send shock waves
throughout the currency markets and the bond markets because
everybody expects the Fed to raise rates and when they don’t do it
because the economy is too fragile because it’s just a bubble, not
a legitimate recovery then people are now going to have to second
guess their idea that what the Fed worked instead of calling Ben
Bernanke a hero a lot more people are going to say, wait a minute
he wasn’t a hero what he did wasn’t heroic. He took the coward’s
way out because all he did was exacerbate the problems to postpone
the day of reckoning.
Mike:Yes the derivatives are bigger instead of
smaller. Everything that was put in place to create that bubble
that then popped. The two big [inaudible 00:05:36] banks are all
bigger. Nothing has been addressed right?
Peter:No. Those banks are now bigger than ever and
if it was going to be a problem to let them fail in 2008 it’s going
to be much bigger problem to let them fail in 2016. So the
government has to do whatever it can unfortunately to keep the
bubble from popping and I think the air is already coming out even
without a rate hike but…
Mike:So do I, yes.
Peter:But more importantly,
the reason that he’s been able to look like he’s succeeded
is because of the illusion that it’s all temporary.
Everybody believes that the Fed can normalize rates, shrink
their balance sheet but when they realize that they can’t do that,
that they’ve been lied to then this is going to be a major event
for the currency markets or the financial markets when people come
to terms with the predict that we’re in. That it’s QE infinity,
that rates have to stay at zero in perpetuity. Because the debt is
now so enormous that even the slightest increase in interest rates
would collapse the system because there is just so much debt.
Mike:I agree.
I don’t think that they can raise interest rates.
The next thing here is rejection of credit applications. And I
wasn’t following this chart before. I just saw it in somebody’s
newsletter. I think this is zero hedge maybe, but this is the
crisis of ’08 and look at what happened in March for credit
application rejections. So there’s something happening in the
economy.
Peter:One of it is the big transformation from
full time employment to part time jobs.
Everybody points to all the jobs that are being created and the
low unemployment rate but the problem is that the unemployment rate
dropped not because people found jobs but because a) they stopped
looking or b) they settled for a part time job. So when people who
used to have full time jobs now have part time jobs they don’t have
the income to get the credit that they need.
Mike:Right so they apply for a loan and it gets
rejected.
Peter:
You know you have home ownership rates now at almost 30
year lows, yet rents are rising.
I mean, now you have a record number of 50% or excuse me 25% of
people who are renting now devote half their income to pay their
housing costs. That’s never happened before. You have hardly
anything left over for food or other expenditures that you have.
And people are loaded up with student loans and unfortunately a lot
of these college grads now have student loans and all they can get
is minimum wage jobs and a lot of them are just part time. So
people are trying to get by.
In fact, a lot of people are actually enrolling in college
now, not because they want the education but because they need the
loans.
They just want to get the money so they can pay their utility
bills. They don’t even care and a lot of our college grads when
they graduate with lots of debt, they can’t find jobs so they go to
grad school to get a master’s degree so now they have even more
debt but they still can’t get a job.
Mike:Right, right. The big debt that has been
plaguing us lately, the growth in debt. A lot of it is in student
loans and auto loans. There are subprime auto loans now.
Peter:
As if the government didn’t learn their lesson from the
housing bubble, they decided to create an auto bubble because when
the governments..
when GM and Chrysler went bankrupt the government also acquired
their financing divisions and they still own them. So the
government after they bailed out these companies they certainly
didn’t want them to fail again. They wanted to make it look like
the ballot was a good idea. So they wanted to revive their profits
by making it possible for just about anyone to buy a car. And so
many people have been able to buy cars with zero down and they’ve
been stretching out their payments so that now people are getting
six and seven year auto loans.
Mike:Right, the seven year auto loan. The car only
lasts maybe that long. So you have no equity ever.
Peter:Well the warranty only lasts for four years.
Four or five years tops. And when these cars come out of warranty,
try to have it repaired. We don’t have a lot of repair places
anymore. It costs a fortune, and of course the value of the cars
are plunging. People are going to have much less equity in their
car than the remaining payments on their mortgage. And so they end
up not making the payments. Now you’ve got to repossess the cars.
But there is a huge bubble. But interestingly enough, the first
four months of 2015, this was the worst start to a year in auto
sales since 2009. So it looks to me like the air is coming out of
the auto bubble already. We’ve already saturated the market and so
this is just the beginning of the decline.
Mike:Home mortgages, they’re going longer now than
30 years. There’s longer home mortgages being offered too, trying
to keep that bubble inflated.
Peter:Well, of course they’re offering 3.5% down
payments now too with government guarantees which was part of the
problem because 3.5% is not enough down to actually have skin in
the game. It costs you more than that just to sell a house. So if
you buy a house with 3.5% down, the minute your mortgage closes
you’re already under water. But now the problem is you’re giving
the homeowner a free gamble on the real estate market. Because if
real estate prices go up, he can keep the profits, refinance. If
prices go down, he could just walk away but better than that he can
just stop making his payments altogether and live rent free for
three years before they can kick you out.
That’s really what they set up. I think a lot of the recent home
buyers that did put 3.5% down are going to do just that. They’re
just going to stop making their payments when they realize that
they’re underwater especially when a lot of their repair bills come
in. Because a lot of people were lulled into buying homes they
couldn’t afford, once they see that it’s just not the mortgage but
you also have maintenance and property taxes and some of these
people might lose their jobs in this next recession so they no
longer even have the income to service. And a lot of these people
have adjustable mortgage. Imagine the people that are not even
taking out 30 year fixed.
Mike:With rates this low they are still buying an
adjustable rate of mortgage.
Peter:Because they couldn’t afford the fixed rate.
That’s how stretched they are. You know the real solution to the
housing market problem is to let real estate prices come down so
that homes are affordable, but the government doesn’t want to do
that because it will bankrupt all the banks that loaned on them so
what their answer is to keep prices inflated and just make credit
available by keeping interest rates low and keep throwing the
lending standards out the window so that people can buy houses that
they cant afford.
Mike:Ben Bernanke recently commented on the
savings glut. He doesn’t think people are spending enough and what
is interesting is when you find out what constitutes savings paying
down debt is not included in this calculation so any currency that
goes to this that is considered savings for some reason. They
consider paying down debt savings.
Peter:Well it’s money you haven’t spent but I
think when Bernanke is talking about a savings glut..
Mike:That they’re paying for previous consumption
basically..
Peter:Right. But when they’re talking about the
savings glut they’re referring in other countries, not the United
States. We have a savings shortage. There’s maybe a glut of savings
in Asia for example but people look at that.. I read an article
recently about Chinese have this big savings problem. They have a
bad habit of savings. Like smoking or something. Savings is a
virtue, but we’re lecturing the Chinese, “You guys are saving too
much. You need to spend more money.” One of the criticisms was that
they don’t have social security. They expected the Chinese to save
for their retirement. Imagine that. Allowing people the freedom to
save for their own retirement. And we basically said “No.”
China needs a gigantic Ponzi scheme run by the government. They
should adopt social security so that the Chinese people won’t have
to save anymore. As if savings are somehow undermining economic
growth. But the only problem for China is that they’re squandering
savings on US treasuries. They’re loaning the money to us and we’ll
never pay it back. So that’s a waste of their savings they need to
invest their savings productively in their own economy and I think
that is going to happen and when it does the dollar is going to
come crashing down.
Mike:Yes, I agree and then the engineering of the
entire economy and the illusion. This is interest rates from 1950
to today. And then we have base money as the red line here and then
I plotted the Wilshire 5000 Total Market Cap Index so the value of
the 5000 largest companies in America and what you see.. I’ll zoom
in on this section here. You see that they took rates down to zero
and at the same time created all this currency and the correlation
between currency creation and the markets is just mind bogglinginly
close. It’s a cannot possibly be an accident that the markets..
Peter:Of course not and that’s why they can’t
raise rates without bursting that bubble. To not understand how
these things are connected the way that they are is one causes the
other and I’ve heard people say, “Peter I’ve had 4%, 5% interest
rates in the past so why can’t we go back there now?” It didn’t
create a problem then because we didn’t have the enormity of the
debt that we have now. It’s one thing to have higher interest rates
when you don’t have a lot of debt. Sure you can afford it. But when
you’re overwhelmed by debt you can’t afford it.
The other thing is when you’ve been on 0% for 6 years you
develop an addiction to that. We have built an entire economy
around free money. You can’t take that away even if the interest
rates are still low, even if they went to just 2% to 3%. Yes that’s
still low. But not low enough for an economy addicted to 0%. If
you’re a heroin addict and your body is used to a certain amount of
heroin then your pusher says “I can only give you half of what I
normally give you, but you still have some heroin.” That’s not
gonna cut it. You’re already gonna start going through
withdrawal.
You know that’s why the Fed… supposedly we’ve been in a recovery
for six years. Yet interest rates are still at zero. I mean if it
was a real recovery they would have raised rates years ago. But
they’re afraid to do it because they know it’s phony. But after a
while they had to at least talk about raising interest rates. They
have to pretend that there’s an exit strategy somewhere but you
know just like someone who’s overweight and talks about going on a
diet in the future they don’t go on one in the present. So the Fed
wants to maintain the ruse that they can raise rates by talking
about their intention to raise rates but they don’t actually do it
and they play word games about “well we’re going to be patient” or
“we’re going to wait a considerable period.” Now they take away the
word patient but we’re not impatient. Now they’re saying “we can’t
raise rates until unemployment improves.” Well it’s supposedly been
improving. The unemployment rate is 5.5%. They initially said they
would raise rates if it got to 6.5%. But the bottom line is that it
doesn’t matter where the unemployment rate goes, doesn’t matter how
high the inflation rate goes they can never raise rates without
precipitating a worse financial crisis than the one we had in
’08.
Mike:So you and I just absolutely agree that this
entire recovery has been engineered through the creation of
currency. Now if Keynesian economics was remotely plausible, if it
worked would they have made it a QE2 or a QE3?
Peter:Well no, it would have worked the first
time.
Mike:Right.
Peter:The reason they’ve done it three times is
because it fails every time which is why they’re going to do a
fourth. Quantitative easing is like trying to put out a fire with
gasoline. You can’t put the fire out, you just make the fire
bigger. The problem is when all you have is gasoline that’s all you
can do. The Keynesians don’t understand that their own remedy is
the reason the patient is so sick and they just want to keep on
administering it. But I don’t think we’ve had recovery.
We haven’t recovered from anything. We’re sicker than ever. The
average American knows that.
The man on the street can feel his standard of living
declining despite what the Federal Reserve. The cost of living is
going up, the quality of jobs is going down, all the Fed is doing
with its monetary policy is redirecting our resources from
productive uses on main street to speculation on Wall Street.
They’re propping up the stock market, they’re propping up housing,
they’re diverting loans to things like education, they’re propping
up health care but the real economy is disintegrating and Americans
can feel that.
If we actually had a real recovery we wouldn’t be talking about
all the jobless recovery. The reason it’s jobless is because it’s
not a recovery. If it was a recovery there would be good jobs and
the jobs that are being created..you know I think the most
interesting thing is who is getting them because they look at the
labor force participation rate which is the lowest it’s been since
the mid 1970s. And everybody wants to say it’s because the baby
boom is retiring. So hey, there’s nothing we can do about it. We
all know there’s a baby boom. They’re getting old, they must be
retiring. That’s why the labor force is shrinking. A lot of people
accept that on face value. Even Janet Yellen says that right?
But the reality is the baby boomers, the older people, they
are the ones working in record numbers.
In fact, there are months when the only jobs that are created
are for people 55 and older. It’s the younger people, people in
their 20s and 30s that are leaving the labor force. And what’s
happening is you have so many Americans who were retired who have
to come out of retirement and take a part time job so they can pay
their utility bills, so they can put food on the table. That’s
where all the jobs are coming. So the labor force participation is
not about people retiring. The people who should be retiring can’t
afford to and the younger people who should be working can’t get
jobs. That’s the truth behind the numbers.
Mike:Yes.
The markets are in a bubble. I think there’s a crash
coming.
This is Dr. Robert Shiller’s data. It’s a little bit of a
confusing chart because it’s got two data plots in it and interest
rates in red. But the valuation of the stock market, judge by PE
ratios. You see bubbles in 1901 and then undervalued in 1921 and
overvalued during the peak of the 1929 stock market bubble and
without exception once it reaches a bubble it bounces on the way
down but it has to go to undervaluation before a new bull market
can start. There was a peak in 1966 of about 22 and the peak in
2000 where the PE ratio is over 45 which was absolute insanity and
it started to bounce, it went down to fair value but then bounced
back up into a bubble here at 27. We’re in an extreme bubble and so
with these other indicators turning do you think we’re in for a
stock market crash?
Peter:I think first of all that it’s actually
worse than that because the earnings have been manufactured by
share buy backs because interest rates have been so low it’s been
easy for companies to buy back their shares. So now their earnings
per share number can be higher because there’s fewer shares. So
they’re not really driving the profitability, they’re not driving
the revenues, they’re just shrinking the share base but they’re
subjecting their shareholders..
Mike:So the earnings per share look better.
Peter:Yes but now they all this debt but right now
the interest rates are really low so it’s not hurting their
earnings but what happens when interest rates rise and if they rise
during a recession where they’re earnings are declining and they
have no ability to pay the interest a lot of these companies that
were buying back shares might have to come back to the market and
resell the shares to raise money to service or repay debt that they
can no longer afford.
Mike:..which will cause it to go way down to the
greatest undervaluation in history I think.
Peter:Right but the reason why I think there may
not be a stock market crash even though one is warranted and in
fact it would be a healthy development rather than to perpetuate
the overvaluation and all the malinvestments that result from that.
But I think this bubble is literally too big to pop. I think the
Fed knows it. Again, that’s why they’ve been talking about raising
rates..
Mike:So you think they’ll do more of this, the
quantitative easing for..
Peter:The way you stop the value of the stock
market from plunging is make the value of the dollar plunge and so
rather than nominal prices declining real prices decline. So the
real value of stocks let’s say measured in honest money like gold
plunges because the Fed is trying to prop everything up. They’re
trying to keep these bubbles from popping because they’re literally
too big to pop. They think the mistake that they made in 2008 was
turning off the spigots right, now they want to keep them wide open
and so it’s the dollar that’s more likely to crash this time than
the stock market.
Mike:Yes. I do think though that if the problems
first develop in other countries like if the Euro has a problem or
if China has a problem we could see the dollar go higher. It might
not but I think that we could see a very very short term deflation,
that’s something that the Fed can’t control and then they will
overreact and print into potentially a hyperinflation.
Peter:I think we’ve already seen the dollar rally.
In fact there is probably more agreement among traders, speculators
in the dollar’s direction. Everybody believes that the dollar’s
going to go up, everybody has longed to dollar, betting on it
continuing to rise because everybody bought into this myth of
legitimate U.S. recovery and they believed that the Fed was going
to raise rates. So I doubt something that everybody expects to
happen will in fact happen. What’s going to surprise everyone is
dollar weakness. Everybody is positioned for dollar strength and I
think that trade is already over. I think the dollar is fully
valued or overvalued based on this belief and when everybody has
ultimately has to come to the conclusion they were wrong, when the
Fed is forced to admit the economy is much weaker than they thought
and instead of a rate hike we get QE4 I think the dollar collapses.
So I wouldn’t want to hold out waiting for another dollar rally. I
think we’ve already had it. I think now the next thing for the
dollar is a big drop.
Mike:The move that the dollar made was..it’s less
than a year right?
Peter:Yes.
Mike:Now imagine if you’re an importer or an
exporter, what that’s doing to your business. This whole thing of
national currencies is just a silly stupid game that countries play
that hurts all of us, it hurts all of our prosperity. An importer
or an exporter that sees the cost of their goods changed by 25% or
the price that they’re able to get for goods going overseas by 25 %
in six months this is something… if you chart it out, the exchange
rates you can probably draw a line across it and say my business
will be successful when this is under here and it’ll go broke when
the exchange rate is above a certain amount. If we were using gold
there wouldn’t be an exchange rates. Right? If they used honest
money all over the world, if honest money was the money that we
used in exchange.
Peter:Yes, it would certainly be a lot easier to
do business and we wouldn’t have all these imbalances. The United
States couldn’t run these huge trade deficits if we had to pay for
our imports with either exports or gold.
Mike:Yes.
Peter:But when we can pay for them just by
printing money that costs nothing, we can make an unlimited
quantity of it but this is going to end in disaster. This is
something that’s never been tried on a global scale. We have had
individual examples of fiat currencies being tried in one country
or another and it always ends in disaster, it never works and
countries always return to a gold standard but what’s unique about
this time period since we went off the gold standard in 1971 since
the world was on a dollar standard and when we went off the gold
standard we took the entire world off of it and this has gone on
for a while but I think we’re in the final stages of the world
rejecting this monetary system where the dollar is at the center
because it cannot work.
Mike:Yes, I do too. When I was writing my book I
loaded into a spreadsheet looking for cycles, every currency
crisis, stock market crash, bank panics or whatever looking for
some kind of cycle in there and what leapt out at me was that every
30 to 40 years the world has a new monetary system. And here we are
like 43 years, going on 44 years after the end of the Bretton woods
being on this global dollar standard. I think the days are numbered
and that there is going to be a crisis and I think it is going to
be soon. This is margin debt and the red line is just numerics, the
total amount of dollars of margin debt but the blue is margin debt
compared to the GDP of the country so the size of the economy. And
this chart is already a year old but what you see is every time it
got over a certain percentage of the economy here there was a stock
market crash right after it got up to those levels and margin debt
is back up to those levels.
Peter:And more importantly though too the actual
quality of our GDP has declined because so much of it is now just
consumer spending finance by debt, the real wealth producing
components manufacturing, mining, things like that those parts of
our economy have been contracting. So the size of the GDP is very
vulnerable to a collapse which would exacerbate those ratios
especially if there was an increase in interest rates.
So we’re certainly due for a stock market crash but the
economy is so vulnerable that it really can’t withstand one anymore
which is why I think again the Federal Reserve is going to do
everything it can to prevent that from happening and there’s only
one thing they can do is printing money but unfortunately the
ultimate consequence there is even worse because a dollar crash is
going to be much more damaging to the US economy and to the
standard of living of the typical American than what a stock market
crash or a real estate crash or banking crisis.
But unfortunately the Fed doesn’t care abut that. It’s just
trying to delay the inevitable. It doesn’t care how much worse it
makes it during that time period because they’re hoping that
there’ll be a different administration in charge at the time. They
have no idea how much time we have so rather than face the music
they want to keep on playing.
Mike:Right
just keep on blowing that balloon up bigger and bigger and every
time it springs a leak they slap a band-aid on it and keep on
blowing more air in. For some reason, people get used to living in
a bubble. They like it and the politicians want to..
Peter:Well, some people like it because there are
some people that benefit from this process but there’s only a small
sliver of the population. The overwhelming number is suffering
don’t understand why. You know you talk about now we have this huge
growing chasm between the very rich and everybody else. Call it 1%
and the 99%. But this class warfare is being fueled by the very
people who are creating it and they don’t even realize that it’s
their policies that are doing it. It’s the monetary policies we
have that are responsible for this widening divide. It’s not
capitalism that’s doing it and just calling for higher taxes and
more wealth distribution isn’t going to solve the problem. It’s
only going to compound it. We have to get to the source of what is
driving this and it’s the central bankers and their monetary policy
and to the lesser extent the regulatory and taxing policy of the US
government.
Mike:Absolutely agreed.
The gap between main street and Wall Street again, it’s
engineered by all of this currency they created going into Wall
Street and not to main street and that’s the reason wages haven’t
grown.
This chart that John Hussmann came up with where he took
overvalued, overbought, overbullish indicators and internals
weakening like earnings per share and added those factors together
and what was interesting is every time there’s a major top this
flashes up to very high levels. The 1987 stock market crash, it
nailed that. And we’ve been getting these alarms going off over and
over again lately. And it may not.. you may be right, the last time
they started creating a lot of currency Wall Street partied but you
did say that there’s going to come a time where they’re gonna start
questioning the currency creation that it might be different this
time. They might start partying on Wall Street first but do you
think that even with massive currency creation though that people
can say if they’ve got to do it again that means it really hasn’t
worked?
Peter:Well they have to come to that conclusion
yet. Obviously they didn’t come to the conclusion with QE2 or 3 but
I think there’s been so much anticipation and self congratulations
by the Fed and the Keynesian economists and the Paul Krugmans of
the world that when it doesn’t work, when we’re right back where we
started with as far as back to recession and if we’ve gone through
the entirety of a business cycle and rates have been at zero the
entire time people might start to realize when can you ever raise
rates? And if we’re doing a QE4 and instead of the Fed’s balance
sheet shrinking from the current four and a half trillion we have
to expand it to six to seven trillion, the idea that it’s ever
going to go back down again people are going to see that for the
ruse that it is and I do think there’s going to be a loss of
confidence. Why anyone still has confidence in the Fed is beyond
me. But I think that that confidence is going to go away and when
it does you know you’ve destroyed the value of the currency.
I think that as the world tries to shun the dollar denominated
debt because the rates have to stay low, we can’t raise interest
rates to make the dollar attractive because we can’t afford to pay
those rates. So we have to keep the rates artificially low. We can
only do that by creating more money but the more money we create
the less it’s worth, the fewer people who actually want it. So then
you have a situation where the Fed Reserve has to expand it’s QE
program not just to mortgages and treasuries but to corporate
bonds, to municipal bonds, they have to start buying everything.
They become the buyer of only resort and then the dollar really has
a crisis and now the Fed is in a position..
Mike:How moral is that that there’s an entity that
gets to create currency that is going to become the buyer of
everything and they’re creating the currency to do it?
Peter:It’s not moral at all, it’s theft is what it
is. But eventually people are not going to want to be stolen from
and they are going to rebel against that currency and they’re going
to look for a safe haven. Something like gold where they can
protect themselves from really this monetary looting.
Mike:
Most people don’t realize that when we’re in this grand
experiment that the Keynesians that run things don’t actually know
what they’re doing because this has never been done at this level
before.
Peter:Well the irons is it’s not an experiment
because we know how it’s going to end. There’s no chance that this
can work. Because history is replete with examples again on a
smaller scale but if it doesn’t work on a small scale just putting
it on a bigger scale doesn’t change the outcome. It maybe changes
the dynamics.
Mike:It makes the same outcome but much bigger to
match the energy put into it.
Peter:People that say this is some kind of
experiment they’re wrong, they haven’t learned anything. We don’t
have to experiment, we have history. We can learn from the mistakes
of the past. The problem is that our central bankers and economists
never learn from the mistakes of the past. They repeat them
all.
Mike:What I mean is from their point, they think
they’ve got these little models that say if you do this this will
happen but they don’t know that they actually can’t control it.
They can influence stuff short term but..
Peter:They think that this time it’s different or
they can tweak it a little bit. It’s like somebody having another
communist revolution saying, we’re gonna get it’s right. The
Soviets didn’t get it right or the Chinese didn’t get it right, the
Cubans or the North Koreans wherever it’s been tried, we’re gonna
try it again. You don’t have to try communism again, it’s failed
right.
Mike:Right
Peter:It doesn’t work. No matter how you want to
repackage it, it’s never going to work but everybody thinks they’re
smart enough they can make it work. And so you’ve got people now
that think yes, we can make this work. Yes, it didn’t work in the
past but we’re so smart that it’s gonna work now and it’s not going
to work it’s going to fail even more spectacularly because it’s
even bigger.
Mike:Okay. We were talking about home ownership a
little bit earlier. So this is a chart that goes back to 1980. It’s
the levels of home ownership have dropped back down to 64% and it
hit 69% during the peak of the real estate bubble.
Peter:First of all, it’s going to go lower. But
you’re really graphing the disintegration of the middle class who
can no longer afford, thanks to the government to buy homes, and
you had all these government programs designed to make home
ownership more affordable and of course like everything the
government does it backfires. And it’s now made home ownership less
affordable and less desirable. So you have record numbers of people
who are now renting their houses from hedge funds and private
equity funds. And you know what’s been happening to rents for the
past few years? They’ve been rising, 4% or 5% or 6% per year, more,
10% in some areas. Because people have no choice now but to rent
and those rents don’t even make it into the CPI because they use
something like owners equivalent rent and for some reason that
never goes up.
But the actual rent that people are paying is going up. That’s
why I mentioned that right now you have 25% of renters have to
spend half their income on their housing costs which is up
considerably from where it was in 2007 right before the Great
Recession started. The old rule of thumb used to be that housing
costs should make up no more than a quarter of your income. And now
people are devoting half their income. And of course everything
else is getting more expensive. Food is getting more expensive,
health care is getting more expensive, utility bills. The only life
line that many Americans had is that gas prices came down. Gasoline
got less expensive. That’s already changing. Oil prices are going
back up. And people are wondering “Where was the benefit that we
got because we didn’t see it in retail sales from the lower gas
prices?” And there was a benefit, there were just so many other
problems that you couldn’t see it because the consumer was
drowning. Okay, now he’s got a lifeline here but you couldn’t see
it. It wasn’t like they were spending the extra money, they needed
the extra money for food. But now that lifeline is being yanked
away because gas prices are going back up.
Mike:And so this will go lower. Home
ownership.
Peter:Yes, because you need to eat, you need
energy, there are certain things you have to buy.
Mike:That figure of 50% to put a roof over your
head.
Peter:Yes.
Mike:The percentage of your income going to home
ownership or rent to put that roof over your head, that’s pretty
much a constant that you can trace back to like ancient Roman
times. You can only afford a certain percentage of your income and
you can see when something’s in a bubble because it’s at or beyond
a certain extreme.
Peter:And think about this Mike because this is
the cost of home ownership with interest rates at record lows. The
Fed’s got rates at zero.
Mike:Yes, so there’s nowhere to go.
Peter:It’s never been cheaper to borrow money.
Back in the day, in the 80’s, people were buying homes with 12%
mortgages, 14% second mortgages, carried back by the seller. How
could we have afforded that? Imagine how much wealthier Americans
used to be in the past when they can buy a house? Put 20% down? And
then pay 12% in mortgage on the remaining 80%? Now Americans are so
broke they can barely scrape up 3.5% with a 2.5% adjustable rate
mortgage. So you imagine where home prices will have to go, or
where home ownership will have to go if we just had a return to low
interest rates? Not zero, just historically low. Or if people were
requiring a down payment again?
Mike:Real estate would definitely crash.
Peter:Of course, either the prices would crash or
nobody would own any homes. It would all be owned by hedge
funds.
Mike:Yes. So levels of margin debt, we’ll skip
that. These are different countries here and all of these countries
are in Europe. The blue here is the different durations of their
bonds that are in negative interest rate territory where you have
to pay to loan the country your currency.
Peter:It shows you how absurd this is. And right
that old expression “Whom the God’s would destroy, they first made
mad” Well, you can see we’re on the eve of destruction when the
world is this crazy that you would actually pay somebody money to
borrow from you. They have the use of your money and you get back
less. I’m going to buy a bond for $1,000 knowing that I’m only
going to get $999 back. I mean, what is the purpose of doing that?
But you know, it’s actually worse than that because I do believe
there are a lot of countries where their CPI is not accurately
measuring what’s really going on with the cost of living. So there
probably are a lot of other countries that have negative rates.
Mike:So when you apply real rates to that you
think much of the world is upside down.
Peter:I think the United States has negative
rates. We say “Oh we have 2% interest rates for a 10-year bond but
our inflation is only a 0.5%.” I think our inflation rate is more
than 2%. I don’t think the government’s statistics reflect how bad
it really is.
Mike:Right, I don’t believe so either. I call it
the CP lie.
Peter:Yes, we’ve got negative rates. The fact that
there’s actually negative nominal rates where again you buy a bond
for 1,000 Euros and you only get nine hundred and ninety something
Euros when it matures. Or even the interest you make along the way
when you add it to what you get back is still less than you
originally loaned.
Mike:Right. It’s crazy. This has never happened
before in human history.
Peter:It shows you we’re running out of rope here
and now people are saying “Why should I buy that bond? I’m just
going to hold on to cash.” “And the bank deposits have a negative
rate, why even put my money in the bank? Why don’t I just put it in
my mattress?” Now putting money under the mattress seems like it’s
a more responsible thing to do than to loan it to a bank at a
negative rate of interest. Because the bank could fail and you’ve
lost your money. Why take a risk if you’re not going to be
paid?
Mike:Right. It’s illegal to put cash in a safe
deposit box.
Peter:Some of these countries want to make it
illegal to even have cash. And they’re cracking down on people who
are even conducting their business in cash which the way around
that is own gold. Own real money. If they’re going to start
punishing you for owning Euros or owning Yen or maybe owing
dollars, okay, don’t own it. Own something real.
Mike:Yes, that’s what I do. My total net worth is
split up between cash and a vast majority is physical gold and
silver.
Now we’re going to talk about what you can do to protect
yourself in this environment and Peter had some… we were talking
about gold potentially basing here.
Peter:Well, I think it’s been building this base
now for a couple of years. You’ll notice every time we get down
below 1200 people start saying “This is it! It’s going to collapse.
Gold’s going below a 1000.”
Source: SchiffGold.com
