Economist Peter Schiff has long been lambasting the Fed for its easy money policies the past several years, and he predicted the U.S. central bank would soon end its balance sheet roll-off, which it confirmed will happen this September.
The Fed also announced it was pausing its two planned interest rate hikes for 2019, a complete 180 from just a couple of months ago.
“As I predicted, they are not telling the truth. The markets can’t handle that,” Schiff said on his latest podcast. “The Fed is not telling the markets, ‘We’re not raising rates because the economy is imploding because of all the debt that was accumulated when we kept rates so low. Now we can’t raise them. Or we can’t continue to shrink the balance sheet because the budget deficits are blowing out of control.'”
And while the economy is supposedly booming — though, fourth-quarter 2018 GDP was just revised down to 2.2 percent — the federal government just spent itself into an all-time record deficit during the month of February.
Generally when an economy is booming, a government pays down its debt. Not so under President Donald Trump as the government is now running bigger deficits than during the Great Recession, which Schiff says is going to blow up in all of our faces.
“If we are running these enormous budget deficits now — before the recession — imagine how much greater they’re going to be during the recession,” he said. “The Fed can’t add fuel to the fire by competing with the Treasury. The Fed can’t keep unloading bonds at the same time that the Treasury is selling them like they’re going out of style.”
Schiff went on to say he believes Trump will set deficit records every single month until he leaves office. The only good news for Republicans, Schiff said, is that the next president will have to run even higher deficits.
“Which is why we’re going to have a sovereign debt crisis and a currency crisis,” he said.
Given the fact that the deficit and national debt continue to grow exponentially, the Fed had no choice but to end the balance sheet roll-off and the rate raising because you can’t raise rates in an economy built on debt because paying off the interest alone will surpass the country’s spending on defense.
“When the Fed has to go back to zero, which it will be doing relatively soon, when the Fed has to go back to quantitative easing, nobody is going to believe that it is temporary again,” he said. “Nobody is going to buy the Fed’s BS about how interest rates are going to stay low only temporarily and then we’re going to normalize them, and we’re going to shrink our balance sheet. We’re not monetizing the debt. After the recession is over we’re going to shrink our balance sheet back down to where it was before the recession. No one’s going to believe that.
“They couldn’t shrink a $4 trillion balance sheet. They won’t be able to shrink an $8 trillion balance sheet. If they couldn’t raise rates when the national debt was $22 trillion, they sure as hell can’t raise them when the national debt is $30 trillion.”
Schiff went on to say the markets and investors haven’t figured this out quite yet.
“They don’t want to admit I was right from the beginning — that the Fed checked us into a monetary roach motel and there’s no way to ever check out,” he said. “But I do believe the markets are going to figure this out, whether the Fed admits it or not — during the next recession.”
Click here to listen to Peter Schiff’s latest podcast in full.