Why FED may never taper

I am a fan of Peter Schiff. I watched almost all his videos and commentaries and his language and style is very close to me. His arguments are very logic and make sense. Peter Schiff predicted the housing bubble and credit crisis since 2006 and everything what he said about what would come to us happened word for word. I remember other “experts” laughing at him when he in his characteristic tone was telling them what would happen when the housing bubble bursts.

Should we listen to Peter’s warnings though? As a dividend investor his predictions are very scary and he is saying that the US economy has two outcomes – we are heading either to another crisis worse than the one in 2008 or a total collapse. Which way will the FED choose? And what should you do as a dividend investor to protect your portfolio?

Here is a transcript of Peter Schiff’s interview in the Canadian broadcasting The Street – business news network from October 2013:

Paul Bagnell: Welcome back, our next guest as we may be stocking a trap of infinite QE, quantitative easing that could end with a currency crisis. Joining us is Peter Shiff, he is a CEO and chief global strategist at Euro Pacific Capital; he is in Toronto on a visit, thanks for being here.

Peter Schiff: Thanks for having me.

Paul: Tell us what your view is on a quantitative easing, as is not a view that’s shared by many people.

Peter: No, and first my view has been consistent since the beginning. I said when the FED first launched QE1 that it was a mistake that they checked in to the equivalent of a monetary Roche Motel that they had no exit strategy that QE would continue indefinitely that we would have increasing doses of this you know monetary heroin and eventually it’s going to come to an end but not because the FED tapers. The Fed’s actually going to do the opposite of tapering. They are going to up the dosage. It’s going to end when there is a currency crisis, when the dollar collapses and that that morphs into a sovereign debt crisis. That’s going to force the FED’s hand. But until then, it’s just going to pretend that there is an exit, it’s going to pretend that there is a tapering. But it can do it because it can’t remove the QE without removing the recovery and putting the economy back into the worst recession then before the FED began this experiment.

Paul: You don’t see even a beginning to a reduction of a bond purchases?

Peter: No, because, you know when they even talked about it last time, when the FED talked about a possibility of maybe reducing QE, interest rates went way up and that threaten to unravel the housing recovery, the bull market in stocks, and so the FED had to back off. The FED is saying that it’s only going to take away the punch bowl if the party keeps going but the party is going to stop if it takes away the punch bowl. That is the predicament that I am seeing you know the economy that lives by a QE dies by QE.

Reporter: Peter, there has been a lot of concern about a currency crisis and that the FED keeps printing money. There is two issues, first we haven’t see the money leaking out of the system and creating inflation yet, so when do you think we start seeing inflationary problems and when the banks start seeing the loan growth, so how’s the FED going to be able to maintain this credibility that it has when the banks will say, “well we actually have a real loan growth opportunities here” …

Peter: First of all, we are seeing inflation, shoppers are seeing it. It’s just that the government doesn’t acknowledge it in the statistics but it’s going to get a lot worse, see, right now in order for the FED to keep the interest rates artificially low which the US economy desperately needs they have to keep printing money. So the FED prints money and buys treasuries. It can only do that as long as foreign central banks buy up those dollars because otherwise the dollar would collapse and then the US prices would skyrocket including interest rates. So the question is: when is the world going to stop buying the dollars that the FED is printing that it’s using to buy up the bonds to keep the interest rates artificially low and that is, you know, the 64 trillion dollar question. But I think the day is soon, if you look what’s happening in China right now, I mean, China is now starting to see a reduction in the amount of US Treasury bonds that they hold and I think more nations around the world are going to stop buying these bonds especially when we told the world that we are going to default on them eventually anyway. If you recall the debt ceiling debate we told our creditors “If we can’t borrow more money, we are going to default”.

Reporter: I don’t think that anybody took it that seriously though, and really are the Chinese going to allow the American dollar to depreciate against their currency and how they going to sell us their products … are we really going to see a competitive currency devaluation situation right now?

Peter: Well, first of all, people didn’t take the default threat seriously because they knew that we would raise the debt limit, but the principle is the same – if we can’t borrow more money, then we will default. And so our creditors know this so why would they want to hold on to these treasuries but when you are talking about “selling us products”, see, that’s a myth because selling means payment, the world really doesn’t sell America products, the world gives America products because we don’t pay for them with exports all we do is give our creditors IOUs. But they can never do anything with those IOUs, they can’t spend the money, all they can do is keep rolling over Treasuries in perpetuity because the minute the world wants to stop rolling over the Treasuries and they want to actually spend some of the money they earned – we default! Either that, we have a massive inflation, but either way the creditors aren’t going to get paid, and eventually they are going to figure it out and I think they’ve already began figuring it out.

Paul: Do you see asset bubbles? What about the big run up in the equity markets that we’ve seen during the period of QE?

Peter: Sure that’s a bubble! I mean, that’s where a lot of the inflation is showing up. It’s showing up in asset prices. The same way it showed up when the housing bubble was inflating between 2002 and 2007. A lot of the inflation that the FED created to artificially stimulate the economy went into the housing market, also into the stock market, so it’s going there again, but rising stock prices, or rising real estate prices do not reflect healthy economic growth. It’s inflation, it’s speculation that’s all it is. It’s our money losing value. But ultimately those bubbles are going to burst if the FED eventually does the right thing and let’s interest rates rise, we will have a worse financial crisis than 2008, if it does the wrong thing and doesn’t let the interest rates rise but keeps printing money instead then we will going to have a runaway inflation and a much bigger financial disaster then what would happen if the FED just let rates rise.

Paul: Interesting stuff, thanks Peter for joining us.

What do you think? Will it pay to prepare your portfolio for the FED’s hangover?







2 Responses to “Why FED may never taper”

  1. FI Fighter says:

    Martin,

    Thanks for sharing. This is a great listen, even if I’m left more confused after hearing it.

    Kind of like your’re damned if you do, and damned if you don’t. Pick your poison, things are gonna be bad… just how bad?